Nishat Chunian Limited (NCL) Portfolio value overshadowing poor core operations!!! BUY Target Price: PKR 45 Current Price: PKR 35 NCL Performance 1M 3M 12M Absolute % ‐11%
‐21%
‐13%
Relative to KSE % ‐12%
‐16%
‐27%
Bloomberg NCL.PA
Reuters NCHU.KA
MCAP (USD mn) 68
12M ADT (USD mn) 0.8
Shares Outstanding (mn) 200
FY15E FY16E FY17E TP New EPS 4.0 4.2 5.1 45 Old EPS 4.4 4.5 5.5 47 Change (%) ‐9% ‐7% ‐7% ‐4% NCL vs. KSE100 Relative Chart NCL
30%
25%
20%
15%
10%
5%
0%
‐5%
‐10%
‐15%
KSE100 Index
Tuesday May 12, 2015 Nishat Chunian Limited (NCL) reported disappointing 9MFY15 results as the profitability posted a decline of 60%YoY to PKR532mn (EPS: PKR2.7). We have downward revised our EPS estimates across our investment horizons by 7%‐9%. The downward revision in estimates is a function of i) slowing volumetric off‐take growth and ii) lower prices of yarn. Making the said adjustments to our estimates and updating the portfolio value, our new fully diluted TP now stands at PKR45/sh (down 4% from previous estimate), as increase in portfolio value partially offset the decline in value of core operations. Company’s subsidiary Nishat Chunian Power Limited (NCPL), in which NCL has a controlling stake (~51% ownership), has surprised investors by maintaining a payout of ~83% in FY15 which supported earnings during the period. Going forward, the sentiments on the sector and the scrip are likely to be driven by budget FY16 and decision on gas tariff hikes. At current levels, the stock is trading at a FY16E P/E of 8.3x. Disappointing 9MFY15 results amid sluggish sales: Nishat Chunian Limited (NCL) which is heavily concentrated in the lower value end of the chain, has reported dismal 9MFY15 as the industry has been battling against i) strong PKR/USD parity, iii) eroding Chinese demand and iii) dumping of cheap Indian yarn in the country. In this regard, the country’s exports of non‐value added goods (yarn, cotton cloth and others) have declined by 12%‐
19%YoY. The tapering demand from China coupled with dumping of Indian yarn in the country ate into the margins of the company further. Decrease in the price of furnace oil (down ~32%QoQ) partially supported the margins of the company. Coal fired plant to lower fuel cost: Company has invested in 46MW coal fired captive power plant which is expected to come online in FY17. Company’s current energy mix is heavily concentrated in FO where diversifying away from FO to coal will yield savings of PKR4.0/sh‐PKR5.0/sh on an annualized basis, our back of envelope working suggests. Apr‐15
May‐15
Jan‐15
Mar‐15
Jan‐15
Dec‐14
Oct‐14
Nov‐14
Sep‐14
Jul‐14
Aug‐14
Jun‐14
May‐14
Another right maybe in offing: With its 9MFY15 results, NCL announced 20% right share issue through which the company is expected to raise PKR1.0bn and the proceeds are likely to be used to finance the construction of 46MW plant. We have estimated the total cost of the project at ~PKR3.8bn (based on comparable projects). Given poor cash generation and extremely high leverage (D/A: ~65% in 9MFY15), we might potentially see another right issue in the coming periods to finance the project. Source: BMA Research Jehanzaib Zafar Unsustainably high dividend payout of NCPL: NCL has a controlling stake in Nishat Chunian Power Limited (NCPL) and therefore dictates the payout of its subsidiary. However, given the fact that NCPL will be undergoing major overhauling in FY16, we do not expect the company to be able to maintain such a high payout and may cut its dividend, going forward. We forecast NCPL to announce full year dividend of PKR5.5/sh‐
PKR6.0/sh which may limit earnings growth in FY16 of NCL. Outlook on cotton prices: Our outlook on the cotton prices remain bearish given i) world inventory being on an all time high level, ii) subdued demand from China and iii) increasing global production, especially from India, US and Pakistan. Consequently, we expect the prices of cotton to remain at the current levels (~PKR5,200/maund‐PKR5,500/maund). As a result, we foresee no recovery in cotton‐yarn margins as we expect retention rates of yarn to remain weak owing to weak global demand. [email protected] +92 111 262 111 Ext: 2062 BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: [email protected] or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.11
1
Investment Perspective: NCL investment case is premised on its portfolio value as the core operations of the company remain disappointing in light of i) power shortage, ii) lower Chinese demand and iii) dumping of cheap Indian yarn in the local market. The scrip has underperformed the KSE‐100 index by 21% since Jan’15, opening up the valuations. Going forward, the sentiments on the sector and the scrip are likely to be driven by budget FY16 and decision on gas tariff hikes. BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: [email protected] or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.22
2