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Elixir Research5
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January 13, 2014 Company Update Pakistan Research Please refer to the last page for Analyst Certification and other important disclosures. Kohat Cement Company Limited (KOHC) has evolved through tough times with reduced debt levels and robust production efficiencies. KOHC is the most efficient player in the cement industry with FY13 EBITDA margin being 22% higher than industry average. With a debt free balance sheet and no major capex plans, KOHC will likely improve its payout going forward. The company has the lowest break-even price in the industry (PKR201/bag in FY13) which provides it a relative immunity to price wars. Being one of the cheapest on EV/ton basis, KOHC remains one of our top picks in the sector even after incorporating a possible price war in FY18. Our Dec-14 price target of PKR130/sh offers the highest upside potential of 25% in our cement space along with a dividend yield of 5%. With KOHC transcending above the tier-II zone, we reiterate our BUY recommendation on the stock. Operational efficiencies to ensure margin sustainability: KOHC remained the most efficient player in the cement industry in FY13 with EBITDA margin of PKR126/bag, 22% higher than industry average of PKR103/bag. Going forward, commencement of Waste Heat Recovery (WHR) plant from FY15 will further enhance operational efficiency. Strong dividend paying capacity to strengthen investment case: With early debt retirement and completion of capex plans (WHR project) by Jun-14, KOHC will likely have a cash rich balance sheet post-FY14 which is likely to be utilized to enhance dividend payout. The company does not have any major expansion plans so far; however the company is considering a capacity debottlenecking project which may enhance capacity by 10%. Relative immunity to price wars due to lowest break-even price: KOHC maintained the lowest break-even price of PKR201/bag during FY13, significantly lower than industry average of PKR238/bag. This makes a strong case for KOHC to defy historical discount to the sector average valuation. KOHC currently trades at FY14 PER of 5.6x as compared to industry average of 6.8x, a gap which is likely to close as KOHC sustains earnings and increase payout. Among the cheapest cement players: Though KOHC has outperformed the index by 26% FYTD, it still remains one of the cheapest players in our universe with EV/ton of USD48, much lower than our universe average of USD84/ton and replacement cost of USD150/ton. Risks: Key risks that pose downside to our estimates for KOHC includes 1) Lower-than- expected dispatch growth, 2) price war earlier than FY18 and 3) increase in power costs. KOHC Financial Highlights FY11A FY12A FY13A FY14E FY15E FY16E EPS 0.4 10.7 17.0 18.7 18.6 21.0 DPS (PKR) 0.0 2.5 4.2 5.0 9.5 10.5 BV/share 13.6 24.3 39.1 52.8 63.6 74.8 PER (x) 253.4 9.7 6.1 5.6 5.6 5.0 Dividend Yield 0% 2% 4% 5% 9% 10% PBR (x) 7.7 4.3 2.7 2.0 1.6 1.4 EV/EBITDA 18.3 6.1 3.7 3.1 2.8 2.3 ROA 1% 18% 26% 26% 24% 24% ROE 3% 57% 54% 41% 32% 30% EBITDA growth 123% 169% 49% 10% 1% 12% Net Profit growth -119% 2506% 59% 10% 0% 13% Source: Elixir Research Construction & Materials KOHC: No more a tier-II stock! KOHC PA BUY Price Target: PKR130/Share Closing Price: PKR103.7/Share Key Data 12m Price Range (PKR) 103.7 – 52.8 Market Cap (PKR mn) 16,146.2 Outstanding Shares (mn) 154.5 Avg. Daily Volume mn (6m) 0.7 1Yr – Relative Performance Source: Elixir Research Syed Nasir Rizvi AC [email protected] (+92-21) 3569 4679 Sohaib Bin Shahid AC [email protected] (+92-21) 3569 4679 60 80 100 120 140 160 180 200 J r - y J l S e J (%) KOHC KSE- 100 INDEX
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