Valuation arbitrage on Maple Leaf Cement: KTML is a one of the leading textile companies in Pakistan. It also has a 55.2% (606m shares) in Maple Leaf Cement (MLCF) and 82.92% shareholding in Maple Leaf Capital (an unlisted public company which primarily invests in public equities). MLCF’s current market cap is PkR48.6bn. Maple Leaf Capital’s latest book value is PkR2.5bn. This means that KTML’s portfolio value is PkR29.7bn. KTML has 299m shares. This means the portfolio value, without any holding discount, is around PkR98 per share. KTML is currently trading at PkR82 per share. This means that it is trading at a 16% discount to the value of just the portfolio companies. The core Textile business is trading at negative valuation! This is a valuation anomaly which we think is creating an attractive buying opportunity.
Core Textile business is also growing: We expect KTML to reach PkR30bn in revenues in FY21 (June 2021 year end) and Net Profit of PkR2.4bn. In the first nine months of the year revenues have grown by 19% due to strong demand in home textile segment. Full year results might be announced in August. They are adding capacity and we expect revenues to grow to PkR32bn next year and Net Profits to reach PkR2.9bn (excluding any impact from the portfolio company). Consequently a negative valuation for a growth business with solid profitability is not rational.
Our pro-forma valuation for KTML is PkR164 – 100% higher than current share price: In our valuation approach, we have applied a 5.0x next year earnings multiple to the Textile core business. Our cement analyst, Wajid Rizvi values Maple Leaf Cement at PkR75 per share and we have taken Maple Leaf Capital business at 1x Book Value. We have applied a 30% holding company discount to the valuation of the portfolio companies. This leads to our price target of PkR164 per share. Our price target implies a PE multiple of 7.5x FY22 earnings. The stock is currently trading at 5.9x 12m forward PE. Its current dividend yield is 2.4%. We have an Outperform recommendation on the stock.