Lucky Cement Company Limited
Earnings Review – 3QFY17 EPS @ PKR 10.47
LUCK: 9MFY17 EPS @ PKR 32.23 (up 8% YoY)
During 3QFY17 Lucky Cement Company Limited (LUCK) posted earnings of PKR 3,384mn (EPS: PKR 10.47), depicting a growth of 12% QoQ / decline of 1% YoY. On a cumulative basis, profitability during 9MFY17 displayed 8% growth at PKR 10,422mn (EPS: PKR 32.23) as compared to PKR 9,614mn (EPS: PKR 29.73) in SPLY.
On a sequential basis, the company’s topline witnessed an ascent of 9% QoQ to PKR 11.8bn, given higher average retention prices along with sales tipping towards the local market (~80% share) in 3QFY17. During 9MFY17, revenue jump of 5% YoY is attributable to an 8% YoY uptick in dispatches to 5,534K tons.
Meanwhile existing coal inventory procured at higher average prices from prior period managed to retract margins by ~426bps to 45%. Albeit, margins remained flat in 9MFY17 at 48% (9MFY16: 47%) owed to growth in domestic dispatches.
LUCK booked effective taxation at 29% (2QFY17: 28%).
The company is rigorously pursuing its 2.3mn tons Green Field cement facility with the Government of Punjab.
Brownfield expansion at the Karachi site of 1.25mn tons cement line is projected to become operational by Dec’17.
Moreover, Lucky Electric Power Company (LEPCL), has executed the EPC contract and finalized draft of PPA and implementation agreement. Furthermore, the company has also received intimation for coal allocation from Sindh Engro Coal Mining Company (SECMC). Pertinently, financial close is expected by Sept’17 and COD is scheduled in Dec’20.
While Iraq’s cement grinding capacity expansion (0.871mn tons) is expected to come online by Sep’17 (0.435mn in Aug’17 while remaining in Oct’17)
As far as KIA Lucky Motors is concerned, application has been submitted to the Board of Investment under Category A which is expected to get approval by end of Apr’17.
FINANCIAL RESULT FOR THE NINE MONTHS ENDED 31/03/2017
(UNCONSOLIDATED) PROFIT/LOSS BEFORE TAXATION RS. IN MILLION 14,668.803
(UNCONSOLIDATED) PROFIT/LOSS AFTER TAXATION RS. IN MILLION 10,421.840
(UNCONSOLIDATED) EPS = 32.23
(CONSOLIDATED) PROFIT/LOSS BEFORE TAXATION RS. IN MILLION 17,980.910
(CONSOLIDATED) PROFIT/LOSS AFTER TAXATION RS. IN MILLION 13,055.709
(CONSOLIDATED) EPS = 37.27
LUCK: Expanding All-Around
We revisit our investment case on LUCK, rolling forward our Jun'18 SOTP based TP to PkR1,180/share (offering 22% upside), implying a BUY stance. Our recommendation is based on: 1) cost savings through new 10MW WHR (achieved COD in Jan'17), 2) doubling capacity of Iraq's JV to 1.742mn tpa (expected to come online in 1QFY18), 3) 1.18mn tpa Greenfield cement plant in DR Congo that started operations in Dec'16 and 4) earnings growth potential via 1.25mn tpa capacity expansion (expected to come online in 2QFY18). Additionally, LUCK as a conglomerate enjoys indirect exposure to the pharmaceutical business through its subsidiary, ICI that continues to grow (acquisition of certain assets of Wyeth Pakistan Ltd and Pfizer Pakistan Ltd). The setting up of greenfield manufacturing plant of Kia motor vehicles (25-30K p.a. capacity), approval for which is expected soon by BoI, remains a key upside earnings trigger. The stock has returned 11%CYTD in anticipation of inclusion in MSCI EM index with valuations standing at FY18F PE of 20.6x. While trading at a premium of 77% to the AKD cement universe's FY18F PE, we feel it remains justified given LUCK's strong earnings profile (5yr forward earnings CAGR of 14% vs. 12% of AKD cement universe) and various diversification projects, boosting consolidated earnings.
LUCK's earnings grew by 8%YoY to record NPAT of PkR10.42bn (EPS: PkR32.23) in 9MFY17. Result highlights include: 1) 5%YoY growth in topline to PkR35.24bn as total dispatches grew by 2%YoY to 5.19mn tons, 2) GM increased by 70bpsYoY to 48.1% due to increase in WHR capacity by 10MW in Jan'17 and 3) 6%YoY decline in distribution cost to PkR1.4bn due to 26%YoY slippage in export dispatches.
Update on expansions:
Brownfield Expansion: Construction work at LUCK's Brownfield Expansion (installation of additional Line of 1.25mn tpa) at Karachi Plant has entered into its final stage, where the management remains confident on the expansion progress expecting to achieve COD in Dec'17. The expansion is expected to provide much needed organic growth to the company (90%+ capacity utilization in FY16/10MFY17) making room available to catch up with the rising domestic demand, where development projects in Gwadar and private housing projects in Karachi are key growth triggers.
Doubling Iraq JV's capacity: LUCK has been quick to realize the potential of Iraq's domestic demand (100% utilization of current capacity) as it reels from war affected insurgencies. Iraq's cement deficit stands at 7-8mn tpa which was previously bridged through imports from Iran. However, recent ban on cement imports in Iraq due to unstable security situation has opened avenues for domestic industry placing LUCK in a favorable position to mobilize additional output. In this backdrop, LUCK has announced to double its capacity to 1.742mn tpa with project financing (expected US$35mn) to be done through internally generated cash flows of the existing plant. The first phase of the expansion (50% of the capacity or 0.4355mn tpa) is expected to come online by Aug'17 whereas the remaining 50% is scheduled to come online by Oct'17. The project is expected to contribute incremental earnings of PkR4.06/5.22/sh in FY18/19F to consolidated results assuming 90% utilization after expansion.
DR Congo JV: LUCK's effort to increase footprint beyond Pakistan has come to fruition with its JV investment in Cement Plant in DR Congo (1.18mn tpa) starting commercial operations in Dec'16. Cement consumption in Congo is estimated around ~1.5mn tpa against the local production of just ~350k tpa. Currently the plant is operating at 50% utilization with a huge growth potential considering Congo's domestic demand and supply situation. We estimate Congo JV to contribute annualized after-tax earnings of PkR3.31/share (at 60% utilization) in FY18F.
Another 10MW WHR: As part of its ongoing cost reduction strategy, LUCK has installed another WHR plant of 10MW at Pezu that started operations in Jan'17. In this regard, we estimate 10MW WHR to fulfill ~10% of the company's power requirement and contribute after tax operational savings of PkR0.35/sh annually with GM improvement of around 1.3ppts.With the addition of the new plant, LUCK's total WHR capacity now stands at 45MW that is estimated to fulfill ~45% of company's power requirement from FY18F (at 80% utilization).
Investment Perspective: The stock has returned 11%CYTD in anticipation of inclusion in MSCI EM index with valuations standing at FY18F PE of 20.6x. While trading at a premium of 77% to the AKD cement universe's FY18F PE, we feel higher valuations remains justified given LUCK's strong earnings profile (5yr forward earnings CAGR of 14% vs. 12% of AKD cement universe) and various diversification projects, boosting consolidated earnings.
LUCK: FY17 Profitability to Grow by 4% YoY
The Board of directors of Lucky Cement Limited (LUCK) is scheduled to meet on July 31, 2017 to approve the financial results for FY17. We expect the company to post a profit after tax (PAT) of PKR 13.4bn (EPS: PKR 41.48) in FY17, as compared to PAT of PKR 12.9bn (EPS: PKR 40.03) during last year. A rise of 4% in net sales to PKR 47.2bn during FY17 is mainly due to an 8% YoY growth in local sales while exports are expected to decline by 31% YoY. The local-export ratio is expected around 84%-16% in FY17 as compared to 77%-23% in FY16. We estimate LUCK’s gross margins during the period under review to stand unchanged at 48%. On sequential basis, we expect the company to post a bottom-line of PKR 2.9bn (EPS: PKR 9.25) in 4QFY17, which is 10% lower than 4QFY16’s PAT of PKR 3.3bn (EPS: PKR 10.33). Along with the result, we expect the company to announce final cash dividend of PKR 10/share.
FINANCIAL RESULT FOR THE YEAR ENDED 30/06/2017
(UNCONSOLIDATED) PROFIT/LOSS BEFORE TAXATION RS. IN MILLION 18,778.253
(UNCONSOLIDATED) PROFIT/LOSS AFTER TAXATION RS. IN MILLION 13,692.249
(UNCONSOLIDATED) EPS = 42.34
(CONSOLIDATED) PROFIT/LOSS BEFORE TAXATION RS. IN MILLION 23,630.221
(CONSOLIDATED) PROFIT/LOSS AFTER TAXATION RS. IN MILLION 17,390.634
(CONSOLIDATED) EPS = 50.18
DIVIDEND = 120%
ANNUAL GENERAL MEETING WILL BE HELD ON 25/09/2017
BOOK CLOSURE FROM 11/09/2017
BOOK CLOSURE TO 25/09/2017
LUCK followed suit
As per official notification, Lucky cement Limited (LUCK) has cut cement’s Maximum retail price (MRP) by PKR 25/bag in the northern region. Pertinently, the decline came after recent price reduction by Bestway Cement Limited (BWCL) and Cherat Cement Limited (CHCC). Our discussion with dealers suggests that initially BWCL oversupplied the market with reduced prices and CHCC and LUCK followed suit in a phase-wise manner. However, interaction with the management of different companies also hints that price decline is on account of dull sales season ahead. We do accentuate that the pullback in prices is in addition to the discount offered (to the tune of PKR 10-15/bag).
We believe the recent decline in cement prices is mainly because of oversupply and expected slowdown of dispatches in the upcoming season (Eid holidays and winters). Historically, we have witnessed the same practice by domestic manufacturers during aforementioned season. Addionally, going forward with the upcoming capacity additions and levered positions of mid to small players, we view that price war would be minimal and pricing power will be retained by bigger players in the industry.