Dear Clients,

KASB Securities hosted a Sales briefing with Mr. Asad Ahmad, the Chief Executive Officer of IMAGE. We were impressed by the growth potential of the company as it is undergoing retail expansion as well enhancing its visibility in international market.

A next textile star? Image Pakistan Limited, incorporated in 1990, started its journey with the production of 4,200 tons per annum of Polyester Filament Yarn. Recently, the company has successfully rebranded itself as a high street fashion retail brand by launching value added embroidered fabric both unstitched and ready-to-wear garments for ladies under the brand name ‘Image’. The stock has rallied 176% CYTD but we think that despite the rally, the company’s improved fundamentals have not been fully priced in yet. The company’s revenues increased by 158% YoY in 9MFY21 and is expected to exceed the threshold of PkR 1.0bn by Jun’21. On the back of the expansion in its retail business and the latest quarterly run-rate, the management expects to achieve a sales target of PKR 1.8bn for FY22.

Higher gross margins in comparison to peers: IMAGE operates in a cyclical industry and the real season of the business commences from Spring. There is particularly strong growth until the month of “Muharram” (Islamic calendar). The management highlighted that the company has been able to achieve higher gross margins in comparison to peers averaging at 37% in 9MFY21 due to its sales mix towards higher margin, premium quality products. Margins are expected to sustain at this level in the foreseeable future as the company is not competing on prices.  95% of the raw material is procured locally and the shift in cotton prices has a significant impact on the company’s gross margins.

Diving into E-commerce business: The main attraction of IMAGE is its entry into ecommerce at the right time. COVID was a blessing in disguise for IMAGE as the company’s e-commerce sales grew by 498% in 2020. Online sales contributed 65% to the top-line in FY20 and now has normalized to a 43% of total revenues. The management highlighted that 95% of the online orders are based on Cash on Delivery (CoD) and the return percentage of CoD orders are 5%. Currently, the fulfilment of orders is done through Karachi and Omni-channel retailing is currently at an infancy stage.

The company aims to become an internet company in contrast to an online retailer. This entails implementation of AI intelligence (with a SriLankan partner) that enables optimization at sales, warehousing and inventory management to expand revenue and growth. AI has also enabled the company to hit the right cities worldwide in contrast to undertaking unprofitable ventures that helps in enhancing its outreach and delivery efforts to make sure they hit the right targets. We believe this is something that is overlooked by various textile players and would provide it a distinctive edge over competitors.

Furthermore, the company has taken the lead to become Pakistan’s 1st approved seller on Amazon on Jun 10, 2021. The application was meticulously formulated and it was approved in only two weeks. Through Amazon, the company would be able to gain traction from customers all around the world. To highlight, the company would go live on Amazon from Jul 01, 2021 and it can easily fetch $3.0mn annual sales through exports. Furthermore, the company has set up a a wholly owned subsidiary under the name of ‘Image Tech Limited’ that will handle its entire e-commerce business (both local and exports), allowing it to avail 100% tax credit against the tax liability for 3yrs.

Ready for expansion: Realizing the immense growth potential in local retail industry, IMAGE plans to expand its retail footprint by adding 10 more outlets in different cities by FY22 at an estimated capex of PkR400m. Enhancing geographical presence would help the company to increase its market share as this would take the total store tally to 17. The company intends to finance the expansion through internal cash generation. The management ruled out the possibility of undertaking debt in view of rising interest rate environment. Additionally, the company is introducing new product line by venturing into Perfume and Halal Cosmetics that are currently at a development stage and will be launched during FY23.

Investment perspective: We strongly believe in IMAGE’s growth story as the company is set to achieve strong revenue/earnings growth backed by expansion in brick and mortar model and as well as increasing e-commerce penetration. Our back of the envelop calculation suggests earnings of PkR 3.8/sh for FY22 assuming a gross margin of 37%. For IMAGE, we have assumed a conservative multiple of 10.0x, translating into a target price of PkR 38/sh. This implies an upside of 52% from the last close.

Regards,
KASB Research

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Image Pakistan Limited (IMAGE PA Equity)

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