Top brokers recommend Textured Jersey IPO as ‘buy’

Most of the leading stock brokers have recommended the Rs. 1.2 billion worth Initial Public Offering of Textured Jersey Ltd., (TJL) as buy.

The official opening of the IPO involving 80 million shares at Rs. 15 per share is today.

The company intends to distribute and allocate the 80m voting shares among employees, unit trusts, retail individuals, and non-retail investors in the order of 10:10:40:40. TJ’s issued share capital would increase to 655.0 mn shares upon full subscription of the IPO.

The company plans to utilise the issue proceeds to 1) fund construction of a new production facility (Rs. 344m) ; 2) purchase new machinery and infrastructure facilities (Rs 1bn); and 3) invest in a water treatment plant for its new production facility (Rs. 82m).

Textured Jersey previously issued a total of 116 million shares at an offer price of Rs. 15 per share in a private sell down of shares in April 2011.

Textured Jersey Lanka Limited is majority owned by Pacific Textile Holdings Limited through its wholly owned subsidiary, Pacific Textured Jersey Holdings Limited holding 45.6% of the company and Brandix Lanka Limited holding 34.3%. The remaining 20.1% stake is owned by the public.

Pacific Textiles Holdings Limited is a listed company in Hong Kong with one of the largest textile manufacturing facilities in China, being a leading manufacturer of customised knitted fabric in the global textile industry. It provides integrated services comprising of knitting, dyeing, printing and finishing.

Brandix Lanka Limited is one of the largest apparel exporter’s in Sri Lanka and manufactures a wide spectrum of apparels to cater to world renowned brands. TJL supports as a strategic link in the supply chain of Brandix Lanka Limited.

Over the years, Textured Jersey Lanka Limited has been able to develop and maintain long-term relationships with strong apparel brand labels such as Victoria’s Secret, Marks and Spencer, Initimissimi, H&M, Express etc. even though the brand owners are not the company’s direct customers.

The company expects to expand its current Sri Lankan business operations to a USD 150 mn turnover capacity from its current capacity of USD 83 mn. In order to achieve this, TJL is expecting to construct a modern production facility built according to internationally accepted quality standards from the proceeds of IPO.

Future outlook

Textured Jersey Lanka’s strong local presence and the fast phase recovery of the textile industry has enabled it to explore new opportunities. Further, TJL expects to expand its current business operations by circa 80% in the next five years (Turnover capacity from USD 83 mn to USD 150 mn) by utilising the new production plant and continuing to produce at optimum levels by having minimum damage rates.

TJL plans to utilise the IPO funds (LKR1.2 bn) to build a new production plant which the company expects will increase the production capacity by 40%.

Research carried out by OTEXA & Eurostat show that the imports of textile and clothing in the US will increase at a CAGR 3.9%, 2010-2015 and CAGR 6.3% in EU region which will have a positive influence to the company’s top line.

Increasing cotton prices and threat of competitors are the main challenges faced by TJL, but it is believed the company will overcome this issue by passing the rise in costs to the customer strengthening the relationship with global brand owners and garment exporters. Brand owners are not TJL’s direct customers; however they play a major role in selecting the fabric suppliers for their products. Further, TJL also expects to expand their production operations in the south Asian region to enjoy enhanced comparative and competitive advantage over their rivals.

TJL’s future looks favourable with backing of a world leader in knitted fabric manufacturing and one of Sri Lanka’s leading apparel exporter’s coupled with a booming industry demand and other favourable production factors that provides an advantage towards the Sri Lankan apparel and textile industry.

Broker Recommendations

John Keells Stock Brokers

“As the largest textile manufacturer to list on the Colombo Stock Exchange, we believe Textured Jersey provides investors with exposure to capitalise on the projected rebound in the global apparel market. We believe near term revenue generation will be largely dependent on the company’s robust product mix, while real growth will only be evident once the planned capacity expansion comes on-stream in roughly 18-24 months. Hence, we view the stock as a medium term buy. The company currently trades at a P/E of 12.6x FY12E earnings. Given its strong growth prospects, we see material upside to the company’s issue price over the next 12 months. We recommend Subscribe.”

Taprobane Securities

“As per our relative valuations, Textured Jersey Lanka Limited (TJL) will trade at a trailing PER of 14.52X and a trailing PBV of 3.31X at its issue price of LKR 15.00. However, we have projected the forward PER to be 4.80X and 2.43X in FY 2012E and FY 2013E respectively, at the issue price. Also the forward PBV to be 1.58X and 0.95X respectively.

As at 1.7.2011, the Footwear and Textile Sector PER and PBV stood at 23.8X and 1.7X respectively. Therefore, TJL will trade below the sector multiples according to trailing valuations and future earnings. Thus we believe, the counter has value and growth potential based on its capacity expansion, strong long term relationships with end customers and in an environment of declining global cotton prices.

The TJL share is valued at LKR 44.60 level based on future earnings at a 40% discount to the current sector PER and LKR 11.30 level based on 30% discount to the sector PBV. On that note, we would recommend a “SUBSCRIBE” to the IPO of Textured Jersey Lanka Limited on the basis of long-term investment opportunity.”

Arrenga Capital Research

“With the management viewing its current contracts with its key customers to continue, we expect TJL to report LKR809.9 mn in FY12E (up 18.3% YoY) and net earnings of LKR937.4 mn in FY13E (up 15.7% YoY). In terms of earnings to price multiple; the share is valued at 12.1X FY12E earnings and 10.5X FY13E net profits compared to the manufacturing sector 4Q Trailing PER of 18.3X and market PER of 18.0X.

Based on the above valuations and having TJL’s investment plans into the future coupled with its strong parent back up, we expect TJL to continue its growth story even after FY13E. Thus, we rate it a SUBSCRIBE.”

Lanka Securities

Forecasted EPS for FY12E is Rs.1.2, out of which 33.0% is expected to be paid as dividends. Estimated BVPS as at 31 March 2012 is Rs.6.8. forward price multiples are expected to be attractive in future with sound earnings records. Accordingly forward PER and PBV at the issue price is 12.0x and 2.2x respectively at the end of FY12E which are relatively below the sector and peers price multiples.

Projected free cash flows are discounted using a discount rate of 12.6% which is estimated using market return, risk free rate and peers beta value. Accordingly we derived a value of Rs.20.6 per share at the end of FY12E. A rational investor is expected to realise a total return of 39.9% for the holding period with a 37.2% capital gain and 2.7% dividend yield. Hence we recommend SUBSCRIBE.

Asia Wealth Management

We forecast TJL to post net earnings of Rs. 831.6 million for FY 2012 up 21% year on year and reach Rs. 999.3 million up 20% year on year in FY2013 considering the anticipated elevation in the apparel industry together with the expected incline in the output increase of the company.

In terms of price to earnings based valuation the counter is currently trading at a PER of 14.3x which we expect to improve to 11.8X for FY2012E and 9.8x for FY2013E respectively. In addition the counter is currently trading at a PBV of 3.3x which we expect to improve to a PBV of 2.0x for FY2012E and 1.6 x for FY2013E respectively. Furthermore this is as opposed to a footwear and textile sector trailing PER of 23.3x and PBV of 1.7x as against a market PER of 17.2X and a market PBV of 2.7x. Hence we advise our investors to subscribe.

New World Securities

“The Company has already analysed its risk factors and taken measures to minimise or mitigate the risk where possible. Thus in our view we see majority of risks as highly unlikely to happen and even if such incidence occur the impact will be minimal as per risk mitigation strategies currently adopted by the company. Taking into account the risk mitigation strategies, earnings and the net asset value, we consider Textured Jersey Lanka IPO as a good investment opportunity.”

SC Securities

“With the strong Growth Potential and solid valuations the issue price of LKR15.00 depicts an attractive offer. Meanwhile economic stability in the country coupled with global economic recovery and increased demand for appeal products has opened up a number of growth opportunities to the industry. And also strong regional presence, the backing of a global manufacturing giant and leading local garment exporter, the company is poised to gain an advantage over its rivals.

We expect TJL to post net earnings of LKR.865.5Mn (up 26%YoY) in FY12E and LKR1,038.3 mn (up 20%YoY) in FY13E. Further the share is fairly valued at PER of 11.3x on FY12E earnings and 9.5x on FY13E earnings. The share is valued at a 49% discount to the market earnings multiple and 47% discounted to the footwear and textile sector earnings multiple on FY12E earnings.

The company is also expected to report attractive earnings compared to the listed industry rivals. Moreover the company is on a strong footing with a low financial risk profile and strong growth in the revenue stream and earnings. There by the IPO offers good value at the issue price of LKR.15.00, and given the strong investor appetite, we recommend SUBSCRIBE.”

Asha Phillip Securities

“Backed by two globally reputed industry leaders, Pacific Textile Holdings Ltd, one of the largest fabric mills in the world and Brandix Lanka (Pvt) Ltd, leading apparel exporter in Sri Lanka. Well established long term business partnership with globally renowned apparel brand owners such as, Intimissimi, Marks & Spencer, Victoria’s Secret, Next etc, which drives the business sustainability, prompting the TJL to be more competitive in the fabric manufacturing industry. Growing global interest in knitted fabric will open up the boundless opportunities to TJL as one of the largest knit fabric mills in Sri Lanka along with their undisputed technological superiority. Strong financial performances recorded historically with a CAGR 25% growth in revenue for last 5 years while accounting an after tax profit growth of 24% on CAGR basis. Attractive IPO price of LKR 15 per share set at PER multiples of 13.2X on FY2011/12 forecasted earnings. Further, short term capital gains will also be visible, since both private equity sell down offered price and the IPO price is fixed at same price of LKR 15.

Based on this we recommend BUY/SUBSCRIBE @ LKR 15.”

CT Smith Stockbrokers

“Whilst near term earnings growth is not expected to be phenomenal (prior to capacity increase), investors can take comfort from the strong financial profile of the company, combined with the reputation and proven track record of TJLL’s management and promoters. Furthermore, the knit fabrics segment is a fast growing market, in which the shift in focus towards cheaper cost developing countries has provided textile producers such as TJLL with numerous avenues of growth. Hence given the company’s steady valuations, strong potential for robust earnings growth (especially once new capacity is commissioned) and the proven capabilities of TJLL’s management team, we expect the company to post sustainably strong earnings growth, and recommend SUBSCRIBE.”

Bartleet Mallory Stock Brokers

Our main method of valuation is the free cash flow basis. Hence, the stock has a target price of LKR 21.12 based on a WACC of 10.6% and terminal growth rate of 3%. The WACC is based on a debt to equity of 31.1%, adjusted beta of 0.69, risk free rate of 7.4% and an equity risk premium of 5%.

In addition, our estimates factor in normalised sales growth 10.5% and EBIT margins of 11% for both FY 2014E and FY 2015E. On a relative valuation basis, the stock has forward PE multiple of 13.1x based on 2012E of LKR 1.14 and IPO price of LKR 15.00. Based on FY 2013E EPS the stock has a PE multiple of 11.3x. The Footwear and Textiles sector PE stands at 23.4x as at 5 July 2011. The expected NAV per share is LKR 7.71 and LKR 8.80 for FY 2012E and FY 2013E respectively. We recommend SUBSCRIBE.”

Acuity Stockbrokers Research

The valuation range for TJL on PBV multiples ranging from 2.0x to 4.0x on estimated FY2012F net asset value gives the share a valuation of LKR 14.46 to LKR 28.92 and a value of LKR 21.75 to LKR 32.62 on PE multiples of 16x to 24x.

The offer price of LKR 15.00 on an estimated FY2012F EPS of LKR 1.36 gives the share a PER of 11x as against a sector PER of 24.1x, offers an attractive investment. The PBV of the share on FY2012F estimates stands at 2.07x and 1.77x for FY2013F. The share offers a dividend yield of 3% on the offer price, on a 33% dividend payout.

Given the strong growth prospects locally and regionally, its operational track record, the backing of established, progressive key stakeholders in Brandix and Pacific Textiles, supported by sound fundamentals we advise investors to SUBSCRIBE.