AKD Quotidian about — DGKC: Upgraded to Buy!

Karachi, May 21, 2013 (PPI-OT): With the cement sector continuing to witness structural upturn, AKD Securities raises target price for DGKC to PkR1 08/share and upgrade AKD Securities stances to Buy. In this regard, AKD Securities expects the incoming government’s anticipated focus on big-ticket infrastructure development (e.g. dams) to drive 7%YoY-8%YoY local off take demand for the sector while potential for exports for India may manifest as a medium-term theme.

According to AKD Securities at the same time, cost reducing initiatives such as WHR and RDF should provide key support to the company’s gross margins (expected to sustain at 35%+ in FY14F) even if cement prices top out and coal depicts a rebound.

Further upside going forward can emanate from planned investments in 1) a Greenfield cement plant in Mozambique and 2) Nishat Dairy (Private) Limited, where AKD Securities awaits further clarity before incorporating these into AKD Securities financials model. Although DGKC has gained 39%CYTD, the scrip still trades at a highly attractive FYI4F PIE of 5.17x. As a result, DGKC is one of AKD Securities preferred plays in the Pakistan cements space where AKD Securities revised target price of PKR1 08/share offers 42% upside. Buy!

Off take poised for growth: Operating at a utilization of 93%, DGKC posted 5%YoY growth in local dispatches in 9MFY13 on account of pre-election expenditure on infrastructure projects while exports were down by 15%YoY, leading total dispatches to decline by 1 %YoY. Post elections however, AKD Securities sees anticipated PML-N focus on big-ticket infrastructure development (e.g. dams) to drive demand for the sector, with a forecasted 7%YoY-8%YoY local off take increase to drive the company’s utilization to 95% in FY14F.

On the exports front, DGKC continues to face challenges in the Afghanistan ii `aricet given availability of cheaper Iranian cement and recently imposed levy on Pakistani cement. That said, AKD Securities are optimistic that potential improvement in Pakistan-India relations can pave the way for higher exports to India.

High margins to sustain: Within an improved demand framework, AKD Securities foresees cement prices going up by PkR1O/bag-PkR1 5/bag in 4QFY13, up from current levels of PkR445fbag while DGKC’s FOB prices stand at US$65/ton. Beyond the immediate term however, AKD Securities does not foresee any further uptick in cement prices while coal prices, which have remained subdued to average US$86/ton in FYi 3TD, are projected to depict a gradual uptick from 2HFY14.

That said, with cost reducing initiatives like Waste Heat Recovery plant (WHR) and Refuse Derived Fuel plant (RDF) already online, DGKC’s gross margins are anticipated to be at a stellar 39% in FY13 (up 610bps ThY) and at a strong 36% in FY14E

Expansion and diversification: DGKC has recently signed a MoLJ with Sumaria Cement Holdings for a JV to install a Greenfield cement plant in Mozambique. In this regard, DGKC’s contribution to this acquisition would be US$8.63mn which may be revised, post due diligence. Over the medium-term, any investment in the cement plant may be in a 65:35 DIE ratio, according to management. Furthermore, DGKC has also approved investment of up to PkR500mn in Nishat Dairy (Private) Limited which AKD Securities understands will have a B2B business model. That said, similar to LUCK’s (TP: PkR2O5/share) overseas expansion ambitions, AKD Securities awaits further clarity before building these into financial model.

Investment perspective: Although DGKC has gained 39%CYTD, the scrip still trades at a highly attractive FY14F PIE of 5.17x. Based on SoTP valuation methodology, AKD Securities values DGKC at PkR 108Jshare based on a core value of PkR81/share and a portfolio value of PkR27/share (post 50% holding discount). DGKC is one of , AKD Securities preferred plays in the Pakistan cements space where AKD Securities revised target price of PKR1OB/share offers 42% upside. Buy!

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