Topline Pakistan Research has published its expert analysis of Nishat Mills Limited (NML). The leading research firm has revised its position and is maintaining a buy recommendation based on adjusted earnings due to lower margins. We have updated our earnings estimates for NML by an average of 33% for FY25 and FY26, projecting earnings of Rs 18.49 and Rs 19.11, respectively, due to the company’s lower-than-expected gross margin in 9MFY25.
– We now anticipate average gross margins of 11.1% for FY25-FY27, compared to 9MFY25 gross margins of 11.3%. Over the past decade (FY15-FY24), the gross margin has averaged 12.4%.
– Despite the decline in earnings, we maintain our BUY recommendation with a target price of Rs 225 for June 2026, indicating a total return of 60%, which includes a dividend yield of 2%.
– The Sum of the Parts (SOTP) valuation indicates a company value of Rs 302/share, representing a 53% discount to the market price. The SOTP values for MCB Bank (MCB) and DG Khan Cement (DGKC) are projected at Rs 156, exceeding the current market price of Rs 142.7/share.
– Other significant holdings of the company include: (1) Pak Gen Power (PKGP), (2) Nishat Power (NPL), (3) Hyundai Nishat Motors, and (4) Lalpir Power (LPL).
– Revising Down Gross Margins: NML’s gross margins, which were 14.3% in FY21-23, fell to 10.8% in FY24. We expect them to reach 11.1% in FY25 (9MFY25: 11.3%), down from initial projections of 12.5%. This downward adjustment is due to higher-than-expected fuel costs and salary expenses.
– We forecast gross margins of 11.1%, 11%, and 11% for FY25, FY26, and FY27, respectively.
– Regarding SOTP valuation and target price: The SOTP valuation consists of Rs 257/share from the portfolio valuation (with 39% attributed to MCB and DGKC) and Rs 466/share from core operations, totaling Rs 302/share. NML is currently trading at a 53% discount to this market valuation.
– In terms of Price-to-Earnings (PE) ratios, NML is trading at 7.72x for FY25, 7.47x for FY26, and 6.51x for FY27. We expect the company to distribute dividends of Rs 3 and Rs 3.50 per share for FY25E and FY26/27F, respectively.
– NML was highlighted as our top pick in our annual strategy report released on November 16, 2024. Since that time, the stock has appreciated by 88%, outperforming the market return of 41% during the same period.
– Key risks to NML’s earnings include: (1) lower-than-expected sales recovery amid economic uncertainty, (2) Higher US tariffs on Pakistani goods, (3) renewed PKR depreciation impacting input costs, and (4) supply chain disruptions.
