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Morning Call about Lucky Cement Limited – Arif Habib Limited

Karachi: Offering lowest PER in three years; Buy

Arif Habib Limited is revising upwards Arif Habib Limited’s FY12 earnings estimates by 27.1% to PKR 18.1/share for Lucky Cement Limited (LUCK). Arif Habib Limited’s positive stance is emanating from downwards sticky pricing scenario in the domestic market which has kept the retail prices un budged around PKR 400/bag. Arif Habib Limited reiterates Arif Habib Limited’s Buy stance on the scrip with June 2012 target price of PKR 107.9/share, which offers an upside potential of 39.4% from the last closing price.

Offering lowest PER since FY09

Based on revised FY12 earnings estimates, the stock is trading at an attractive PER of 4.3x, offering a deep discount of 32% from average 6.3x PER of AHL Cement Universe Stock. LUCK’s PER comparison of last four year reveals that the stock had never been this cheap since FY09, when it was trading at PER of 3.8x. It is pertinent to mention that FY09 was the year when every blue chip stock fell due to the fallout of the floor imposed in the local bourse.

Even if Arif Habib Limited calculates PER on the lowest price of the respective year, the stock still looks attractive on current levels. The stock has been trading at average PER of 7.9x during last 4 years, reflecting a deep discount 46% on FY12E PER of 4.3x.

PER Snapshot  FY08      FY09    FY10   FY11
EPS (PKR) 8.30  14.21  9.70  12.28
Average Price (PKR)  123.67   54.05   70.41   70.48
Lowest price (PKR)  88.35  26.50  58.56  60.32
PER at Average Price  14.90   3.80   7.26  5.74
PER at Lowest Price  10.65  1.86  6.04  4.91

Source: Company Financials and AHL Research

Pricing consensus holds even after capacity addition by Fauji Cement

After the capacity addition of 7,200 tpd by Fauji Cement Company Limited in the start of FY12, supply glut has increased to ~ 12.8mn tons based on 44.2mn tons of installed capacity against 31.4mn tons of estimated demand. Despite increasing oversupply situation, cement prices in the domestic market remained firm around PKR 400/bag since the start of FY12.

This has strengthened Arif Habib Limited’s confidence on a stable cement price outlook in the domestic market for at least FY12. However from FY13 Arif Habib Limited fears a price decline of 11%, which is likely to drag down gross margins at the level of 33% as depicted in the chart below.

Softening coal prices second Arif Habib Limited’s strong FY12 earnings forecast

International coal prices are mapping a southward trajectory since the start of FY12. This decline turned far steeper in 2QFY12, where coal price have shed more than 12% to USD 103/ton in December 2011.

Coal prices in 2QFY12TD have averaged USD 107/ton, an 8% QoQ drop, when compared with the average USD 117/ton during 1QFY12. This declining trend in the international coal price coupled with the downwards sticky cement prices in the domestic market are shaping to make FY12 the best earning year for the Cement Giant.

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