We hosted a Sales Briefing with Mr. Muhammad Maqsood, the President/Group CFO of Interloop (ILP). We were impressed by the growth prospects of the company and we think the recent pull back is an attractive entry point. The feedback from the call is below:
Promising demand outlook: ILP is Pakistan’s leading textile player, has an immense growth potential as it has continuously expanded and diversified its product line. Nearly 90% of its revenue comes from exports where major customers in the hosiery segment include Nike, Target, Puma and Adidas. The four clients contribute more than half of the export revenue. With the rollout of vaccination in US and European region, the demand is expected to remain resilient in the coming months. This coupled with order diversion to Pakistan from US/China trade spat and shift in orders from India and Bangladesh during pandemic will likely help ILP to achieve a sustainable growth going forward. What is extremely noteworthy is that ILP has the first right of refusal based on strong commitment and high quality, giving it a distinctive edge over competition.
ILP has a strong focus on ESG: The management highlighted to us that they have strong commitment to ESG standards. They have invested heavily in renewable energy to reduce their carbon footprint and water consumptions. Additionally, the company is heavily investing in sustainability standards of cotton. Additionally, the company is heavily investing in cotton sustainability standards that helps in securing orders.
Aggressive expansion plan: Mr. Maqsood highlighted that the company continues to expand to address rising demand and enhance footprint. To highlight, the denim expansion is on track, and is expected to complete in 4QFY21. In the hosiery segment, capacity would be enhanced in a phased manner starting from Sep’21 as the company is operating at maximum rated capacity. The company plans to invest USD 300mn to expand its production capacity and install Apparel factory to capture the pent up demand. The management is targeting to double its revenues by FY26. We are modelling revenue growth of 46% over the next three years and earnings growth of 41%.
Investment perspective: The stock has come off recently on the back of concerns about EU’s threat of revoking Pakistan’s GSP+ status. ILP’s management doesn’t believe that this would happen. Nevertheless, they have higher concentration of sales to the UK (biggest market for them in Europe) and the US is increasingly becoming a more important market. We think the pull back in the stock price is providing an attractive entry point. Our price target of PKR 94/sh is 42% higher than the current share price. The stock is currently trading at a FY22f PE of 7.9x and has a dividend yield of 6.3%.
(Please see the report for Q&A session)