Pakistan Cement Sector

Upgrade rating on improved FY13E outlook; Buy Lucky

 

Upgrade Lucky Cement to Buy & DGKC to Neutral 

We upgrade Lucky Cement to Buy (from Neutral) and DGKC to Neutral (from U/P) with new POs of PRs151/sh and PRs48/sh, respectively. Following DGKC and Lucky outperforming KSE-100 by 95% and 52% in Jan-Apr 12, the stocks are down 11% and 13% respectively from their highs, triggered by recent correction in North cement prices. With strong FY12 results expected around the corner (Jul/Aug), improved cash payout expectations and improved earnings outlook for FY13E, we expect buildup of a near term rally in the stocks. Our cement universe is on average currently trading at a 31% discount to KASB Universe FY13E P/E of 6x (well below Lucky's historical premium to the market multiples), despite ~40% earnings growth expected in FY13E. Lucky remains our top pick in the sector, offering 21% upside potential to our PO. DGKC offers 12% potential upside to our PO.  

Estimates & PO upgrade on coal and cement price outlook 

We raise our PO for Lucky by 9.4% to PRs151 and DGKC by 11.6% to PRs48 led by earnings upgrade. We revise FY13/FY14E EPS for Lucky by 12%/7.8% on the back of PRs10/bag increase in cement prices in the South, recovery in cement prices in the North, cut in coal price forecast and 10% increase in gas prices. Similarly, we raise our FY13/14E EPS for DGKC by 24%/17%. 

We cut global coal price forecast by 14% 

A major portion of our earnings upgrade is driven by change in coal price forecasts. Our Global metals & mining team has cut its coal price forecast for FY13/14E by 14%/8% to US$93/98 per ton FOB due to increased global over-supply of coal. We expect coal prices to trade in a range in the next 6-9 months before starting to pick up in late-2013 on the back of supply cutbacks and demand pick-up in India. 

Improved outlook for domestic cement prices 

With no major supply addition planned in the next three years, we expect the industry capacity utilization rate to see 3% pa improvement from its current level of 69%, which should support prices. With the trend of gradual uptick in cement price (and margins) appearing to be back on track and our discussions with industry players, we see lower risk to the cement price outlook, where abrupt weakness in prices in the North region had turned us cautious earlier this year.  

Key risks to our call 

Decline in domestic cement prices on slow demand, decline in export prices, stronger/earlier than expected recovery in coal prices, gas supply cut for captive power plants are the key risks to our estimates. 

Pakistan Cement Sector