AKD Securities Limited Equity Research – Daily Report

Karachi, December 05, 2017 (PPI-OT): Pakistan Cement: Nov’17 Dispatches Review

Total cement dispatches during the month rose 4.8%YoY to 3.93mn tons in Nov’17, while declining on a monthly basis (down 6.9%), as reflected in provisional data released by APCMA. Local demand growth tapered off to 9.4%YoY/-5.3%MoM against an avg. 4MFY18 dispatches growth of 25.6%, on account of construction activities losing pace as winter approaches. Exports, on the other hand, remained under significant pressure with figures showing a significant 26.4%YoY /20.5%MoM decline possibly due to trade barriers imposed by Afghanistan.

Cumulatively, 5MFY18 dispatches are up 13.8%YoY over the previous year to 18.50mn tons primarily driven by strong domestic consumption, (+19.8%YoY), while export growth decelerated (down 18.1%YoY). Post the seasonal blip, we expect domestic demand to pick up pace with GoP looking for swift completion of public projects during the election year, evident in 20%YoY higher PSDP disbursement in 5MFY18. With pricing concerns coming to the fore along with fundamental pressures (rising coal prices), the cement sector has undergone steep correction (down 44% since May’17).

While pricing risk remains as additional capacity streams online, we base our investment case on: 1) strong domestic demand growth and 2) discounted valuations. In this backdrop, we maintain our preference for well diversified, energy efficient companies like LUCK (TP: PkR898/sh), MLCF (TP: PkR108/sh), DGKC (TP: PkR194/sh) and PIOC (TP: PkR109/sh) in our Cement Universe.

Company wise local performance: The construction activity slowed down during the month on account of the approaching winter season. This slowdown was reflective in local cement dispatches growth tapering off to 9.4%YoY/-5.3%MoM at 3.58mn tons against an avg. 4MFY18 dispatches growth of 25.6%. Furthermore, political disorder in the federal capital, a 21 day long sit-in at one of the most important interchanges, might have resulted in supply disruptions, leading to monthly decline in dispatches. Company wise, MLCF and FCCL emerged as star performers for the month, growing their dispatches by 5.6/3.0%MoM, while DGKC, LUCK and PIOC witnessed a downtrend (-8.4/6.8/2.3%MoM).

Exports remain discouraging: Exports posted yet another month of dismal performance, falling 26.4%YoY to 0.35mn tons. Similar trend was seen on a sequential basis as well with dispatches falling by 20.5%MoM. Cumulatively, 5MFY18 total cement exports stand at 2.08mn tons, down 18.1%YoY, struggling on account of trade barriers imposed by Afghanistan along with an influx of Iranian cement into the said region. LUCK’s exports slipped the most (down 52.6%YoY) with the company just being able to transport 0.064mn tons of cement during the month.

Investment Perspective: Though risks in the form pricing war and rising coal prices (+22.6% FYTD) exist, but recent correction in our AKD cement universe (down 44%CYTD) offers attractive entry points especially when growth story remains intact. Maintaining our preference for the sector, our top picks include well diversified, energy efficient companies like LUCK (TP: PkR898/sh), MLCF (TP: PkR108/sh), DGKC (TP: PkR194/sh) and PIOC (TP: PkR109/sh) in our Cement Universe.

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