AKD Quotidian about — NML: Gearing up for GSP Plus

Karachi, December 13, 2013 (PPI-OT): The EU Parliament in its plenary session on Dec 12’13 has approved the list of GSP Plus beneficiaries which include Pakistan. The GSP Plus status will become applicable from Jan 1st, 2014 for ten year where the first review of the status will be due in 2017.

According to AKD Securities Limited, AKD Securities Limited highlights NML as a potential outperformer despite the recent rally of 27% since Nov 1’13 (in anticipation of approval of GSP Plus status) as it is already in the process of expanding its capacity in the higher value added segment and has a strong customer base in the EU.

The increase in capacity coupled with PkR depreciation will likely result in a 5 year topline CAGR of 14% with FY15 topline growth anticipated at 22%. Incorporating capacity increases and the grant of GSP Plus status to Pakistan, AKD Securities Limited has increased AKD Securities Limited’s EPS estimates by around ~16% across AKD Securities Limited’s investment horizon increasing AKD Securities Limited’s FY14 forecasted NPAT to PkR6,691mn (EPS: PkR19.03/share). This has resulted in an upward revision in AKD Securities Limited’s TP by 11% to PkR141.4/share which offers an upside of 18% from current levels, Accumulate.

GSP Plus announced, NML to benefit most: The EU Parliament in its plenary session on Dec 12’13 has approved the list of GSP Plus beneficiaries which include Pakistan. The GSP Plus status will become applicable from Jan 1st, 2014 for ten years with the first review due in 2017. The status will allow Pakistan exports to the EU at preferential tariffs. In this regard, Pakistan’s textile sector is set to benefit the most from the GSP Plus status where Pakistan exports account for about 3%-4% of textile imports by the EU (CY12 Pakistan exports to the EU stood at EUR2.86bn).

Textile exports from Pakistan will now be able to enter the EU market duty free providing much needed support to the country’s textile sector and putting it on an even footing with Bangladesh’s textile industry which already has duty free access to the EU.

AKD Securities Limited highlights NML as a potential outperformer despite the recent rally of 27% since Nov 1’13 (in anticipation of approval of GSP Plus status) as it is already in the process of expanding its capacity in the higher value added segment and has a strong customer base in the EU. Higher value added segments contributed around 53% to total revenues and exports to the EU clocked in at PkR11.7bn (22% of total revenue) during FY13.

Gearing up for GSP+: NML is currently gearing up to reap benefits from the grant of EU GSP Plus status to Pakistan where the company is in the process of expanding capacities in the home textiles, garments, and weaving divisions. In this regard, the company has announced an increase in home textiles capacity by around 25% expected to come online towards end 2QFY14 / beg. 3QFY14.

The company is also increasing weaving capacity by 100 looms which would increase production capacity of the weaving division by 15% (expected to commission by 4QFY14). For the garments division, NML is planning to increase capacity by 4.8mn pieces, with the additional capacity available during FY15, as per management.

The increase in capacity, coupled with PkR depreciation, will likely result in a 5 year CAGR of 14% in topline where going forward AKD Securities Limited expects a sharp growth of 22% in the topline in FY15. The company has also announced plans to increase spinning capacity by 28,800 spindles, however, in the absence of a definite timeline for the project, AKD Securities Limited has not yet built it into AKD Securities Limited’s model.

Potential increase in prices: AKD Securities Limited’s recent discussions with NML management suggest that the company will benefit on the price front as well due to the GSP Plus status as it will try to share some benefit of the waiver on import duties by pushing for a slight increase in prices where AKD Securities Limited has incorporated around a 1% increase in prices of higher value added items. This will result in an annualized incremental EPS impact of 0.4%.

Higher dividend income to drive bottom-line growth: While AKD Securities Limited expects a slight decline in core earnings of 3% during FY14, primarily due to a reduction in gross margins of the spinning segment based on procurement of a higher priced cotton inventory and increase in power costs, AKD Securities Limited expects higher dividend income from NPL and MCB to drive bottom-line growth. In this regard, AKD Securities Limited expects dividend income during FY14 to clock in at PkR2,854mn (EPS Impact: PkR7.4/share) as opposed to dividend income of PkR1,801mn (EPS Impact: PkR4.61) during FY13.

Investment Perspective: Incorporating capacity increases and the grant of GSP Plus status to Pakistan, AKD Securities Limited has revised upwards AKD Securities Limited’s EPS estimates by ~16% across AKD Securities Limited’s investment horizon, increasing AKD Securities Limited’s FY14 forecasted NPAT to PkR6,691mn (EPS: PkR19.03/share). This has resulted in an upward revision in AKD Securities Limited’s TP by 11% to PkR141.4/share which offers an upside of 18% from current levels – Accumulate.

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