Analysis Of Cement Sector In Pakistan Focusing Lucky Cement Ltd
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Suite #001 Business Finance Centre I.I Chundrigar Road Karachi. Ph: 021-2440xxx
Sample Securities (Pvt.) Ltd Corporate Member Karachi Stock Exchange (G) Ltd
RESEARCH REPORT ON CEMENT SECTOR FOCUSING
LUCKY CEMENT LTD
Saturday May 31 ‘08
Research Analyst M. Faisal Panawala Cell: 0321-2956003 [email protected]
Content Particulars 01
Page No.
Overview – Cement Sector Future Outlook – Sales & Growth…………......... 1 Hike in Cost……………………………………... 1 Export Demand & Expansions…………………..
1
Final Word…………………………………......... 2
02
Lucky Cement Limited Expansions…………………………………......... 3 Exports…………………………………………... 3 Operation Results………………………………... 3 LUCK Highlights………………………………... 3 GDR Issue of US$ 109.3mn…………………….. 3 Recommendation………………………………... 4
03
Pivot Analysis……………………………………… 5
This report has been prepared by Sample Securities (Pvt) Ltd – (SSPL) and is provided for information purposes only. As a result, investors should consider this report as a single factor in making their investment decisions with out undue reliance on this report and the company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. The views expressed are of research department & do not necessarily reflect those of SSPL directors.
Pakistan’s Cement Sector Analysis
Sample Securities (Pvt) Ltd
Industry Overview Future Outlook – Sales & Growth The robust growth of 32% cement demand both in domestics and export markets during FY ‘07, continued as cumulative dispatches for 10 months FY ’08 showed an increase of 25%. Total domestic consumption grew by 1% YoY while exports grew by whopping 157% YoY.
Hike in Cost The industry debt to asset ratio is 60%, the recent volatility in interest rates is likely to affect the finance cost significantly. However companies including DGKC, LUCK & MLCF have entered into interest swap agreements linked to Libor. On the other hand coal prices in Intl’ markets have reached to US $142/ton during Feb ‘08 which were US $80 last year, increasing cost by PKR 32 per 50kg bag and oil prices soaring at US $133/barrel have increased the cost of production.
Hike in Prices The price increase of PKR 40-45 per 50kg bag during the year, due to impact of rising coal & fuel prices, have been passed on to consumers which indicates margins are expected to remain intact in the short term. Cement Sector MKT CAP Cement Sector MKT CAP Cement Sector Weightage in KSE 100 Capacity Utilization Cement Sector PAT Growth EV/ton US$ mn EV/EBITDA x ROE
FY’07A -32% $ 147 11.2 14%
Synopsis Sector P/E Capacity in tones Local demand Export demand 9M FY ’08 Production in tones 9M FY ‘ 08 Growth in % Domestic Export No. of Companies
11.5 37mn 30.4mn 7mn 21.9mn 24.79% 8.68% 140.24% 22
Production Output
21% LUCK DGKC
59%
12%
OTHERS
8% According to FY ’06-07
PKR 118.66bn US$ 2,221mn 3.02% 90% FY’08E 19% $ 93 6.5 13%
MLCL
FY’09E 28% $ 89 4.9 16%
Source: FCEL report on cement sector
Export Demand & Expansions Local cement dispatches registered 7% growth at 20.6mn tons during 11months FY ’08. Demands from Mid Eastern & African countries gave significant boost to production which stood at about 24m tons in FY ’07 and export revenues stood at $23m in Jan ’08. The upward trend in cement demand is likely to continue for years to come as UAE finds it cost effective to import cement from Pakistan. Page 1
Pakistan’s Cement Sector Analysis
Sample Securities (Pvt) Ltd
Export avenue also includes India & South Africa besides Afghanistan & UAE. India now with demand deficit with 8mn tones, which is partially fulfilled by Pakistani cement. Year wise Industry Growth 40% 35% 30% 25% 20% 15% 10% 5% 0% 2004
Year wise Industry Dispatches 36% 30
32% M. Tons
25
20%
20
12%
15 10
2005
2006
2007
2008
5
2009
0 2005
2006
2007
2008
Source: LCL Annual Accounts FY ‘06-07
Final Word The increase in demand coupled with rising coal & fuel prices and construction season at its peak, it is expected local prices to increase by 5% by end of FY ’08. However regional demand shows promise till FY ’10-11.
Page 2
Lucky Cement Ltd
Sample Securities (Pvt) Ltd
Lucky Cement Overview Expansion Expansion of 2.5mn MT is expected in two phases. One plant of 1.25mn MT is expected to be operational by Dec 08, while other plants announcement is expected soon. LUCK is also converting its power plants from furnace oil to a mix of furnace & gas. This will increase margins as energy costs make up of 65% of total cost of sales.
Exports LUCK is the market leader & has 21% of the total market share. LUCK sales comprise of 44% exports & 56% local sales and similar mix is expected to continue. Recently a memorandum of understanding (MOU) with Noor Financial Investment Company for supply of 0.5mn MT of Clinker per year for a period of 5 years, guaranteeing 810% utilization at current capacity & 7-8% of post expansion. Company’s edge over export makes it unique, relative to its peers.
Operating Results Description Sales Revenue Gross Profit Operating Profit Profit After Tax EPS
Synopsis Symbol LUCK Shares O/S local 263mn GDR Issue 60mn GDR US$ 109.3mn Mkt Cap (PKR) 33.43bn Mkt Cap (US$) 484.5mn Current Price 103.5 Average Price 112.09 Average Volume 10.94mn Index Weightage % 0.84 Exchange Rate PKR 69 Market Share 21.57% Ratio Analysis FY ’06-07 Gross Profit to Sales 29.35% Net Profit to Sales 20.34% Acid test ratio 0.85:1 ROE 27.23% Book Value per share Rs. 35.51
(Rupees in million except EPS)
9M FY ’07-08 11,865 3,121 2,300 2,014 7.65
FY ‘ 06-07 12,522 3,675 3,066 2,547 9.67
9M Growth 32.14% 23.72% 6.64% 49.74% 49.71%
FY ‘06-07 Growth 55.48% 23.32% 10.68 31.56% 31.56%
Source: LCL 3rd QTR Accounts FY ‘07-08
LUCK Highlights Description Net Sales EBITDA Net Profit EPS P/E ROE
(PKR in mn) (PKR in mn) (PKR in mn)
Price Target PKR 135.00 – “BUY” FY ‘07
FY ‘08E
FY ‘09E
FY ‘10E
12,522 4,410 2,547 9.67 14.3 27.2
18,800 4,600 2,900 11.05 15.2 24.4
20,900 6,400 4,100 15.70 9.3 26.5
21,300 7,100 3,900 15.10 9.1 21.2
Source: Company reports, JP Morgan estimates. All data based on prices as of March 28 ‘08
GDR Issue of US$ 109.3mn Additional raising of capital worth US$ 109.3mn through issue of 15mn Global Depository Receipts (GDR’s), each representing 4 ordinary shares of LUCK has now been completed. The raised capital is used to payoff the costly debt and up to 55%-60% short & long terms have been paid off. This has significantly reduced the financing burden.
Page 3
Lucky Cement Ltd
Sample Securities (Pvt) Ltd
Synopsis WACC Beta Risk Free Rate Equity Risk Premium Req Return by investor Target Price Reiterate
16.8% 1.18 12% 6.0% 17.5% 135 Buy
Source: JP Morgan estimates
Recommendation High margins of exports are expected to boost sales & growth to increase prices. Key risks to our price target are: a) Changes in coal prices b) Expansion c) Fall in price d) Local & foreign growth Due to positive long term earnings as result of export of cement and the recent downturn in stock price, the current valuation is very attractive and we strongly reiterate “Buy” recommendation
Page 4
Pakistan’s Cement Sector Analysis
Sample Securities (Pvt) Ltd
30th May ‘08
Pivot Analysis Script Close Strategy
S3
S2
S1
Pivot
R1
R2
R3
Upper Lower RSI
LUCK
103.5 BUY
94.17 96.45 99.98 102.26 105.79 108.07 111.60 111.60 108.68 26.9
MLCF
12.90 WEAKNESS 12.07 12.27 12.59 12.79
13.11
13.31
13.63
13.55
12.26
17.5
PCCL
7.10
7.42
7.73
8.32
8.10
6.10
28.9
DGKC
69.24 BUY
69.89
70.53
71.07
72.70
65.78
15.4
BUY ON
BUY
5.62
5.93
6.52
6.83
67.53 68.17 68.71 69.35
Source: KASB Research & RSI based on 14 days from SC Securities (Pvt) Ltd
S3 = Third Support R3 = Third Resistance
S2 = Second Support S1 = First Support R2 = Second Resistance R1 = First Resistance
Page 5
Sample Securities (Pvt.) Ltd Corporate Member Karachi Stock Exchange (G) Ltd
RESEARCH REPORT ON CEMENT SECTOR FOCUSING
LUCKY CEMENT LTD
Saturday May 31 ‘08
Research Analyst M. Faisal Panawala Cell: 0321-2956003 [email protected]
Content Particulars 01
Page No.
Overview – Cement Sector Future Outlook – Sales & Growth…………......... 1 Hike in Cost……………………………………... 1 Export Demand & Expansions…………………..
1
Final Word…………………………………......... 2
02
Lucky Cement Limited Expansions…………………………………......... 3 Exports…………………………………………... 3 Operation Results………………………………... 3 LUCK Highlights………………………………... 3 GDR Issue of US$ 109.3mn…………………….. 3 Recommendation………………………………... 4
03
Pivot Analysis……………………………………… 5
This report has been prepared by Sample Securities (Pvt) Ltd – (SSPL) and is provided for information purposes only. As a result, investors should consider this report as a single factor in making their investment decisions with out undue reliance on this report and the company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. The views expressed are of research department & do not necessarily reflect those of SSPL directors.
Pakistan’s Cement Sector Analysis
Sample Securities (Pvt) Ltd
Industry Overview Future Outlook – Sales & Growth The robust growth of 32% cement demand both in domestics and export markets during FY ‘07, continued as cumulative dispatches for 10 months FY ’08 showed an increase of 25%. Total domestic consumption grew by 1% YoY while exports grew by whopping 157% YoY.
Hike in Cost The industry debt to asset ratio is 60%, the recent volatility in interest rates is likely to affect the finance cost significantly. However companies including DGKC, LUCK & MLCF have entered into interest swap agreements linked to Libor. On the other hand coal prices in Intl’ markets have reached to US $142/ton during Feb ‘08 which were US $80 last year, increasing cost by PKR 32 per 50kg bag and oil prices soaring at US $133/barrel have increased the cost of production.
Hike in Prices The price increase of PKR 40-45 per 50kg bag during the year, due to impact of rising coal & fuel prices, have been passed on to consumers which indicates margins are expected to remain intact in the short term. Cement Sector MKT CAP Cement Sector MKT CAP Cement Sector Weightage in KSE 100 Capacity Utilization Cement Sector PAT Growth EV/ton US$ mn EV/EBITDA x ROE
FY’07A -32% $ 147 11.2 14%
Synopsis Sector P/E Capacity in tones Local demand Export demand 9M FY ’08 Production in tones 9M FY ‘ 08 Growth in % Domestic Export No. of Companies
11.5 37mn 30.4mn 7mn 21.9mn 24.79% 8.68% 140.24% 22
Production Output
21% LUCK DGKC
59%
12%
OTHERS
8% According to FY ’06-07
PKR 118.66bn US$ 2,221mn 3.02% 90% FY’08E 19% $ 93 6.5 13%
MLCL
FY’09E 28% $ 89 4.9 16%
Source: FCEL report on cement sector
Export Demand & Expansions Local cement dispatches registered 7% growth at 20.6mn tons during 11months FY ’08. Demands from Mid Eastern & African countries gave significant boost to production which stood at about 24m tons in FY ’07 and export revenues stood at $23m in Jan ’08. The upward trend in cement demand is likely to continue for years to come as UAE finds it cost effective to import cement from Pakistan. Page 1
Pakistan’s Cement Sector Analysis
Sample Securities (Pvt) Ltd
Export avenue also includes India & South Africa besides Afghanistan & UAE. India now with demand deficit with 8mn tones, which is partially fulfilled by Pakistani cement. Year wise Industry Growth 40% 35% 30% 25% 20% 15% 10% 5% 0% 2004
Year wise Industry Dispatches 36% 30
32% M. Tons
25
20%
20
12%
15 10
2005
2006
2007
2008
5
2009
0 2005
2006
2007
2008
Source: LCL Annual Accounts FY ‘06-07
Final Word The increase in demand coupled with rising coal & fuel prices and construction season at its peak, it is expected local prices to increase by 5% by end of FY ’08. However regional demand shows promise till FY ’10-11.
Page 2
Lucky Cement Ltd
Sample Securities (Pvt) Ltd
Lucky Cement Overview Expansion Expansion of 2.5mn MT is expected in two phases. One plant of 1.25mn MT is expected to be operational by Dec 08, while other plants announcement is expected soon. LUCK is also converting its power plants from furnace oil to a mix of furnace & gas. This will increase margins as energy costs make up of 65% of total cost of sales.
Exports LUCK is the market leader & has 21% of the total market share. LUCK sales comprise of 44% exports & 56% local sales and similar mix is expected to continue. Recently a memorandum of understanding (MOU) with Noor Financial Investment Company for supply of 0.5mn MT of Clinker per year for a period of 5 years, guaranteeing 810% utilization at current capacity & 7-8% of post expansion. Company’s edge over export makes it unique, relative to its peers.
Operating Results Description Sales Revenue Gross Profit Operating Profit Profit After Tax EPS
Synopsis Symbol LUCK Shares O/S local 263mn GDR Issue 60mn GDR US$ 109.3mn Mkt Cap (PKR) 33.43bn Mkt Cap (US$) 484.5mn Current Price 103.5 Average Price 112.09 Average Volume 10.94mn Index Weightage % 0.84 Exchange Rate PKR 69 Market Share 21.57% Ratio Analysis FY ’06-07 Gross Profit to Sales 29.35% Net Profit to Sales 20.34% Acid test ratio 0.85:1 ROE 27.23% Book Value per share Rs. 35.51
(Rupees in million except EPS)
9M FY ’07-08 11,865 3,121 2,300 2,014 7.65
FY ‘ 06-07 12,522 3,675 3,066 2,547 9.67
9M Growth 32.14% 23.72% 6.64% 49.74% 49.71%
FY ‘06-07 Growth 55.48% 23.32% 10.68 31.56% 31.56%
Source: LCL 3rd QTR Accounts FY ‘07-08
LUCK Highlights Description Net Sales EBITDA Net Profit EPS P/E ROE
(PKR in mn) (PKR in mn) (PKR in mn)
Price Target PKR 135.00 – “BUY” FY ‘07
FY ‘08E
FY ‘09E
FY ‘10E
12,522 4,410 2,547 9.67 14.3 27.2
18,800 4,600 2,900 11.05 15.2 24.4
20,900 6,400 4,100 15.70 9.3 26.5
21,300 7,100 3,900 15.10 9.1 21.2
Source: Company reports, JP Morgan estimates. All data based on prices as of March 28 ‘08
GDR Issue of US$ 109.3mn Additional raising of capital worth US$ 109.3mn through issue of 15mn Global Depository Receipts (GDR’s), each representing 4 ordinary shares of LUCK has now been completed. The raised capital is used to payoff the costly debt and up to 55%-60% short & long terms have been paid off. This has significantly reduced the financing burden.
Page 3
Lucky Cement Ltd
Sample Securities (Pvt) Ltd
Synopsis WACC Beta Risk Free Rate Equity Risk Premium Req Return by investor Target Price Reiterate
16.8% 1.18 12% 6.0% 17.5% 135 Buy
Source: JP Morgan estimates
Recommendation High margins of exports are expected to boost sales & growth to increase prices. Key risks to our price target are: a) Changes in coal prices b) Expansion c) Fall in price d) Local & foreign growth Due to positive long term earnings as result of export of cement and the recent downturn in stock price, the current valuation is very attractive and we strongly reiterate “Buy” recommendation
Page 4
Pakistan’s Cement Sector Analysis
Sample Securities (Pvt) Ltd
30th May ‘08
Pivot Analysis Script Close Strategy
S3
S2
S1
Pivot
R1
R2
R3
Upper Lower RSI
LUCK
103.5 BUY
94.17 96.45 99.98 102.26 105.79 108.07 111.60 111.60 108.68 26.9
MLCF
12.90 WEAKNESS 12.07 12.27 12.59 12.79
13.11
13.31
13.63
13.55
12.26
17.5
PCCL
7.10
7.42
7.73
8.32
8.10
6.10
28.9
DGKC
69.24 BUY
69.89
70.53
71.07
72.70
65.78
15.4
BUY ON
BUY
5.62
5.93
6.52
6.83
67.53 68.17 68.71 69.35
Source: KASB Research & RSI based on 14 days from SC Securities (Pvt) Ltd
S3 = Third Support R3 = Third Resistance
S2 = Second Support S1 = First Support R2 = Second Resistance R1 = First Resistance
Page 5
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