Karachi: AKD Securities rollover its financial model for Lucky Cement Limited (LUCK) and upward revise its target price to PkR112.9 (from PkR100.7 previously).
According to AKD Securities Limited, upward revision comes on the back of 1) robust FY11 financial results, 2) expected commercial operation of the company’s TDF plant and the resulting cost savings and 3) declining D/A ratio of the company. Additional expected benefits to the company include increasing export prospects to India, expected supply of electricity to HESCO (to start by Dec’11) and the set-up of cement plant in Democratic Republic of Congo (DRC). AKD Securities revises its EPS forecast to PkR15.61-PkR2O.42 across FY12F- FY15F (from PkR12.90-PkR17.03) in the same period. AKD Securities now expects LUCK to post NPAT of PkR5.05bn (EPS: PkR15.61) in FY12F against NPAT of PkR4.17bn (EPS: PkR12.90) estimated previously. At current price level, LUCK trades at FY12F PER of 5.2x and offers upside of 39% to AKD’s revised target price of PkR112.9/share.
Elevated Margins: After reaching the peak of US$129.75/ton (Australian floods-mid FY11), coal prices have now settled down 15.7% from the latest peak (currently trading at US$10944/ton). On the contrary, cement prices, initially raised by cement manufacturers to offset the increase in coal prices, continued to increase and still hover at the levels as high as PkR417/bag (countrywide-average). Besides, LUCK’s Tire Derived Fuel (TDF) plant is also expected to begin commercially by Dec’11 (a saving of 15% to 20% on coal cost). In this backdrop, AKD Securities expects LUCK to report gross margins in the range of 35%-36% across FY12F-FY15F (against AKD’s initial estimates of 33% to 35% for the same period).
Increased focus on Local Sales plus potential of exports to India: Increased capacities in East Africa and MENA region plus higher cement prices in the country, have led the company to take a strategic shift towards local sales. Besides higher prices, the local market also offers a potential growth in dispatches in accordance with post flood reconstruction and construction of small and medium dams in the North. In this regard, local dispatches have already posted a growth of 103%YoY in 4MFY12. On the export front, LUCK should benefit from the increase in exports to India (provided trade between the two countries is further liberalized). Note that Indian Punjab (the main potential market for exports) has only one cement company with a capacity of 1.74mn tons, while the demand in Punjab stands at 329mn tons (as per March 31,10- Indian Cement Manufacturers Association).
Investment Perspective: In the backdrop of higher cement dispatches and elevated prices on the local front, TDF cost saving and supply of electricity to HESCO to start by Dec’11, reducing D/A ratio (18% in FY11 against 21% in FY10) on the company’s balance sheet and the set- up of cement plant in Democratic Republic of Congo (DRC), LUCK has immense potential going forward. AKD Securities now expects LUCK to post NPAT of PkR5.O5bn (EPS: PkR1 5.61 in FY12F against NPAT of PkR4.1 7bn (EPS: PkR12.90) estimated previously. At current price level, AKD Securities has a Buy stance on LUCK, which trades at a PER of 5.2x and offers an upside of 39% to cur revised target price of PkR112.9/share.