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AKD Quotidian about — Textiles: Positives on the Card!

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by September 11, 2012 Brokerage

Karachi, September 11, 2012 (PPI-OT): Following the cumulative 350bps cut in Discount Rate (DR) in the ongoing monetary easing cycle, the SBP has reduced interest rates on Export Finance Scheme (EFS) and long Term Financing Facility (LTFF) by 1.5% across-the-board, with unchanged bank spread.

According to AKD Securities, considering its 50%+ share in Pakistan’s exports, AKD Securities expects the Textile sector to be the major beneficiary of this development (the Textile sector has availed EFS of ~PKR 120 billion as at Jun 30’12). Within AKD Securities’ coverage cluster, this reduction in borrowing cost will have an annualized +ve EPS impact of PKR 0.53 on NML where, coupled with surprise dividend income from DGKC (DPS: PKR 1.5), AKD Securities now sees FY13F EPS of NML at PKR 10.87, up 9% from previous estimates. At current levels, AKD Securities’ target price of PKR 71/share for NML offers 27% upside. Buy! On the lenders’ side, reduction in EFS and LTFF should have Neutral impact given the unchanged spread on intermediation. At most, selected trade-oriented banks (BAHL/HMB/SNBL) may witness some improvement in asset quality as borrowers’ repayment capacities improve.

EFS Rates Structure

Maturity Rate of Refinance Bank spread End Users rate
  New Old New Old New Old
             
Long Term Financing Facility            
Upto 3 year

9.50%

11.00%

1.50%

1.50%

11.00%

12.50%

From 3 to 5 years

8.60%

10.10%

2.50%

2.50%

11.10%

12.60%

Over 5 years

8.20%

9.70%

3.00%

3.00%

11.20%

12.70%

Export Finance Scheme

EFS

8%

9.50%

1.50%

1.50%

9.50%

11.00%

Source: SBP and AKD Research

Exporters see relief: Steep cuts in the Discount Rate had brought concessionary EFS and LTFF rates close to commercial rates (10.5% DR vs. 11.0% EFS), providing a strong case for a cut in EFS and LTFF in order to better incentivize the export-based industry. In AKD Securities’ view, the Textile sector (accounting for more than 50% of the country’s exports) will be the major beneficiary of this cut where maximum chargeable EFS rate for end-users will now be 95% (85% refinance rate + maximum 1% bank spread), down from earlier 11% (10% refinance rate+ max 1% bank spread). At the same time, the maximum LTFF rate will range from 11.0%-11.2%, including bank spread ranging from 15%-30%.

NML and NCL in focus: AKD Securities estimates that lower EFS/LTFF rates will boost NML’s EPS by PKR O.53 (annualized impact). Other positives for NML include the recently announced PKR 1.5/share dividend by DGKC (after 5yrs) which will increase NML’s FY13F EPS by another PKR O.53. Provided GIDC on fuel stock is halved to PKR 50/mmbtu, there should be a further annualized EPS impact of PKR 0.31 for NML. While AKD Securities awaits formal notification on GIDC, AKD Securities raises AKD Securities’ FY13F EPS estimate for NML to PKR 10.87, up from PKR 9.95 previously. AKD Securities’ back of the envelope working suggests that cut in EFS and LTFF rate will have an annualized +ve EPS impact of PKR 0.28 on NCL, another well managed vertically integrated textile company.

Investment Perspective: Having gained 38%CYTD, NML trades at a CY13F P/E of 5.14x where AKD Securities’ target price of PKR 71/share offers 27% upside. In this regard, AKD Securities believes positive developments – both for core Textile business (reduction in interest rates, potential GIDC reduction, state buying of cotton in China) and for the portfolio (DGKC dividend, possibility of MCB upping its payout ratio) – have yet to be fully priced in. AKD Securities is in the process of initiating coverage on NCL and will update investors shortly. For Banks, AKD Securities sees a largely Neutral impact although selected trade-oriented banks (BAHL/HMB/SNBL) may see asset quality improvement at the margin.

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