TEXTURED JERSEY LANKA (TJL.N : LKR32.40) ------Softlogic Equity Research

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Net earnings up c.66% YoY to LKR468.4 mn whilst net margin expanded to 11.7% in 2QFY16.The capacity expansions reflecting the improved sales volume growth as well as margin expansion and economies of scale practiced has aided the bottom line to grow by 66.2% YoY to LKR468.4 mn. NP margins widened to 11.7% in 2QFY16 against 8.2% in the comparative quarter of the previous year. Moreover the company further expects to expand its valued added segment’s revenue contribution beyond c.26% in FY16E and FY17E with hopes on touching synthetic fabric manufacturing market which could aid immensely to maintain TJL’s prevailing NP margins.

Moreover TJL being debt-free till 4QFY14, recorded a debt to equity ratio of c.3% in the quarter under consideration for the purpose of managing and optimizing current cash flows and investments. TJL being a BOI venture, was tax exempted until September 2016 while being entitled to 15% tax payment for 8 years thereafter.

A revenue growth of c.16% YoY to LKR4,011.3 mn during 2QFY16. The capacity additions through consolidation of Quenby Lanka Prints and Ocean India which took place recently reinforced TJL in yielding a c.16% YoY revenue growth to LKR4,011.3 mn during the quarter under consideration. The acquisition of Quenby Lanka Prints which completed by 1st June 2015 has improved the sales of value added products during the quarter whilst creating a platform for synergies. However with further capacity addition of Ocean India (36 MT/day), TJL is expected to touch synthetic and printed fabric manufacturing which would expand TJL’s value added product portfolio to 25%-30% levels to result an improved top line growth during FY17E and FY18E. In addition the company is hoping to further strengthen its clientele by catering to many new high-end emerging brands.

Gross profit margin grew c.572 bps YoY to 15.5% while gross profit increased 83.7% YoY in 2QFY16. The improved margins coupled with the efficient sourcing synergies and the tight cost management structure followed enabled TJL to achieve a gross profit of LKR 622.5 mn in 2QFY16. In addition, the lower global cotton prices averaging USD70.5 for the quarter also favored to curtail cost of sales growth (though inclined c.9% YoY).

EBIT grew by 80.3% YoY to LKR448.8 mn with a c.398.6 bps YoY growth in margin. TJL saw steady growth at operating level where operating profits grew significantly by 80.3% YoY to LKR448.8 mn in 2QFY16, chiefly led by robust gross margin expansion and backed by improved operating efficiencies. TJL recorded an EBIT margin of 11.2% in 2QFY16 cf. 7.2% in 2QFY15 resulting a c.398.6 bps YoY growth.

Moreover total OPEX escalated c.97% YoY chiefly led by the increased administration expenses which rose 110.6% YoY on the back of catering the planned expansion systems, processes and infrastructure of Quenby Lanka Prints and Ocean India (Pvt.) Ltd to aid group’s long term development plans.

TJL’s net finance income for the quarter dipped c.15% YoY to LKR14.0 mn mainly on the back of increase in finance costs by c.272% YoY to LKR5.0 mn during 2QFY16.

Impact on GSP plus will also benefit to widen the margins further for TJL once the concessions are being finalized. Primarily as a result of the expected cost savings from the multi fuel boiler plant and optimal usage of newly added capacity, we forecast a 21.5% YoY bottom-line growth for TJL’s net earnings for FY16E to LKR1,618.5 mn and TJL’s FY17E net profit to LKR1,877.6 mn (up 16.0% YoY). Thereby the share trades at 13.9x forecast FY16E net profit and 12.0x forecast FY17E earnings offering a dividend yield of 4.7% and 5.4% for FY16E and FY17E respectively. Moreover ROEs are expected to be in the range of 21.3%-22.8% for FY16E to FY17E. Therefore we maintain BUY.