Morning Call about – Least effected from increased power tariff – Buy – Arif Habib Limited

Karachi, August 12, 2013 (PPI-OT): The stock of Lucky Cement Limited (LUCK) has underperformed the market by 5% since the announcement of increase in power tariff.

According to Arif Habib Limited just to recall, the government has increased the power tariff for industrial users by up to 73% effective from August 1, 2013 (for detailed impact on cement companies refer to Arif Habib Limited updates “Power Tariff increased; Cement sector to feel the brunt” dated August 6, 2013).

Arif Habib Limited believes the market has overdone its pessimism on LUCK as it remains unaffected from rising power tariff due to its captive power generation on gas. Though the government is considering raising gas tariff as well, however, due to lower cost of power generation on gas, Arif Habib Limited believes the company would retain the benefit of lower generation cost despite increase in gas tariff.

Increase in Power Tariff (PKR/unit)   Current   Previous  Change 
Peak Hours                             18.81      12.37    52% 
Off Peak Hours                         12.91       7.46    73% 
Weighted Average                       14.39       8.69    66% 

Source: Business Recorder 

In today’s ‘Morning Call’ Arif Habib Limited highlights the competitive advantage of lower power generation cost of LUCK and reiterate Arif Habib Limited ‘Buy’ stance on the stock with DCF- based target price of PKR 308/share, offering an upside potential of 34% from current levels. In addition to this sizeable upside potential, the stock is trading at an attractive forward PER of 6.2x, a 20% discount to market PER of 7.7x

Gas price fear overplayed
At the prevailing gas price of PKR 538/mmbtu, LUCK’s power generation cost is estimated around PKR 6.3/kwh, a whopping 56% discount to the average power tariff of ~PKR 14.4/kwh. This makes LUCK the major beneficiary of the cement price hike by the industry to pass on the rising electricity costs.

As per Arif Habib Limited estimates, every PKR 5/bag increase in cement prices adds PKR 0.95/share (2.6% of FY14 EPS) to LUCK bottom-line. Though gas prices are also expected to be increased, Arif Habib Limited believes the impact of increase in gas prices would be lower than the impact of increase in power tariff.

As per Arif Habib Limited estimates, LUCK’s benefit would dilute only if gas prices increased by 146% to PKR 1,323/mmbtu, which seems highly unlikely. Following table summarizes sensitivity of rising gas prices on the earnings and per bag cement prices assuming no pass-on to the end consumer.

% Increase Gas price required cement price increase EPS Impact (with no price increase)

PKR/mmbtu              PKR /bag           PKR/share
10%    592                        2.84               (2.70) 
20%    646                        5.69               (5.40) 
30%    699                        8.53               (8.10) 
40%    753                       11.37              (10.80) 
50%    807                       14.22              (13.51) 

Source: AHL Research

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