July 13, 2012 (JS Research)
After Fauji Cement’s (FCCL) impressive 3QFY12 result, we have made some minor adjustments to our financial model of the company. We raise our earnings estimates for FY12E-FY14F by 5-10%. The adjustments are mainly related to marginally higher cement prices than our initial assumption and dip in coal prices. Consequently, our target price is revised to Rs7.1 from 5.5 previously. Hence, we have a ‘Buy’ call on the stock. The stock is currently trading at an FY13F EV/EBITDA of 5.4x versus the regional average of 9.5x. Recall, that the company after its recent expansion has become the fourth largest cement producer in Pakistan.
3Q results propel 9M earnings
Enhancement of capacity by 2.24mn tons annually allowed the company to record higher volumetric sales in 3Q. This along with 31%YoY jump in average retention prices in 3Q augmented the top-line of the company by 177%YoY. Ascending cement prices allowed the company to register a higher gross margin of 29% compared to 13% in the same period last year. Financial charges surged by 38.1 times due to amortization of the capitalized cost associated with the expansion.
Thus, overall earnings in 3Q were shed away somewhat due to higher financial charges, nonetheless, the company still managed to report an earnings growth of 4.67x to Rs243mn (EPS: Rs0.18). Cumulatively in 9MFY12 though, the PAT was down by 54%YoY to Rs140mn (EPS: Rs0.11).
Earnings Revision
After the adjustments linked to higher cement prices and dip in coal prices, we have changed our earnings estimates for FCCL. Our FY12E-FY14F earnings are raised by 5-10%.
Fauji cement enters the big boys club!
FCCL initially had only one production line with a capacity of 1.16mn tons annually but after the recent capacity expansion the company added another production line with a capacity of 2.24mn tons annually. Therefore, now the company’s overall installed capacity stands at 3.4mn tons annually, making it the fourth largest cement producer in the country. Furthermore, the company is ideally placed to cash in on the additional demand expected from the construction of the Diamer-Bhasha Dam. With the distance of approximately 800km from the Dam site, the company is among those who enjoy the closest proximity.
Recommendation: ‘Buy’
Resolute cement prices are critical for the company to maintain its growth momentum. The pricing power remained firm throughout the year and the industry still seems adamant to keep prices at these relatively ‘lofty’ levels. Thus, we have a ‘Buy’ recommendation on the stock as it offers an upside of 22.6% to our target price of Rs7.1. At current levels the stock is trading at an FY13F EV/EBITDA of 5.4x versus the regional average of 9.5x. The key risk to our investment thesis remains any unforeseen adjustments to cement prices.
92 (21) 111-574-111 (ext. 3103)
No comments:
Post a Comment