Building Materials
6 November 2014
Mohammad Ali Amin
Tel. No.: 111 222 000
[email protected]
Current Price
Fair Value
PRs64.29
PRs76.00
KATS
Bloomberg
Reuters
PIOC
PIOC PA
PION.KA
Pioneer Cement Limited
Multiple growth triggers on offer; Buy!
Initiate coverage with a Buy
We initiate coverage on Pioneer Cement Ltd (PIOC), Pakistan’s 10th largest cement
player, with a Buy rating. We set a conservative, DCF-based PO of PRs76/sh which
implies 18% upside from yesterday’s closing price. While the stock price has shored
up 154% in the last 12mths, we believe there is more room for valuation and price
performance to clock in. Key reasons for our liking
Shares Outstanding
227.15mn
1-Margin accretion via management’s continuous focus on cost efficiency in the form
of (1) 10MW Waste Heat Recovery (WHR) project expected to come online in FY16,
and (2) replacement of old equipment such as grater cooler and kiln burner expected
to provide fuel and power cost efficiency.
Market Cap
PRs14,603mn (USD141.93mn)
12m average daily volume
1,452,559 shares
2-Fast-paced deleveraging adopted by the company since FY10 owing to (1) PIOC’s
profitability turnaround and (2) improving cement industry dynamics.
12-month High/Low
64.29/25.30
3- Room to capture industry growth as PIOC’s capacity utilization rate currently stands
at 56% in 1QFY15, well below industry average of 73% in the same period.
Stock Performance
4-Valuations are undemanding as PIOC currently trades at an FY15E P/E of 7.46x, a
10% discount to domestic and 56% discount to its regional peers.
Absolute%
Rel Index%
Abs.(PRs)
1M
3M
12M
16.8 15.2 9.3 25.3 154.1 22.3 119.9 13.0 39.0 PIOC vs. KSE100 Index
Conservative assumptions leave upside
We believe further upside in stock price, other than that reflected in our PO, is likely on
the back of (1) saving in transportation cost from drop in oil prices, (2) potential long
pending settlement of debt repayment and (3) likely investment in 30MW coal power
(impact of PRs1.88/sh in FY18 assuming 50% power plant utilization), in our view.
Key Risks to our call
1.80
Key risks to our estimates include (1) delay in installation of Waste Heat Recovery
(WHR) project and other efficiency projects; (2) sharper than expected recovery in
coal prices; and (3) softer than expected payout in the face of heavy capex outlay in
the medium-term.
1.30
Table 1: PIOC Valuation Snapshot
2.80
2.30
PIOC
Source: KSE Nov‐14
Jul‐14
Sep‐14
Jun‐14
Apr‐14
Feb‐14
Dec‐13
Nov‐13
0.80
KSE‐100 Index
(YE: Jun) Revenues (PRsmn) % Change PAT (PRsmn) % Change EPS – fully diluted (PRs) PER (x) DPS (PRs) P/BV (x) EV/EBITDA (x) Source: Company Accounts, KASB Estimates Refer to important disclosures at the end of this report
FY13A 7,568 1,535 6.76 9.51 4.00 2.37 5.43 FY14A 8,025 6.0% 1,769 15.2% 7.79 8.25 4.25 2.15 4.79 FY15E 8,361 4.2% 1,956 10.6% 8.62 7.46 5.00 1.87 4.33 FY16E 9,095 8.8% 2,186 11.7% 9.63 6.68 5.50 1.65 3.96 FY17E 9,889 8.7% 2,442 11.7% 10.75 5.98 6.00 1.45 3.63 Pioneer Cement Limited – November 6, 2014
Initiation of Coverage – Buy
We initiate coverage on Pioneer Cement Company Ltd. (PIOC) with a Buy
rating and a fair value of PRs76/sh. PIOC is Pakistan’s 10th largest cement
producer with an installed capacity of about 2.1mntpa, located in Khushab
District in South Punjab, between the cities of Sargodha and Mianwali. The
company was established in 1986 as part of the Noon Group of Companies,
a prominent business group of Pakistan with widespread stakes in textiles
and engineering. PIOC is currently a subsidiary of Vision Holdings Middle
East Limited, which acquired 22.03% stake in Pioneer Cement in 2009,
raising its stake to about 47% in 2012.
We expect the company’s EPS to grow by 11%/12% in FY15/FY16 as the
company is well poised to capture industry growth, operating at a relatively
low capacity utilization of 56% in 1QFY15, while progress on cost efficiency
projects pick up pace. The PIOC stock price currently trades at an FY15E
P/E of 7.46, a 10% discount to its domestic peers, and a 56% discount to
regional peers.
Key factors underpinning our Buy call
1.
Table 2: PIOC Margin Analysis
FY13A FY14A FY15E FY16E FY17E Gross 37% 37% 39% 40% 40% Net 20% 22% 23% 24% 25% EBITDA 34% 37% 39% 39% 39% Source: Company reports, KASB estimates Margin accretion via continued focus on cost efficiency
While declining coal and petroleum product prices have given rise to expectation of industry‐wide jump in already robust margins, we believe PIOC has the capacity to deliver above‐average improvement in margins on the back of strong management’s efforts to increase energy cost efficiency via focus on (1) waste heat recovery of about 10MW (expected to cater to 20% of PIOC’s energy requirement), and (2) replacement of some old equipment such as kiln burner and grater cooler with more efficient ones, which shall lead to improved operational efficiency and product quality. Consequently, we expect PIOC’s margin to improve from 37% in FY14 to 39%/40% in FY15/16E. In our view, the company might also go for a coal based captive power plant (up to 30MW) to reduce their dependence on the grid energy, resulting in potential margin upside in the medium to long‐term. However, we have not incorporated the aforementioned possibility in our estimates. 2. Upside from de-leveraging
Chart 01: PIOC Finance Cost ‐
100
200
300
In addition to the change in cement industry fortunes in the last two years, the turnaround in profitability of PIOC alongside healthy cash position has led to steep reduction in the gearing ratio from 40% in FY10 to 17% in FY14. This deleveraging is likely to continue in FY15, augmenting the company’s bottomline growth. Furthermore, we believe possible amicable settlement of an old dispute on exchange rate adjustment (fully provided in accounts) expected to come through in FY15 can result in substantial savings of about PRs3.5/sh. However, we have conservatively not included possible earnings upside from such a settlement as we await further clarity on this issue. 400
FY14
FY13
FY12
3. Room to capture industry growth
FY11
FY10
Source: Company reports PIOC’s capacity utilization rate currently stands at 56% in 1QFY15, well below industry average of 73% in the same period. Thus, the company is well poised to capture industry’s volumetric growth in the medium and long‐term. While we stick to our FY15E cement demand growth of 4%, we believe PIOC can comfortably capture industry’s volumetric growth going forward for another 11 Refer to important disclosures at the end of this report
Pioneer Cement Limited – Novermber 6, 2014
years without expanding, assuming cement demand grows at an annual rate of 4%. The company almost matched the industry’s YoY off‐take growth of 4.68% in 1QFY15. Chart 2: PIOC capacity, sales and utilization
2.5
68%
66%
64%
62%
60%
58%
56%
54%
52%
50%
2.0
1.5
1.0
0.5
‐
FY13A
FY14A Capacity
FY15E
Sales
FY16E
FY17E
Utilization
Source: Company Accounts, KASB Estimates
4. Valuations are undemanding
PIOC currently trades at an FY15E P/E of 7.46x, which is a 10% discount to its domestic peers, and a steep 56% discount to its regional peers. PIOC is one of the few local cement players which have maintained strong cash payout ratio (54% in FY14) post favorable changes in cement industry dynamics in the past five years. With a relatively higher dividend yield on offer and better opportunities for margin accretion, we believe the stock’s discount to its domestic peers is unjustified. PIOC offers an 18% upside to our PO and FY15E D/Y of 8%.
DCF valuation assumptions: The key assumptions underlying our DCF Table 3: PIOC WACC
FY15
Risk Free Rate
Equity Risk Premium
Equity Beta
11%
7%
1.10
Cost of Equity
18.7%
Cost of Debt
9.4%
Target Gearing
Corporate Tax Rate
WACC
Source: KASB Estimates
5%
33%
18.1%
valuation for the company are (1) a risk free rate of 11%; (2) an equity risk premium of 7%, which we believe compensates for Pakistan equity risk and a beta of 1.1. In terms of sensitivity, a 50bp hike in the risk free rate assumption (to 11.5%) results in PO reduction of 3% to PRs74/share, while a 0.1 increase in beta would cut our PO by 4%. We incorporate a terminal growth rate of 4% for the company. Table 4: PIOC DCF valuation
(PRsmn) EBITDA Tax Payable on EBIT ∆ in Working Capital Capital Expenditure WACC NPV of FCF NPV of Forecasts Terminal Growth Rate Terminal WACC NPV of Terminal Value Enterprise Value Less: Net Debt (YE 2014) Equity Value No. Shares (mns) Per Share Equity Value FY15E
2,969.5 (775.2)
78.6 (964.1)
18%
1,384.2 6,054.0 4%
19%
10,384.1 16,438.0 (810.0)
17,248.0 227.1
76
FY16E
3,330.0 (854.6)
25.8 (975.7)
18%
1,362.9 FY17E
3,627.8 (916.2)
29.3 (295.1)
19%
1,839.1 FY18E
3,598.0 (881.4)
(96.7)
(300.8)
19%
1,467.7 Source: KASB Research
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Pioneer Cement Limited – Novermber 6, 2014
Conservative assumptions leave upside
We believe further upside in the stock, than that suggested by our PO, is a likely outcome due to the following reasons:‐
Saving in transportation cost in both coal and cement due to recent drop in oil prices (FY15E EPS impact of 2% assuming a 10% drop in diesel prices).

Potential settlement of long pending settlement of debt repayment which may provide an upside of up to PRs3.5/sh, if materialized. However, while we flag that such a gain will be an earnings upside, no cash inflow will occur, as a result, the provision made for debt will be reversed.

Likely focus on potential saving from 30MW coal power (impact of PRs1.88/sh in FY18 assuming 50% power plant utilization), in our view. Key risks to our valuation

Delay in installation of Waste Heat Recovery (WHR) project and other cost efficency projects.

Sharper than expected recovery in coal prices

Softer than expected payout in the face of heavy capex outlay in the medium‐term. 4
Pioneer Cement Limited – Novermber 6, 2014
PIOC financial statements
Table 5: Pioneer Cement - Income Statement (Y/E June)
PRsmn FY13A Local Net Sales 6556 Export Sales 1012 Total Net Sales 7568 Cost of Sales 4795 Gross profit 2774 SGA 143 Operating Profit 2630 Other Income 120 Other expenses 144 EBITDA 2606 Depreciation 377 EBIT 2229 Financial Charges 170 Exchange (gain)/loss ‐190 EBT 2248 Taxation 713 Net Profit after tax 1535 Proposed Dividends 908 EPS 6.76 DPS 4.00 Table 6: Pioneer Cement - Balance Sheet (Y/E June)
FY13A Assets Operating assets 7,795 Other long‐term assets 106 Total non current assets 7,900 Current assets Stores & Spares 990 Stock‐in‐trade 315 Assets held for disposal Advances, receivables & deposits 36 Trade debtors 50 Taxation ‐Net 70 Short term Investments 776 Cash & bank balance 1,465 Total current assets 3,702 Total assets 11,602 Current liabilities Current portion of long term loans 1,716 Short term finance 497 Creditors, accrued & other liabilities 961 Accrued markup 255 Provision for Taxation Total current liabilities 3,430 FY14A 7324 700 8025 5049 2976 107 2869 272 190 2950 397 2553 155 ‐32 2430 661 1769 965 7.79 4.25 FY14A 7,506 109 7,615 1,033 674 21 61 1,582 890 4,262 11,877 1,451 1,001 304 227 2,982 FY15F 7580 780 8361 5094 3266 111 3156 293 186 3263 403 2860 57 0 2803 846 1956 1136 8.62 5.00 FY15F 8,067 114 8,181 1,042 680 42 64 1,000 373 3,201 11,382 161 ‐ 1,054 304 291 1,809 FY16F 8308 787 9095 5447 3648 116 3531 243 201 3573 432 3141 41 0 3100 914 2186 1249 9.63 5.50 FY16F 8,612 118 8,730 1,114 701 45 69 1,000 602 3,533 12,263 161 ‐ 1,159 304 314 1,937 5
Pioneer Cement Limited – Novermber 6, 2014
Non Current liabilities Long term loans Other long‐term liabilities Total long term liabilities Total liabilities Share capital & reserve Paid‐up capital ordinary shares Reserves Total share holders' equity Total Liabilities & equity 787 1,217 2,003 5,433 2,271 3,898 6,169 11,602 562 1,530 2,093 5,075 2,271 4,531 6,802 11,877 402 1,378 1,779 3,588 2,271 5,522 7,794 11,382 241 1,240 1,481 3,418 2,271 6,573 8,844 12,263 Table 7: Pioneer Cement - Statement of Cash Flows (Y/E June)
PRsmn
Net Cash flow from operations Net cash used in invest activities Net cash used in finance activities Net (decrease)/ increase in cash Cash at beginning of the year Cash at year end FY13
FY14
FY15
FY16
2,802 (854) (751) 1,196 269 1,465 2,267 (810) (2,032) (574) 1,465 890 2,292 (387) (2,423) (518) 890 373 2,512 (980) (1,302) 230 373 602 Analyst Certification
I, Mohammad Ali Amin, hereby certify that the views expressed in this research
report accurately reflect our personal views about the subject securities and
issuers. We also certify that no part of my compensation was, is, or will be,
directly or indirectly, related to the specific recommendations or view expressed
in this research report.
This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable
care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such.
From time to time KASB Securities Ltd. and any of its officers or directors may, to the extent permitted by law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this
report. This report is provided solely for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report and the company accepts no responsibility
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individuals, who should seek further advice before making any investment. This report may not be reproduced, distributed or published by any recipient for any purpose. The views expressed in this document are those of the
KASB Securities & Economic Research Department and do not necessarily reflect those of KASB or its directors. KASB, as a full-service firm, has or may have business relationships, including investment banking relationships,
with the companies in this report.
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