June 19, 2012 (JS Research)
We have altered our assumptions for Lafarge Pakistan Cement (LPCL) post its 1Q2012 results where the company reported a growth of 11.8xYoY. The adjustments come on the back of high and downward sticky cement prices and the recent decline in coal prices. Consequently, we raise our target price by 22% to Rs4.1 from Rs3.35 previously. We now expect the company to register a PAT of Rs923.7mn (EPS: Rs0.70) in 2012. Nevertheless, key downside risk to our valuation remains any reversal in cement prices. Since the stock is trading 9% above our target price we have a ‘Hold’ call on the stock. At current levels, the stock is trading at 2012E PE and EV/EBITDA of 6.4x and 4.8x respectively.
1Q2012 Review
Net sales of the company surged by 32%YoY owing to an increase in average retention prices. Average retention prices of the company rose by 34%YoY which countered the dawdling volumes. COGS/ton too, increased at a hefty pace (up by 22.1%YoY) due to rising fuel and power costs. Nevertheless, frequent rise in cement prices allowed the company to improve its gross margin to 28.3% compared to 21.1% in the same period last year.
Due to its reasonably leveraged balance sheet (D/A at 46%) financial costs shed 61% of the operating profitability. Overall the company reported a PAT of Rs164mn (EPS: Rs0.13) in 1Q2012 against a PAT of Rs14mn posted in the corresponding period last year, translating into a growth of 11.8xYoY.
Revision in earnings estimates
On account of improving pricing power within the cement industry, prices have shown a firm trend over the last ten months. As a result, we have tweaked our assumption on cement prices for 2012-2014. Moreover, further adjustment has come on the back of international coal prices which have declined by 19% since January 1, 2012 to FOB US$86/ton. Our revised EPS for 2012 now stands at Rs0.70.
Outlook
Sustainability of cement prices will be the key to profitability going forward. Since LPCL is a reasonably leveraged company any unwarranted movement in cement prices will be more detrimental to the company’s profitability compared to less leveraged companies like LUCK and DGKC. Since the stock is currently trading marginally above our target price of Rs4.1 we have a ‘Hold’ recommendation on the stock.
No comments:
Post a Comment