August Cement Sector LUCKY CEMENT LUCK: RIDING ON EXPORT. Company Update. URL:

Size: px

Start display at page:

Download "August Cement Sector LUCKY CEMENT LUCK: RIDING ON EXPORT. Company Update. URL:"

Estella Sanders
5 years ago
Views:

1 August 2010 Cement Sector LUCKY CEMENT LUCK: RIDING ON EXPORT URL:

2 Luck: Riding on Export Continuation of coverage with BUY stance on LUCK with 16% upside potential KEY DATA KATS code LUCK Reuters code LUCK.KA Current price (Rs) Year high, low (Rs) 84.31, 58 Year ADV (mn) 2.1 Adjusted Beta 1.2 Market cap (RS'bn) Market cap (US$ mn) 252 Shares outstanding (mn) 323 Free float (%) 40 Major shareholder Younus Brothers Fair value (Rs) 77.2 Upside potential (%) 16 We continue our detailed coverage on Lucky Cement Company (LUCK) with a DCF value of Rs 77.2/share. We like LUCK due to 1) timely expansion giving Company an edge 2) export market share of more than 30% 3) simultaneous Presence in both Northern and Southern region of the country 4) attractive price multiples (it is currently trading at FY11 PER and PBV of 5.98x & 0.72x). We recommend 'BUY' on LUCK. Coal encompass more than 60% of Total cost During the period FY11 cement sector of Pakistan to remain under pressure because of sharp surge in the international coal prices during 2HFY10. The coal price contributes more than 60% of total cost & such a high surge in coal prices is main concern for whole industry as well as for Lucky. Index 10,500 9,000 7,500 6,000 4,500 Price Relative to KSE 100 Index Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 KSE 100 INDEX LUCK PKR Scenario Analysis (Coal vs. EPS) Optimistic-case Base -case Pessimistic-case Coal price per ton (Landed-Cost) $ EPS-FY Source: WE Research Market share to remain 20% during FY11 The market share of LUCK during the FY08 stands at 16% & 23% on the local & export front respectively, however its exports market has improved a lot to the level of 33% during FY10. Whereas we expect the company's market share will boost to the extent of 20% of total cement dispatches of the country by the end of FY11 (currently stands at 19% in FY10). Risk to our valuation Risk to our valuation include 1) expected price per bag to decrease due to Supply glut 2) increase in political wrangling in Pakistan to raise country risk 3) Delay in construction of water reservoirs by the new political democratic set-up. Scenario Analysis (10PIB vs. fair value) Optimistic-case Base -case Pessimistic-case 10 Yr PIB Fair value (Rs per share) Source: WE Research 2

3 Valuation remain terrific LUCK with Fair value of PKR 77.2/ share offering an upside potential of 15.6% from current level. We have value LUCK on Discounted cash flow method (DCF). Trading at FY11E PER of 5.98x, with estimated ROE of for the period FY11, we believe LUCK trades at a discount to its worth. FY09A FY10A FY11F FY12F EPS (Rs) Book value (Rs/share) DPS (%) PE (X) P/BV (X) Dividend Yield (%) Dividend Payout (%) Source: Company reports & WE Research Net sales revenue of the company is expected to touch Rs billion during FY13 Sales revenue to remain lackluster going forward Net sales revenue of the company is expected to touch Rs billion during FY13 which will be the highest revenue stream in the form of net sales by LUCK. However net sales of the company have remained weak during the past couple of years owing to the domestic dreary cement prices. Cement dispatches of the company to remained dreary Going forward we expect cement dispatches of the company to remain dreary primarily due to the above mentioned reason of lower exports volumes due to the massive regional expansion. However cement dispatches on the local front is expected to remain balanced on the back of government continued focus on infrastructure development and work on the floods effected areas to boost local cement consumption. Vertical integration to bright the future Lucky has also made an arrangement with the European company to extract coal locally from the Thar coal field (the largest coal field in Asia). However we expect it to be positive for the company in the longer run as 5% lower coal cost boosts company's EPS by 9%. Moreover as per our estimation extraction cost should not be more than $10 per ton if extract in bulk, thus around 5% of cost saving in the present scenario and is expected to increase further, as extraction cost tend to decrease with the passage of time. Power sale agreement is also another diversification strategy Lucky Cement Company is the largest cement producer of the country, expanding its wings to the huge different contracts such as 10-year agreement of power sale with KESC having strapped facility. The company's power sale agreement with KESC is a take and pay agreement of 49.5MW power supply from its Karachi plant. Sale is expected to start from the start of FY11 with the link to Lucky's power generation unit to KESC's grid in Karachi. However we expect the company will be able to supply only 30MW of excess power utility to KESC out of its total power capacity of 95MW in the South. 3

4 Recurring Earnings of the company will grow at a 3 year CAGR of 7% to Rs 3.5 billion as against Rs 3.1 billion in FY10 mainly due to lower base effect in FY10 earning Earnings are expected to grow at 3-year CAGR of 7% Recurring Earnings of the company will grow at a 3 year CAGR of 7% to Rs 3.5 billion as against Rs 3.1 billion in FY10 mainly due to lower base effect in FY10 earning. We have positive stance on the company owing to its simultaneous presence in both the region of the country as well as proximity to sea is another major advantage for the LUCK. Source: Company Reports & WE Research Rs in million Profit after Taxation 4,500 4,000 3,500 3,000 FY09A FY10A FY11F FY12F Source: Company Reports & WE Research Closure of PEZU plant operated on 9th August. As per news reports, production at Lucky Cement's Pezu plant has been halted for 5 days (23rd July to 28th July) after 50 unauthorized persons, who claim to be union leaders, have infiltrated the premises. However as per our discussion with management the plant is operational from Monday 9th August, As per discussion and analysis out of 15 days closure the working days was around 12 and as per 300 working days in a year the company has around 65 reserve day to adjust orders and incidental shifts. We expect it to be Neutral for company's profitability in FY11 except lower cement dispatches in the month of July only. 4

5 Sector update Cement consumption strongly correlated with country's core fundamentals Cement consumption & GDP growth are strongly correlated variables all over the world. Pakistan has also emerged as one of the developing nations during FY00-07 attained sustainable growth rates in the range of 5% - 8.5%. After that global economic crisis has destroyed the country core fundamentals, however some recovery have witnessed during the past few months but the recent floods in the country have destroyed the hopes of 4.5% GDP growth. We have now revised our GDP growth assumption to 3% for FY11. Sector's eminence by the end of FY10 the recent floods in the country have destroyed the hopes of 4.5% GDP growth. We have now revised our GDP growth assumption to 3% for FY11 Pakistan's extensive cement sector consists of 25 cement companies. These companies are operating with a combined 29 cement plants. Out of these plants, 19 are located in the northern region of the country and remaining 10 are located in southern region. The total production capacity of the cement sector stands at MTPA (million tonnes per annum) as per data issued by APCMA. Going forward, this capacity will increase during FY11, owing to expansions undertaken by Fauji cement and Gharibwal Cement (GWCL), all based in the northern part of the country. Taking cue from that, we estimate total capacity of the industry to touch 47.5 MTPA during the current year FY11-FY12. In light of this, Pakistan's leading producers such as Lucky Cement (LUCK), DG Khan Cement (DGKC) and Attock Cement (ACPL) have taken a first mover advantage by undergoing expansions and they are in line with tapping local demand as well as export opportunities emanating from Afghanistan, UAE, far east and African countries. 5

6 Demand drivers 1) Local cement demand has grown by 1.6x the GDP growth over the last ten years. 2) Housing demand. 3) Government's spending on development-related projects. 4) Relatively price inelastic, so price not a major demand influencer. 5) Standardized product. Cement consumption strongly correlated with country's core fundamentals... Cement consumption & GDP growth are strongly correlated variables all over the world. Pakistan has also emerged as one of the developing nations attaining sustainable growth rates in the range of 5% - 8.5% since FY00. For FY11, we expect the country to attain GDP growth of 3.0%. Housing growth to spur consumption going forward According to public sector based House Building Finance Corporation (HBFC) figures, the average population per housing units in Pakistan is approximately 9 people per housing unit as compared to the global average of around 6 persons per housing unit. The units required for a population of 165 mn, Pakistani should have 27.5 mn housing units, an addition of 6.7 million to the current 20 mn units. We anticipate an increase in per capita income that will translate into construction of at least 6-7 mn homes. PSDP to remain driver again in FY11 due to the government focus on small Dams, infrastructural development and construction and rehabilitation work on floods affected areas. This aspect is facilitated by banking sector's renewed mortgage finance business. At present this business is merely less than 1% of GDP in Pakistan (total size of mortgage liabilities is nearly Rs 55bn) as against 3% - 4% in neighboring India. Banking industry is aiming for a target of at least Rs 300 bn till FY11-12 under the guidance of State Bank of Pakistan and International Finance Corporation (IFC). PSDP allocation & disbursement- key to cement consumption At present Pakistan's PSDP program accounts for nearly 45% of the total domestic cement consumption. Government's increased focus towards infrastructure development in the country over the last few years has also given impetus to our assertion. It has been a main driver of cement consumption in recent years. However PSDP cut and its disbursement remained a major cause of concern during FY10. We expect PSDP to remain driver again in FY11 due to the government focus on small Dams, infrastructural development and construction and rehabilitation work on floods affected areas. Pakistan per Capita Consumption There are 29 cement units working which are producing 44 million tonne per annum Pakistan currently has a per capita consumption of 135kg cement which is comparable to that of India's 150kg per capita. However it is just a third of China's but substantially below the world average of 300kg and the regional average of over 400kg for peers in Asia and over 600kg in the Middle East. 6

7 Global Cement Production: Pakistan yet to make its mark We expect cement dispatches of the county is expected to remain stagnant YoY in FY11 to 34mn tons (local sales of 25mn tons and export sales of 9mn tons). The primary reason behind stagnant sales is expected drop in cement exports due to massive regional expansions Pakistani cement sector is still not in world ranking because of low per production capacity and its utilization. Currently there are 29 cement units working which are producing 44 million tonne per annum. But our neighboring countries China and India are on the 1st and 2nd rank in Asia with 900 million tonnes and 185 million tonnes per annum. If we go through world comparison USA, Japan and Russia ranked below India and China. Cement profitability to boost in FY11 We expect cement dispatches of the county is expected to remain stagnant YoY in FY11 to 34mn tons (local sales of 25mn tons and export sales of 9mn tons). The primary reason behind stagnant sales is expected drop in cement exports due to massive regional expansions. On local cement consumption we expect it to grow significantly on the back of improvement in private sector construction activities and construction and rehabilitation work on floods effected areas with construction work on small dams. Sales tax increase to pass through easily TDAP has announced 35% subsidy on inland freight subsidy on sea routed exports in April. However we do not expect it's to continue going forward owing to the government budgetary constraints on the revenue side In the recent budget sales increase in the GST by 1% to 17% is expected to pass through to the end users easily (i.e. Rs 2.5/bag). On the other hand lower cement prices is an issue for the small and inefficient producer where they cannot compete with the giants Lucky and DGKC. FED on gas is not a worry for cements Enhancement in the rate of FED from 5.09% to 10% (per MMBTu) on natural gas is neutral for the cement sector owing to no gas allocation to cement plants in the country and the sector is fulfilling its 90% percent of energy requirement form coal. Inland freight subsidy if continued may be a trigger In the budget FY11 the topic of inland freight subsidy totally eliminated. The TDAP has announced 35% subsidy on inland freight subsidy on sea routed exports in April. However we do not expect it's to continue going forward owing to the government budgetary constraints on the revenue side. On the other hand if TDAP continues with the current inland freight subsidy in FY11 it will boost the country's cement exports routed through sea. 7

8 FY10 Result Review Lower domestic prices keep FY10 in dark The primary reason behind massive earnings decline is owing to dreary domestic prices during the 1HFY10 which resulted in a YoY lower retention prices for the company Top line of the company has showed a decent performance over all with the sales revenue declined by nominal 6% during FY10 to Rs 24,508 million as against Rs 2,6330million during FY09 Lucky Cement Company Limited (LUCK) announced its results for FY10. The company posted after tax earnings of Rs 3,137 million (EPS; 9.70 per share) as compared to Rs 4,596 million (EPS; per share) in FY09. The company has also announced cash dividend of Rs 4.0/share i.e. (40%), is highest payout ratio in the company's history which is around 42%. The primary reason behind massive earnings decline is owing to dreary domestic prices during the 1HFY10 which resulted in a YoY lower retention prices for the company. The domestic prices during the 1HFY10 as remained as low as Rs 235/bag at the retail level in the North. Moreover the volumetric sales of the company grown significantly by 12.3% to 6.63 million tons for FY10 (26% increase in local sales and 2.2% increase in exports). Sales revenue remained stagnant Top line of the company has showed a decent performance over all with the sales revenue declined by nominal 6% during FY10 to Rs 24,508 million as against Rs 2,6330million during FY09. The major cause behind this stagnant sales revenue despite 12% increase in volumetric sale is only because of lackluster cement prices on domestic level (Net retention prices for domestic sales remained around Rs 3,320 per ton on average for Lucky cement during the FY10). Production and other cost showed balance Cost of sales during the FY10 remained poise as during the same period last year to Rs 16,529 million as compared to Rs Rs 16,519 million during FY09. Such stable cost of sales is mainly because of lower coal prices YoY, while increase in volumetric sales to balance the cost of production to FY09 level. Moreover the distribution cost of the company boosted by massively due to increase in company's inland transportation cost and ocean freights. On the other hand delay in the disbursement of inland freight subsidy funds also resulted in a massive increase in distribution cost. In the end finance cost of the company showed decent improvement because of the company's switching to low cost export refinance. Rs in million FY10A FY09A YoY Net Sales 24,508 26, % Cost of Sales 16,529 16, % Gross Profit 7,978 9, % Operating Profit 4,242 7, % Financial Charges 569 1, % Profit before Taxation 3,417 5, % Profit after Taxation 3,137 4, % EPS (Rs) % Source: Company Report Outlook and Recommendation Lucky cement is one of the largest cement manufacturers in the country with the added advantage of simultaneous presence of both the regions of country. We expect the ongoing development of waste heat recovery in the company's plant and other business diversification to boost the company's margins in the sky during the years to come. We maintain our Buy rating on the Lucky cement with 1-year target price of Rs 77.2/share. 8

9 Assumption Summary FY2009A FY2010 FY2011F FY2012F Dispatches Forecast Local Dispatches (mn-tons) Exports Dispatches (mn-tons) Cement prices Assumptions Gross Local prices (M.tons) Exports Prices (US$/ton) Coal Prices Assumptions C&F Coal (US$/ton) Economic assumption Inflation (%) Exchange Rate average (US$) Source: WE Assumptions Background Lucky Cement Limited was incorporated in Pakistan on September 18, 1993 under the Companies Ordinance, 1984 (the Ordinance). The shares of the company are quoted on all the three stock exchanges in Pakistan. The Company has also issued GDRs which are listed and traded on the Professional Securities Market of the London Stock Exchange. The principal activity of the company is manufacturing and marketing of cement. The company has two production facilities one at Pezu, District Lakki Marwat in Khyber Pukhtunkhwa and the other at Main Super Highway in Karachi, Sindh. 9

10 Financials Income Statement Rs in million FY09A FY10A FY11E FY12F Net Sales 26,547 24,508 24,583 25,666 Cost of Sales 16,519 16,529 16,233 17,814 Gross Profit 10,027 7,978 8,349 7,851 Selling & Admin Expenses 2,594 3,736 2,704 2,480 Other Income (47) Other Charges Profit before Taxation 5,177 3,417 4,676 4,556 Taxation ,005 Profit after Taxation 4,597 3,137 3,752 3,551 Balance Sheet Rs in million FY09A FY10A FY11E FY12F Share Capital 3,234 3,234 3,234 3,234 Total Equity 23,252 25,095 28,719 31,451 Non-current Liabilities 6,042 3,572 3,337 2,762 Current Liabilities 9,043 9,641 5,117 4,092 Total Liabilities & Equity 38,337 38,310 37,173 38,305 Non-current Assets 30,479 31,438 29,774 29,068 Current Assets 7,858 6,871 7,398 9,237 Total Assets 38,337 38,310 37,173 38,305 Cash Flow Statement Rs in million FY09A FY10A FY11E FY12F Cash from operation 8,422 4,247 4,942 4,557 Cash from Investing activities -5,788-1, Cash from financing -1,855-2,241-4,494-2,924 Net Change in cash ,092 Beginning Cash Balance Ending Cash Balance Key Ratios Analysis Key Ratios FY09A FY10E FY11F FY12F EPS DPS PER (x) PBV (x) EV/ton (USD) Gross Margin Operating Margin EBITDA Margin Pretax Margin Net Margin Return on Fixed Assets ROE ROA

11 WE Financial Services Corporate Office: , Eleventh Floor, Park Avenue, 24-A, Block 6, P.E.C.H.S. Karachi Tel: (92 21) , Fax: (92 21) URL: info@we.com.pk Our Network Sargodha Branch 1st Floor Ala Ahmed Plaza University Road Sargodha. Tel: (92 048) Fax: (94 048) Jauharabad Branch 236-B, Main Bazar College Road Jauharabad, District Khushab Tel: (92 454) Fax: (92 454) Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, we do not accept any responsibility for its accuracy & completeness and it is not intended to be an offer or a solicitation to buy or sell any securities. WE Financial Services & its employees will not be responsible for the consequence of reliance upon any opinion or statement herein or for any omission. All opinions and estimates contained herein constitute our judgment as of the date mentioned in the report and are subject to change without notice. URL:

Pakistan State Oil. PSO: Pessimism overplayed. WE Detailed Report

Pakistan State Oil. PSO: Pessimism overplayed. WE Detailed Report 1 KEY DATA KATS Code PSO Reuters Code PSO.KA Current Price (Rs) 198.97 Year High, Low (Rs) 251.74, 198.45 Market Cap (Rs' bn) 49 Market Cap (US$ mn) 496 Shares Outstanding (mn) 247 Free Float (%) 46 Source: