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Pakistan Cement: May'18 Dispatches Review

 

 

04 June 2018

AKD Securities Limited

 

 

 

  • After posting record high dispatches in previous months (reached a monthly peak of 4.65mn tons in Mar'18), cement dispatches growth came into the red zone for the first time in FY18 owing to seasonal slowdown on arrival of Ramadan in May this year.
  • As per provisional statistics, total dispatches during May'18 declined by 13.8%MoM/1.5%YoY to 3.65mn tons, primarily led by 14.0%MoM/4.5%YoY fall in domestic dispatches to 3.25mn tons. Exports on the other hand, continue to recover, going up 32.2%YoY to 0.409mn tons in May'18. On a cumulative basis, total dispatches growth reached 13.5%YoY in 11MFY18, significantly higher than the 5.8%YoY growth witnessed in 11MFY17, primarily led by domestic demand growth of 15.2%YoY.
  • With the elections drawing close, we anticipate total dispatches to remain on the higher side (despite seasonal slowdown in the month of Ramadan and eid holidays) for the remainder of the year. We derive our thesis from: 1) strong PSDP and provincial spending in upcoming month ahead of national polls (32% unutilized federal PSDP at the end of May'18) and 2) impressive growth in private sector credit related to construction activity (+22.3%YoY in Apr'18). While risk of pricing indiscipline prevails with each expansions (particularly for South players) coupled with higher coal prices, we believe recent cement price recovery (+PkR55/bag in North since Feb'18), offer attractive entry points especially when the sector has corrected 11.5% since May’18 . While maintaining our preference for the sector (particularly North players), our top picks include well diversified, energy efficient companies like LUCK (TP: PkR849/sh), MLCF (TP: PkR108/sh), PIOC (TP: PkR109/sh) and DGKC (TP: PkR198/sh) in our Cement Universe.

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Pakistan Cement: Sluggish domestic sales in May-2018

 

 

07 June 2018

JS Global Capital Limited

 

 

 

  • Cement dispatches for the month of May-2018 clocked in at 3.94mn tons, up by 6% YoY, however down by 7% MoM.
  • During the month, domestic sales witnessed nominal growth of 2% YoY to 3.48mn tons, while export sales continued its buoyant augmentation; up by 48% YoY to 0.46mn tons.
  • Amidst surge in export volumes, local to total sales mix declined by 3ppts YoY and clock-in at 88%, while capacity utilization improved by 6ppts YoY to 95% (North 95% and South 96%).
  • Cumulatively, total dispatches during 11MFY18 surged by 14% YoY to 42.94mn tons with major contribution stemming from local sales (+16% YoY to 38.5mn tons).

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Pakistan Cement: Coal: A Schlemiel on Cement’s Profitability

 

07 June 2018

Elixir Securities Pakistan (Private) Limited

 

 

 

  • Coal prices rose by 34% during FY18TD to USD105/ton due to growing demand from emerging markets and production cuts in China.
  • Our sensitivity analysis suggests that every USD5/ton increase in coal prices results in erosion of 4%/6% in FY19/FY20 for Cement Companies’ bottom-line. Companies that are highly sensitive to coal price are 1) ACPL due to expectation of retail price weakness in South and 2) Players having captive coal power plant (i.e. DGKC and MLCF)
  • We maintain our long term coal price assumption at USD80 as we believe 1) political and social opposition will limit CO2 emissions worldwide, 2) cheap and accessible gas will displace coal in USA and China and 3) Green energy consumption will increase in China.
  • We maintain LUCK and CHCC as our top bets from the sector.

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Pakistan Cement Sector: Pricing discipline to come in focus; stick with the best

 

 

07 June 2018

EFG Hermes Pakistan Limited

 

 

 

  • As incremental capacity continues to come online (Bestway (1.9mn tpa) & DG Khan (2.6mn, trial run), in addition to Cherat, Lucky and Attock’s earlier expansions of 1.3mn each), sector capacity utilisation should bring pricing discipline in focus. Industry utilisation has held up well, but we believe pricing discipline will be tested as utilisation declines going forward.
  • With a large chunk of expansions ahead (c18.2mn over 3 years) to add to existing capacity (53.9mn tpa), we believe utilisation and resulting pricing consensus will not only remain the centre of discussion, but will also have a significant impact on stock prices. We reiterate that pricing consensus remains a matter of survival rather than choice, given high balance sheet gearing and increasing costs (higher fuel, FED & weak PKR). However, the threat to sustainability can’t be ruled out.
  • We prefer LUCK (cost efficient & well-diversified) and DGKC (5-year tax haven for new plant & diversified investment portfolio) and view them as safer plays in the current environment.

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Pakistan Cement: Local sales growing, utilization 95%

 

 

14 June 2018

Azee Securities (Pvt.) Ltd.

 

 

 

  • As per the latest data, cement sales in 11MFY18 stood at 42.9 million tons against 37.59 million tons in 11MFY17, witnessing rise of 14% mainly due to rise in domestic sales. The local sales during the year were 38.57 million tons against 33.27 million tons in 11MFY17, increasing by 16% YoY. This was mainly due to massive investments by both public and private sectors in infrastructure and housing sectors in the country. The export sales were 4.35 million compared to 4.32 million tons in 11MFY17, depicting surge by 1% mainly due to 4% higher export sales from South. Exports to Afghanistan jump by 10% and exports through sea hike by 22%.
  • Cement sales swell by 6% YoY to 3.91 million tons in the month of May'18 against 3.71 million tons in May'17 mainly due to better exports. Local dispatches witness surge by 2% YoY to 3.48 million tons in May'18 versus 3.4 million ton in May'17 on rising construction activities. Similarly, exports surge by 41% YoY to 0.43 million tons compared to 0.31 million ton in May'17.
  • The bottom-line of the sector is anticipated to remain weak due to lower cement prices and higher coal prices. Thus we maintain Market weight stance on cement sector but our top picks include DGKC, FCCL & LUCK with Dec'18 target price of Rs 179/share, Rs 38/share and Rs 740/share respectively.

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Pakistan Cement: Foreign selling, an emerging risk

 

 

21 June 2018

Sherman Securities (Pvt.) Ltd.

 

 

 

  • Pakistan cement sector witnessed huge selling by offshore investors since last 31 trading sessions on a daily basis (except for one day). As a result, Pakistan cement stocks shed 16% market capitalization in last 31 days (20% down in US$).
  • Major reason behind foreign selling is recent Pak rupee devaluation against the US dollar as of shore investors’ fear that their dollar return may affect at a time when concerns on cement sector have re-emerged.
  • Key concerns include over supply situation and any abrupt hike in interest rate . We believe overall capacity utilization to remain around 90% in FY19 and 84% in FY20. Any abrupt increase in interest rate remains the other major downside trigger for the sector as our calculation suggest that every 1ppt rise in interest rate may erode annual earnings by 3% in FY19 while 6% in FY20.
  • Relatively, offshore investors have little exposure in Pakistan cement sector compared to heavy weight Oil & Gas and Banking sectors. Nonetheless, Pakistan market saw US$32mn worth of foreign selling (on net basis) in cement stocks in last 31 days compared to overall selling of US$106mn by offshore investors in broader market. Just to recall, foreigners remained net seller of US$31mn in cement sector (on net basis) so far in FY18 versus overall selling of US$252mn in Pakistan stocks.

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Pakistan Cement: Macro headwinds to further dilute sector profitability

 

25 June 2018

JS Global Capital Limited

 

 

 

  • Thermal coal prices have nearly doubled from its lows of ~US$54/ton in FY16 to currently hover in the range of US$102-104/ton.
  • Our sensitivity suggests that every US$5/ton increase in coal prices will erode Cement sector EPS by 2.8% to 7.7% from our base case.
  • Recent devaluation of 15% has compounded the already augmented energy costs; however, average exchange rate currently hovers near US$125.
  • Any further 5% depreciation will erode JS Cement Universe profitability in the range of 1.7-3.8% in FY19. We highlight that companies with higher export ratios such as Attock Cement (ACPL), Lucky Cement (LUCK), and Maple Leaf Limited (MLCF) will depict lower erosion in the bottom-line.

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Pakistan Cement: Jun’18: Eid Holidays Limit Growth

 

 

29 June 2018

Arif Habib Limited

 

 

 

  • Provisional cement data for the month of Jun’18 indicates a noticeable 28% dip MoM in dispatches to 2.81mn tons (May’18: 3.92mn tons) on the back of fewer working days (25) as Eid holidays were observed across the country. Whereas on a YoY basis, offtake witnessed a jump of 3% vis-à-vis 2.73mn tons in Jun’17 with support stemming from both domestic sales (at 2.44mn tons; +2% YoY) as well as exports (at 0.37mn tons; +7% YoY).
  • This took the cumulative FY18 dispatches to 45.72mn tons as opposed to 40.32mn tons in SPLY, marking a growth of 13% YoY. We believe a mix of private sector (in particular housing) and public sector (infrastructure expenditure under PSDP) projects tagged with some high level CPEC ventures (roads and power projects etc.) unfolded the need for higher cement demand.
  • Local demand has led the overall growth by a wide margin; dispatches rose by 15% YoY in FY18 to 41.01mn while exports underwent a slight 1% uptick to 4.72mn tons. Further dissection revealed that offtake in North remained robust at 36.90mn tons, up by 14% YoY amid strong domestic sales of 33.83mn tons in contrast to 29.14mn tons in FY17 (+16% YoY). Exports however, stumbled by 3% YoY to 3.06mn tons vs. 3.15mn tons. Likewise, sales in South also depicted a double-digit growth of 10% YoY to 8.83mn tons led by an identical growth in the domestic space (7.17mn tons compared to 6.51mn tons in FY17). Alongside this, exports inched up by 9% YoY to 1.66mn tons (FY17: 1.51mn tons).

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Pakistan Cement: FY18 set to end on a strong note; speed bumps ahead!

 

 

29 June 2018

BMA Capital Management Limited

 

 

 

  • As per our channel checks, cement demand in Jun’18 is expected to drop by 23% MoM due to seasonality and Ramadan-effect. However, sales are expected to increase by 10% YoY supported by 13% jump in local sales.
  • FY18 has proved to be a productive year in terms of demand with double digit growth of 14% YoY in total dispatches, primarily due to exuberant local sales (+16% YoY). Utilization level of the industry surged to 93% (highest in past 20 years).
  • However, sector’s performance during FY18TD (down 32% relative to KSE-100) is not reflective of the demand side positives mainly due to margin erosion (down from 38% in FY17 to 30% in FY18E) and concerns on supply side.

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Pakistan Cement: sales +13% YoY in FY18; Industry Utilization at 2.5 Decade High

 

 

02 July 2018

Topline Securities (Private) Limited

 

 

 

  • Cement sales in FY18: Pakistan’s cement industry ended FY18 on an ecstatic note with expected ~13% YoY growth in cement sales, as per our channel checks. The support was largely due to robust growth in local dispatches fueled by both Public and Private spending as well as recovery in exports post Feb 2018.
  • Growth in local and export dispatches fared better than our start of the year expectations thanks to higher infrastructure demand from CPEC related projects, real estate construction activities across Pakistan and increase in exports from LUCK and ACPL’s new cement lines that came online in 2HFY18. Moreover, due to expected increase in competition in South region owing to upcoming capacities, players are tapping into new export markets that also supported export growth, we believe.
  • Industry utilization in FY18 is likely to reach at around 95% (including LUCK and ACPL’s new capacity) vs. 87% in FY17. The utilization this year will be a 2.5 decade high. The highest utilization of 92.7% previously was recorded in FY96.

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Pakistan Cement: Revising down on fundamental challenges

 

 

03 July 2018

AKD Securities Limited

 

 

 

  • 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.

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Pakistan Cement: FY18 likely to register stellar growth of 13% YoY

 

 

03 July 2018

Alfa Adhi Securities (Pvt.) Ltd.

 

 

 

  • Based on provisional figures, June-18 industry dispatches are expected to grow by 3% YoY (2.81mn tons) driven by marginal uptick in local dispatches of 2% YoY and 7% YoY growth in exports. North local dispatches are estimated to increase by 7% YoY, however, south local dispatches are likely to record a decline of 14% YoY. Healthy growth in exportsis expected to continue from south recording YoY growth of 67% whereas north will likely continue to be laggard in exports posting a decline of 26% YoY.
  • Based on June-18 estimates, FY18 dispatches are likely to register a YoY growth of 13% with major impetus coming from an estimated 15% growth in local dispatches, while exports are likely to close in at 1% YoY growth.
  • Average cement prices for June-18 in the north region increased by PKR 9/bag MoM to PKR 555/bag where cement prices in south also increased by PKR 9/bag to PKR 593/bag during June-18. Coal prices increased by USD 2/ton to USD 103.20/ton during June-18.

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