Kohinoor Textile Mills Ltd (KTML) – one of the largest listed textile composites in Pakistan. We like KTML for its penetration in the high-margin finer yarn counts and high thread count Home Textile categories. We estimate a 3yr CAGR of c.20% for core textile earnings on the back of both rising local sales and exports amid growing global demand for Pakistani Textiles.

We believe that KTML is significantly mispriced at present levels, where the market price implies that the core textile business is valued at an undemanding PKR16/sh (c.80% discount to our estimate of PKR75/sh).

Reinstate coverage with Buy

We reinstate coverage on Kohinoor Textile Mills Ltd (KTML) – one of the largest listed textile composites in Pakistan – with a Buy rating and an SoTP based June 2022 TP of PKR145.0/sh. Our Buy stance emanates from (i) the company’s success in the niche markets of finer count yarn (average 60/s count), used mainly in women’s clothing, and higher thread count Home Textile products such as beddings, (ii) consistent gross margins hovering around 17% over the past five years, (iii) extensive expansion plans mainly focused in the Spinning and Weaving segments (gradual enhancements in Home Textiles), and (iv) being a local textile demand play, where margins tend to be higher than that on exports. KTML also benefits from diversification through strategic holdings in MLCF (one of the large cement producers in Pakistan) and Maple Leaf Capital.

Can capitalize on all the positives in the Textile space

The escalating US-China trade rift (Xinjiang cotton issue) has spurred global demand for Pakistan’s yarn since early 2021. The rise in yarn demand, coupled with rising cotton prices, resulted in a surge in Spinning margins in 3QFY21 for KTML (likely to remain healthy in 4Q), also complemented by inventory gains on cotton. Due to the ongoing and likely persistent rebound in the overall textile exports of Pakistan, KTML is also well positioned to cater to the export markets, given the fast-growing global demand for women’s clothing. Despite the low exports-to-revenues ratio of c.45% (lowest in our coverage), we like KTML for its focus on the higher-margin local sales (similar shift adopted by GATM as well, albeit gradually). The demand for Home Textiles is likely to remain strong with the resurgence of Covid-19 cases in the West. KTML is presently expanding both the Spinning and Weaving capacities. Lastly, Home Textile margins are likely to improve in the coming quarters amid a sharp rise in global cotton prices and PKR/USD devaluation, in our view.

Stake in MLCF deserves greater appreciation

Given the historical cyclicality in global yarn dynamics, we appreciate KTML’s strategic holding in Maple Leaf Cement (MLCF), the fourth largest cement company in Pakistan. It provides both exposure to a higher growth industry and diversification of its textile operations, given that the rise in profitability of the Cement sector is likely to continue in the near future, in our view. However, we highlight that we have not assumed any dividends from MLCF in our earnings estimates, as MLCF is set to undertake another expansion. Nonetheless, the market has significantly undervalued KTML’s core-business (c.80%), in our view, even after taking a holding company discount of 30% for MLCF, where both its Spinning and Cement exposures have been considerably de-risked recently, in our view. We also highlight that MLCF’s contribution to the TP is c.50%, whereas NML’s portfolio contribute c.75% of our TP.

Growing focus on local sales is a wise strategy

The shift in local sales from exports has led to sustainable margins, which have paid off well in the recent past. For instance, despite the Chinese policy of stockpiling cotton during 2013-2014, which depressed global prices of cotton, KTML’s margins averaged c.15% during the period (compared to 10yr average of 16%). Also, KTML offered the highest average core textile ROEs over the past 5yrs, exlcuding ILP, at c.16%, where we expect FY22/23f core ROEs of c.25% (second only to ILP).

4QFY21 result preview

For 4QFY21f results, we expect KTML to post a NPAT of PKR687mn (EPS: PKR2.30), flat qoq, amid flattish gross margins (c.22%) while revenues are estimated to rise 3% qoq to PKR7.9bn on the back of c.5% qoq rise in Pakistan’s textile exports. Spinning margins are expected to remain healthy at c.25% due to the c.2% rise in international cotton prices during the quarter, while Home Textile margins may decline by c.1ppt qoq amid rising input costs. We believe that margins for the Home Textile sector are likely to improve in the coming quarters amid price rises on the back of rising cotton prices, which are presently hovering around US¢100/lb.

Courtesy – Intermarket Securities Limited