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Current Price 75.79 stance on the scrip, offering an upside potential of 6.05% including 3.37%
of dividend yield. MLCF is currently trading at a trailing and forward P/E
Target Price 77.82 multiple of 8.43x and 11.73x. The 3-yr average $EV/Ton of the stock is
D/Y 3.37% $120/Ton.
Upside 6.05%
Key Stats Demand is Intact
Demand for cement is to remain upbeat on the back of increased activity in government and
Market Cap (PKR bn) 45.715 private sector housing scheme, rising urbanization, CPEC related infrastructural projects,
Market Cap (USD mn) 394.89 construction of motorways, water reservoirs and various hydel power projects and with
election just around the corner, we believe demand for cement to remain sturdy during the
52w Low - High 63.05 – 128.82 remainder of the current fiscal year.
Outstanding shares 593.7 mn
Free float 45% KATAS RAJ - Blessing in Disguise
As per MMDP report, since MLCF lies in the safe zone and relies on own sources of water, it is
Adj. Beta 1.29
highly plausible that the company may be given green light by the Supreme court while other
Relative Performance Graph companies in the negative zone will have to search for other alternatives or cede expansions.
This is likely to bode well for MLCF in setting strong foot hold in the region.
30.00%
20.00%
10.00% Brownfield Expansion – Effort to Retain Market Share
0.00% In order to retain its market share MLCF has also announced a brownfield expansion project
-10.00% (line-3) to be setup at its existing site, thereby taking total capacity to 7.3 MT. The project is
-20.00%
worth PKR 23Bn, financed through 48% debt and 52% of equity out of which 19% was raised
-30.00%
through issuing 12.5% right shares.
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar-18
Valuation
The target price is derived using Discounted cash flow method (FCFF). The target price for
Samia Umer June 2018 is valued at PKR 77.82. This offers a total return of 6.05% including 3.37% of
Investment Analyst dividend yield.
Demand is Intact
With increasing population, urbanization and several infrastructural projects, reasonable
growth in construction sector was observed over the last decade. The size of the total
construction sector is PKR 320bn (FY17) and on average it contributes 2.5% to the national
GDP. During current government of PML-N, the size of the contribution has risen sharply with
incumbent’s strong focus towards mega infrastructural projects and hefty government
spending in this regard has led the growth rate of construction to outpace growth rate of
GDP.
Relative GDP to Construction Growth
3.0% 20.0%
2.5% 15.0%
Construction Cont.
10.0%
2.0%
Growth
5.0%
1.5%
0.0%
1.0%
-5.0%
0.5% -10.0%
0.0% -15.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Pakistan also enjoys fair share in the world cement industry of 0.77% and is ranked amongst
top 20 producer which constitutes 87% of global cement industry. China being the single
largest producer covers 57% of world cement industry, followed by India (6%) and USA
(1.7%). However in terms of per capita consumption Saudi Arabia is well ahead (1,683kgs)
closely followed by China (1,581kgs), South Korea (911kgs) and Iran (770kgs) whereas
Pakistan’s consumption is well behind its peers at 140kgs, which implies significant room for
growth.
Since the year 2000 Pakistan cement industry has also grown at a CAGR of 9%, dispatches
which were only 9.62mn MT now stands at 40.32mn MT (FY17). Going forward demand for
cement is to remain upbeat on the back of increased activity in infrastructure and housing
sector. Government and private sector housing scheme, rising urbanization, CPEC related
infrastructural projects, construction of motorways, water reservoirs and various hydel
power projects are the key reasons for increased cement consumptions and with election just
around the corner, we believe demand for cement to remain sturdy during the remainder of
the current fiscal year as only PKR 607bn (60%) is released so far for PSDP as against total
allocated budget of PKR 1,001bn (as of March 30, 2018). Any further release of these funds
will have direct benefit on the cement sector.
Another key product is sulphate resistant cement, which is used in the construction of dams
and barrages especially in the areas where there is high sulphur content in the water. In the
back drop of power and water shortage, as per WAPDA a total 21 water dams and hydel
power projects are underway. Out of these, three hydro power projects (Kurram Tangi
Mohmand dam, and Tarbella - fifth extension are expected to complete in the ongoing year
whereas eight other projects are ready for construction including much anticipated mega
dams of Diamer- Bhasha and Dasu. Moreover, 12 additional projects are also on the table for
which detailed feasibility report is being prepared.
Most of these projects are located in North with Kurram Tangi Mohmand and Tarbela dam
(fifth extension) in close proximity to MLCF plant in Iskanderabad. Since MLCF is the fourth
largest player in the cement industry and given its strong brand image, the company in our
view is well-poised to capture demand growth. In the backdrop of above stated scenario, we
believe this will further augment volumetric sales and topline of the company going forward.
1) Diamer-Bhasha Dam
2) Kurram Tangi Dam
3) Dasu kohistan Dam
4) Maple Leaf Cement Factory
5) Golen Gol
6) Bunji hydro power
7) Tarbella 5th Extension
On a conservative basis, these projects are expected to complete over 4 to 15 years assuming
preliminary work to start off by next year though past record suggests delay is highly
probable and same have been incorporated in our estimates. As per our research, on average
58,807mt/km2 of cement in the ratio of 1:2:4 (cement, gravel, mud) is required for hydro
projects which is likely to generate total cement demand of around 8.92 mn MT over the
prescribed period (0.667mn MT/annum).
The grid below illustrates specification of hydel projects in close proximity to MLCF.
The project is worth PKR 23Bn, financed through 48% of debt and 52% of equity, out of which
19% was raised through issuing 12.5% right shares. Following the foot steps of other major
players in the industry, MLCF has too ordered the new state-of-the-art plant from a Danish
based company, FLS Smidth.
The plant was initially expected to be online by FY19 but the construction was halted over
environmental concerns by EPA which was later over-ruled by Lahore High Court. Once the
Cash Flow case is completely over, we believe the construction will be is in full swing however, we
expect the plant to be operational by FY 1H20 with a delay of 3-5 months, along with a slight
2020 increase in total estimated cost and we have incorporated these assumptions in our model.
2019
The graph below illustrates impact on financial performance following start of commercial
operations of the new plant
CFF
8000
(15) (10) (5) - 5 10 PKR 'mn
6000
Source: Company Accounts, ASDA Research
4000
2000
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
GP OP PBT PAT
The 40 MW coal fired plant was established through 100% wholly owned subsidiary ‘Maple
Leaf Power Limited’. The plant was imported from Chinese firm ‘Sinoma Energy Conservation
limited’ and is build in vicinity to MLCF Iskanderabad plant over 112 Kanals of land to ensure
smooth and uninterrupted supply of power to parent company via three feeders at 6.3 KV.
Source: Company Accounts, ASDA Research
The plant has a useful life of 25 years and the overall cost of the project is PKR 5.05Bn,
financed through 40% equity and 60% debt and was completed within the estimated time
frame.
As per management, approximately 150,228 ton/annum of imported coal will be used for
power generation which will be supplied via trucks from port to plant location. To recall MLCF
has inked a 5 year agreement with Railway authorities for timely and cost effective
transportation of 360k ton per annum of coal, translating into annual after tax savings of PKR
0.47-1.1 on a per share basis. Since there is no information on this matter, therefore we have
not incorporated cost savings in our model but it is highly probable that the company will
review its contract with the railway authorities as the current coal supply is already in line
with the production level.
The drawback of this plant is the efficiency factor which is 30.08%, well below the average
range of 35%-40%. The plant has already commenced operations and we have incorporated
its impact from 3QFY18. The grid below illustrates after tax impact on EPS, gross and net
margins after incorporating 10% auxiliary consumption.
We have used discounted cash flow method (FCFF) in order to calculate intrinsic worth of the
stock. The target price for June 2018 is valued to be PKR 77.82, offering an upside of 2.68%
from last closing price and assuming 38% of dividend payout ratio in the years to come, this
translates into a dividend yield of 3.37%, thereby offering a total return of 6.05%.
Sensitivity Analysis of target price with respect to 6M KIBOR and growth rate
KIBOR
5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5%
2.5% 74.77 74.46 74.15 73.84 73.53 73.23 72.93 72.63 72.33 72.04
3.0% 76.91 76.57 76.24 75.91 75.59 75.26 74.94 74.62 74.31 74.00
GROWTH 3.5% 79.23 78.87 78.51 78.16 77.82 77.47 77.13 76.79 76.45 76.12
RATE 4.0% 81.75 81.37 80.99 80.61 80.24 79.87 79.50 79.14 78.78 78.42
4.5% 84.51 84.1 83.69 83.29 82.89 82.48 82.10 81.71 81.32 80.94
5.0% 87.55 87.1 86.66 86.23 85.79 85.36 84.94 84.52 84.1 83.69
5.5% 90.9 90.42 89.94 89.46 88.99 88.53 88.07 87.61 87.16 86.71
Source: ASDA Research
FCFF
Discounted Value 19,110.63
Terminal growth rate (Real GDP %) 3.50%
Terminal Value 57,737.40
Discounted terminal value 32,630.20
Weight of debt 14.00%
Weight of equity 86.00%
Interest rate
Kibor 6M (Target) 7.00%
Spread 2.00%
Loan rate 9.00%
Tax rate 30.00%
Cost of Equity 16.81%
Risk Free rate 8.00%
Risk premium 6.80%
Stock Beta 1.295
WACC 15.33%
Coal price is expected to slump off over the next decade over global environmental concerns
and availability of cheaper and less toxic sources of power generation. Developed economies
have already started shifting towards renewables and other environment friendly sources of
power generation. On the contrary, as per International Energy Agency (IEA) decline in coal
demand for the next 5-6 years will somewhat be compensated by emerging economies
especially South Asian countries on the back of increased electricity requirement for
production.
2Q21
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
3Q21
4Q21
1Q22
2Q22
Source: Bloomberg, ASDA Research
Similar to other players in the industry, MLCF too rely on captive powers for electricity and
coal is the major commodity used for power generation which alone accounts for 40% of
total COGS. In our view MLCF will rely more on coal based captive power going forward
because the cost per KW of producing through coal is the lowest after WHR.
As per our study every 5% change in coal price will also inversely change EPS by 4%, GM by
1% and TP by 3%.
To recall, the company in FY16 has made an early retirement of Sukuk worth PKR 8bn and
likewise can happen given the excellent financial position of the company.
KEY RATIOS
2012A 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E
Gross Margin 26% 35% 34% 36% 43% 40% 34% 36% 36% 35% 36%
PAT Margin 3% 19% 15% 17% 21% 20% 16% 16% 16% 16% 17%
Tax Burden 112% 102% 79% 77% 69% 70% 70% 70% 70% 70% 70%
ROA - 2% 10% 9% 11% 14% 11% 7% 6% 7% 9%
ROE - 9% 39% 25% 23% 27% 21% 14% 12% 13% 14%
EBITDA ('mn) 4,438 6,515 6,746 7,356 9,371 9,087 7,807 7,726 9,203 11,388 11,714
BVPS 17.28 22.40 27.74 33.47 40.43 44.88 53.13 54.56 58.80 64.09 69.68
Earnings Yield 18% 28% 18% 8% 9% 8% 10% 9% 10% 12% 13%
Debt to Equity 78% 64% 48% 27% 9% 16% 18% 27% 20% 13% 8%
Debt to Avg Assets - 37% 28% 15% 5% 10% 13% 21% 14% 9% 5%
Liabilities/Avg Assets - 63% 54% 43% 34% 43% 40% 41% 37% 33% 28%
Financial leverage 8.55 4.78 3.27 2.42 1.91 2.00 1.84 1.88 1.80 1.68 1.54
Times interest earned 1.19 2.86 3.45 5.16 17.34 22.58 10.74 7.67 6.79 9.96 13.25
Long term l oa ns 2,157 1,591 479 38 927 2,890 3,800 7,731 5,214 3,023 1,261
Total non-Current Liabilities 12,996 11,982 10,138 5,414 5,657 7,345 8,064 11,883 9,365 7,167 5,405
Tra de a nd other pa ya bl es 3,727 3,026 3,306 3,164 3,194 3,680 3,928 3,581 4,168 5,150 5,199
Short term borrowi ngs 3,249 3,278 2,619 2,556 1,425 3,138 3,289 1,859 3,541 3,476 2,817
Total Current liabilities 10,604 8,569 7,133 8,144 5,027 7,764 9,470 8,632 10,737 11,328 10,289
Total Equity and Liabilities 32,728 32,373 31,911 31,221 32,022 38,817 47,787 52,926 55,030 56,567 57,082
Property, pl a nt a nd equi pment 26,774 25,630 24,706 23,721 22,822 23,648 30,676 37,723 39,692 38,450 37,220
Long term i nves tment 3 2 2 660 4,670 5,020 4,769 4,531 4,304 4,089
Total Non-Current Assets 26,842 25,690 24,766 23,782 23,544 28,405 35,777 42,574 44,305 42,836 41,391
Stores , s pa re pa rts 3,102 3,751 3,773 4,196 5,384 6,751 7,228 6,589 6,224 7,691 7,763
Stock-i n-tra de 903 939 1,151 1,207 873 1,301 832 758 882 1,090 1,101
Tra de debts 576 758 839 571 577 683 813 171 888 1,082 1,100
Total Current Assets 5,886 6,683 7,145 7,439 8,478 10,412 12,009 10,353 10,725 13,731 15,691
Total Assets 32,728 32,373 31,911 31,221 32,022 38,817 47,787 52,927 55,030 56,567 57,082
Valuation Methodology
To arrive at our 12-months Target Price, ASDA Research uses multiple valuation methods which include:
1) DCF methodology (DCF, DDM)
2) Relative valuation methodology (P/E/, P/B, P/S etc.)
3) Equity & Asset-based valuation methodology (EVA, Residual Income etc.)
Ratings are updated to account for any development impacting the economy/sector/company, changes in analysts’ assumptions or a
combination of these factors.
Disclaimer
This report has been prepared by Research Department of ASDA Securities (Pvt.) Limited and is provided for information purposes
only. Under no circumstances, should this be used or considered as an offer to sell or solicitation of any offer to buy. While
reasonable care has been taken to ensure that the information contained herein 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. This report is
provided only for the information of professional advisers who are expected to make their own investment decisions without undue
reliance on this report. Investments in capital markets are subject to market risk and ASDA Research 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 account of the investment objectives, financial situation and particular needs of investors, who should seek further
professional advice or rely upon their own judgment and acumen before making any investment. The views expressed in this report
are of the Research Department and do not necessarily reflect those of the company or its directors. All rights reserved by ASDA
Securities (Private) Limited. This report or any portion hereof may not be reproduced, distributed or published by any person for any
purpose whatsoever. Nor can it be sent to a third party without prior consent of ASDA Research. Action could be taken for
unauthorized reproduction, distribution or publication.
Furthermore, in accordance with clause 8(2) sub- clause (i) of RAR 2015, we currently do not have any financial interest associated in
the subject security aggregating more than 1% of the value of the company.