Nishat Mills Limited – Divestment of Pak Gen could further add value!

Strong 1Q EPS on robust margins; higher other income: 1QFY11 earnings for Nishat Mills Limited (NML) continued its robust trend, helped by strong spinning margins and higher other income. The company posted PAT of PKR1,350mn (EPS: PKR3.84), up 163% YoY.

Margins likely to remain healthy: 1QFY11 gross margins at 21.5% were up 90bps over the previous quarter, due to impact of low priced inventory. While fresh cotton purchases could affect margins, the impact would be more than offset by higher realized prices on fresh contracts. Unit sale price changes for NML lags cotton prices by 2-4 months due to order backlog.

Divestment of 10% of Pak Gen holding and subsequent listing could rerate portfolio value: Listing would help in price discovery of unlisted investments in the power sector, let aside capital gains and containment of finance cost from proceeds of the sale.

Investment Perspective: At yesterday’s closing price of PKR59.7/share, NML trades at 2.8% premium to its portfolio’s market value (taking AES at cost). With divestment of Pak Gen Power Ltd likely to rerate holdings in AES, we eye room for strong share price performance ahead.

Strong 1Q EPS on robust margins; higher other income

NML’s net sales rose 56% YoY and 8% QoQ mainly due to healthy volumetric sales coupled with higher prices. All business segments contributed towards growth, with spinning and garment segments performance standing out with 59% YoY and 61% YoY increase in sales. Further support to bottom line came from strong other income, up 93% YoY.

Margins likely to remain healthy

1QFY11 gross margins at 21.5% were up 90bps over the previous quarter due to impact of low priced inventory. NML’s cotton procurement for a year generally lasts till 1Q of the subsequent year, leading to strong 1Q margins in rising cotton price scenario. While fresh

cotton purchases could affect margins, we believe the impact would be more than offset by higher realized prices as fresh contracts with higher unit prices kick in. Unit sale price changes for NML lags cotton prices by 2-4 months due to order backlog, with lag rising with each level on value chain.

Divestment of 10% of Pak Gen holding and subsequent listing could rerate portfolio value

NML recently disclosed its intention to divest 10% of its holdings in Pak Gen Power Ltd (formerly AES Pak Gen Ltd) through offer for sale and subsequent listing on the stock exchanges. While acquisition of AES owned IPPs has led to diversification of its revenue stream away from textiles to power generation, we believe listing could potentially rerate portfolio value through market based price discovery of unlisted investments in the power sector. Furthermore, capital gains on sale of investments would prop up near term earnings, whereas proceeds from sale would contain finance cost through lowering of borrowing needs.

Investment Perspective

NML’s existing investment portfolio is worth PKR20.4bn (PKR58/share) at current market prices (treating unlisted investments at cost). At yesterday’s closing price of PKR59.7/share, NML trades at 2.8% premium to its portfolio’s market value. With divestment of Pak Gen Power Ltd likely to rerate holdings in AES, we eye room for strong share price performance ahead.

Economic & Political News

Release of USD3.4bn tranche: IMF formally asked to extend SBA to March 31

Islamabad has finally submitted its formal request, in writing, to the International Monetary Fund (IMF) to extend its standby arrangement (SBA)-a USD11.3bn bailout package-for three months, up to March 31, 2011.

5MFY11 FDI down 22%

According to SBP, FDI registered a decline of USD157.1mn or 21.5% during the 5MFY11.  With current decline, FDI fell to USD573.3mn in 5MFY11 as compared to USD730.4mn in same period last fiscal year.   However, the portfolio investment has registered a decrease of 45% in 5MFY11. Overall portfolio investment stood at USD172.5mn in 5MFY11 relative to USD311.3mn in the corresponding period of FY10, depicting a decline of USD138.8mn.
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