INVESTMENT SUMMARY

We issue a SELL recommendation for Maple Leaf Cement Factory Limited Recommendation: SELL
(MLCFL) with one year target price of PKR 24/- on 30th June 2023 the target
Date: 06. 30. 2023
price is based on DCF method our recommendation lays on the following analyis
Sell: The current economic downtown resulting an adverse effect on entire market Industry: Cement
of PSX and the macro economic impact.
Share Price: PKR.22
BUSINESS DESCRIPTION
Target Price: PKR 24
Historical Background:
Upside: 9 %
Maple Leaf Cement Factory Limited (MLCFL) with the largest single-line cement
production plant in Pakistan, is a subsidiary company of Kohinoor Maple Leaf Group. It Stock Exchange: PSX
was formed in 1956 through a collaboration between the government of Canada and the
West Pakistan Industrial Development Corporation. It got registered under the Companies Key Figures:
Act, of 1913 (now the Companies Act, 2017), and is a listed company on the Pakistan
Market Capitalization: 24.2 bln
Stock Exchange.
Geographical Presence: Shares Outstanding: 1.10 bln
MLCFL mainly has its presence in the north and central regions of the cement industry in
EPS: PKR. 3.44
Pakistan. The factory is located in Iskanderabad District Mianwali in the province of
Punjab and has its registered office in Lahore. The sales are geographically segmented Value Of Firm: 57 bln
respective to the continents mainly among Africa and Asia. MLCFL exports cement in
Afghanistan, Comoros, Madagascar, Mozambiquem, Nigeria, Ethiopia, Oman,
Qatar, Seychelles, Sri Lanka and Tanzani.

Market Mechanism
MLCFL’s core strategic operation is manufacturing and selling cement locally in Pakistan
and internationally around the globe. The company inclines to lead the market
competitively, mainly by adapting the market trends and expansion policies. Presently,
MLCFL has four production lines, one for white cement and three lines for grey cement.
The company tends to be the market leader for white cement with more than 90% of the
market share. Additionally, in order to fully capture the market demand MLCFL sells five
Clinker Production Capacity After
types of cements; Ordinary Portland Cement, Sulphate Resistant Cement, Low Alkali Expansion
Cement, White Cement and Wall Coat. 16 14.22
Currently, MLCFL has a clinker production capacity of 5.7 MMT, after the brownfield 13.7
14
expansion project MLCFL’s clinker production capacity will escalate to 7.8 MMT. The 12
3.15
4.32
9.94
elevation of 2.1 MMT will henceforth position it as fifth in Pakistan’s cement industry. 10
7.8 7.62
8 4
Market Strategy 2.1
6 11.07 3.3
Strategically, MLCFL aims to lead the market. In order to achieve its aim MLCFL creates 4
9.38 2.67
a unique competitive edge by incorporating different cost-cutting and efficient tools in its 5.7
4.32
2 3.27
business operations. MLCFL proportionately generates power through the waste heat
0
recovery plant which is apparently the cheapest energy source. Moreover, MLCFL has the Lucky Bestway Fauji / MLCF Cherat
Askari
cheapest energy-efficient plants that consume 720 Kilo Calories per kg of clinker.
 2
MLCFL is now shifting towards the use of local Dara coal which contains high sulphur
Electricity content and is cheaper than Richard bay and afghan coal, which helps MLCFL to stand out
from its competitors and be cost-efficient as they are the only cement manufacturer with
120.00
their plants operating on Petcoke, a cheaper substitute for coal that enables plants to tolerate
100.00 high sulphur content. Hence, coal being the major cost driver it gives MLCFL a major
80.00 competitive edge. The effective operational logistical network of MLCFL dispatches
19500 tons per day.
60.00
INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING
40.00

20.00 Cement sector is one of the major industrial sectors around the globe. It principally falls
under the oligopolistic region, which denotes that the sector has sufficient barriers to entry
-
majorly in terms of high capital investment. China’s cement industry tends to be the outlier
FY26f
FY17a
FY18a
FY19a
FY20a
FY21a
FY22a
FY23f
FY24f
FY25f

in the global cement production. As it attains more than 50% of the global market share.
Fundamentally, cement sector is economically a crucial sector indicator for economic
Imported Coal Afghan Coal Darra Coal growth. As a high demand in cement, denotes a high demand for infrastructure,
simultaneously indicating higher living standards.
Demand Drivers:
Demand Drivers Fundamentally, we foresee these three elements as the key demand drivers for MLCFL.
Housing and Infrastructure:
Referring to the National Disaster Management Authority (NDMA) a loss of 1.76mn
affecting the houses, bridges, and roads have been incurred till September 14, 2022. It is
likely that profits of the cement sector will decline by 13% (FY23), however, they are
Housing &
Infastructure anticipated to recover by 20% (FY24) with the recovering economy post floods.
The major buildup of housing is estimated at 9mn units, various plans are announced by
the government to encounter this shortfall. The growth in urbanization with a lower number
of individuals residing per house creates greater demand for housing units. Demand for
cement is escalating as affordable housing schemes are being introduced. Moreover, $9.8b
Renewable Energy infrastructure projects are scheduled to be undertaken in China Pakistan Economic
Resources
Corridor.
Renewable Energy Resources:
MLCF has most of its production based on renewable energy resources, which is one the
reasons why it is able to attain the competitive price. As due to the technological
Market leader for advancement and the application of renewable resources, MLCF attains a substantial
White Cement market share and
Market Leader for white cement: By holding more than 90% of the market share,
MLCFL’s overall demand is highly derived by the sales of white cement. As firstly, it is a
premium product and is sold at a higher then market value price. Secondly, because of its
unique selling point the targeted customers demand it at a higher proportion.
Supply Drivers
Supply Drivers:
High Barriers to entry:
Cement sector is a part of the oligopolistic market, mainly because of the high
capital intensive procedure. The existing can players in the market were tend to
grow mainly because of the ongoing growth of cement industry in the continuously
High Barriers to
developing country i.e. Pakistan. With some alternative suppliers, maple has
entry
dominated the market by their supply for white cement.
Fuel and Power:
Fuel and Power being the main cost drive, impacts the supply chain of MLCFL
substantially. As in order to stay at par with the declining cost, the company has
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here] made innovations and upgraded their upcoming and ongoing projects.
Fuel Power
By using renewable energy resources for power
Generation and using by shifting to darra coal
MLCFLhave reduced their overall cost.
 3
Long Term Competive
ENVIROMENTAL, SOCIAL AND GOVERANCE
Advantages
Environmental:
MLCFL is using environmentally friendly approaches by having organizations like
ENVIROMENTAL Eco Green on board for policy compliance. Since Pakistan is facing an energy crisis
FACTORS the company, apart from Waste Heat Recovery Plant, has installed a renewable
resource of 12.5MW of Solar PV Systems for cleaner operations. MLCF has a
competitive edge over the other competition and took lead in energy suitability through
the “Waste Heat Recovery Plant” that makes energy from the heat of the kiln. It is a
White renewable energy source and has an electricity generation capacity of 37MV, which
Cement reduces fuel emissions leading to savings in power costs and improved asset
utilization. According to Figure 1, MLCF uses 32% of energy from WHRP and 3%
from solar, which lowers the burden on the National Grid. However, 53% of the energy
used by the organization comes from Coal Fired power plant that produces carbon
Pet Coke
emissions, leading to pollution. Moreover, Environment Protection Agency (EPA)
Punjab has awarded MLCFL with the Best Performance Award 2022 along with
Environment and Health (NFEH), who appreciated the efforts of the company for
Waste Heat excellence in health, safety, and environment. A water turbine system was installed in
Recovery Daud Khel, plantations and donations were given to environmental campaigns in
Mianwali city, Go Green (Environmental Day was celebrated that aimed towards a
green and clean Pakistan.
Solar PV
Systems
Social:
MLCF is one of the leading enterprises in Pakistan, which believes that Corporate
Social Responsibility is the key to achieving success. Therefore, CSR policy is
designed in a way that helps MLCF achieve its vision and mission. MLCF is enhancing
its long-term shareholder value through fulfilling social responsibilities, (figure 2)
SOCIAL shows some SDGs that have been achieved by the organization. Workforce well-being
FACTORS has always been the priority, the company has equal opportunities for women as men
and it has a workforce that includes 3% of disabled persons in compliance with the
rules of the Government. Employee centrism is promoted through a purpose-built club
at the factory site for workers to relax, and training either on-site or virtual is provided.
Gratuity, Provident Funds, and workers’ Profit Participation Funds are also part of
CSR Award employee contracts. The unique selling point of MLCF in an intensely competitive
environment is following a strict policy of delivering superior quality products to the
consumers along with giving consumers’ rights the first priority. It has installed state-
of-the-art technology from Denmark to manufacture cement and monitors through
SDGs advanced quality control methods.

Health and Safety at the workplace place is never compromised as employees are given
frequent CRP training. The compliance standards of ISO 14001 and ISO 18001 are in
CRP
line with effective EMS (Environmental Management System) and OHSAS
Trainings
(Occupational Health and Safety Assessment Series).MLCF ensures community
development as it built Al-Shifa, state-of-the-art health facilities for the local
Health and community and has won the Corporate Social Responsibility Award previously in
Saftey 2021 as well. To reduce inequality, a rural development program has been launched in
Measures the year 2022 to create awareness amongst the localists related to serious diseases like
dengue through medical campaigns, where there is a lack of medical aid. A Master
Mistri Program has been initiated to improve the skillsets and standards of living of
masons. Furthermore, an example of the promotion of education is Al-Aleem medical
college in Devi Chest Hospital in Lahore.
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 Governance: 4
MLCF’s executive management board is a key driver behind all the company decisions
and is in compliance with the code of corporate governance.
Composition of Board
• Board of Directors: The total number of directors in the year 2022 are nine in
6
total, including eight males and one female compared to all the previous years
5 (Apendix), where one female director was on board from 2021. Consequently,
4 the board of directors include two independent directors, four non-executive
directors, two executive directors and one female director to ensure overall
3
success for MLCF.
2 • Shareholder Rights: The Companies Act 2017 is followed as at June 30, 2022
1 for shareholders. The dividends are deducted from the accumulated profit and
are recorded as a liability in the year, which is further approved by the Board of
0 Directors in the AGM. In the year 2022, the company issued 504,645,556
2019 2020 2021 2022
ordinary shares at the rate of Rs. 12 per share including Rs.2 share premium.
Independent Director • Company Code of Ethics: MLCF board has formed committees such as the
Executive Director Audit Committee, Human Resource, and Remuneration Committee,
Nomination Committee, and Risk Management Committee to keep compliance
Non Executive Director
with the code of conduct.

Organizational Structure

Shareholders

Board of Board of
Directors Commities

Group
Finance Chief Advsior to
Director Executive CEO

GM Sales & GM
DGM A & IR DGM IT GM works DGM HR GM Finance
Marketing Procurement

DGM DGM Power

DGM Sales & DGM DGM Finance DGM Finance
Mechanical & Electrical
Makreting Logistics DGM Process HO Plant
Relaibility Relaibility

FINANCIAL ANALYSIS
Revenue & Profitability:
The sales revenue for MLCFL tends to have an upward trend historically. As Year
over Year is witnessed historically and forecasted simultaneously. As per the data of
7 years from 2016-2022. The cost of goods sold as a percentage of revenue is
consistently showing an increasing (upward) trend from Fiscal year 2017 to 2020,
after which it shows a decreasing (downward) trend from Fiscal year 2020 to 2022.
The total increase in cost of goods sold as a percentage of revenue from FY16 TO
FY20 is 78.9% and the decline from FY20 to FY22 is of 37.08%. It becomes the
highest in FY20 i.e., 102.40% due to the increase in outbound freight, and increased
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cost of locally produced cement
 Sales 5
80,000 Consequently, the gross profit has the opposite trend from that of cost of goods sold.
70,000 From FY16 to FY20 the gross profit margin has been declining because of the
60,000 consistent increase in the cost of goods sold in this period. The total decline in the
50,000 gross profit margin is of 94.38% from FY16 to FY20. After that, the gross profit
40,000 margin shows an increasing trend till FY22 because from FY20 there is a decrease in
30,000 the cost of goods sold. The decline in gross profit margin from FY16 to FY17 is due
20,000
to high coal and fuel price which has also reduced the overall operating profit. Gross
10,000
profit margin becomes lowest in FY20 receding to -2.40% due to lower growth in
-
domestic demand accompanied by lower sale prices and declining exports. The
FY18a
FY19a
FY20a
FY21a
FY22a
FY23f
FY24f
FY25f
FY26f

substantial growth in gross profit margin from FY20 to FY21 because cheaper coal
Export Sales from Afghanistan was used, relied on internal power generation, and government also
Net local Sales
reduced FED on the sale of cement.
Net Sales The assumptions used for forecasting the years ahead are based on the macro-
economic factors and by making the year 2022 the base year. As according to the 5
Profitability Analysis
months record of FY2022, 18% fall in the sales of north, correspondingly 20% fall in
30,000
south sales is witnessed. FY2023 is witnessed to be the worst year. Rationally, taking
25,000 in the economic factors under consideration, and the impact of floods and other
economic downturns. This can be said that the decline ratio of past 5 years is overly
20,000
stated with respect to the ratio that curtails in the economy, this is mainly because
15,000 FY2022 had the worst economic conditions and July-August in FY2023 had no
10,000
cement demand, because of floods. Hence, the leftover moths (Dec-June) in FY2023
are assumed to be the recovery months. On average basis with some recovery in the
5,000 last quarters of FY2023. We have assumed the domestic sales of MLCFL will
- decrease by 15%. Moreover, 15% on average decline in the domestic sales is also
FY19a
FY17a
FY18a

FY20a
FY21a
FY22a
FY23f
FY24f
FY25f

because of the assumption of the recovery phase. As per the values in 2021 the highest
(5,000)
YoY was 21%. Hence, on rationale basis 15% decline is predicted for FY2023.
(10,000) Subsequently, FY2024 will be the recovery year. As 10% increase in the domestic
Gross Profit
demand is forecasted. Considering the facts that cement sector has a continuous
growth rate and after some better economic conditions stability. Simultaneously,
Profit after taxation
keeping the same basis and a CAGR of 6.5% for the period 1992-2022 under
EBITDA
consideration, we have kept a constant growth rate of 5%. Growth rate of MLCF is
SALES CAGR: 1.5% lower than the industrial CAGR because of economic uncertainties.
1992 – 2022 6.5%
The historical profitability trend is such that: the profit margin has an overall
decreasing trend from FY16 to FY22 registering the lowest profit margin in FY20 of
P&L Expenses -16.63%. One of the reasons for this drastic decline of profit margin in FY20 could
2500 30% possibly be the substantial increase in finance cost from 4.51% in FY19 to 10.24% in
25%
FY20. The gross profit margin is negative in FY20. In the FY21, the profit margin
2000
has jumped to 17.60% from -16.63% in FY20, the possible reason again is the
20% substantial decline in the finance cost from 10.24% in FY20 to only 4.20% in FY21.
1500
The forecasted profits will fluctuate year by year based upon the respective expenses.
15%
1000
10%

500
5%

0 0%
FY20a
FY19a

FY21a
FY22a
FY23f
FY24f
FY25f
FY26f

Other Charges
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ADMINISTRATIVE EXPENSES
DISTRIBUTION COST
Inflation Rate
 Raw Material Consumed 6
Vs Inflation Cost Analysis
4,500 30.00% Cost is the major factor for the fluctuations in cost. Cement factor being the capital
intensive sector is highly influenced by the cost of sales. The historical trend forseen
4,000
25.00% with respect to the macroeconomic factors is that the Cost increses simultaneously
3,500
with the inflation rate the available resources, Which is why minor costs is the cost
3,000 20.00% mix, like raw material, packaging, stories and spares, salaries and others are
2,500 forecasted on either inflation or CAGR. However, in depth calculations are done for
15.00%
2,000 fuel and power as they hold a substantial part in the cost. Fuel and power fluctuates
1,500 10.00%
as the resources available for producing them changes.

1,000
5.00% The assumptions for forecasting the Cost of sales was segregated into main portions
500 of COGS, which were contributing the most to the cost. Major components included
- 0.00% fuel, power, raw materials. For forecasting fuel cost, coal prices were incorporated
FY22a
FY19a
FY20a
FY21a

FY23f
FY24f
FY25f
FY26f

based on MLCFL fuel mix proportionate of Imported coal, Afghan coal and Dhara
coal. As per current Russia Ukraine war MLCFL is no more considering the use of
imported coal for fuel mix and utilizing Afghan coal, Dhara coal and alternative fuel
Power pet coke. Clinker production lines 1 ,2 and 4 are not operated on alternative fuel,
120 only line 3 is feasible to operate on it. For forecasting of line 1, 2 and 4 afghan and
local coal cost per ton is incorporated on propionate basis. For line 3 cost is
100
calculated by proportionate basis of coal cost per ton( Afghan and local coal) and
pet coke. Depending upon the usage of lines. For power utilization cost was
80
allocated on the basis of the lowest per unit cost, this was arrived by using the logical
60 testing on excel that the lowest cost would be utlizalted first and then from the other
plants based on Requirement of KWHR/ton. The power cost consist of the power
40 plant mix first the lowest cost of power plant which is Waste heat recovery sheet
(WHR) was used on 70% . Then solar plant is the next cheapest plant and it only
20 require maintenance cost. Then the plants coal captive plant, dual plant and national
grid was incorporated on the basis of lowest cost being consumed first using logical
-
testing. Other components in COGS were forecasted using CAGR on year on year
FY24f
FY18a
FY19a
FY20a
FY21a
FY22a
FY23f

FY25f
FY26f
FY27f

base increase.
WHR DUAL GAS Solar Coal
Liquidity Analysis
The non-current assets as a percentage of total assets also do not show any
substantial change in the period under consideration. The non-current assets are
Liquidity Ratio primarily dominated by property, plant, and equipment (PPE), and long-term
2.00 investments. The investment in PPE has been increasing from FY’17 till FY’22.
1.80 The declining trend of intangible assets show that not much attention is paid to them.
1.60 In the FY’22, the non-current assets are majorly dominated by the investment in
1.40 PPE. Though the current assets as a percentage of total assets for each year do not
1.20 show any significant change, there are significant things that require attention.
1.00
The spare parts and loose tools, and stock-in-trade are consistently increasing from
0.80
FY’17 to FY’22 which is not a very good sign in terms of the liquidity of the
0.60
company because the cash/money is stuck in them. The trade debts are also showing
0.40
a substantial consistent increase which is again not a very good sign. For the FY’22,
0.20 the major chunk of the current assets is dominated by the spare parts, stock-in-trade,
- and trade debts which means that significant amount of money is stuck in them.
FY26f
FY17a
FY18a
FY19a
FY20a
FY21a
FY22a
FY23f
FY24f
FY25f

FY27f

This can adversely impact the cashflows if not liquidated in time. The current ratio
tends to grow. This is showcases that in future MLCFL may have more cash reserves
Current ratio
and investment opportunitunities.
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Quick / Acid test ratio
 7
VALUATION
DCF Valuation
Recommendation: SELL Our DCF valuation incorporate the free cash flow to firm (FCFF) methodology
to arrive at the intrinsic value of PKR 24. This model is fit for valuation as it
Date: 06. 30. 2023
depicts the current view of market regardless of expansion and capital structure.
For forecasting we have analyzed historic figures and valued them from 2023
Industry: Cement
onwards, with an explicit forecast period from 2023-2028.

Share Price: PKR.22

WACC
The equity as a percentage of total assets shows a declining trend from FY’16
Target Price: PKR 24
till FY’20 with a slight increase in FY’20. The total decline is of 28.78% till
Upside: 9% FY’20. It reaches 56.68% in FY’21 and then lowers down to 49.33% in FY’22.
For the FY’22, the equity is dominated by accumulated profits which is because
Stock Exchange: PSX the dividend was not announced/given in this year in order to preserve funds
required for the dry process grey clinker production Line under construction.
Value Of Firm: 57 bln Non-current liabilities as a percentage of total assets show an increasing trend
from FY’16 to FY’19 after which it declines to 26.04% in FY’21, this decline
is aligned with the financial support provided by the TERF. It is increasing to
30.97% in FY’22 due increase in the rate by SBP 7% to 13.75%. Also, the
VALUATION METHOD: global coal and oil prices had risen the third and fourth quarter which is a
FCFF possible reason for an increase in the non-current liabilities.

We estimate a WACC of 15% for MLCFL using the debt rate approach for
arriving at cost of debt. The cost of equity is calculated using the CAPM
RECOMMENDATION:
formula, reflecting the KSE 100's equity risk premium, the risk free rate and a
FCFF
beta through slope of return of market and return on MLCFL, 1.2.

Terminal Growth
120% 18.00% We expect terminal growth rate to stabilize at 4.16% after 2023 based on
WACC Average GDP growth rate. We see a potential upside for the terminal growth
16.00%
100% rate in long term based on future market stability over the period on time. This
14.00%
will result in appreciation of share price in future years.
80% 12.00%

10.00%
60%
8.00%

40% 6.00%

4.00%
20%
2.00%

0% 0.00%
FY19a
FY20a
FY21a
FY22a
FY23f
FY24f
FY25f
FY26f

WD WS
WACC Kd
Ke

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 8
INVESTMENT RISK
Investment
Risk
Strategic Risk
Increase in production capacities and limited growth in demand may lead to
Strategic increased competition among rivals. Through efficient use of marketing
Risk
strategy, MLCFL is creating a pull effect by locking-in its customers and also
to tap potential markets.
Financial
Risk Financial Risk
Increased packing cost, fuel and power generation cost may result in increase
in cost of production and squeeze margins for the Company. Increase in cost of
Operational borrowing may adversely affect the profitability of the Company. Payment
Risk
defaults by counter parties may leave the Company with inadequate resources
for discharging its own liabilities. The Company is actively looking into
Commerical alternate sources of power generation to reduce cost. Management has
Risk addressed the risk of shortage of working capital by availing sufficient lines
from the diversified financial institutions in order to meet the short-term finance
requirements of the company. Moreover, all efforts are being made to improve
30,000 35,000
the average credit period of the Company along with improved operation cycle.
Strong follow up and adherence to procedures and credit terms ensures that the
30,000 risk of default from counter parties is kept to a minimum. Adequate steps are
20,000 taken for any dispute that may arise.
25,000
Operational Risk
10,000 20,000 Machinery breakdown/ stoppages adversely affect the profitability of the entity
as it hinders production and delays operation. Loss of the qualified and
15,000 competent staff. Accidents can take place which can cause serious injuries to
-
employees, and also cause disruptions in operations. To avoid such stoppages,
FY24f

FY28f
FY23f

FY25f
FY26f
FY27f

10,000
a reliability center has been established which runs a number of operational
checks to ensure smooth operations and avoid breakdown and Enterprise Asset
(10,000) 5,000
Management module is in place as the system to monitor this. The Company
-
has developed the culture wherein it promotes and enables innovations in
(20,000) processes. Succession planning and capacity building of existing resources are
(5,000) one of the primary focus of the Company. A sound system of HSE is in place
for timely identification of potential hazards and to remove such threats.
(30,000) (10,000) MLCFL major cost is depended upon economic factors which can effect
Net cash generated from operating adversely to the cost of operations such as fuel and power which would effect
activities on firms Cash flows and operating margins.
Net cash used in investing activities
Commercial Risk:
Net cash generated from / (used in) Due to dependency on Pakistan Railways for coal transportation, delays can
financing activities
occur owing to strikes or railway breakdown. Adequate stock levels have been
Cash and cash equivalents at end of
the year maintained with provision of such incidents in mind.

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