Gul Ahmed Textile Mills (GATM) has reported a consolidated 3QFY21 net profit of PKR1.7bn (EPS: PKR4.00), up a sharp 44% qoq and up from a net loss of PKR453mn last year (LPS: PKR1.06). This takes 9MFY21 NPAT to PKR3.6bn (EPS: PKR8.41), up a stunning c.7x yoy. The 3Q result has come in significantly higher than our expected EPS of PKR1.49, where the deviations stems from higher-than-expected gross margins and lower finance costs. GATM also announced a surprising cash dividend of PKR1.0/sh and bonus shares of 20%.
Key result highlights for 3QFY21
Revenue is flat qoq to PKR22bn (broadly in line with our expectation), where we understand volumes were higher qoq but export prices came off (partly because of the PKR appreciation). However, there is improvement in every segment compared with last year – most notably local retail sales (Ideas) and local yarn sales, in our view.
Gross margins have risen 3ppt qoq to c.22%, higher than our expectation of 19%. This may be due to significantly higher Spinning margins, due to higher local prices of yarn and continued rise in margins of the Retail segment (which had crossed the 30% level in 2Q), in our view. However, with the tightening of restrictions in the country (negative for Ideas) and removal of duties on imported yarn, we expect overall margins to decline in the coming quarter.
Distribution and Admin expenses have declined by 7% qoq. This may be due to greater fixed cost reductions, such as renegotiated rental agreements, among others, in our view. Other income has clocked in at PKR101mn, in line with our expectation.
Finance costs have declined by a sharp 40% qoq to PKR361mn from PKR568mn in 2Q; we understand this is due to some one-off adjustment which may not recur in the next quarter, in our view. Effective tax rate has clocked in at 18%.
Notwithstanding the strong growth in margins (due to the Spinning segment), the significant earnings beat has emanated from the reduction in finance costs which is nonrecurring, in our view. We expect GATM to post normalized EPS from the next quarter. Following with the 3Q result, GATM has also disclosed that the Board of Directors has approved the carve-out of the Retail segment (Ideas), and submitted the plan to the court for legal approvals – meaning the company’s plan for IPO of Ideas is well intact (not affected by recent tax changes in the Finance Bill). This is likely to unlock further upside value for GATM (not incorporated in our base-case estimates). The strong 3Q result and material disclosure further reinforces our liking for the stock, where we have a June 2022 TP of PKR75/sh.
Courtesy – Intermarket Securities Limited