Though not a part of our Cements Universe, we intend to highlight the strong fundamental story of Fecto Cement (FECTC) that forms the basis of recent rally in the stock price
Despite 19% increase in cost/bag owing to 8% YoY increase in coal prices and persistent rise in electricity tariffs, the company managed to depict a marked improvement of 340bps in gross margins during 9MFY12 primarily due to higher average local prices and improved capacity utilization
Given the persistent increase in power tariffs to control the circular debt in energy chain and increased electricity outages, the WHR plant (6 MW) of the company is providing considerable support to the bottomline
Going forward, revamp in infrastructure build-up in Afghanistan boosted by recently pledged US$16bn (over 5 years) in aid amid better export margins would bode well for the company
Our liking for the stock stems from 1) improved capacity utilization, 2) consistent decline in coal prices, 3) strong pricing scenario and 4) lower debt/ton compared to peers (small manufacturers)
At our target price of PKR 26 the stock offers an upside potential of 43% from current level. Our computed TP is derived from a blend of fair values computed using industry’s PER, PBV and EV/ton multiples
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