Image Pakistan Limited (IMAGE)

Dear Clients,

IMAGE has announced its intention of offering 75% rights issue, an issuance of 42.69mn ordinary shares at a rate of PKR 15/sh. This is in-line with the feedback we published in our previous report, ‘IMAGE – Feedback from Sales Briefing Sessions’ where management had indicated that they might not take on leverage as they think the interest rates cycle would turn unfavourably.

The company intends to raise PKR 640mn to i) increase existing production capacity via installation of new machines, ii) expand retail network and iii) meet the increased working capital requirements of the additional outlets. As per our discussion with the management, the company intends to utilize these proceeds to achieve its revenue target of over PKR 2.0bn in FY22 (79% YoY growth). Additionally, the company expects to avail tax savings with the installation of new machinery which would keep the effective tax rate on the lower side and has been incorporated in our estimates.

We believe in the company’s growth story as IMAGE has established its brand in fast fashion, fleet of home grown designers and the new all-season export market via Amazon. There is considerable anecdotal evidence that IMAGE has established a niche in delicate embroidered fabric.

Installation of new embroidery machines: Out of the total estimated outlay of PKR 640mn, PKR 240mn would be utilized to enhance its production capacity to install new Schiffli embroidery machines, enabling the company to achieve its revenue target in FY22.

Retail expansion to spur growth: The company intends to open 10 new retail outlets in different cities to increase its brand presence and meet working capital requirements, all at an estimated outlay of PKR 400mn. With regards to the retail expansion, IMAGE aims to open 4 new outlets in Multan, Hyderabad, Pindi and Peshawar by Dec’21 and the remaining stores will be opened in 2HFY21, taking the total stores tally to 17. Assuming a conservative sales/outlet of PKR 100mn (FY21: PKR 142mn) in new cities, our preliminary calculation suggests an earnings impact of PKR 1.8/sh post right issue.

Investment perspective: We had already included the growth plans in our estimates. We previously assumed in the base case that the growth would be financed through internal cash flow. We have now adjusted our estimates for the new share issue along with tax adjustment and revised down our price target to PKR 31/sh (post right). We maintain an Outperform recommendation on the stock with an upside of 43% from the last close.

KASB Research

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