The Bell Textiles: Upgrade to Marketweight on strong earnings outlook Textile sector earnings set to improve in FY15 Pakistan’s textile sector earnings are expected to grow by 34% YoY in FY15 after weak FY14 earnings (down 16% YoY). Earnings rebound would be driven by: 1) Recovery in yarn margins due to weak cotton prices, 2) Increase in value added exports due to GSP+, and 3) Improvement in export competitiveness due to PKR depreciation. Improving yarn margins; risks to earnings of spinners persist Yarn primary margins have improved by 20% YoY during 1QFY15 after posting substantial drop of 19% YoY in FY14. Margins posted strong recovery on account of tumbling cotton prices following China’s new cotton policy urging consumption of domestic cotton and yarn. However, gains from margins’ improvement would likely be limited by weak yarn volumes owing to reduced yarn demand from China. Cumulative yarn exports have fallen by 22% YoY during 2MFY15. Encouraging value added textile exports Textile exports remained flat in USD terms during 8MCY14, clocking in at USD9.0bn despite GSP+ in effect. However, volumes of knitwear, bed wear and ready-made garments grew by 13%, 11% and 7% YoY respectively during 8MCY14, while low value added segment exports dropped. PKR depreciation shall help improve earnings and exports PKR has rebounded recently and depreciated by ~4.5% since Apr-14 to ~PKR101.9/USD which would make Pakistan’s exports cheaper in comparison to other competitors and help textile sector realize strong gains. Upgrade to Marketweight The sector has underperformed KSE-100 index by 16% since our Jan-14 strategy note owing to weak FY14 earnings. With strong rebound in earnings, we expect that the sector would likely post strong return in FY15. We thus upgrade our stance on the sector to Marketweight. We maintain our liking for NML as the stock offers 22% upside to our revised Jun-15 PT of PKR145/sh (+3%) along with dividend yield of 5%. We maintain our HOLD stance on NCL as it offers an upside of 13% to our Jun-15 PT of PKR46/sh (+7%). Elixir Research.
Posted on: Thu, 02 Oct 2014 08:09:50 +0000
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