· Our liking for KTML emanates from i) Robust growth in textile exports (+27.4%YoY in 1QFY22) amid higher US apparel demand and rerouting of orders from (China and Vietnam) due to massive energy/power shortage, ii) broad based growth in local spinning segment amid higher local yarn margins (49% local yarn margins vs 23.2% export yarn margin), iii) PkR depreciation, and iv) higher than expected local cotton production.

We expect KTML to continue the same trajectory of topline growth with FY21-24F CAGR of 10%, similar to a growth experienced in FY21 where all the segments across the value chain contributed in growth (+40.7/43.3/30 in Spinning/Weaving/Home Textile).

· In the long run, KTML will be eyeing growth in export sales where Home textile sales in FY21 clocked in at PkR10.2bn out of which 48.2/27/20% of sales coming from US/Asia & Africa/Europe. In the Weaving segment, export sales clocked in at PkR2.34bn with Europe contributing 85.5% of the sales in FY21. Moreover, we expect KTML to continue to leverage its strong hold in US market where (US apparel imports have shot up 28.1% in 8MCY21 with Pakistan apparel exports to US increased by 66.7%YoY in 8MCY21).

We expect, exports sales to register FY21-24F CAGR of 10-15%. Furthermore, on the macro front, Govt. has also provided incentives to support textile exports in the shape of financing facilities by SBP under ETF and LTFF with ~3% and 5%, respectively and reduction in turnover tax from 1.5% to 1.25% of sales. Moreover, recent release of PkR6bn under DLTL also helped textile exporters to solve liquidity problems.

· On the local front, higher cotton production target of 9.8mn bales for FY22 (expected to be surpassed) will provide breather for soaring local cotton prices (+10.7% FYTD vs 39% CYTD). We expect cotton prices, in the short term to remain elevated while in the longer run prices will retreat to last 3yr avg. of PkR10-10.5K/maund. Similarly, yarn margins will also revert to last 3yr avg. of 45% vs 60% CYTD, in our opinion.

· KTML performance has remained sluggish (FYTD return: -ve 3%) despite robust earnings and positive outlook supporting future earnings. Moreover, taking MLCF and equity investments of Maple Leaf Capital at market value, KTML portfolio value arrives at PkR80.4/sh (incorporating 25% discount) which in essence provides core operations virtually free, while the value of company’s core operations is estimated at PkR34.4/sh using P/E ratio of 4.0x for FY22F.

Consequently the fair value of KTML is estimated at PkR114.8/sh, offering 57.3% return on the last close.

Courtesy – AKD Research