Pakistan Cements: Revising down on fundamental challenges
With respect to persistent upward pressure on input costs, we revisit our investment case for AKD Cement Universe, revising down our earnings estimates by an average 18%/14% for FY19F/FY20F incorporating: 1) relentless increase in international coal prices (+34%/+10%YoY to average at US$105/97 per ton in Jun’18/CYTD) and 2) sharp currency depreciation (weakened ~15%/10%TD since Dec'17/Mar'18 to stand at PKR121.5/US$ in Jun'18). With outlook for the two remaining depressed, we also revise down our GM estimates for AKD cement universe by an average 5.32/3.73ppts to 26.9%/28.4% for FY19F/FY20F, reconsidering our assumptions for PkR depreciation and avg. coal price (revised to US$90/85 per ton from US$80/ton for FY19/onwards). Consequently, this has led us to lower our Jun'19 TPs for the universe by an average 16%. The cement sector has corrected 20% since May'17 on the risk of pricing indiscipline (particularly for South players) further exaggerated by higher coal prices. We believe this underperformance has opened up valuations with the AKD Cement Universe available at current P/E of 8.6x vs. 13.5x in May'17, considering demand dynamics of the cement sector remain sound. While maintaining our preference for the sector (particularly North players), our top picks include well diversified, energy efficient companies like LUCK (TP: PkR790/sh), DGKC (TP: PkR158/sh), MLCF (TP: PkR89/sh) and PIOC (TP: PkR91/sh) in our Cement Universe.
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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