Pakistan Cements: Fundamental challenges call for revision
Post release of detailed accounts for FY17, we revisit our investment case for AKD Cement Universe, revising down our earnings estimates by an average 27%/29% for FY18F/FY19F on account of: 1) recent pressure on cement prices mainly in northern region ( prices down by an avg. 8% or PkR40/bag to PkR510/bag since budget hike in Jun'17), 2) persistent rise in international coal prices (up 41%/30%YoY to avg. US$83/88/ton in CYTD/FYTD). With outlook for the two remaining depressed, we revise down our GM assumption for AKD cement universe by an average 16.5/18.4ppts to 32.9%/29.8% for FY18F/FY19F incorporating 3 yr avg. coal price of US$85/80/ton while cement prices are to remain flat. Consequently, this has led us to lower our Jun'18 TPs for the universe by 26%. The cement sector has corrected 42% since May'17 on the risk of pricing indiscipline further exaggerated by higher coal prices. We believe this underformance has opened up valuations with the AKD Cement Universe available at current P/E of 10.2x vs. 13.5x in May'17 considering improvement in earnings outlook post a blip in FY18. We maintain our preference for well diversified, energy efficient companies like LUCK (TP: PkR898/sh), MLCF (TP: PkR108/sh), DGKC (TP: PkR194/sh) and PIOC (TP: PkR109/sh) in our Cement Universe.
Maple Leaf Cement Factory is engaged in the production and sale of white cement, grey cement and clinker. Co. is a subsidiary of Kohinoor Textile Mills Limited.
AKD Securities Ltd. is one of the leading securities firm in Pakistan, providing a comprehensive range of investor focused services, including equity brokerage, economic and securities research, investment banking and financial advisory services. AKD Securities accounts for more than 6% of the average daily value of the Karachi Stock Exchange. AKD Securities was the first brokerage house to launch an online trading platform in Pakistan in November 2002 and now has the largest market share with over 6000 customers. This has helped diversify and expand the retail investor base in the country and ushered in a whole new universe of investors to the stock market.
AKD Securities Ltd. caters to a diversified group of domestic and international institutional investors, high net worth individuals and upscale retail clients, including expatriate Pakistanis. With high quality research, unparalleled execution and distribution capability for both regular and large block trades, AKD Securities Ltd. has earned an outstanding reputation in the Pakistani securities industry.Outside of commercial banks, AKD Securities Ltd. is one of the biggest capital market firms in the country. AKD Securities is the leader in raising and providing risk capital in underwriting, market making and mergers and acquisitions in Pakistan. Good corporate governance and professionalism are emphasized throughout the firm and AKD Securities Ltd. is amongst the very few companies to have introduced a firm-wide comprehensive CODE of ETHICS, overseen by an independent compliance manager.Ultimately, our success is based on the quality of service we provide to our customers and the trust and confidence reposed in us by them. Our focus, therefore, remains on customer satisfaction at all levels in the company.
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