KohinoorTextileMills

TheKohinoorwithinTextiles

ThursdayJanuary22,2015

KTML
CurrentPrice:PKR46
KTMLPerformance

1M

3M

12M

Absolute%

36%

83%

64%

RelativetoKSE%

25%

68%

37%

Bloomberg

KTML.PA

Reuters

KOHT.KA

MCAP(USDmn)

113

12MADT(USDmn)

0.21

SharesOutstanding(mn)

246

KTMLvsKSE100RelativeChart
KTML

KSE100Index

60%
45%
30%
15%
0%
15%
Jan15

Dec14

Nov14

Oct14

Sep14

Jul14

Aug14

Jun14

May14

Apr14

Mar14

Jan14

Feb14

30%

Source:KSE,BMAResearch

WehighlightKTMLasahiddengemwithinsmallcapscripswhereourconvictiononthe
stock is based on i) improving fundamentals in core operations and ii) impressive
portfoliovaluations.Inthisregard,thecompanyholds58.06%stake(306mnshares)in
Maple Leaf Cement Factory (MLCF), benefiting from improving operations of the
subsidiary.TheindicativeTPofthestockiscomputedatPKR70/shcomprisingofKTML
textile operations valued at PKR27/sh plus portfolio valuation contributing PKR43/sh
(assuming a portfolio discount of 30%). Note that KTML is not part of our actively
covered textile universe. In CY14, Pakistan Textile sector has underperformed the
benchmark KSE100 by 18% on account of unfavorable industry dynamics leading to
declineinsectorprofitability.However,CY15isexpectedtofarebetteronaccountofi)
~26%YoY decline in cotton prices in FY15, ii) ~43%FYTD decline in prices of FO, iii)
improvedvolumetricofftakeonaccountofGSP+andiv)easingfinancecostontheback
ofdeclininginterestrates.Materializationoftheabovementionedtriggerswillremain
the key valuation triggers, going forward. We expect the company to post
unconsolidatedEPSinthevicinityofPKR4.5PKR5.0inFY15.
Margins to improve on lower cotton: 1HFY15 was marked by a mild recovery in the
industryscoreoperationsasthepricesofcottoncameoffandthebenefitsoftheGSP+
startedtomaterialize.Inthisregards,companystoplinepostedagrowthof8%YoY(and
4%QoQ) while gross margins also remained robust at around 15% (BMA universe gross
margins13.9%).Goingforward,weexpectthecoreoperationsofthecompanytoremain
robust due to easing cost pressures as the cotton procured by the company (around
PKR5,300/maund, down 20%YoY) will likely come into effect, resulting in further margin
accretion. As per our back of envelope calculations, we expect the lower cost of raw
materialtoresultinsavingsofPKR1.24/sh(25%ofFY15EPS).
Deleveraging+DRcuttoreduceburdenonprofitability:Thefinancialleverageposition
ofthecompanyhadalreadyimprovedfromFY12(LongTermDebttoAssetspeakedat4%)
asthecompanysettledmostofitsoldlongtermdebtby1QFY15.AsofSep14,thelong
debtofthecompanystoodatPKR370mn(LongTermDebttoAssetsat2%),includingnew
loan of PKR317mn for its upcoming production facility. This coupled with decreasing
interestratesinthecountrywillsignificantlyreducethefinancecostthusfurtheradding
to the growth in bottomline. As per our estimate, every 100bps in interest rates
translatesintoanannualizedearningsimpactofPKR0.21/sh.
On back of the said reasons, we expect the company to post unconsolidated EPS in the
vicinity of PKR4.5PKR5.0 in FY15. The company posted earnings of PKR4.76/sh in FY14
whichincludedaoneoffincomefromthedivestmentofMLCFsholdingwherecompany
reduced its holding of MLCF from 64.5% in FY13 to 60.5% resulting in a capital gain of
PKR3.0/sh.

JehanzaibZafar
jehanzaib.zafar@bmacapital.com

Newproductionfacilitycomingonline:KTMLrecentlyannouncedthatithasexpandedits
productionfacilityinweavingsegmentbyadding48newHighSpeedAirJetLooms.The
new looms started their production w.e.f. Jan715. The companys weaving plants were
running at a capacity of 85% as per the latest company reports. Assuming, the new
productionfacilityrunsatautilizationrateof80%,thecompanysbottomlinewillgeta
liftofPKR0.65/sh(13%ofFY15EPS)onannualizedbasis,asperourcalculation(assuming
statusquoonmargins).

+92111262111Ext:2062
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.11

Savings from plummeting fuel and power cost: The companys production facilities are
located in the north where the chronic gas shortage forces the company to run its
operationsonFO.GiventherecentdeclineinFOprices(downby~43%FYTD),weexpect
further improvement in margins on falling fuel and power cost. In this regard, it is
pertinenttonotethatthecostofelectricityproductionthroughFOisaroundPKR10/unit
(down ~42%YoY) while the cost of importing electricity from national grid is currently
~PKR12.6/unit.Asperourbackofenvelopeworking,thedeclineinFOpriceswillresultin
additionalsavingsofPKR1.3/shonanannualizedbasis.
Portfolio Valuation: The company currently holds substantial investment (58.06% i.e.
306mnshares)initsgroupcompanyMapleLeafCementFactory(MLCF).Drivenbyrobust
turnaroundinprofitability,thestockpriceofMLCFhasappreciatedby66%FYTD,resulting
inhugejumpintheportfoliovalueofKTML.BasedonthecurrentpriceofMLCF(wehave
selected lower of current and target prices to keep our estimates conservative), KTMLs
portfoliovaluestandsat~PKR43/sh(afterassumingadiscountof30%onportfolio).The
companyhasalsoinvestedPKR2.0bninMapleLeafCapitalLimitedwithaviewtotapthe
highlylucrativecapitalmarkets.
PossibledividendfromMLCF:WithMLCFpotentiallyinapositiontopaydividendinFY15,
KTMLs earnings could receive further boost via increased other income. In this regards,
everyPKR1/shdividenddeclaredbyMLCFresultsinapositiveimpactofPKR1.12/sh.
InvestmentPerspective:AssigningaP/Eof5.5xonthecompanyscoreFY15earningsof
PKR4.9/sh leads to an indicative core price of ~PKR27/sh. At the same time, KTMLs
portfolio value stands at ~PKR43/sh (after assuming a discount of 30% on portfolio)
translatingintoanindicativeTPofPKR70/sh.Thestockcurrentlyoffersapotentialupside
of47%onitslastclosing.BUY

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.22

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