BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:[email protected]:111262111Thismemorandum
isproducedbyBMACapitalManagement Limitedand isonly for theuseof
their clients.While the information containedherein is from
sourcesbelieved reliable,wedonot represent that it
isaccurateorcompleteand shouldnotbe relieduponas
such.Opinionsexpressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuyorsellthesecuritiesmentioned.11
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WehighlightKTMLasahiddengemwithinsmallcapscripswhereourconvictiononthestock
is based on i) improving fundamentals in core operations and ii)
impressiveportfoliovaluations.Inthisregard,thecompanyholds58.06%stake(306mnshares)
inMaple Leaf Cement Factory (MLCF), benefiting from improving
operations of
thesubsidiary.TheindicativeTPofthestockiscomputedatPKR70/shcomprisingofKTMLtextile
operations valued at PKR27/sh plus portfolio valuation contributing
PKR43/sh(assuming a portfolio discount of 30%). Note that KTML is
not part of our activelycovered textile universe. In CY14, Pakistan
Textile sector has underperformed thebenchmark KSE100 by 18% on
account of unfavorable industry dynamics leading
todeclineinsectorprofitability.However,CY15isexpectedtofarebetteronaccountofi)~26%YoY
decline in cotton prices in FY15, ii) ~43%FYTD decline in prices of
FO,
iii)improvedvolumetricofftakeonaccountofGSP+andiv)easingfinancecostonthebackofdeclining
interestrates.Materializationoftheabovementionedtriggerswillremainthe
key valuation triggers, going forward. We expect the company to
postunconsolidatedEPSinthevicinityofPKR4.5PKR5.0inFY15.
Margins to improve on lower cotton: 1HFY15 was marked by a mild
recovery in
theindustryscoreoperationsasthepricesofcottoncameoffandthebenefitsoftheGSP+startedtomaterialize.Inthisregards,companystoplinepostedagrowthof8%YoY(and4%QoQ)whilegrossmarginsalso
remained robustataround15%
(BMAuniversegrossmargins13.9%).Goingforward,weexpectthecoreoperationsofthecompanytoremainrobust
due to easing cost pressures as the cotton procured by the company
(aroundPKR5,300/maund,down20%YoY)will likelycome
intoeffect,resulting in furthermarginaccretion. As per our back of
envelope calculations,we expect the lower cost of
rawmaterialtoresultinsavingsofPKR1.24/sh(25%ofFY15EPS).
Deleveraging+DRcuttoreduceburdenonprofitability:Thefinancial
leveragepositionofthecompanyhadalreadyimprovedfromFY12(LongTermDebttoAssetspeakedat4%)asthecompanysettledmostof
itsold longtermdebtby1QFY15.AsofSep14,the
longdebtofthecompanystoodatPKR370mn(LongTermDebttoAssetsat2%),includingnewloan
of PKR317mn for its upcoming production facility. This coupled with
decreasinginterestrates
inthecountrywillsignificantlyreducethefinancecostthusfurtheraddingto
the growth in bottomline. As per our estimate, every 100bps in
interest
ratestranslatesintoanannualizedearningsimpactofPKR0.21/sh.
Onbackof thesaid reasons,weexpect thecompany
topostunconsolidatedEPS in thevicinityofPKR4.5PKR5.0 in FY15.The
companypostedearningsofPKR4.76/sh in
FY14whichincludedaoneoffincomefromthedivestmentofMLCFsholdingwherecompanyreduced
itsholdingofMLCF from64.5% in FY13 to60.5% resulting ina
capitalgainofPKR3.0/sh.
Newproductionfacilitycomingonline:KTMLrecentlyannouncedthatithasexpandeditsproductionfacility
inweavingsegmentbyadding48newHighSpeedAirJetLooms.Thenew looms
started theirproductionw.e.f.
Jan715.Thecompanysweavingplantswererunning at a capacity of 85% as
per the latest company reports. Assuming, the
newproductionfacilityrunsatautilizationrateof80%,thecompanysbottomlinewillgetaliftofPKR0.65/sh(13%ofFY15EPS)onannualizedbasis,asperourcalculation(assumingstatusquoonmargins).
KohinoorTextileMills
TheKohinoorwithinTextiles ThursdayJanuary22,2015
KTMLPerformance
1M 3M 12M
Absolute% 36% 83% 64%
RelativetoKSE% 25% 68% 37%
Bloomberg KTML.PA
Reuters KOHT.KA
MCAP(USDmn) 113
12MADT(USDmn) 0.21
SharesOutstanding(mn) 246
KTMLCurrentPrice:PKR46
KTMLvsKSE100RelativeChart
30%
15%
0%
15%
30%
45%
60%
Jan14
Feb14
Mar
14
Apr
14
May
14
Jun14
Jul1
4
Aug
14
Sep14
Oct
14
Nov
14
Dec
14
Jan15
KTML KSE100Index
JehanzaibZafar
[email protected]
+92111262111Ext:2062
Source:KSE,BMAResearch
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:[email protected]:111262111Thismemorandum
isproducedbyBMACapitalManagement Limitedand isonly for theuseof
their clients.While the information containedherein is from
sourcesbelieved reliable,wedonot represent that it
isaccurateorcompleteand shouldnotbe relieduponas
such.Opinionsexpressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuyorsellthesecuritiesmentioned.22
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Savings fromplummeting fuelandpowercost:Thecompanysproduction
facilitiesarelocated in the north where the chronic gas shortage
forces the company to run itsoperationsonFO.Giventherecentdecline
inFOprices(downby~43%FYTD),weexpectfurther improvement in margins
on falling fuel and power cost. In this regard, it
ispertinenttonotethatthecostofelectricityproductionthroughFOisaroundPKR10/unit(down
~42%YoY)while the cost of importing electricity from national grid
is
currently~PKR12.6/unit.Asperourbackofenvelopeworking,thedeclineinFOpriceswillresultinadditionalsavingsofPKR1.3/shonanannualizedbasis.
Portfolio Valuation: The company currently holds substantial
investment (58.06%
i.e.306mnshares)initsgroupcompanyMapleLeafCementFactory(MLCF).Drivenbyrobustturnaroundinprofitability,thestockpriceofMLCFhasappreciatedby66%FYTD,resultinginhugejumpintheportfoliovalueofKTML.BasedonthecurrentpriceofMLCF(wehaveselected
lowerofcurrentand targetprices
tokeepourestimatesconservative),KTMLsportfoliovaluestandsat~PKR43/sh(afterassumingadiscountof30%onportfolio).ThecompanyhasalsoinvestedPKR2.0bninMapleLeafCapitalLimitedwithaviewtotapthehighlylucrativecapitalmarkets.
PossibledividendfromMLCF:WithMLCFpotentiallyinapositiontopaydividendinFY15,KTMLsearningscouldreceive
furtherboostvia increasedother income. In
thisregards,everyPKR1/shdividenddeclaredbyMLCFresultsinapositiveimpactofPKR1.12/sh.
InvestmentPerspective:AssigningaP/Eof5.5xonthecompanyscoreFY15earningsofPKR4.9/sh
leads to an indicative core price of ~PKR27/sh. At the same time,
KTMLsportfolio value stands at ~PKR43/sh (after assuming a discount
of 30% on
portfolio)translatingintoanindicativeTPofPKR70/sh.Thestockcurrentlyoffersapotentialupsideof47%onitslastclosing.BUY
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