JS Securities Limited – JS Research Beep

Karachi, December 29, 2017 (PPI-OT): EPA setting new dynamics; MLCF expansion on hold!

According to a recent notice published by Maple Leaf Cement Factory Limited (MLCF), the company has put the construction of its brownfield expansion project (~2.2mnTpa) on hold following order issued by Environmental Protection Agency (EPA). The management of the company is of the view that all necessary regulatory approvals regarding the said project have already been completed before the commencement of construction. Consequently, MLCF has filed a writ petition against the directive of EPA in Lahore High Court (LHC). We highlight that Pioneer Cement Limited (PIOC) has already put construction of its new line (2.5mnTpa) on hold since last month due to similar problems.

Despite company’s expectations of a positive outcome, we expect a minimum delay of three months in project’s COD (company’s prior expectation: 4QFY19). We believe the LHC may hold its verdict till the Supreme Court concludes ‘Katas Raj’ case, where we expect possible conclusion by the end of Feb-2017. However, MLCF’s expansion project can face further delays if the case prolongs.

We have already incorporated a possible three months delay in plant construction as compared to management expectations into our base case (COD: 1QFY20), where we highlight that a delay of another six months can erode company’s bottom-line by ~7-8% earnings in FY20F. It is pertinent to note that, Cherat Cement Limited (CHCC) and Bestway Cement (BWCL) remains key beneficiaries of this development as both companies’ expansion plans remain on track. We presently have a ‘Buy’ rating on MLCF with a Dec-2018 Target Price of PKR106/share.

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