AKD Quotidian about — Cement – Identifying the next set of outperformers

Karachi, May 31, 2013 (PPI-OT): The listed cement sector posted combined NPAT of PkR27.6bn in 9MFYI3 vs. combined NPAT of PkR9.26bn in the same period last year, translating into a stellar 3x increase.

According to AKD Securities this robust growth was mainly driven by 13%YoY improvement in average retail prices to PkR445/bag I 6%YoY growth in domestic off take to 18.4mn tons and a I 6%YoY decline in coal prices to US$87.6fton. As a result, the sector was able to witness margin expansion by 850bps to 35%.

Going forward, while cement off take for May’13 is likely to depict a seasonal breather on account of wheat harvesting in the Northern region, off take should pick up pace in Jun’13 again, ensuring a strong end to the year.

AKD Securities retains Overweight stance on the Cement sector where AKD Securities preferred picks are LUCK (TP: PkR2OSIshare) and DGKC (TP: PkRI O8fshare). Within the broader sector space, AKD Securities flags KOHC, FECTC and LUCK as three stocks that have lagged in terms of price performance despite sequential growth in 3QFY13 and could now catch up.

9MFY13 Result Review; The listed cement sector posted combined NPAT of PkR27.6bn in YMFY13 vs. combined NPAT of PkRQ.2Sbn in the same period last year, translating into a stellar 3x increase.

This robust growth was mainly driven by 1 3%YoY improvement in average retail polices to PkRII5/bag, 6%YoY growth in domestic off take to 1 8.4mn tons and a 16%YoY decline in coal prices to US$87.6/ton. As a result, the sector was able to witness margin expansion by 850bps to 35%.

Impetus to margin expansion, particularly for DGKC and LUCK, also arose from shift to RDFITDF plants and WHRP while lower interest rates combined with deleveraging to reduce financial charges by a sizeable 37%YoY. On a sequential basis however, the sector’s profitability plunged by 5%QoQ with a slight hit to margins due to higher cost of sales.

The next set of outperformers: While most cement sector stocks appear to have priced in the 3QFY13 performance (e.g. FCCL has returned 33% since result announcement with its 3QFY13 profits up by a strong 15%QoQ), there are some prominent laggards.

In this regard, despite posting sequential growth in the previous quarter, names such as KOHC, FECTC and LUCK have markedly underperformed the sector. Considering FY13 PIE for these names is still in the 3.Ox-6.Ox range, AKD Securities believes some price outperformance from them is now overdue.

Outlook: AKD Securities expects local off take in May”13 to witness a seasonal breather on account of wheat harvesting in the Northern region. That said, off take should pick up pace in Jun’13 due to seasonal pickup in demand. Over the medium- term, the incoming government’s anticipated focus on big-ticket infrastructure dovetails well with the prospects for improved regional trade. At current levels, AKD Securities retains a preference for both LUCK (TP: PkR2O5Ishare) and DGKC (TP: PkR108share).

Leave a Reply