A performance review of Gul Ahmed Textile Co. Ltd

Revenues outperforming expectations; upgrade estimates    

We reiterate our Buy stance on GATM, with a new rolled-over June 2022 TP of PKR75/sh (from PKR50/sh earlier), where positives stem from a significantly improved revenue outlook (greater exports and local sales) and rising gross margins from the recent pandemic-affected low.

We estimate GATM’s revenues to grow by c.45%/15% yoy in FY21/22f (vs. c.30%/10% earlier), due to (i) ongoing BMR projects in the Spinning segment, and (ii) expected rise in both value-added exports and retail sales post-vaccine roll out.

GATM is trading at attractive FY21/22f P/E of 7x/5x versus average P/E of 11x/9x for IMS Textiles Universe. Key catalysts for the stock are potential Ideas’ IPO (likely in 2022) and implementation of a new Textile policy by the government.

Raise TP to PKR75/sh amid robust revenue trends

We retain our Buy stance on Gul Ahmed Textile Mills Ltd (GATM), with a new rolled over June 2022 TP of PKR75/sh, up from PKR50/sh previously. With the robust growth in both local and exports sales likely to continue, we raise our revenue estimates by 16% over FY21/22f. The growth in sales is expected to stem from (i) an overall improved backdrop amid robust order flows from its major export markets (US, UK and Europe), (ii) uptick in the Spinning segment (which had lagged behind the value-added segments), (iii) easing of lockdown restrictions, which will further boost retail sales, and (iv) extensive BMR projects, where additional spinning capacities will potentially commence with full utilization, by 4QFY21. The global roll-out of Covid-19 vaccine may further improve order flows for GATM in all segments, post-easing of lockdowns, in our view. We therefore raise our FY21/22f earnings estimates by c.40%.

Well-positioned to benefit from improved backdrop

GATM is presently undergoing BMR projects, where an additional spinning capacity (of about 10% of the existing, in our view) is likely to commence by 4QFY21. The additional capacity may operate at full utilization, where new technology can also improve overall margins, as seen the last time GATM undertook such a project in 2017 (the segment contributed c.20% to topline in 2Q). Due to the low margins on yarn exports until 4QFY20, GATM shifted its focus on local yarn sales in 1QFY21. However, with rapid changes in the global cotton/ yarn dynamics (shift away from China), GATM may revert to exports, in our view. The easing of local restrictions on retail outlets from mid-March, the retail segment profitability can improve further, where a noticeable increase in gross margins was seen in 2Q (c.30% compared to c.25% in 1Q and similar to pre-pandemic levels). We have raised our Retail segment revenue by c.15% for both FY21/22f and expect the segment’s gross margins to remain around 30%.

Attractive valuations vs. peers

GATM is presently trading at attractive FY21/22f P/E of c.7x/5x, a c.30% discount to average P/E of 11x/9x for our Textiles Universe. Key triggers for stock price will be (i) potential IPO (now planned for 2022) which will unlock greater value for GATM, given Ideas is likely to fetch Consumer sector valuations (P/E of over 20x), and (ii) implementation of a new Textile policy, which can improve overall margins with the reduction in gas tariffs, in our view. According to the management, GATM has a cogeneration CPP and thus will be exempted from the gas moratorium for industries – instated by the government.   

Courtesy – Intermarket Securities Limited.

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