Image Pakistan Limited (IMAGE)

Dear Clients,

After the publication of our note ‘IMAGE – Issuance of right shares’, we received a lot of queries from our clients. Therefore, KASB Securities hosted a management call to address those concerns. The stock has rallied 209% CYTD but we think that despite the rally, the company’s improved fundamentals have not been fully priced in yet. The stock currently trades at a PE of 16.8x (post right issuance).

We trust the company’s growth story on the back of growing E-commerce business that would operate via recently established wholly-owned subsidiary ‘Image Tech Limited’. This would allow it to avail 100% tax credit against the tax liability for 3yrs. Additionally, retail expansion financed through issuance of rights is another upside trigger for the company. 

Major concerns from our clients are as follows:

1.         Has the company gauged the market of new cities that it is planning to penetrate?

The company aims to become an internet company in contrast to online retailer that entails implementation of AI. AI has enabled the company to hit the right cities in contrast to undertaking unprofitable ventures. Therefore the company has decided to go for Pindi, Peshawar, Multan and Hyderabad while it continues to contemplate upon locations for other 6 cities which would be finalized soon. As per the management, each retail outlet would contribute PKR 100mn annually which is in-line with our initial estimates.

2.         What is the targeted sales mix for E-commerce and Retail stores in FY22?

With the addition of 10 new stores in FY22, the sales contribution from brick and mortar model would increase to 70% from 60% in FY21. Meanwhile, E-commerce’s share would normalize to 30% after a touching a peak of 60%+ in FY20.

3.         What is the update on establishment of Image Tech Limited?

Image Tech is recently established to avail tax credit through E-commerce business (both local and exports). This would ultimately result in tax savings and increase earnings going forward. Additionally, the company went live on Amazon in the first of week July and has received an overwhelming response since then.

4.         Why has the company not opted for loan or TERF facility to finance new machinery for Schiffli embroidery?

The company could not avail the TERF facility as the growth plan was finalized post expiry (Mar’21). Additionally, loan was purposely avoided on concerns over potential monetary tightening.

5.         Which one is your flagship store and how much does it contribute towards sales?

Dolmen Mall (Clifton) is the flagship store that is by far the biggest outlet. It has twice the sales in comparison to other stores since the mall has the highest footfall.

6.         What is the major raw material of IMAGE?

Grey fabric is the primary raw material and the company has multiple local suppliers (almost 95% is procured locally). Moreover, the company does not have any plans for vertical integration in the near future.

7.         Given rise in cotton prices, would the company be able to maintain gross margins?

The company has established a niche in premium quality product with delicate embroidery patterns that will ensure sustainable gross margins in future.

8.         How would the management address the concerns of some investors that are evaluating the company on the performance of TRPOL (the legacy company before business evolution to Image)?

The company has successfully resolved the matter with banks pertaining to bad loans by TRPOL that arose from the downfall in polyester filament yarn business. However, successful rebranding as a high street fashion retail brand would ensure smooth cash flow generation on a sustainable basis and does not pose a threat to company’s future performance.

Investment perspective: Given the company’s aggressive expansion in place and subsequent growth, we believe that the company deserves a higher multiple of 12.0x. Previously, we assumed a PER of 10.0x. Based on the new multiple and earnings forecast of PKR 3.1/sh for FY22, our target price is revised up to PKR 37/sh (post right issuance), that offers an attractive upside of 63% from the last close.

KASB Research

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