Acuity maintains Textured Jersey as Buy

Acuity Stockbrokers is maintaining Textured Jersey as ‘Buy’ following the release of first quarter results by the newly listed entity. The broker is forecasting Textured Jersey to achieve net profit of Rs. 845 million in 2011/12 Financial Year. Here are excerpts from Acuity’s earnings update

Top-Line growth amidst declining SG&A overheads

Quarterly revenue grew 32.9% Y-o-Y aided by TJL’s focused change in its product and marketing strategy to target the high-margin niche of its existing customer-base.

Top-line growth was also attributable to the increase in demand from the US, and the company’s ability to pass on a 30% price increase to its customers, thus negating the effects of increasing cost structures and increasing the GP margin to 9.3% (from 7.9% in Q1 2010/11).

TJL’s cost saving initiatives over Q1 –namely its waste minimisation and improved efficiency measures – succeeded in reducing (-1.4%) its Y-o-Y SG&A overheads.

Consequently, Q1 operating profit rose a significant 143.6% Y-o-Y.

Gross Profit Growth despite Increasing Price of Raw Materials

Q1 Growth comes amidst an increase in the cost of TJL’s primary raw material cotton. Cost of sales over the quarter rose 30.9% Y-o-Y primarily due to the increase in Cotton prices. The company’s strong top-line growth however helped negate the rising cost of sales, allowing TJL to record a gross profit increase of 56.3% Y-o-Y.

TJL’s decision to increase its raw material inventory as a hedge against Cotton price fluctuations and shortages has resulted in a significant increase in its Y-o-Y finance costs.

Nevertheless, TJL’s strong operational results have led to the company recording a Net Profit growth of 136.6% Y-o-Y.

We maintain our valuation and recommendation We maintain our Buy for TJL. We expect revenue for FY2013F to record a 34% growth and estimate a 15% CAGR FY2009 – FY2013F as TJL’s increased production capacity is expected to kick in mid FY2013F.

We estimate TJL will record net profits amounting to Rs. 845.1Mn and Rs. 1.23Bn in FY2012F and FY2013F respectively, due to TJL’s steady order book and stable margins.

On PBV multiples ranging from 2.0x to 4.0x on estimated FY2012F net asset value, the share has a valuation of Rs.14.46- Rs.28.92 and a value of Rs. 21.75-Rs.32.62 on PE multiples of 16x to 24x.