Morning Call about – Eyeing to expand in Mozambique, Africa! – Arif Habib Limited

Karachi, March 28, 2013 (PPI-OT): As per the notice issued in Karachi Stock Exchange, D.G. Khan Cement Company Limited (DGKC) has signed a Memorandum of Understanding with Sumaria Cement.

According to Arif Habib Limited holdings Limited of Mauritius, to acquire 57.5% shareholding in a proposed holding company having indirect majority ownership in GS Cimentos S.A.R.L. (GSC), a Greenfield cement project.

DGKC holds strong brand image there

In Arif Habib Limited discussions with the management of DGKC, Arif Habib Limited has learned that the company has established strong brand equity in Mozambique by exporting cement there. Mozambique has been enjoying a strong GDP growth of above 7% for last 3 years, which is fuelling cement demand in the country. The management of DGKC further added that the acquisition process is in initial stages for which the company has estimated an investment around USD 8.6mn (PKR 851mn).

This estimated amount will vary based upon the outcome of the due diligence of the project. The management further added that, the plant capacity would be finalized once the due diligence process is completed, though provided an estimate of around 0.5-1mn tons. As per Arif Habib Limited estimates, with Debt-Equity assumption of 60:40, the investment may require an outlay of USD 20-USD 40mn.

Strong balance sheet and cash flow generation to support expansion

Healthy balance sheet with debt occupying only 23% of the balance sheet size, coupled with strong expected cash-flow generation, going forward, strengthens company’s financial muscle to go through with the acquisition. As per Arif Habib Limited estimates, the company is expected to generate cash flows of PKR 2.4bn and PKR 3.4bn for FY13F and FY14F, respectively (assuming no short-term debt repayments).

Strong Cash Flow Generation
(PKR mn) FY13F FY14F
Cash flow from Operations 5,906 5,836
Capex (2,084) (833)
Financing Cash flow (1,405) (1,577)
Cash Generation 2,416 3,427

Source: Arif Habib Research

Arif Habib Limited about the dividend cut

Even before this development, Arif Habib Limited assumed dividend payout at PKR 3/share (payout ratio of 21% vs 16% in FY12). So, Arif Habib Limited maintains DPS assumption of PKR 3/share for both FY13F and FY14F, as Arif Habib Limited believes the company will be generating enough cash in the next couple of years (PKR 5.8bn) and, thus will be able to finance even a bigger project i.e. 1.0mn tons (costing ~PKR 4bn).

Recommendation

Arif Habib Limited DCF-based price target for the scrip stands at PKR 84/share; offering a strong upside potential of 23%. In addition to this, DGKC is trading at an attractive PE of 4.9x based on FY13E; Arif Habib Limited re-iterates ‘Buy’ on the scrip!

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