Pakistan Cements Company Update January 15, 2015 Kohat Cement Company Limited Production risk has allayed; focus on strong fundamentals - Buy Morning Shout Plant re-commissioned: reiterate focus on strong fundamentals With the re-commissioning of Kohat Cement Ltd’s (KOHC) plant early this week, we believe Mohammad Ali Amin [email protected] +92 21 111 222 000 market concerns on material earnings and production downside have eased off. This will likely bring strong fundamentals and attractive valuation in the limelight for KOHC – our top pick among medium-sized cement players. We expect an amicable and early resolution of the original issue with locals over alleged non-payment of royalty. The stock underperformed the sector last week by 4.3% on news that the plant had closed down due to the aforementioned issue. The stock currently trades at a FY16E P/E of 6.9x, which is at 20% discount to our cement universe. Reiterate Buy with a PO of PRs219/sh (16% upside). Kohat Cement Limited Current Price PRs189.6 Price Objective PRs219.0 Reuters Bloomberg Production risk largely mitigated As per management guidance, KOHC’s plant has become operational since Monday, and dispatches have resumed since yesterday. We, however, expect dispatches to remain subdued for the next week; they are expected to average around 1,500-1,800tons per day (about 50% of expected average daily volume under normal conditions) after which off-take is expected to normalize. We believe the company will likely cover up for the lost volume in the months of Dec/Jan, going forward. We highlight that KOHC has developed another pocket in the same mining lease, which is fully catering to KOHC’s limestone requirement, while they are also negotiating with locals to resolve the dispute to be able to revert to the primary mine. KOHC.KA KOHC.PA Shares Outstanding 154.51mn Market Cap PRs29295mn (USD291.17mn) WHR and tariff cut – two big catalysts to lift earnings… 3M Average Daily Traded value USD0.78mn We have not incorporated the power tariff cut in our estimates, which could lead to potential upside of PRs1.6/sh in FY16. Furthermore, the company’s WHR plant of 15MW is in the process of being installed, and we expect commissioning of the plant before June 2015. The WHR plant is expected to entail an EPS impact of PRs4.61/sh in FY16. 12M High / Low 194.01/0.62 …with steep cut in oil prices to yield cheaper power generation KOHC: Valuation Snapshot Revenue % change PAT % change EPS (PRs) PER (x) DPS (PRs) D/Y (%) P/B (x) ROE (%) EV/EBITDA Source: KASB Research FY14A 12,766 13% 3,155 20% 20.42 9.26 2.0 1% 3.40 37% 5.10 FY15E 13,626 7% 3,335 6% 21.59 8.76 4.0 2% 2.51 29% 4.53 FY16E 15,273 12% 4,256 28% 27.55 6.86 8.0 4% 1.91 28% 3.63 The steep dip in oil prices has managed to draw KOHC’s attention towards possible power generation through their 22MW furnace oil (FO)-based power plant, enough to cater to about 50% of their total power requirement. The company is currently in the process of evaluating the financial and operational viability of FO-based generation. We believe that current HSFO rates of about PRs40,000/ton pose a lucrative opportunity for the company to generate power through FO, which could possibly result in an FY16E EPS impact of PRs1.8, after incorporating the PRs2.36/KWh tariff cut for the purpose of this calculation. We opine that depressed FO prices will keep the FO generation and grid energy-mix a plausible option for the company relative to 100% grid dependence even after recent downward tariff revision. 2QFY15 EPS to take marginal hit -2HFY15 outlook sanguine We expect KOHC to post 2QFY15 EPS of PRs4.19/sh, down 14% from our pre-excavation ban development forecast, particularly due to depressed December dispatches (dispatches 3% down QoQ). However, the company’s gross margins (cash-basis) are expected to improve by about 0.5% to 39% in 2QFY15, mainly owing to 9%QoQ drop in coal prices. We expect margin accretion and further improvement in earnings in 2HFY15 as (1) the company will likely cover up for lost dispatches in Dec/Jan due to plant closure, (2) improved PSDP disbursement and (3) lower coal price trend likely to continue. KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi 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 whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particular, the report takes no accounts of the investment objectives, financial situation and particular need of 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. Page 1 Kohat Cement Company Limited – January 15, 2015 Morning News KSE-100 Intra-day Movement FIPI 33,630 Ministry recommends PRs3.0/KWh cut in power tariff (DAWN): Consumers are expected to get a relief of about PRs3.0/KWh in power tariff next month for braving extensive load-shedding last month. The relief will be available in the billing month of February after approval by NEPRA. The ECC formally approved permanently including three equalization surcharges of up to PRs2.40/KWh along with additional system losses in the consumer tariff with an estimated financial impact of about PRs75bn to deliver on commitments made with the IMF. High 33,629 33,590 33,550 33,510 SECP okays first REIT scheme (DAWN): The SECP has approved a proposal for launching the country’s first Real Estate Investment Trust (REIT) scheme. The REIT scheme will be managed by Arif Habib REIT Management Company Limited. 33,470 Low 33,434 33,430 9:30 AM 10:57 AM 12:23 PM 1:47 PM 3:12 PM Oil rebounds from 5½-yr low (Reuters): Crude oil prices had their biggest surge in two-and-ahalf years on Wednesday, rebounding from a nearly six-year low as traders turned away from the bearish pressures of a worldwide glut to cover themselves on expiring options. WTI and Brent crude staged blistering US$2/bbl rallies as dealers with options exposure scrambled to square their positions. Source: KASB Research Index Data & Volume Leaders Close KSE30 KSE100 KSE All Share ENGRO DGKC PSO MLCF JSCL Technical View Vol. US$ mn % Chg 21,703.90 33,585.75 0.5% 0.6% 92.92 133.05 24,366.38 255.03 119.04 342.17 48.02 16.40 0.5% 4.9% 2.7% -1.2% 0.2% 6.5% 176.48 27.00 15.43 5.40 5.17 4.99 Ahmed Hanif [email protected] KSE-100: Targeting the upper daily & monthly Bollinger bands The index opened on a positive note yesterday and formed a new all-time high, giving a closing near its day’s high. The index could now initially target 34,000 level, which is the upper daily Bollinger band. However, the eventual target of the index could be the upper monthly Bollinger band which is currently at 34,500-34,600 area. The cement sector (ACPL, FCCL, MLCF, FECTC and DGKC) and oil & gas sector (POL and PPL) are looking strong at current levels and they might play a role in guiding the index towards new highs. It is recommended to accumulate trading positions on weakness with risk defined below 32,000 Source: KSE KSE-100: Top Gainers & Losers FIPI HUMNL JSCL EFUL PCAL EFUG KOHC KEL PKGP FFBL ISL -4% -2% 0% 2% 4% 6% 8% Source: KASB Research Page 2 Kohat Cement Company Limited – January 15, 2015 World Markets and Commodity Prices International Equity Markets Asian Markets (Last trading session’s) European Markets (Last Trading Session’s Rates) Price All Ordinaries Shanghai Composite Hang Seng BSE 30 Jakarta Composite KLSE Composite Nikkei 225 NZSE 50 Straits Times Seoul Composite Taiwan Weighted KSE-100 Index Abs. Chg. 5,332.24 3,222.44 24,112.60 27,346.82 5,159.67 1,742.01 16,795.96 5,648.63 3,326.16 1,913.66 9,180.23 33,585.75 -49.9 -24.9 -103.4 -78.9 -54.7 -6.9 -291.8 12.0 -14.9 -3.5 -51.6 214.5 % Chg. Price -0.93 -0.77 -0.43 -0.29 -1.05 -0.39 -1.71 0.21 -0.45 -0.18 -0.56 0.64 ATX BEL-20 CAC 40 DAX AEX General Swiss Market FTSE 100 American Markets Dow Jones Ind. Average NASDAQ Composite NASDAQ -100 S&P 500 Index, RTH Abs. Chg. % Chg. 2,122.08 3,274.03 4,223.24 9,817.08 418.33 9,198.20 6,388.46 -34.3 -35.6 -67.0 -123.9 -5.5 -87.4 -153.7 -1.6 -1.1 -1.6 -1.2 -1.3 -0.9 -2.3 17,427.09 4,639.32 4,145.84 2,011.27 -186.6 -1.1 -22.2 -20.4 -11.8 -0.5 -0.5 -0.6 Source: Bloomberg Foreign Portfolio Investment in Equities Country Day (US$mn) Pakistan India Indonesia Japan Philippines South Korea Sri Lanka Taiwan Thailand Vietnam Abu Dhabi Qatar WTD (US$mn) 2.7 41.0 (49.6) N.A 47.2 (128.8) (3.1) (193.9) (1.1) 2.4 (2.0) 5.7 MTD (US$mn) 10.9 82.8 (84.3) (337.8) 369.8 (365.7) (1.3) (129.5) (133.9) 2.9 (6.6) (31.9) (8.9) (311.6) (70.7) (337.8) 362.0 (453.5) (4.5) (669.6) (380.9) (0.9) (22.8) (90.2) YTD (US$mn) 12M (US$mn) (8.9) (311.6) (70.7) (337.8) 362.0 (453.5) (4.5) (669.6) (380.9) (0.9) (22.8) (90.2) 375.0 15,761.7 3,456.8 21,556.7 1,650.3 5,441.3 153.0 11,973.7 (1,536.6) 104.8 919.6 2,036.4 Date 14-01 13-01 14-01 02-01 14-01 13-01 13-01 14-01 14-01 13-01 14-01 14-01 Source: Bloomberg, NCCPL Forex and Money Market snapshot Current 6-Month KIBOR (Offer) 12-M T-Bill (Average) 10- year PIB (Average) PkR/ US$ Source: KASB Money Market 9.38 8.79 10.23 100.64 Previous 9.33 8.84 10.24 100.57 Chg. 0.05 -0.05 -0.01 0.07 Commodity Prices Price WTI (Crude Oil) Gold CRB Index Source: Bloomberg 48.48 1,228.70 223.28 Abs. Chg. % Chg. 2.59 -2.05 3.58 5.6 -0.2 1.6 Page 3
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