Karachi: Lucky Cement Limited (LUCK) posted NPAT of PkR3.97bn (EPS: PkRI2.28) in FY11 against NPAT of PkR3.14bn (EPS: PkR9.70) in FY10, translating into a strong growth of 27%YoY.
According to AKD Securities, alongside, LUCK announced a final dividend of PkR4.0/share. Growth stemmed from higher cement prices (up -45%YoY) coupled with higher local dispatches (up 11%Y0Y) despite slowdown in business/construction activities due to floods in 1HFY11. Higher cement prices offset the impact of increase in coal prices in mid-FY11 (due to Australian floods), leading to an increase of ~90bpsYoY in the Gross Margin to 33.5% in FY11. Consequently, the Operating Margin increased to 19.8% in FY11 against 17.3% in FY10. Moreover, finance cost of the company also declined by 9%YoY (despite high interest rates) on the back of LUCK’s continuing debt reduction policy (D/A ratio declined to 17.5% in FY11 from 21% in FY10 and 27% in FY09). Along with the result, LUCK’s management announced its new venture in Democratic Republic of Congo (DRC), where the company plans to install a cement plant (capacity 1mn tons), in partnership with the Groupe Rawji. DRC (estimated 2011 GDP growth rate: 6.8%), with an annual cement requirement of 3.2mn tons is the point of recent focus for world cement companies where Germany-based Heidelberg Cement Company has acquired a majority stake in three operational plants of capacity 500k tons in 2HFYII and plans to increase capacity to 1.4Mln tons in the coming years. LUCK’s plant is expected to commence operations in three years after it begins construction in the next 3-5 months. We expect this addition to provide stability to LUCK’s margins (African cement companies currently show gross margins of up to 28%), with the added advantage of adding fresh export markets.
LUCKs CONGO Plant & Group Rawji: Group Rawji is a well-known Africa based group with operations in DRC, Angola, Belgium, China, Dubai, Germany, India, Nigeria and South Africa. In its portfolio, the group manages different companies encompassing activities like FMCG, manufacturing (Marsavco) & distribution (Beltexco), distribution of Industrial engineering goods (Prodimpex), Banking (Rawbank), purchase, sale & leasing of Property (Parkland), Port operations & Cargo handling (RAFI) etc. Other companies in the portfolio include Proton (Electrical Contracting, Electrical Engineering Services, Electrical contracting Services) and Hexagon (buying and liaison house based in Germany with subsidiaries in South Africa, India and China). The Congo cement plant is expected to cast US$175mn, 54% of which will be raised through debt from multilateral institutions. LUCK is expected to contributed 50% in the equity financing of the plant. The plant should commence operations in three years after construction begins in the next three to five months. Key advantages of DRC (located n mid-Africa) are its 1) strong organic demand, 2) Central African location allowing exports to the entire continent and 3) close proximity to the coal deposits in South Africa.
Investment Perspective: We remain optimistic on the local cement sector, with expectations of higher dispatches in FY12 on the back of anticipated pickup in reconstruction activities and the GoP’s plans to construct dams including Diamer Bhasha in the northern region. In this regard, news reports indicate that United States is considering backing the construction of the US$12bn Diamer Bhasha dam, while PM Gilani is also urging ADB to help finance the dam after its support in construction of road-links in Punjab & Balochistan. Moreover, cement prices are also expected to remain at the current high levels, at least n 1HFY11. LUCK (FY12F PER: 5.6x), remains our preferred bet in the domestic cement space, offering an upside of 22% to our target price of PkR87.6/share. Buy!