Morning Call about -What could be the better time for Lalpir transaction? – Arif Habib Limited

Karachi, June 10, 2013 (PPI-OT): As announced previously by Nishat Mills Limited (NML), the group has decided to divest 10% of its ownership in Lalpir Power Limited.

According to Arif Habib Limited the total shareholding of NML in Lalpir Power Limited stands around 121.55mn shares, making up 32% of the total outstanding shares (379.84mn shares). Other investors with significant influence include Stanhope Investments and Engen (Pvt) Limited having 30% and 20% shareholding, respectively.

The sponsors have decided an offer for sale of 10% of their holding (37.98mn shares) through book building, followed by an Initial Public Offering (IPO) with a Green Shoe option of 5% of paid up capital.

What can be the impacts on Nishat Mills Limited?
NML owns 121.55mn shares of Lalpir with total cost of PKR 1,823mn, translating into per share cost of PKR 15. The floor price for the book building has been set at PKR 15/share, equal to Lalpir’s cost on NML’s books.

Considering the current market scenario where the index level is hovering around its historic high and energy companies being the prime focus of investors due to expected resolution of the circular debt issue, the strike price is expected to be quite higher.

Arif Habib Limited has worked out a sensitivity of every PKR 2/share rise in strike price and its impacts upon NML. Arif Habib Limited base-case scenario is PKR 19/share, which demonstrates per share cash inflow of PKR 0.66 and gain of PKR 0.14 from this transaction. Further, every PKR 2/share change in strike price leads to PKR 0.07/share impact on NML, depending upon the direction of change.

Transaction assumption                    PKR mn
Price (PKR/share)        15.0   17.0   19.0   21.0   23.0   25.0 
Cash inflow               182    207    231    255    280    304 
Per share inflow (PKR)   0.52   0.59   0.66   0.73   0.80   0.86 
Gain on sale               -      24     49     73     97    122 
Gain per share (PKR)       - 0   .07   0.14   0.21   0.28   0.35 

Source: Company Accounts, AHL Research

Arif Habib Limited believes the aforesaid transaction to be a wise business decision amid current political and market circumstances. The energy sector stocks continue to charm investors due to expected resolution of power crisis and inter-corporate debt issue.

Moreover, other portfolio investments of NML have also performed stunningly post elections (NPL 29%, MCB 27% and DGKC 14%) and the gain from this transaction is just a one from many. Arif Habib Limited Sums of The Parts (SoTP) based financial model values NML at PKR 133/share (increased investment value by marking to market NML’s portfolio with 35% discount). The scrip offers a handsome upside potential of 25% from its last closing, making us recommend a BUY!