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Pakistan Market Savvy

December 31, 2018
Cement: 12mn tons capacity planned for CY2019 Sector Cement
Stance Market-Weight
Pakistan to witness record cement capacity addition in CY19 at a time when
country's real GDP growth is anticipated to slow down to 9 year low, following, a (mn tons) Monthly Capacity Utilization (North Region) (%)
4.5 120%
record hike of 425bps during outgoing year. Though market is anticipating cement
100%
supply glut during CY20-21 once majority of the new capacities come online in 2020, 4.0
80%
our recent discussion with industry sources reveal that most of the plants will be
3.5
operational much earlier in CY19. The reasons could be to avoid further cost over 60%

runs which may swell due to expected hike in imports duties on plants (likely in mini 3.0 40%

May-19

May-20
Nov-19

Nov-20
43405
43466
43525
43586
43647
43709
43770
43831
43891
43952
44013
44075
44136
Mar-19

Mar-20
Dec-18

Sep-19

Sep-20
Jan-19

Jan-20
Jul-19

Jul-20
budget) and Pak rupee devaluation against the US dollar.
Capacity in north to rise by 13% in CY2019 and 16% in CY2020 Capacity (LHS) Utilization (RHS)
Incorporating recent timelines, we may see installed capacity in north region Source: APCML, Sherman Research

reaching 44.7mn tons per annum by the end of CY19, compared to 39.5mn tons in
Expected capacity addition during CY19 (North Region)
CY18, up 13% (see table), while full impact will be visible in 2020 when installed
Capacity
capacity of 52.0mn tons will be available in north region by CY20. Company Expected COD
(mn tons)
Just to recall, total cement sales in north stood at 35.4mn tons (up 2%YoY) during CHCC 2.0 Feb-19
CY18 out of which local sales posted growth of 3%YoY while export sales posted a MLCF 2.1 May-19
PIOC 2.4 Oct-19
decline of 8%YoY. Thus, cement players in north region operated at average capacity
LUCK 2.6 Dec-19
utilization of 90% during CY18.
KOHC 2.3 Dec-19
All depends on demand Total 12.0 -
Interestingly, during CY18, available capacity increased by 3% to 39.5mn tons in Source: Company Accounts, Sherman Research
north region while total sales improved by 2%. Thus average capacity utilization,
according to our estimates, reduced from 91% to 90%. With no major capacity Base Case
addition during CY18, cement players managed to raise prices by 13% to average (Rs) EPS Target
Company FY19E FY20F Price
Rs615 per bag. However, rise in cement price is lower than their increment in
Cherat Cement 14.5 9.9 79
production cost, (coal up 16%YoY, Furnace oil up 51%YoY) resulting in erosion in
D.G. Khan Cement 7.9 9.6 92
gross margin. Fauji Cement 1.9 1.5 18
Our base case assumption includes demand growth of 7% and 5% for CY19 and Maple Leaf Cement 5.2 9.6 60
CY20, respectively. Moreover, we have also assumed price cut of Rs30/bag and Pioneer Cement 6.0 7.2 58
Rs20/bag in CY19 and CY20, respectively. Best Case
(Rs) EPS Target
In a best case scenario, if demand in north region grows by historic 5-year average Company FY19E FY20F Price
of 7% (average capacity utilization 83%) with production cost and cement price to Cherat Cement 19.0 20.0 110
remain at current levels, our estimates suggests that gross margin may increase to D.G. Khan Cement 8.3 12.2 130
27% compared to our base case assumption of 24%. Our valuation improves by 33% Fauji Cement 1.8 2.3 23
while earning improves by 48%. Maple Leaf Cement 6.2 12.8 77
Pioneer Cement 7.5 13.6 75
In worst case scenario, assuming production cost remains the same and demand
Worst Case
reduces by 10% to 31.7mn tons during CY19, in that case capacity utilization may
(Rs) EPS Target
reduce to 74% which trigger downward pressure in cement prices by around 10% Price
Company FY19E FY20F
(as we saw prices in 2015). In this case, our sample companies valuation may fell Cherat Cement 11.6 9.1 64
by 20% while earnings to go down by 29%. D.G. Khan Cement 5.8 6.0 80
Maple & Pioneer: Best picks even in worst case Fauji Cement 1.6 0.9 15
Though there are multiple ways to value cement stocks like EV/ton, EBITDA/ton Maple Leaf Cement 4.7 6.9 45
etc. However, we believe, in a supply glut like situation EV/ton is not a true reflection Pioneer Cement 4.4 6.0 44
Source: Sherman Research
of cement stock prices. Our estimates suggests that even in worst case scenario,
Maple Leaf Cement (MLCF) and Pioneer Cement (PIOC) are trading at FY20 PE of Saqib Hussain Khan
6.0x and 7.1x, respectively. While Fauji Cement (FCCL) is trading at higher FY20 PE saqibkhan@shermansecurities.com
of 23.0x. Moreover, D.G. Khan Cement (DGKC) is trading at FY20 PE of 13.6x in a (+92-21) 35302927 Ext. 1502
worst case scenario. We maintain ‘Market-Weight’ stance on Cement sector. Sherman Securities (Private) Limited
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 Risks to valuation:
Risk to valuation includes 1) Change in coal and oil prices, 2) Lower than expected growth in dispatches, 3) Change in cement
prices and 4) Higher than expected interest rate.
Analyst Certification and Disclosures:
The research analyst(s) primarily involved in the preparation of this report, certifies that (1) the views expressed in this report
accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was,
is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Furthermore, it is stated
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aggregating more than 1% of the value of the company. Additionally, the research analyst or its close relative have neither served as
a director/officer in the past 3 years nor received any compensation from the subject company in the past 12 months.
Price Methodology:
To arrive at our period end Target Price, Sherman Securities uses different valuation methods which include : 1) Discounted Cash
flow method 2) Relative Valuation method and 3) Justified Price to Book Value method.
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Disclaimer:
Sherman Securities (Pvt) Ltd. has produced this report for private circulation only. The information and statistical data herein have
been obtained from reliable sources to our knowledge where such information has not been independently verified and we make
no representation or warranty as to its accuracy, completeness or correction. This report makes use of forward looking statements
that are based on assumptions made and information currently available to us and those are subject to certain risks and uncertainties
that could cause the actual results to differ. This report is not a solicitation or any offer to buy or sell any of the securities mentioned
herein. It is meant for information purposes only and does not take into account the particular investment objectives, financial
situation or needs of individual recipients. Neither Sherman Securities (Pvt.) Ltd. nor any of its affiliates or any other person connected
with the company accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the
information contained herein.
Rating System:
Sherman Securities employs a 3-tier rating mechanism i.e. Buy, Hold and Sell, which is based upon the level of expected return
for a specific stock. Time horizon is usually the annual financial reporting period of the company. If total expected return
exceeds or equals to 18.5%, a Buy rating is issued. If total expected return exceeds or equals to -10%, a sell rating is issued. If
return is in between the two ranges, hold rating is assigned. Aforementioned ratings are subject to change on the basis of
change in stock price, change in analyst’s estimates, change in assessment of company’s business risk or a combination of
these factors.

Rating Interpretation
Buy ≥ 18.5%
Sell ≤ ‐10%
Hold Between -10% to 18.5%.

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