AKD Securities Limited Equity Research – Daily Report

Karachi, August 09, 2018 (PPI-OT): Textiles: Cyclical Tailwinds Favor Low Value-added Players

Previewing FY18 results, we expect AKD Textile Universe to post cumulative earnings of PkR5.38bn (down 9%YoY), with earnings decline primarily attributable to: i) lower dividend income (-13%YoY) due to lower payouts from respective power portfolios and ii) input cost pressure leading to margin contraction particularly in value added segments. On a standalone basis, NML is expected to report NPAT of PkR850mn (EPS: PkR2.42) in 4QFY18 vs. PkR1,178mn (EPS: PkR3.34) in 4QFY17, down 28%YoY. Lower payouts from power holding companies and lower utilization in value added segment (i.e. garments) will keep conglomerate earnings in check. On the flip side, NCL with operations skewed towards lower end of the value chain is expected to benefit from cyclical tailwinds (i.e. widening yarn-cotton spread and rupee depreciation), with earnings expectations of PkR561mn (EPS: PkR2.33) in 4QFY18 vs.PkR221mn (EPS: PKR0.92) in 4QFY17, up 2.5xYoY.

NML – lower payouts from power holdings to keep earnings in check: In 4QFY18, we expect NML to report NPAT of PkR850mn (EPS: PkR2.42) vs. PkR1,174mn (EPS: PkR3.34) in 4QFY17, down 28%YoY. The earnings decline is mainly attributable to lower payouts from portfolio companies (-45%YoY). However, core earnings are anticipated to witness significant improvement (core EPS: PkR0.51 in 4QFY18E vs. LPS: PkR0.12 in 4QFY17) on the back of i) double digit topline growth (+25%YoY) largely driven by macro developments (i.e. rupee depreciation and exports growth) and ii) margin accretion (+96bpsYoY) in low value added segments. On a cumulative basis, full year earnings (EPS: PkR10.28 in FY18 vs. PkR12.12mn in FY17) are expected to remain 15%YoY lower due to absence of dividend income from power holdings and cost pressures in first half of the outgoing fiscal year. Accompanying results, NML is expected to declare a final dividend of PKR5/sh (payout ratio: 48.6%).

NCL – cyclical upswings lead to another good show: With company operations being skewed towards lower end of the value chain, NCL should continue to benefit from macro and cyclical tailwinds (i.e. rupee depreciation and widening yarn-cotton spread). Against this backdrop, we expect the NCL to post NPAT of PkR561mn (EPS: PkR2.33) in 4QFY18 against PkR221mn (EPS: PkR0.92) in 4QFY17, up 2.54xYoY. Factors contributing to another good showing include: i) 13%YoY topline growth on back of the strong domestic yarn demand and improved yarn prices and ii) margin accretion (4.57ptsYoY) largely attributable to cyclical upswings (i.e. widening yarn-cotton spread) and 3) one-off exchange gain of ~PkR258mn resulting from recent rupee depreciation. Cumulatively, FY18E earnings are expected to rest at PkR1,764mn (EPS: PkR7.34) against total earnings of PkR1,621mn (EPS: PkR6.75 in FY17, up 9%YoY). Accompanying results, NCL is anticipated to announce a final dividend of PKR3/sh (payout ratio: 41%).

Investment perspective: Confluence of recent positives including rupee depreciation (18.6% since Dec’17) and extension of export incentives albeit at lower rate should help the domestic textile sector to stave off competitive pressures in the export market. In the short-medium term where cyclical tailwinds favor low value added names, we recommend NCL. At current levels, the scrip offers an overall capital upside of ~10% and D/Y of 5.4%.