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AKD Quotidian about — NCL: Worthy of a multiple re-rate!

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by March 5, 2013 Brokerage

Karachi, March 05, 2013 (PPI-OT): AKD Securities has reviewed AKD Securities Investments case for NCL and have updated AKD Securities earnings estimates. According to AKD Securities the increase in FY13F EPS estimates (to PkR12.26) stems from higher revenue expectation in 2HFYI3, where AKD Securities believes NCL’s revenues will improve based on stronger cotton prices as well as likely weakening in the PkRIUS$ parity.

For FY14F and beyond, AKD Securities sees improvement in revenues and profits as the expanded spinning capacity comes into play. Moreover, dividend income from 51%-owned subsidiary NCPL will further buttress NCL’s bottom-line. NCL is currently trading at a EYI3F PIE of 3.76x and EV/EBITDA of 8.64x where AKD Securities discounted cash flow valuation leads to a Dec’13 TP of PkR56/share, offering upside potential of 21% from current levels as well as a 6.5% dividend yield. Buy!

FY13F to be a bellwether year! AKD Securities expects NCL to post N PAT of PkR2.23bn (EPS: PkR12.26) during FY13 up a significant 219%YoY where the company has already recorded NPAT of PkR99Omn (EPS: PkR5.44) in 1HFYI3. Continuing strong demand for yarn from China coupled with higher int’l yarn prices and further weakening in the PkRJUS$ parity should result in sales of PkR2O85bn for FYi 3F.

Moreover, dividend income from NCPL of PkR75Omn across FY13F will provide further support to NCL’s bottom-line. AKD Securities are also likely to see improvement in margins of the spinning segment as the company has purchased cotton at cheaper rates during 2QFYI3. As a result, overall margins are also likely to see an improvement.

Capacity expansion: NCL is in the process of expanding its spinning capacity to meet high yarn demand from China. In this regard, the company is in the process of importing a state-of-the-art 22,000 spindle unit which is expected to become operational by Dec’13.

As the added capacity comes online AKD Securities expects revenues of the company to increase by 1 8%YoY during FY14F leading to forecasted NPAT for FY14F and FYi SF at PkR2,516mn (EPS: PkR1383) and PkR3,l7Omn (EPS: PkR1 7.42), respectively.

The company is also in the process of acquiring the spinning units of Taj Textile Mills which will add -40,000 spindles. Staying on the conservative side, AKD Securities has not factored in the impact of the additional spinning capacity from the Taj acquisition as the mailer is sub judice.

That said, sensitivity analysis of this acquisition (assuming It comes online at the same tune as the organic capacity expansion) indicates 17%-21% increase (average: 19% increase) in EPS estimates across AKD Securities forecasts horizon.

Investment Perspective: In addition to strong core operations, dividend income from subsidiary NCPL will further buttress NCLs bottom-line. Going forward, AKD Securities sees dividend income from NCPL increasing based on likely further PkRIUS$ parity weakening. Dividend income will on average form about 24% of NCL’s NPBT.

Despite 31% CYTD gains, NCL still trades at an attractive FYI3F PIE of 3.76x and EV/EBITDA of 8.64x. Moreover, the scrip appears cheap compared to peer NML which is trading at a forward PIE of 477x. AKD Securities also expect NCL to announce a dividend of PkR3/share with full-year FY13F implying a dividend yield of 65%. AKD Securities discounted cash flow valuation leads to a Dec’13 TP of PkR56/share offering upside potential of 21%. Buy!


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