Home / Brokerage / AKD Quotidian about — NML: Revising TP down on PF erosion, weak exports

AKD Quotidian about — NML: Revising TP down on PF erosion, weak exports

Karachi: NML share price has been under pressure in recent times where the share price has been hit by weak sentiment in the textile chain twined with poor performance of NML portfolio (PF) companies. Given the sharp erosion in PF value and weak textile export outlook, AKD Securities reduces AKD Securities’ NML target price to PkR48/share. Relief rally in equities coupled with sharp PKR/US$ depreciation could be key triggers for NML.

Portfolio concerns weighing down price performance: NML share price has been under pressure in recent times where the share price has been hit by weak sentiment in the textile chain twined with poor performance of NML portfolio (PF) companies. As per FY11 shareholding, the market value of NML’s listed PF has reduced by 27% FY12TD to PkR14.8bn (PkR42/share).

Treating NML’s PF as a quasi-close end fund and applying a 50% discount, per share value of NMLs listed PF reduces to PkR21, while adding the unlisted portfolio value (PkR2bn) with 50% discount1 AKD Securities arrives a PF value of PkR24/share for NML. Reversal in PF shares particularly in heavy weight MOB (56% weight in listed PF) could be a key upside for NML going forward

PkR/sh) 30th Jun’11 20th Dec’11  Change
NPL  15.4   12.9 -16.5%
DGKC 23.0  19.0  -17.4%
MCB   199.3     140.1    -29.7%
NCL   22.3    17.8   -20.0%
AICL   65.0   42.1    -35.3%
PKGP   18.9  11.3                 -40.2%
Listed PF value (PKR mn) 20,125 14,750  -26.7%
KSE-100 index  12,496  11,338    -9.3%

Source: AKD Research

Textile exports slouching: While Pakistan textile exports for 5MFY12 are up by 15%YoY to US$5.6bn, the MoM trend is declining, in tandem with international cotton prices. A cursory look at volumetric exports also paints a concerning picture with Yarn exports down by 11% YoY while value added items including Bedwear and Garments are also down by 22% YoY and 13%YoY, respectively. A 10% volumetric decline in NML product suite would result in an EPS decline of PkR1.47 from of AKD Securities’ base case EPS of PkR8.50 for FY12.

Cotton prices are also a key risk: Cotton prices have witnessed a steep fall since touching their all-time high in Mar’11. For NML, AKD Securities’ full year assumption for int’l cotton price is US$1/pound, while the local prices are forecast at PkR6,320/maund. Over the last week, int’l cotton price has found some support from GoP’s announcement to procure 1mn bales of cotton from local farmers to stabilize prices.

AKD Securities maintains AKD Securities’ full year average cotton price assumption at US$1/pound where a 10% change from AKD Securities’ base case assumption will result in EPS change of -8% for NML. One positive for textiles is the recent PKR depreciation, where AKD Securities believes depreciation is necessary for Pakistan textile exports to remain competitive given the recent erosion in Indian Rupee. For AKD Securities’ base case AKD Securities has assumed 5% pa. depreciation vs. USS where a 1% higher than base case depreciation would improve NML earnings by 2% or PkR0.16/share.

Recommendation: Given the recent erosion in PF value coupled with weak export outlook, AKD Securities has revised down AKD Securities’ NML target price to PKR48/share. The scrip is trading at a FY12 PER and PBV of 4.9x and 0.4x, respectively, and offers an upside of 16% to AKD Securities’ target price. Relief rally in equities (particularly Nishat Group) and PKR/US$ depreciation are two key upsides for NML. Accumulate!

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