Elixir Securities Limited – Elixir Insight

Karachi, November 02, 2018 (PPI-OT): Lucky Cement Limited – Lucky 660MW: The Jewel in the “Crown”

LUCK is targeting to achieve COD of its 660MW super critical coal project by Mar-21. The project offers a revised ROE of 29.5% (vs. 27% initially) and carries an estimated project cost of USD 885mn (vs. earlier USD1.08bn).

We expect LEPCL (i.e. Project Company) to contribute PKR24.5, PKR26.9 and PKR29.5 to respective FY22, FY23 and FY24 Consolidated EPS i.e. a top-up of 41-43% on the company’s earnings from domestic cement operations for the period. The project also contributes PKR64 to our Jun-19 PT of PKR625/share.

While we maintain a Market weight stance on the cement sector (owing to expected slowdown and margin attrition), we flag our liking for LUCK due to its 1) diversification (both locally and internationally) within and outside the sector and 2) its leverage-free book.

Due to lack of available information, our valuations do not incorporate upcoming 1.2MTPA Greenfield clinker production facility in Samawah (Iraq) and equity investment in 50MW wind power – we regard both the projects as upside risks to our investment thesis.

Diversification turning Out “Lucky” For the Company: Lucky Cement Limited (LUCK) is undertaking a number of projects in cement, automobile assembly and power within and outside the country. Currently the Company has an installed cement production capacity of 9.3MTPA in Pakistan, 1.7MTPA grinding plant in Basra (Iraq) and 1.2MTPA cement production plant in Democratic Republic of Congo (DRC) while it is undertaking expansions in KPK, Pakistan (Brownfield cement production plant: 2.6MTPA) and Samawah, Iraq (Greenfield clinker production facility: 1.2MTPA).

In addition, LUCK is also venturing in various other sectors including Power and Automobiles. Currently, the company is investing in a 660MW supercritical coal based power project, 50MW wind farm and holds a 70% stake in a PKR20bn automotive manufacturing plant (Kia Lucky Motors, KLM).

Anticipating slowdown in cement offtakes, we feel that the company has successfully hedged itself via its diversified portfolio. While the enclosed table outlines the details of each project, we are most excited about the 660MW Coal Project which is slated to come online in Mar-21.

Lucky 660MW Supercritical Project – Overview and Latest Revisions: Lucky Electric Power Company Limited (LEPCL) has been established as an Independent Power Producer (IPP) under GoP Power Policy and is engaged in setting up a 660MW supercritical power project using Thar Lignite Coal. The project site is located at Port Qasim. LEPCL is wholly owned by LCL Holdings Limited (LCLHL) which is a wholly owned subsidiary of Lucky Cement.

LEPCL achieved its financial close on June 25, 2018 and the project is progressing as per plan. As per detailed accounts, the contractors have been mobilized at the site and levelling and piling work has commenced. Required Commercial Operation Date (COD) for the project is March 1, 2021. The estimated project cost is USD 885mn (vs. USD1.08bn earlier).

As per our discussions with the management, the project cost has been scaled down due to changes in project design to use local coal (from an earlier plan of using imported coal). The changes in coal procurement has also revised up ROE component in Tariff to 29.5% (from an earlier of 27.2%). The project has a Debt: Equity ratio of 75:25, respectively. To finance debt component, LEPCL has arranged foreign currency financing of PKR210mn and local currency financing of PKR56mn from consortium of local banks.

LEPCL to offer top-up of 41-43% to Domestic Cement Earnings: We expect LEPCL (i.e. Project Company) to contribute PKR24.5, PKR26.9 and PKR29.5 to respective FY22, FY23 and FY24 Consolidated EPS i.e. a top-up of 41-43% on the company’s earnings from domestic cement operations for the period. The project also contributes PKR64 to our Jun-19 PT of PKR625/share. Using a Dividend Discount Model (DDM) and employing a 17% cost of Equity translates into Jun-19 value of PKR64 per share of LUCK (which contributes 10% to our Jun-19 PT of PKR625/share).

Stable Income – A Hedge Against Weak Cement Fundamentals: Amongst all ongoing expansions (including those in Automobile and Cement), we are most positive on the aforementioned 660MW coal power project as it not only offers a far more stable and convincing cash flow projection, but also acts as a natural hedge against economic slowdown and PKR depreciation. Moreover, the project is based on coal (rather than more expensive oil based fuels) – being a priority area for the government this means that timely capacity payments from the government should be less of an issue when compared to other listed IPPs.

We maintain a Marketweight stance on the overall cement sector owing to 1) interest rate lift-off, 2) expected slowdown in economy, 3) higher coal prices, 4) further anticipated PKR/USD depreciation and 5) pressure on cement prices on the back of upcoming competition in North. Moreover the recent rally in the sector has left limited upside on the table for most cement stocks. However we continue to flag our liking for LUCK due to 1) its diversification (both locally and internationally) within and outside the sector and 2) its leverage-free book. Our current PT does not incorporate 1.2MTPA Greenfield clinker production facility in Samawah (Iraq) and equity investment in 50MW wind power – we regard both the projects as upside risks to our investment thesis.

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Elixir Securities Limited – Elixir Insight

Karachi, November 02, 2018 (PPI-OT): Lucky Cement Limited – Lucky 660MW: The Jewel in the “Crown”

LUCK is targeting to achieve COD of its 660MW super critical coal project by Mar-21. The project offers a revised ROE of 29.5% (vs. 27% initially) and carries an estimated project cost of USD 885mn (vs. earlier USD1.08bn).

We expect LEPCL (i.e. Project Company) to contribute PKR24.5, PKR26.9 and PKR29.5 to respective FY22, FY23 and FY24 Consolidated EPS i.e. a top-up of 41-43% on the company’s earnings from domestic cement operations for the period. The project also contributes PKR64 to our Jun-19 PT of PKR625/share.

While we maintain a Market weight stance on the cement sector (owing to expected slowdown and margin attrition), we flag our liking for LUCK due to its 1) diversification (both locally and internationally) within and outside the sector and 2) its leverage-free book.

Due to lack of available information, our valuations do not incorporate upcoming 1.2MTPA Greenfield clinker production facility in Samawah (Iraq) and equity investment in 50MW wind power – we regard both the projects as upside risks to our investment thesis.

Diversification turning Out “Lucky” For the Company: Lucky Cement Limited (LUCK) is undertaking a number of projects in cement, automobile assembly and power within and outside the country. Currently the Company has an installed cement production capacity of 9.3MTPA in Pakistan, 1.7MTPA grinding plant in Basra (Iraq) and 1.2MTPA cement production plant in Democratic Republic of Congo (DRC) while it is undertaking expansions in KPK, Pakistan (Brownfield cement production plant: 2.6MTPA) and Samawah, Iraq (Greenfield clinker production facility: 1.2MTPA).

In addition, LUCK is also venturing in various other sectors including Power and Automobiles. Currently, the company is investing in a 660MW supercritical coal based power project, 50MW wind farm and holds a 70% stake in a PKR20bn automotive manufacturing plant (Kia Lucky Motors, KLM).

Anticipating slowdown in cement offtakes, we feel that the company has successfully hedged itself via its diversified portfolio. While the enclosed table outlines the details of each project, we are most excited about the 660MW Coal Project which is slated to come online in Mar-21.

Lucky 660MW Supercritical Project – Overview and Latest Revisions: Lucky Electric Power Company Limited (LEPCL) has been established as an Independent Power Producer (IPP) under GoP Power Policy and is engaged in setting up a 660MW supercritical power project using Thar Lignite Coal. The project site is located at Port Qasim. LEPCL is wholly owned by LCL Holdings Limited (LCLHL) which is a wholly owned subsidiary of Lucky Cement.

LEPCL achieved its financial close on June 25, 2018 and the project is progressing as per plan. As per detailed accounts, the contractors have been mobilized at the site and levelling and piling work has commenced. Required Commercial Operation Date (COD) for the project is March 1, 2021. The estimated project cost is USD 885mn (vs. USD1.08bn earlier).

As per our discussions with the management, the project cost has been scaled down due to changes in project design to use local coal (from an earlier plan of using imported coal). The changes in coal procurement has also revised up ROE component in Tariff to 29.5% (from an earlier of 27.2%). The project has a Debt: Equity ratio of 75:25, respectively. To finance debt component, LEPCL has arranged foreign currency financing of PKR210mn and local currency financing of PKR56mn from consortium of local banks.

LEPCL to offer top-up of 41-43% to Domestic Cement Earnings: We expect LEPCL (i.e. Project Company) to contribute PKR24.5, PKR26.9 and PKR29.5 to respective FY22, FY23 and FY24 Consolidated EPS i.e. a top-up of 41-43% on the company’s earnings from domestic cement operations for the period. The project also contributes PKR64 to our Jun-19 PT of PKR625/share. Using a Dividend Discount Model (DDM) and employing a 17% cost of Equity translates into Jun-19 value of PKR64 per share of LUCK (which contributes 10% to our Jun-19 PT of PKR625/share).

Stable Income – A Hedge Against Weak Cement Fundamentals: Amongst all ongoing expansions (including those in Automobile and Cement), we are most positive on the aforementioned 660MW coal power project as it not only offers a far more stable and convincing cash flow projection, but also acts as a natural hedge against economic slowdown and PKR depreciation. Moreover, the project is based on coal (rather than more expensive oil based fuels) – being a priority area for the government this means that timely capacity payments from the government should be less of an issue when compared to other listed IPPs.

We maintain a Marketweight stance on the overall cement sector owing to 1) interest rate lift-off, 2) expected slowdown in economy, 3) higher coal prices, 4) further anticipated PKR/USD depreciation and 5) pressure on cement prices on the back of upcoming competition in North. Moreover the recent rally in the sector has left limited upside on the table for most cement stocks. However we continue to flag our liking for LUCK due to 1) its diversification (both locally and internationally) within and outside the sector and 2) its leverage-free book. Our current PT does not incorporate 1.2MTPA Greenfield clinker production facility in Samawah (Iraq) and equity investment in 50MW wind power – we regard both the projects as upside risks to our investment thesis.

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