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The Concrete Connection, (AKD Cement Quarterly Report, Mar 08' 2024)

The Concrete Connection

 

Cement offtakes witnessed a decline of 5%MoM and 19%YoY, respectively, in the month of Feb’24, totaling 3.26mn tons. The monthly decline is attributed to February being a shorter month; however, on a daily dispatch basis, domestic dispatches rose by 3%MoM. The annual decline in dispatches is mainly due to a slowdown in construction activity amid election activities during the month. On the exports front, North exports increased by 95%MoM due to an overall low base in the previous month when the Pak-Afghan border was closed for 11 days. However, south exports stood down by 24%MoM (daily exports down 5%MoM) due to higher freight premiums over the Red Sea crisis. Overall, in 8MFY24, total sales have shown a 3%YoY increase, reaching 30.55mn tons, primarily driven by heightened annual sales in the initial two months of FY24.

 

Earnings on the rise; debt levels on decline: Despite 2QFY24 total dispatches being down by 1.2%YoY, gross margin expansions amid higher retention prices have pushed profitability up, with AKD universe profitability increasing by 8%QoQ and 26%YoY (ex-DGKC 10%QoQ and 28%YoY). On the other hand, with interest rates at their record highs and post-expansion profitability, companies have focused on paying back their debt, where AKD cement universe (ex-FCCL) total debt has reduced by 24%YoY as of Dec’23 accounts (FCCL debt up 26%YoY amid dual expansions).

 

Coal prices receding: The recent decline in international coal prices, dropping to US$100/ton following reduced winter demand from Europe, presents a favorable development for the cement industry. At the current international price, the post-axel load landed cost calculates to PkR38.5k/44.7k per ton in the South and North regions, respectively. Consequently, South plants have predominantly transitioned to fully utilizing international coal. However, in the North, companies continue to rely heavily on local coal. Furthermore, the utilization of Afghan coal is diminishing due to escalating prices, with the discount observed in FY23 (averaging PkR12k/ton or 23% below international prices), transitioning to a premium of PkR5-8k/ton presently, with Afghan coal priced between PkR50-53k/ton. Subsequently, only companies with previously procured inventory are utilizing Afghan coal. Additionally, the gap between local and international coal prices has narrowed to ~PkR5-7k/ton, with local coal prices rising to PkR38-40k/ton. For this reason, if international coal prices decline to below US$90/ton, the usage of international coal in the North is expected to rise. However, for the full year, international prices are anticipated to average at US$105/ton, while local coal prices are expected to remain stable at PkR38-42k/ton.

Moreover, cement prices are still holding ground with current average prices hovering at PkR1,234/bag (up 11%YoY). However, the recent axel load implementation has had a negative impact on the industry, with total distribution expenses of the AKD cement universe increasing by 28%QoQ in 2QFY24.

 

Influx of payouts: With the increase in profitability levels and declining burden of borrowing, companies have started paying out after taking a gap of 3-5 years amid the ongoing expansionary cycle and higher debt levels, starting with CHCC & LUCK in FY23 and extended by PIOC by announcing dividends in the Dec’23 quarter.

 

Outlook: Going forward, offtakes in the current quarter (3QFY24) are expected to remain subdued owing to election activity, Ramadan, Eid festivities, and unfeasible weather conditions. Meanwhile, for the full fiscal year, we expect local sales to remain flat YoY at ~40mn tons; however, improved exports can bring total cement offtakes for FY24 to 45mn tons (up 2-2.5%YoY). With increased retention prices, profitability is expected to remain higher for the AKD Universe, with profitability expected to grow by 79%YoY in FY24. Overall, we maintain a bullish stance on the cement sector owing to the aforementioned positive earnings outlook, and LUCK, FCCL, & MLCF remains our preferred picks from the sector with a Dec’24 TP of PkR1,074/30/57 per share, respectively. Additionally, with PIOC more recently beginning payouts, we expect DY for FY24/25 at 8.2%/10.4%, our outlook on the scrip remains positive with a Dec’24 TP of PkR160/sh.