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ValuationsrevisitedfollowingtheawardofGSP+
BUY
We revisit our target price estimates for Nishat Chunian Limited (NCL) following
countrys entry into European GSP+ program. As a result, we have upgraded our
earnings estimates by PKR1.27/share and PKR2.26/share for FY14 and FY15
respectivelytoPKR13.21/shandPKR15.02/sh.
With all the expansions that company has made to its spinning segment, the
segmentscontributioninrevenueofthecompanyislikelytoincreaseevenfurther
(60% of sales in FY13) making the company extremely susceptible to changes in
Chinascottonpolicy
DividendincomefromNishatChunianPowerLimited(NCPL)ofPKR750mn(PKR4/sh)
will be recognized by the company in 2QFY14 which will help support the bottom
line.
Factoringinthesefavorablechangesinearningsforecast,werevisetheTPofNCLto
PKR74/share. We also expect the stock to pay full year dividend of PKR3/share
thereforethestockoffersatotalreturnof~22%.BUY
TargetPriceDec14:PKR76
CurrentPrice:PKR63
Bloomberg
NCL.PA
Reuters
NCHU.KA
MCAP(USDmn)
100
12MADT(USDmn.)
1.2
SharesOutstanding
200
Valuations
2013A
2014F
2015F
EPS
11.4
13.2
15.0
DPS
2.0
3.0
4.0
5%
2014FDividendYield(%)
CapitalGain(%)
17%
TotalGain(%)
22%
NCLvs.KSE100RelativeChart
KSE100Index
NCL
200
180
160
140
120
Thursday,January9,2014
GSP+;ImpactonNCLsprofitability
WerevisitourtargetpriceestimatesforNishatChunianLimited(NCL)followingcountrys
entryintoEuropeanGSP+program.NCL,with~12%ofitssalescomingfromEU,isinline
tobenefitfromthisconcession.However,giventhecompanysconcentrationinspinning
segment(contributing~58%ofitstotalsalesinFY13),theimpactwouldnotbesignificant
since countrys exports of yarn to EU remains negligible. As a result, we have upgraded
our earnings estimates by PKR1.27/share and PKR2.26/share for FY14 and FY15
respectively to PKR13.21/sh (upward revised by 10%) and PKR15.02/sh (upward revised
by 17%). Weve also taken this opportunity to roll forward our model to reflect Dec14
targetprice.Factoringinthesedevelopments,werevisetheTargetPriceofNCLby12%to
PKR74/share.CompanyisexpectedtoannouncefullyeardividendofPKR3/share(DY5%).
Therefore,NCLoffersanupsideof17%,settlingthetotalreturnat~22%.
Continuedfocusonspinning:Puttingalleggsinonebasket
100
80
Jan14
Nov13
Dec13
Oct13
Sep13
Aug13
Jul13
Jun13
Apr13
May13
Mar13
Feb13
Jan13
JehanzaibZafar
jehanzaib.zafar@bmacapital.com
+92111262111Ext:2062
NCLsspinningcapacityhasbeenreinforcedsignificantlyasitsnewspinningunitof22,000
spindles came online in Dec13. The company is expected to add ~ 7.05mn KGs to its
spinningcapacity(assumingnewspindlesproduce320KGsofyarn/spindle).Furthermore,
theacquisitionofTajtextilesassetswillfurtheraddtothecapacityofthecompanywhich
is likely to come online in 4QFY14. With all these expansions in spinning segment, the
segments contribution in revenue of the company is likely to increase even further
(previously it was 60% of sales in FY13) making the company extremely susceptible to
changes in Chinas cotton policy. However, with China likely to continue its cotton
procurementpolicyinCY14,weexpectthecompanytoridethecrustofthewaveforyet
anotheryear.
BittersweetnewsonFuelandPowerFront
The much anticipated 14MW, from WAPDA grid, has finally come online in Jan14. This
developmentwouldkeepthefuelandpowercostinchecksincethe3Qcomeswithgas
outages.Therefore,theneedtouseFOtosupplementthegasoutageswouldbelimited
keeping the fuel and power cost low. This news complements the decision to divert
85mmcfdtoindustriesratherthanIPPs.However,GIDCleviedonCPPswillincreasethe
fuelcostsgoingforwardandourbackoftheenvelopecalculationsuggestthatitwillhave
animpactofPKR0.58/share(4%ofEPS)onNCLsearningsonannualizedbasis.
Rupeedevaluation
The currency depreciation, causing major headaches for the incumbent government, is
goodnewsforexportorientedcompanies.NCLssales(~73%USDdenominated)arealso
likelytobenefitfromPKRdepreciation.Rupeedepreciatedby7%inFYTD,webelieve,the
PKR/USDparitywillcloseataroundPKR110/USDinCY14.
Bigpaydayfromsubsidiary
DividendincomefromNishatChunianPowerLimited(NCPL)ofPKR750mn(PKR4/sh)will
berecognizedbythecompanyin2QFY14havinganaftertaximpactofPKR3.37/sh.We,
expectthisdividendtocontinue,goingforward,onthebackofimprovedfundamentalsof
NCPL.
FinancialSnapshot(PKR/share)
Sales
GrossProfit
OtherIncome
FinanceCost
EPS
FY13A
106.07
17.98
5.00
6.22
11.37
FY14E
114.30
18.25
7.38
6.54
13.21
FY15E
118.44
20.45
7.45
6.83
15.02
Source:BMAResearch
Valuations
We maintainour BUY rating on the stock with a Dec14 targetpriceof PKR74/sh.We
expect the company to announce full year dividend of PKR3/share. The scrip currently
tradingataforwardP/Eof4.7x,offersanupsideof~17%anddividendyieldof5%taking
tototalreturnthestockoffersto22%.