LUCK: Present Risks and Our Take on Them

Lower than expected FED cut (PKR5/bag), imposition of cess on captive plants, rumors of disconnect gas supplies to captive plants and steep decline in PKR value has led LUCK to underperform broader index by 9% in last 2 weeks    The burden of higher energy cost from unlikely gas curtailment to CPPs and additional cess amount will be conveniently passed down by the manufacturers     The aggressive PSDP utilization expected in 1HFY13 (pre-election populist measures) will continue to keep the prices downward sticky    With lower debt/ton, higher interest coverage and rising cash balances, LUCK is best positioned to fend off the threat of increase in borrowing costs    Higher exports share and softening coal prices downplay the concerns emanating from PKR depreciation    1) LUCK’s capacity to add considerable debt to its predominantly unleveraged balance sheet and 2) Group level nature of the transaction further downplay the concerns regarding funding and liquidity issues relating to potential ICI acquisition    Despite 20% decline in coal prices during past two months, LUCK has underperformed the benchmark index by 11%. Thus, the current price level has yet to incorporate the impact of declining coal prices on LUCK’s gross margins    At our upward revised target price of PKR136/share, the stock offers an upside potential of 21% plus a dividend yield of 5%

LUCK: Present Risks and Our Take on Them