Cotlook A index bottomed to its lowest (since Feb10) at USD0.78 during the first week of Jun-12. The sluggish price performance is primarily attributable to rising inventory levels and renewed concerns on global economic slowdown
The ending stocks are estimated to propel by 11% to 74.5mn tons in FY13 mainly driven by hefty pile up in Chinese inventory. That said, the jump in world stock/use ratio to 68.3% (versus last 4 year average of 51%) remains a key downside risk to recovery in cotton prices
The profitability of the company remained depressed during 9MFY12 as the earnings of the company declined by 27% YoY to PKR2.5bn (EPS: PKR7.2). The 34% YoY surge in Fuel and Power cost to PKR3.0bn remain the major culprit behind lower margins as it offset the impact of falling cotton
In order to counter the prevailing gas crisis in the country, the company embarked on an alternate fuel project to generate both power and steam through utilizing cheaper inputs (mainly coal and bio-mass)
The EU parliament has finally approved the amended Generalized System of Preferences (GSP) thus allowing zero duty Pakistani exports to EU countries. The recent development bodes well NML given the 1) strong presence of NML in EU market and 2) NML’s high share of value added items exported to EU countries
A timely and concrete solution to the prevailing energy crisis remains a key to sectors’ performance; otherwise, the fate of the GSP status will be nothing but another opportunity wasted
1) Robust dividend income (a strong guard against volatility in cotton market), 2) implementation of energy efficiency measures and 3) approval of GSP status by EU parliament will remain the key triggers, going forward. That said, we reiterate our liking for NML based on our SoTP based target price of PKR60/share, depicting a total return of 27%.
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