IMAGE: Forming fashion foundations

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Dear Clients,

We hosted an Investor briefing session with Ms. Uzma Ahmad (Director) and Mr. Hussam Subzwari (CFO) of Image (IMAGE). The management shared impressive growth story underpinned by expansion in brick and mortar model along with access to the customers across the world via Amazon. The management expects the top-line to grow at a 5yr CAGR of 31% during FY22-FY27 translating into a profitability growth of 53%. We believe in company’s growth story. We think that the stock deserves a higher multiple of 12.0x given i) aggressive growth plans, ii) high pricing power, iii) new customers via Amazon and iv) diversification into new product lines such as Denim, Perfumes and Halal cosmetics. We project the company’s top-line to grow to PKR 2.0bn and PKR 2.8bn in FY22 and FY23 translating into EPS of PKR 3.1 and PKR 3.4, respectively. Our blended target price using P/S and P/E multiple of 1.2x and 12.0x comes at PKR 37/sh, offering an upside of 34% (post rights issue) from the last close.

Diversification into high margin product: Along with addition of 10 new retail outlets, the company is diversifying its product portfolio by launching Denim, Perfumes and Halal Cosmetics. The company would be able to fetch higher margin on these products without having to incur additional fixed costs. As per the management’s guidance, this would be reflected in top-line from FY23 onwards where we expect it to roughly add ~15% towards the top-line.

Booming E-commerce business: We think that Amazon would be a major upside trigger for the company since it gives access to 300mn active consumers across the world. The management expects this avenue to add USD 2.0mn annually. Overall, the management is targeting online sales to contribute 30% towards its top-line in FY23 (vs existing share of 43%), which we believe is a conservative number since the company has seen more than 2.0mn visits to its retail website. Additionally, the company would also enjoy tax credit against tax liability for 3yrs on sales through ‘Image Tech Limited’ that would handle E-commerce business (both local and exports). This would keep effective tax rate on the lower side.

Phenomenal revenue growth in future: The company recorded impressive revenue growth of 150% YoY in FY21 despite strict lockdown conditions amidst pandemic courtesy successful E-commerce business. Given aggressive growth plans and product diversification, we expect the company’s topline to post a growth of 39% and 15% in FY22 and FY23. The company has the highest gross margins in the industry and this trend is likely to sustain due to exposure in high margin product. We expect the company’s earnings to clock in at PKR 3.1/sh and PKR 3.4/sh for FY22 and FY23, respectively.

Superior quality provides it a competitive edge: The company’s key strength lies in Schifli embroidery that is a premium quality product. As per the management, creativity in designing and styling gives the company a competitive advantage over other notable brands such as Khaadi. Image intends to use 31.25% of the proceeds from right shares to import new embroidery machines for Schifli to expand and cater to the growing demand. This would also result in tax savings for the company in FY22.

Major feedback from clients: The most prominent question that we have received from clients is that as per the management’s guidance operating expenses would grow at a 5yr CAGR of 23%. Our discussion with the management suggests that this is attributed to higher marketing and admin expense as the total store count would reach 17 from the existing tally of 7. Therefore, operating expense is expected to grow in line with the company’s sales growth expectation of 31%.

Investment perspective: We think that the stock is really attractive given its promising future outlook and the stock deserves a higher multiple of 12.0x. Our blended target price using P/S and P/E multiple of 1.2x and 12.0x comes at PKR 37/sh, offering an upside of 34% (post rights issue) from the last close.

KASB Research

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