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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
Mohammad.ali1@kasb.com
+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
ahmed.hanif@kasb.com KSE-100: Targeting the upper daily & monthly Bollinger bands
ƒ
The index opened on a positive note yesterday and formed a new all-time high, giving a
closing near its day’s high.
ƒ
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.
ƒ
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.
ƒ
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