Pakistan International Bulk Terminal (PIBTL): Reinstate with 'Sell'

• Investment thesis: We reinstate our stance on Pakistan International Bulk Terminal (PIBTL) with “Sell” after incorporating lower than estimated 9MFY18 financial results and weak demand outlook. Our thesis is based on factors including 1) lower than expected demand of coal handling from Power Sector, 2) lower than expected realized tariff and 3) low volume of potential cement/clinker handling.      
• Demand outlook not encouraging: PIBTL has so far handled 1.4mn tons of coal in 9MFY18 and this coal handling is expected to reach 2.3mn tons in FY18, which is 18% of its total coal handling capacity and lower than our initial expectations. We now anticipate low utilization levels next few years that could keep the company’s profitability under pressure due to high fixed cost & operating costs. We expect coal handling of 4mn tons in FY19 and 6mn tons in FY20, which will gradually increase to 10mn tons or 84% of the installed capacity by FY24. We had earlier expected PIBTL to reach this utilization level much earlier by FY22.
• Ban on use of imported coal for Non-CPEC power projects: barred Non-CPEC power plants to use imported coal to contain the import bill of the country. This has affected the demand outlook for PIBTL that was eyeing higher demand from upcoming coal power projects. This coupled with development of own facility (Jetty) by Sahiwal Coal Power Plant (recently inaugurated 1,320MW coal power plant) has dented PIBTL’s coal handling potential. Going forward, coal based power plants with a capacity of 1,620MW are expected to come online by  2022, which could generate additional coal handling demand of ~4-6mn tons of coal if coal handling is being carried out through PIBTL.
• Weak pricing outlook: PIBTL is currently charging around US$5per ton for coal handling, which is significantly lower than the initial pricing projected by the company of US$8/ton amid weak demand. On top of this, PIBTL pays around US$2/ton as Royalty Fee to Port Qasim Authority (Pakistan’s second largest port), where PIBTL is located. In contrast, Karachi Port Trust (KPT) is charging around US$3-4/ton for coal handling facility. 
• Uncertainty remain regarding usage of PIBTL by cement players: Cement industry is undergoing major expansion and they use coal for kilning process. Further, expansion of over 20mn tons are also expected by FY21. However, use of PIBTL by some of the cement players for coal handling is still uncertain due to higher pricing being charged by PIBTL. We are of the view that cement expansion will only generate maximum coal handling demand of 2-3mn tons annually.
• Insignificant cement/clinker handling potential: Pakistan currently exports 1.6mn tons of cement through sea (37% of Exports) and we expect PIBTL to handle up to 1mn tons of cement exports by 2024. 
• Key Risks: Key risks for the company includes, 1) delay in inauguration of coal power plants, 2) delay in cement expansion, and 3) further pressure on tariff.