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Morning Call about Nishat Mills Limited – Arif Habib Limited

Karachi: FY11 profitability increased by 66% YoY

In FY11 Nishat Mills Limited posted a profit after tax (PAT) of PKR 4,844mn (EPS: PKR 13.78) compared to PKR 2,915mn (EPS: PKR 8.29) in the same period last year, marking a YoY increase of 66% on standalone basis.

According to Arif Habib Limited, this rise was mainly due to 54% YoY jump in revenue and 149% YoY rise in other operating income. However on QoQ basis, company’s profitability dropped by 4% to PKR 1,362mn in 4QFY11 as compared with PKR 1,424mn in 3QFY11 due to 45% decline in raw cotton prices in 4QFY11. This subsequently led to shrinkage of gross margin by 279 bps on QoQ basis. Alongside the result, company also announced a final cash dividend of PKR 3.3/share.

High cost eats away gross margins

NML’s topline inched up by a hefty 54% YoY to PKR 48.56bn in FY11 as compared to PKR 31.54bn last year. The growth is attributable to better product mix, depreciation of Pak Rupee against US Dollar, higher sales volume and sales prices. On the other hand, higher raw material expenses on the back of increased cotton prices and forced used of furnace oil due to lower gas availability jacked up the cost of sales by 59%YoY. However, timely procurement of cotton helped the company in limiting the contraction of gross margins to 16.2% from 19% last year.

 

Financial Highlights 4QFY11 3QFY11 % Chg.  FY11  FY10  %Chg.
Sales  13,701 13,520 1% 48,565 31,536  54%
Cost of Sales 11,594 11,063  5% 40,719 25,555 59%
Gross Profit  2,107  2,457 -14% 7,846 5,980 31%
Distribution Cost  707 559 27% 2,190 1,715 28%
Admin Expenses 177 164 8% 657 545 20%
Other Operating Expenses 123 119 3% 431 289 49%
Other Operating Income 760  478 59% 2,445  982 149%
Operating Profit 1,860 2,093 -11% 7,013 4,413 59%
Finance Cost 392 504  -22% 1,601 1,127 42%
Profit Before Tax 1,469 1,589 -8% 5,412 3,286 65%
Taxation 107 166 -36% 568 371 53%
Profit After Tax 1,362 1,424 -4% 4,844  2,915 66%
EPS 3.87 4.05 -4% 13.78 8.29 66%
Source: AHL Research

 

 

Other operating Income has supported the bottom-line

During FY11 total other operating expenses went up by 49% YoY whereas financial cost increased by 42% YoY to PKR 1,601mn from PKR 1,127mn in FY10, on the back of increased short term borrowing and higher interest charged due to increase in discount rate. On other hand, other operating income of the company has augmented by 149% YoY from PKR 982mn in FY10 to PKR 2,445mn in FY11. This improvement is mainly due to gains on foreign exchange derivatives and higher dividend income earned from strategic investments along with new investments.

Recommendation

Based on SOPT valuation method, Arif Habib Limited’s target price for June 2012 works out to be PKR 74.10 per share, which offers an upside potential of 58.4% from its last closing price of PKR 46.77 per share. Besides attractive upside potential, the stock offers FY12F dividend yield of 7.1%. Thus Arif Habib Limited recommends a Buy.

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