Banks HBL - SELL TP Dec-11: PKR 100 Current Price: PKR 122 Abdul Shakur abdul.shakur@bmacapital.com Stock Statistics Ticker HBL Mkt Cap USD mn 1,423 12M ADT mn shares 0.3 Shares Outstanding mn 1,002 Stock Performance 1M 3M 12M Absolute % -4.27 17.22 15.68 Relative to KSE % -0.15 7.36-6.15 Price and Volume Graph 130 110 100 Volume mn HBL & KSE Relative Graph 130 110 100 KSE Index Price PKR(LHS) HBL 4 3 2 1 0 HBL: CY10E EPS of PKR15.04 HBL is projected to post PAT of PKR15.1bn (EPS of PKR15.04), up by 22% YoY. Dividend of PKR7/sh. is expected to be announced along with the result PAT for 4QCY10 is projected to grow by considerable 119% YoY to PKR3.8bn (EPS of PKR3.76) against PAT of PKR1.7bn (EPS of PKR1.72) for same period last year Since the bank had booked higher provisions last year amid non recurring diminution of investment of PKR1.8bn on behalf of PHB bank, total provisions are projected to decline by 21% YoY in CY10 At current price levels, the scrip trades at 22% premium to our Dec11 based TP of PKR100, recommend Sell Habib Bank Ltd. (HBL) is scheduled to announce financial results for the period ended CY10 on Friday 18 Feb, 2010. We expect PAT of the bank to grow by 22% YoY to PKR15.1bn (EPS of PKR15.04) compared to CY09 reported PAT of PKR12.3bn (EPS of PKR12.28). PAT for 4QCY10 is projected to grow by considerable 119% YoY to PKR3.8bn (EPS of PKR3.76) against PAT of PKR1.7bn (EPS of PKR1.72) for same period last year. As the bank holds the maximum threshold for MCR, no bonus issue is expected along with the result. However better cash payout, DPS of PKR7, can not be ruled out. HBL: Financial Summary MCB Financial Highlights PKR mn CY10E CY09A 4QCY10E 4QCY09A Net int. inc. 45,886 41,663 10% 12,289 10,537 17% Prov. & writeoffs 7,587 9,612-21% 2,511 4,299-42% Other income 10,334 9,942 4% 2,430 2,746-12% Non int. expense 24,749 22,508 10% 6,489 6,071 7% Profit after tax 15,064 12,298 22% 3,771 1,726 119% EPS (PKR) 15.04 12.28 3.76 1.72 DPS (PKR) 7.00 6.00 7.00 6.00 Source: Company Reports, BMA Research Cost rationalization to support core earnings Asset growth is projected to remain muted while better margins ensures 10% YoY growth in net mark up income for CY10. In this regard, reshuffling deposit mix, CASA up by 5ppt during 9MCY10, is likely to trim cost of funds and to strengthen margins. Since the bank had booked higher provisions last year amid non recurring diminution of investment of PKR1.8bn on behalf of PHB bank (Nigeria), cumulative provisions are projected to decline by 21% YoY this year. However it is important to note that no major downward revision is expected in NPL provisions - estimates 1
Banks for NPL provision loss stand at PKR7.4bn, down by only 11% YoY with coverage projected at 81%. HBL: Recommend sell with potential down side of 22% Considering higher proportion of equity investments carried by HBL, surplus on investments is expected to increase amid better performance of domestic and int l equity markets during 4QCY10. However, this tends to be a non event for income while it should strengthen the balance sheet footing. At current price levels, the scrip trades at PBV multiple of 1.4x compared to the banking avg. multiple of 1.2x. Further, the scrip currently trades at premium of 22% to our Dec11 based TP of PKR100 as we reiterate our Sell stance on the stock. 2
Textile NML - ADD TP Dec-11: PKR 71 Current Price: PKR 64 Sana I. Bawani sana.iqbal@bmacapital.com Stock Statistics Ticker NML Mkt Cap USD mn 261 12M ADT mn shares 3.00 Shares Outstanding mn 352 Stock Performance 1M 3M 12M Absolute % -8.43 17.81 19.81 Relative to KSE % -4.31 7.95-2.02 Price and Volume Graph 70 60 50 40 30 Volume mn Price PKR(LHS) NML vs KSE100 Relative Index Chart KSE Index NML 135 105 75 60 25 20 15 10 5 0 NML: 1HFY11E EPS of PKR6.06 NML is expected to announce its 1HFY11 results on Friday, February 18, 2011. The company is expected to post PAT of PKR2,131mn (EPS: PKR6.06), over 2x that posted in the same period last year For 2QFY11, we expect the company to post PAT of PKR781mn (EPS: PKR2.22), 57% higher YoY compared to PAT of PKR497mn (EPS: PKR1.41) posted in the same period last year We have a DCF-based Dec11 TP of PKR71/share with an upside potential of 11%. ADD Nishat Mills Limited (NML) is expected to announce its 1HFY11 results on Friday, February 18, 2011. The company is expected to post PAT of PKR2,131mn (EPS: PKR6.06), over 2x that posted in the same period last year. For 2QFY11, we expect the company to post PAT of PKR781mn (EPS: PKR2.22), 57% higher YoY compared to PAT of PKR497mn (EPS: PKR1.41) posted in the same period last year. NML: Financial Summary PKRmn 1HFY11E 1HFY10A 2QFY11E 2QFY10A Net Sales 21,439 14,152 51% 11,478 7,757 48% Cost of Sales 17,706 11,663 52% 9,883 6,449 53% Gross profit 3,733 2,489 50% 1,595 1,308 22% Other Income 746 339 % 389 153 154% Finance cost 640 547 17% 325 288 13% PBT 2,416 1,146 111% 939 553 70% PAT 2,131 1,010 111% 781 497 57% EPS (PKR) 6.06 2.87 2.22 1.41 Source: Company Accounts, BMA Research Fresh cotton procurement at PKR8K/maund levels to dampen profitability The company is likely to benefit from improved profitability from the spinning segment which contributes about 30% to its revenues. Yarn prices averaged at PKR282/kg (benchmark 20s count) in the domestic market in 1HFY11, 87% higher YoY compared to PKR151/kg in the same period last year. Similarly, it averaged at PKR330/kg in 2QFY11 compared to PKR235/kg in 1QFY11 and PKR165/kg in the same period last year. Higher selling prices particularly in the export markets are expected to push up the spinning revenues to PKR4,091mn in 2QFY11 and augment the company s total sales at the same time. NML had low-cost cotton inventories (valued at PKR4,500/maund) available till Sep10 which resulted in inventory gains in 1QFY11; however, our conversation with the management hinted at further procurement at a price of PKR8,000/maund for the rest of FY11. Therefore, we believe that spinning margins would see a dip to 17% in 2QFY11 against 23% yielded in 1QFY11. 3
Textile Higher yarn prices are further expected to dampen margins for weaving and home textiles segment as retailers are generally reluctant to translate the increase in raw material prices into end-product prices immediately. However, our conversation with the management has revealed that prices have been revised w.e.f January 01, 2011 which are expected to be reflected in 2HFY11 profitability. Other Income to augment from AES dividends NML s investments in its group companies act as a source of income for the company in each period. Out of these, dividend income from MCB and NCL are expected to contribute PKR173mn while AES Power Projects are also projected to yield dividend income of PKR207mn during 2QFY11. In case dividend from AES does not come through NML s EPS is expected to clock in at PKR1.71 for 2QFY11 (EPS: PKR5.55 for 1HFY11). Outlook: Pressure on margins cannot be ruled out Cotton prices have shot up 27% CY11TD to PKR11,620/maund at present, propelled by Indian act of stopping export of the cotton to Pakistan and other countries. Remaining procurement at such high levels in addition to greater imports from non-india are expected to put pressure on margins going forward. We have a DCF-based Dec11 TP of PKR71/share with an upside potential of 11%. ADD. 4
Construction & Materials DGKC - BUY TP Dec-11: PKR 49 Current Price: PKR 27 Omar Rafiq omar.rafiq@bmacapital.com Stock Statistics Ticker DGKC Mkt Cap USD mn 114 12M ADT mn shares 3.8 Shares Outstanding mn 365 Stock Performance 1M 3M 12M Absolute % -13.35-5.35-5.83 Relative to KSE % -9.23-15.21-27.65 Price and Volume Graph 35 30 25 20 15 Volume mn Price PKR(LHS) DGKC vs KSE100 Relative Index Chart 140 130 110 100 70 60 KSE Index DGKC 30 25 20 15 10 5 0 DGKC: 1HFY11E EPS of PKR0.35 DGKC is expected to announce its 1HFY11 result on Thursday. February 17, 2011. We expect the company to report PAT of PKR127mn (EPS: PKR0.35); recording YoY decline of 73% For 2QFY11, we expect the company to report PAT of PKR105mn (EPS: PKR0.29) compared to LAT of PKR115mn (LPS: PKR0.31) for the corresponding period last year Despite higher price of cement in the local market, gross margins are likely to remain lackluster at 14% for 2QFY11 on account of rising coal/energy prices Strong dividend income from portfolio however is likely to keep profitability afloat despite weak margins Although domestic cement offtake is likely to see an increase post Feb11 with the rural incomes increasing post wheat harvesting, we expect coal prices to keep profitability in check We thus maintain our stance on the sector whilst having a BUY call on DGKC s stock (Dec11 Target Price of PKR49/share) D.G. Khan Cement (DGKC) is expected to announce its 1HFY11 result on Thursday. February 17, 2011. We expect the company to report PAT of PKR127mn (EPS: PKR0.35), recording YoY decline of 73%. For 2QFY11, we expect the company to report PAT of PKR105mn (EPS: PKR0.29) compared to LAT of PKR115mn (LPS: PKR0.31) for the corresponding period last year. We do not expect the company to announce any divided for the period. DGKC: Financial Summary PKR mn 1HFY11E 1HFY10A 2QFY11E 2QFY10A Revenues 8,032 7,958 1% 4,504 3,366 34% Gross Profit 1,304 1,705-23% 626 388 61% Other Income 546 471 16% 313 303 3% Financial Charges 1,012 956 6% 524 488 7% PAT 127 470-73% 105-115 NM EPS (PKR) 0.35 1.29 0.29-0.31 Source: BMA Research Gross Margins to Remain Lack Luster Suffering from higher input prices in the wake of the Australian floods, DGKC s margins are likely to remain stricken. We expect 2QFY11 gross margins to clock in at 14% compared to 12% recorded during the corresponding period last year. However, rising prices of cement (PKR320-330/bag during 2QFY11E) is likely to push the over all gross profit north by 61% YoY to PKR626mn. 5
Construction & Materials Other income to Lend Support The company s portfolio (composed primarily of group companies) is likely to keep profitability afloat. Dividend income is expected to clock in at PKR293mn (EPS impact of PKR0.72). The positive impact of other income is however likely to be stunted by rising financial charges for the company, where we expect financial charges to clock in at PKR524mn; YoY growth of 7%. Outlook: Increasing fuel costs to keep profitability in check Although domestic cement offtakes are likely to experience a push post Feb11, on account of improving rural incomes (wheat harvest to provide the main impetus), we remain wary of the profitability of the sector given rising fuel costs. Thus, we maintain our stance on the sector whilst having a BUY call of the company s stock with a Dec11-TP of PKR49/share. 6