20 October 2021 PAKISTAN

Pakistan Cements

Pakistan Cements – New coal Yusuf Rahman, CFA

Research Analyst

inventory witnessing a sharp rise yusuf.rahman@kasb.com

Aye
The coal inventory costs of Pakistan’s cement sector are expected to witness a sharp Richard Bay Coal Prices

uptick in light of the surge in global coal prices. International coal CFR rates crossed USD/MT
300
the USD 270/MT (PkR 46,000/MT), Afghan coal is hovering around PkR 32,000/MT, 250
and local coal has increased to PkR 21,000/MT. 200
150
The existing, relatively lower cost inventories, are projected to last till Dec21 before 100
the effects of the higher cost inventory kick in. To better analyze industry margins in 50
the coming months, we held discussions with company management to assess 0

Jun-21
Jul-21
Feb-21

Oct-21
Apr-21

Sep-21
Mar-21

May-21

Aug-21
Jan-21
average inventory levels and the rates at which each company was booking newer
coal inventories.
Source: Bloomberg
Company Coal Inventory (USD/MT) Coal Mix (%)
Current Latest LC Cost % Imported Afghan Local
LUCK 170.0 210.0 24% 100% 0% 0%
DGKC 155.0 180.0 16% 100% 0% 0%
MLCF 175.0 190.0 54% 85% 15% 0%
CHCC 180.0 200.0 11% 55% 20% 25%
FCCL 175.0 190.0 9% 85% 8% 7%
PIOC 170.0 195.0 15% 88% 10% 2%
KOHC* 165.0 n/a n/a 80% 20% 0%
Source: Company Management
*not booked yet

Industry margins likely to take a hit

Cement manufacturer’s coal inventory costs are presently averaging around USD Pakistan Cement Prices (PKR/bag)

170/MT, a surge of over 2.4x against average inventory levels of USD 70/MT in FY21.
Moreover, the latest coal LCs by the industry were opened at USD 200/MT. While
global coal prices are expected to ease post winters, we believe average coal
inventory costs will hover around the USD 160/MT mark for FY22. This average
implies a PKR 134/bag increase in production costs during the fiscal year.

In view of the higher costs, cement manufacturers have increased cement prices by
PkR 125/bag CYTD (effective PkR 100/bag) as of Oct21. Onwards, we project
additional hikes and estimate cement prices to average PkR 720/bag in FY22. As
cement price hikes are projected to partially absorb the higher costs, we estimate
our cement universe’s margins to decline to 14% in FY22 (vs. 24% in FY21). Source: Bloomberg
20 October 2021 PAKISTAN

Cement Industry Financials

Earnings Margins
FY21 FY22 % FY21 FY22 pps
LUCK 43.51 38.74 -11% 30% 22% -8.4
LUCK - Consol 70.69 95.61 35%
DGKC 8.49 6.91 -19% 18% 11% -7.0
MLCF 3.49 2.90 -17% 21% 13% -8.1
FCCL 2.52 2.00 -21% 25% 14% -10.6
KOHC 17.41 14.81 -15% 25% 14% -10.6
PIOC 8.69 7.54 -13% 19% 14% -4.7
Source: KASB Research

Easing coal prices improving market sentiments

News reports revealed that China plans an intervention to calm coal prices as it
announced maximum utilization of its coal mines to ensure ample supply for its
power requirements. Post the announcement, coal futures eased from a high of USD
256/MT to present levels of USD 220/MT. Most notably, coal futures for 4QFY22
declined to USD 140/MT from peaks of USD 190/MT witnessed during the month.
This decline improved investor sentiments over projected industry margins,
particularly in light of the recent cement price hikes. We conducted a sensitivity
analysis for the sector’s earnings at various price points.
LUCK (FY23) EPS Sensitivity - Standalone DGKC (FY23) EPS Sensitivity
Coal Cement Prices (PKR/bag) Coal Cement Prices (PKR/bag)
USD/MT 700 750 800 USD/MT 700 750 800
120 52.52 66.82 81.11 120 9.20 17.64 26.08
150 35.81 50.11 64.41 150 1.11 9.54 17.98
180 19.11 33.42 47.70 180 (6.99) 1.45 9.89

MLCF (FY23) EPS Sensitivity FCCL (FY23) EPS Sensitivity

Coal Cement Prices (PKR/bag) Coal Cement Prices (PKR/bag)
USD/MT 700 750 800 USD/MT 700 750 800
120 4.66 6.98 9.32 120 2.42 3.71 5.00
150 2.07 4.37 6.70 150 1.15 2.44 3.73
180 (0.75) 1.98 4.14 180 (0.12) 1.17 2.45

PIOC (FY23) EPS Sensitivity KOHC (FY23) EPS Sensitivity

Coal Cement Prices (PKR/bag) Coal Cement Prices (PKR/bag)
USD/MT 700 750 800 USD/MT 700 750 800
120 11.33 20.76 30.18 120 23.19 33.13 43.07
150 0.87 10.29 19.72 150 11.60 21.54 31.47
180 (9.60) (0.17) 9.25 180 0.00 9.94 19.88
Source: KASB Research
 20 October 2021 PAKISTAN

Long-term growth thesis intact; sector remains a strong BUY

We continue recommending exposure in the cement sector despite macroeconomic

headwinds because of the industry’s long-term growth thesis. The sector remains an
essential part of Pakistan’s economic recovery and we believe it will continue benefitting
from favorable policy decisions. In view of high cement dispatches, supported by
approved amnesty-based projects and construction financing, we believe the sector has
ample pricing power to pass on elevated costs. We have a positive stance on all cement
stocks and recommend LUCK as our top pick with an upside of 68% because of its
diversified operations.

Pakistan Cement Estimates

Earnings Multiples Target (PKR/sh)
FY22E FY23E PE (FY23E) EV/MT TP Upside
LUCK 95.61 144.60 4.85 112 1,180 68%
DGKC 6.91 17.64 4.73 65 118 41%
MLCF 2.90 6.98 5.03 54 52 48%
FCCL 2.00 3.71 4.77 35 26 47%
KOHC 14.81 33.13 5.13 41 232 37%
PIOC 7.54 20.76 4.16 57 134 55%
Source: KASB Research
20 October 2021 PAKISTAN

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Rating Definitions
• Outperform >18.5% potential upside
• Neutral: 12.5% to 18.5% potential upside
• Underperform <12.5% potential upside