Pakistan Cement sequential Uptick in Mar’14 Dispatches – AKD Research

By: Bilal Alvi,

UAN: 111-253-111

AKD Securities Limited

According to news reports cement dispatches for 9MFY14 clocked in at 24.8mn tons up only 1%YoY. In this regard, cement dispatches fell in comparison to Mar’13 where local dispatches came off by 4%YoY to 2.5mn tons while exports clocked in lower at 725k tons, down by 6%YoY. The decline in domestic cement dispatches was largely due to heavier rainfall during Mar’14. While cement dispatches are expected to improve going forward, sector dynamics will remain dependent on the outcome of the expansion by DGKC and LPCL’s acquisition. We highlight DGKC as a potential outperformer where the stock offers an upside of 15.6% to our Jun’14 TP of PkR106.9/share.

Mar’14 Dispatches: Total cement dispatches during 9MFY14 clocked in at 24.8mn tons up only 1%YoY. Domestic dispatches for the period registered a growth of 2%YoY to 18.8mn tons. In this regard, Mar’14 total dispatches increased by a sharp 17% sequentially to 3.2mn tons. However, cement dispatches fell in comparison to Mar’13 where local dispatches came off by 4%YoY to 2.5mn tons while exports clocked in lower at 725k tons, down by 6%YoY. The decline in domestic cement dispatches was largely due to heavier rainfall during Mar’14. As a result total cement dispatches posted a decline 4%YoY during Mar’14.

Outlook: Going forward, cement dispatches are likely to improve as the weather improves and Government goes ahead with infrastructure development plans including construction of the Metro Bus Service in Rawalpindi/Islamabad. Sharp appreciation of the PkR vs. the US$ cement manufacturers with a relatively lower share of exports are likely to benefit more from the falling coal import cost where manufacturers with low share of exports include DCL and PIOC. We expect the declining costs to result in stable cement prices. That said, sector dynamics going forward are likely to be dictated by the acquisition of LPCL and expansion by DGKC. Where we believe expansion by DGKC and acquisition of LPCL by LUCK may possibly leave sector dynamics unchanged.

Investment Perspective: 3QFY14 results are expected to be significantly better on a sequential basis where growth is expected to be led by a 4%QoQ increase in dispatches and the impact of higher prices and lower coal prices coming into play. In this regard, Richard bay coal came off by 5%QoQ during 3QFY14. In this regard, DGKC currently trading at an FY14 and FY15 P/E of 7.1x and 6.1x respectively offers an upside of 15.6% to our Jun’14 TP of PkR106.9/share..