Karachi: Low base and higher retentions to bloat EBITDA margins
According to Elixir Securities, they expect EBITDA margins to surge by 78% YoY (up 17% QoQ) during 1QFY12 owing to low base effect along with rise in retention prices. EBITDA margins for LUCK fumbled in 1QFY10 and reached its lowest level in 1QFY11 at PKR976/ton (down 19% YoY), while they have been on a rising trend since then due to stronger price consensus amongst cement manufacturers. Average retention for 1QFY12 is expected at PKR5,184/ton (up 29% YoY); attributable to increase in domestic cement prices, which shall more than offset 12% YoY increase in COGS/ton breeding from utilization of expensive coal inventory and possible electricity generation on furnace oil. Increase in retention prices is likely to have gushed from lower govt levies on cement prices in FY12 budget which would have enlarged LUCK’s average retention by PKR250/ton during the quarter.
Accretion in local off take to offset decline in exports
Elixir Securities expects LUCK’s 1QFY12 total off take to rise by 3% YoY to 1.4mn tons on the account of strong uptick in local dispatches while export off take is likely to have fallen. Elixir forecasts local dispatches to rise by 27% YoY to 0.9mn tons primarily due to, low base effect caused by devastating floods of 1QFY11, coupled with healthy construction activity in the south region in contrast to the north region during the quarter.
Export off take is likely to post a decline of 20% YoY to 0.6mn tons where sluggish construction activities coupled with oversupply of cement in the Middle East is likely to have kept export demand growth in the negative territory. However, cement demand from East/South African markets and Afghanistan is likely to have mitigated the decline from the GCC region. Elixir Securities estimates local retention to have averaged PKR5,112/ton during 1QFY12, whereas export retention, after adjusting for handling charges is estimated at PKR3,904/ton. Subsequently Elixir expects net sales to increase by 33% YoY to PKR7,413mn
PT revised to PKR105/share
Elixir Securities has lowered its risk free rate to 12% and raised its market risk premium to 8% which yields a price target of PKR105/share. Elixir Securities has raised its FY12/FY13 EPS by 58% and 38% to PKR21.4 and PKR16.2 respectively, primarily due to soaring EBITDA margins proliferating from higher retention prices and lowest conversion cost amongst industry peers . Elixir’s valuations do not reflect savings from, TDF project and power sale to HESCO, which if are materialized would yield an additional 10% upside to Elixir’s Jun‐12 PT. At yesterday’s closing price of PKR82.3/share, LUCK offers an upside of 28% to Elixir’s Jun‐12 price target of PKR105/share and trades at FY12 PER of 3.8x. BUY!