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Lucky Cement (LUCK): Cement operations upbeat, KIA surpassing expectations, ICI pose vaccine upside; Reiterating Buy with new Target Price of Rs835

• We reiterate our ‘Buy’ rating on Lucky Cement (LUCK) with Jun-2021 Target Price of Rs835, offering an upside potential of 58%.
• LUCK offers exposure to combination of factor including (1) construction up cycle as a result of favorable government policies, (2) pickup in Auto sales driven by low markup rates and (3) COVID-19 related benefits through its Pharmaceutical cum Chemical company, ICI Pakistan. 
• In addition to these, company also provides exposure in international ventures (Iraq and Congo) and renewable (wind) & thermal (coal) energy projects.
• We are revising up our EPS forecast by ~6% to Rs48 and Rs108 for FY21E and FY22F, respectively due to strong performance portrayed by KIA Lucky Motors. We now expect 3-Year (FY22-24) earning CAGR of 43% primarily on the back of induction of 660 MW coal power plant, better-than-expected KIA performance, improvement in cement business margins and commercial operations of integrated plant in Iraq.
• KIA Lucky Motor surpassing expectations: KIA lucky Motors has received an impressive response from the market on both its products, Picanto and Sportage. As per our channel checks, company is booking 1,500-2,000 cars/month, which can take sales to 18,000 to 24,000 units per annum (against our earlier expectation of 12,000 units for FY21E).
• In FY22F, the company is planning to launch 2-4 new models before Jun-2021 to avail low tariff benefits of the Automotive Policy 2016-2021. Resultantly, we now expect Kia-Lucky profits of Rs2.2-3.3bn in FY21E and FY22F vs. our earlier expectation of a loss in FY21E and a nominal profit in FY22F. The company has a tax holiday for 10 years unlike other players like Pak Suzuki, Indus Motors and Honda Car.
• Pharma cum chemical business looking for launch of COVID-19 vaccine: A UK based AstraZeneca has a long standing relationship with ICI Pakistan (ICI) in cardiovascular and oncology segment. AstraZeneca has partnered with Oxford university in developing vaccine to cure COVID-19 patients. As per news reports, the drug “AZD1222” has moved rapidly into larger scale studies and after its successful results billions of doses can be produced. We believe success of this vaccine and potential opportunity for ICI Pakistan to distribute it in Pakistan, along with rising spending on health sector after COVID-19 will augment earnings of the company.
• Cement business to benefit from construction package: Cement operations in Pakistan are showing strong signs of recovery as government has reduced Federal Excise Duty (FED) by Rs25/bag and North based players have increased cement prices by Rs20-30/bag. The construction package and dams driven volumetric growth coupled with falling commodity prices will result in unconsolidated EPS at Rs34 and Rs56 in FY21E and FY22F, respectively, after falling to Rs10.37 in FY20E.
• Iraq plant 2 to commence operations by end of 2QFY21: After six months, the 1.2mn capacity of the company is expected to come online in partnership with Al Shamookh group. We estimate this business to generate profits of Rs1.4-1.8bn during FY22E and FY23F.
• Valuation revised up to Rs835: We have raised our Jun-2021 target price for LUCK to Rs835 (earlier Rs750), depicting a total return of 58%. We have valued all businesses of the company on free cash flows except ICI, a listed firm which we have taken at market price.

Key Risks: Key risks to our thesis include (1) delay in commercial operations of power plant (assumed in July 2021), (2) higher-than-expected delays in receivables of the power sector, (3) lower-than-expected hike in local cement prices, (4) lower-than-expected response to KIA’s new models, (5) lower international cement prices and (6) any unfavorable decision on Company’s petition against CCP in Lahore High Court (LHC).