Kohat Cement Company Limited: Expansion to drive earnings growth; Buy
We update our earnings estimates for KOHC by -2%/+39%/+22% in FY19/20/21E incorporating (i) actual FY18 accounts, (ii) 2.45mm tons expansion project, (iii) 18MW WHR to be installed on new line, (iv) tax credit on expansion (nil tax expense booked in FY20), and (v) change in sales mix.
KOHC posted FY18 earnings of PKR19.29/sh, down 16% YoY, mainly led by reversal in deferred tax liability of PKR1.6bn, leading to effective tax rate of mere 7% in 4Q.
The company is currently in the process of expanding its base by 1.8x with industry’s cheapest hybrid brown-field expansion project (EV/ton of USD46/ton), which is expected to support earnings growth going forward (expected to be online by FY20).
With industry’s lowest capacity utilization providing room to absorb demand, ongoing expansion project, and attractive multiples on offer, we reiterate our Buy stance on the scrip with a revised DCF-based TP of PKR184/sh.
KOHC trades at a FY19E P/E/EV/EBITDA of 7.0x/3.1x, reflecting a significant 10/34% discount to peer valuations. Moreover, the company is trading at an EV/ton of USD35/ton (48% discount to industry). Interestingly, 32% of KOHC’s market cap is reflected in net cash on the balance sheet.
Kohat Cement Company Limited. Kohat Cement Company Limited is a Pakistan-based company, which is engaged in the production and sale of cement. The Company's products include Grey Cement and White Cement. The Company offers Ordinary Portland Grey Cement under the brand name KOHAT CEMENT. The Company produces and sells White Portland Cement under the brand name KOHAT SUPER WHITE. The Company also offers white canvas for various architectural applications. The Company's white canvas is used for concreting and ornamental applications, terrazzo floorings, fixing of tiles and marbles, and others. The Company's White Portland Cement is available in all local markets in Pakistan and Afghanistan. The Company has an annual production capacity of 2.8 million tons of Grey Cement and 150,000 tons of White Cement. The Company produces both Grey and White Cements at its plants located in Rawalpindi Road, Kohat.
BMA is amongst the leading financial groups in Pakistan. BMA Capital’s core areas of business include Capital Markets, Corporate Finance & Advisory, Asset Management, and Financial Products Distribution. BMA Capital is the leader in privatisation advisory in Pakistan, having successfully advised on over 50% of all privatisations in Pakistan, by value, in transactions valued in excess of US$4 billion. Recent transactions include joint lead managing the $813 million GDR Offering of 10% of OGDCL on the London Stock Exchange in 2006-07, and advising Etisalat on their successful acquisition of a 26% strategic stake in Pakistan Telecommunications Company Limited (PTCL) for US$2.6 billion, the largest M&A transaction and foreign direct investment in Pakistan’s history. The firm is among the top brokers in the Pakistan equity and treasury markets, and is among a handful of firms that comprehensively cover all segments of the capital markets. This is supported by a very strong and independent research capability, which is quoted regularly in both local and international media. BMA Capital’s retail brokerage brand, BMA Trade, has launched a nationwide network of branches as well as a comprehensive online trading platform, enabling investors across Pakistan to take part in the capital markets.
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