Khadim Ali Shah Bukhari Securities Limited (KASB) a leading brokerage house in Pakistan has shared four Research investment ideas for the week ending Jun 11’2021. Stock includes Kohinoor Textile Mills Limited (KTML PA Equity), Kot Addu Power Company (KAPCO PA Equity),), Jahangir Siddiqui & Co. Limited (JSCL PA Equity), and Millat Tractors Limited (MTL PA Equity).
Research Idea # 1: Kohinoor Textile Mills Limited (KTML PA Equity); 94% upside
Key Catalyst: Strong portfolio value of PKR 103/sh along with thriving textile business (PKR 45/sh) translates into our target price of PKR 148/sh, upside of 94% from the last close. Why to Buy? COVID19 has turned out to be a blessing in disguise as textile manufacturers witnessed influx of orders and global buyers turned to Pakistan. To highlight, exposure in KTML gives an indirect coverage in cement business. Therefore, strong fundamentals of cement business solidifies our stance on the stock.
Booming textile business: Pakistan’s textile exports bounced back stronger as evident from 17% YoY growth in 10MFY21 accredited to influx of orders because of order diversion from India and Vietnam. Additionally, US/China trade spat has given another boost to the exports. Consequently, order book for textile companies is lined up till Dec’21. With global rollout of vaccine in full swing, demand is expected to remain sky-high going forward. During 9MFY21, KTML’s topline posted a growth of 19% YoY in 9MFY21 accredited to pent-up demand in home textile segment. The company has posted a net profit of PKR 5.65/sh during 9MFY21 and we expect this year to close at PKR 7.85/sh. Boom in home textile segment coupled with resumption of dividend stream from MLCF (PKR 2.0/sh) would keep the earnings elevated in FY22 and we anticipate the company to post EPS of PKR 13.9. Textile business adds PKR 45/sh (30% to our TP).
Getting two for one: KTML has a substantial exposure in Cement business as it owns 55.2% (606mn shares) of Maple Leaf Cement Factory Limited (MLCF) which provides an indirect exposure to thriving cement business. To highlight, exposure in 1 share of KTML gives an indirect coverage of 2 MLCF shares. With upcoming pro-growth Budget FY22 which will likely earmark PKR 900bn under PSDP and rise in cement demand emanating from private housing projects, MLCF would be at a favorable position. Additionally, recently announced capacity of 2.1mn MT would help the company to expand its market share. Based on intrinsic value of PKR 67/sh, the portfolio value after a discount of 30%, comes at PKR 95/sh. Furthermore, KTML holds 82.9% shares of Maple Leaf Capital Limited that adds PKR 8/sh to the company’s value, thereby taking the total portfolio value to PKR 103/sh.
Price target of PKR 148/sh: Better export prospects coupled with promising cement business outlook warrants our case of phenomenal upside valuations. Our SoTP based target price for KTML comes at PKR 148/sh, providing an upside of 94% from the last close.
Research Idea # 2: Kot Addu Power Company (KAPCO PA Equity)
Key Catalyst: The PKR 90bn payment to the IPPs has injected a much needed dose of liquidity into the sector, opening room for bumper pay-outs. Why to Buy? KAPCO has emerged as the largest beneficiary of the PKR 90bn payment to the IPPs, receiving PKR 39.6bn (PKR 45.0/sh) in cash, Sukuk and PIBs (33.33% each). As there is a high likelihood that the company will liquidate both its PIBs and Sukuk at the earliest possibility, a potential for a bumper cash pay-out is expected to materialize in the upcoming financial results.
A cash surplus likely to result in cash pay-outs: The partial (40%) payment to the IPPs is likely to instil confidence into investors that the federal government will clear the remaining overdue balance within 6 months. We project KAPCO to register a net cash surplus of PKR 40.7bn (PKR 47.24/sh) once the entire payment (PKR 99bn overdue balance) has been processed and its short-term obligations are cleared. Given KAPCO’s history of high cash pay-outs (87% between FY09 & FY18) prior to the circular debt, any cash surplus is likely to be passed through to the shareholders.
Plant likely to remain operational in spite of PPA expiry: KAPCO’s Power Purchase Agreement (PPA), which was due to expire on Jun 26’21, has been extended for a period of 16 months. While the company will not be entitled to capacity payments during the extended tenure, its liquidated damages (LDs) of PKR 28bn (PKR 31.7/sh) is likely to be settled. For the longer horizon, KAPCO’s plant is expected to remain operational despite the expiry on account of its strategic location with an established network infrastructure. Note that KAPCO’s management assesses the remaining life-span of the production facility to hover around 10 years.
Sustainable utilization rates: likely even in a competitive market: Within a competitive electricity market, KAPCO will likely function on a take-and-pay basis in lieu of the guaranteed capacity payments model. Despite being a relatively older power plant (inaugurated in CY96), KAPCO operates at a relatively high efficiency of around 45% because of continuous overhauls. As such, the company has constantly landed in the top 10 of NTDC’s merit order list when operating on domestic gas. Even when utilizing RLNG, KAPCO generally lands in the top half of NTDC’s tier list. Consequently, we believe the company can comfortably operate at around 30% utilization for the remainder of its life span because of its strategic location even in a competitive market environment.
Sustainable earnings of around PKR 6.5/sh in the new setting: Adjusting for the likely tariff revision and a switch to a take-and-pay model, we project KAPCO to register cash-flows of around PKR 6.0/sh post the expiry of its PPA. Assuming high liquidity levels because of a competitive setting and a similar pay-out structure, KAPCO potentially offers a sustainable annualized yield of 15%. Given the high likelihood of bumper dividends in FY22 and FY23, we believe KAPCO has the potential to rally considerably from current levels.
Research Idea # 3: Jahangir Siddiqui & Co. Limited (JSCL PA Equity); 63% upside
Key Catalyst: There is deep value in an investment company as it trades 69% lower than market adjusted NAV of PKR 39.06/share. The upside which narrowed to 4% in Dec’20 has widened as the company lost 29% of its capitalization over the last few months. Treading similar lines, we have a BUY stance on our TP of PKR 37.56/share, the market adjusted NAV offers 63% upside from last close.
Why to Buy? JSCL is an investment company primarily in financial services and also makes long term investments in growing companies in Pakistan. As good times continue to roll at PSX, and recent performance of companies like TRG (Mar’21 till date returns of 18%) among others, we believe that the company is trading at a hefty discount to its NAV. Even though it has never traded at a premium historically, recent underperformance since Dec’20 as the price dropped significantly makes it a screaming BUY as per our calculations. We also believe, one of its subsidiaries JS Bank (JSBL) is also poised to re-rate when the economic growth cycle continues beyond the COVID19 vaccination period.
Direct and indirect exposure: JSCL owns 8.72% of TRG while it also owns another 3.62% TRG via JS Infocom, one of its wholly owned subsidiaries. We believe that the company will be realizing nearly PKR 2.5bn in capital gains from equities in the quarter ending Jun’21, PKR 1.86bn only from TRG. While we have only taken 8% return PSX since Mar 31’21 in capital gains in equities, JSCL’s short term equity investments may likely outperform benchmark, as done previously.
There can be upside risk too: Even though the company’s investments cover all sectors including asset management, commercial banking, investment banking, Islamic banking, securities brokerage and insurance, we believe another upside to our TP can emerge JS Bank (JSBL) and Bank Islami (BIPL) start re-rating as the banking sector is poised for a mean-reversion. JSBL and BIPL are currently tading at a PB of 0.3x and 0.6x, respectively.
Price target of PKR 37.6/share: We believe the stock is poised to rally as stock has lost one-third of its capitalization and the discount to NAV has widened to a large extent. Our estimates yield 63% upside from current levels, BUY!
Research Idea # 4: Millat Tractors Limited (MTL PA Equity); 27% upside
Key Catalyst/Why to Buy? We expect improvements in farmer economics as a function of better liquidity, increased support prices as well as food price uptick. The ripples from accommodative policy has already brought in improved tractor sales. We believe the market still discounts Millat’s position as leading tractor manufacturer and earning potential currently trading at a forward P/E of 8.3x.
Positive theme is still discounted: We see MTL to potentially report historic high volumes going ahead from reduction in sales tax on locally manufacture red tractors as well as pick up in agri-credit on easy term provides foothold to demand uptick. Large crops such as wheat, rice and sugarcane has noted improved incomes per acre. The demand from development sector alone provides another avenue for healthier sales. We potentially see MTL selling 48k units in FY23.
Subsidy drives volumes: Subsidies levied to the agri sector equates to improved tractor sales. This was seen with various subsidies announced over the past 10 years. In the past one year, the government has brought down sales tax to zero for the sector. This acts as a direct subsidy injection for the farmer. We note coherent uptick in tractor sales as a result. We expect the same to remain in place going ahead as Pakistan continues focus on improvement in farmer economics.
Investment Thesis: MTL has attracted a premium valuation historically trading at an average P/E of 11x in the past 20 years. This is yet to reflect with the uptick in 9MFY21 profits at PKR 4.3bn vs PKR 1.4bn (up by 216% YoY) in the SPLY. We note better margins that the company can maintain at 23% as it continues to produce tractors with up to 95% localization. That said, we eye MTL to post earnings of PKR 133/sh and PKR 144/sh in FY22E and FY23E, respectively. This implies MTL is trading at a P/E of 8.3x and 7.7x. Our TP of PKR 1,398/sh implies an exit multiple of 10.5x presenting an upside of 27% from last close.
