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Morning Call about Nishat Mills Limited – Arif Habib Limited

Karachi: Dividend Income and Exports will lead the way

Arif Habib Limited is reinitiating coverage on Nishat Mills Limited (NML) with a BUY stance on the scrip.

According to Arif Habib Limited, its Sum of the Part (SOTP) based June’12 target price works out to PKR67/share, offering an upside of 43.4% from its last closing price. Arif Habib Limited has valued company’s core operations at PKR32/share using Discounted Cash-flow (DCF) valuation method, whereas the value of its portfolio investments is calculated at PKR35/share taking a discount of 35% to market prices.

Gross margin to remain intact

Cotton prices kept on fluctuating on the account of bumper crop expectation in 1QFY12, prices dipped to PKR 3,500/maund during the period. However due to supply constraints after floods in Sindh prices were pushed up to PKR 7,400/maund. Arif Habib Limited expects on the back of sufficient arrivals of approx 13.5mn bales, cotton prices will remain in a range of PKR 5,000 – 6,000/maund in FY12. This will normalize gross margins to historical levels of 15 -16% in FY12 and FY13 helping the company in earning healthy profits. Earnings are expected to grow from PKR 4,327mn in FY12 to PKR 6,047mn in FY15, at 3-year CAGR of 9%.

Dividend Income to support the bottom line

During FY12, Arif Habib Limited remains upbeat on strong support from dividend income, which will incorporate higher dividend from newly acquired investments – Lalpir and Pakgen Power Limited. Incorporating dividend from quoted investments, Arif Habib Limited projects contribution to go up by 63% YoY to PKR 1.63bn. Total other income is projected to remain at PKR 2.57bn during FY12, translating into an after tax EPS impact of PKR 7.30/share.

Textile Exports to remain Firm in future

In FY12 Arif Habib might not see same robust growth in cotton related exports as the prices of cotton in particularly eases off to (USD 1.10/lb). However higher cotton production (almost 13.5mn bales) could mitigate the impact of decline in cotton prices. With the Indian support for EU concessions, which will allow 75 Pakistani items a duty free access to European markets and pushing up Pakistan’s textile exports by USD 200mn, will bode well for country’s export. On the other hand Government is hopeful that Pakistan will get a status of Generalised System of Preference (GSP) plus to avail duty concession on its export to European Union member countries in 2014.

 

Financial Highlights (PKRmn) FY11A FY12F FY13F FY14F FY15F
Revenues 48,565 48,428 54,802 62,692 67,351
Net Earnings 4,844  4,327  4,938 5,281 6,047
Earning Per Share (PKR) 13.78 12.69  14.82 15.93  16.64
Dividend Per Share (PKR) 3.30 3.00 3.00  3.50  3.50
PER  3.26 3.54  3.03  2.82 2.70
Dividend Yield 7.4%  6.7% 6.7% 7.8% 7.8%
Return on Equity (ROE) 14%  11% 12% 11% 12%
Return on Assets (RCA)  9% 8% 8% 8% 9%
Source: AHL Research

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