The Story - Growth and Diversification · PDF fileCurrent Price as of July 11th, 2016 July 13,...

Current Price as of July 11th, 2016

July 13, 2016

The Story - Growth and Diversification

Cements Lucky Cement Limited

CCCompanyC

REP 300

We reiterate our buy stance on Lucky Cement Company Limited given its sound

investment case in the cement sector and diversified business strategy for future

growth. Being the largest conglomerate in the cement industry with net asset

value of over PKR 65bn, we view that LUCK is poised well for next leg of growth

amid improved economic outlook along with direct and indirect benefits from the

China Pakistan Economic Corridor (CPEC). Our conviction for the stock primarily

stems from i) buoyant cement demand on the back of improved economic activity

and CPEC, ii) robust margins in the industry amid stable cement prices and lower

coal prices, and iii) diversification to start reaping profits.

Demand to remain buoyant

Total cement demand of Pakistan has grown at a CAGR of 5% over the past 5 years

(FY12-16). However, local demand posted a 5-year CAGR growth of 8% while exports

declined by 7% in the said period. Moreover, with the formal announcement of CPEC

last year along with the massive demand expected in housing schemes (deficit of 9mn

houses per annum as per World Bank) with major contribution coming from high end

housing schemes, we believe that cement demand shall grow at a 5-year CAGR of 5%

by FY20. That said, LUCK being the 2nd largest player with strategically located

manufacturing facilities across the country, we view that the company holds strong

ground to tap the growth through all avenues including CPEC-related projects, strategic

hydro power projects and exports going forward.

Downwards sticky margins to fund profitability After reaching peak levels in 2008, coal prices, consistent with crude oil, collapsed to

multi-year low levels (down 18% YoY during FY16 to USD 52.78/ton-Richard Bay);

waning Chinese demand and a shift towards natural gas-based production given shale

boom in US coupled with stringent environmental regulations to reduce emissions

resulted in the coal industry’s woes in the past year. Coal being the largest cost

component of the cement manufacturing process and constituting around 27.5% of

the total production cost of LUCK, aided company’s margins amid downturn in its

pricing trend. In our base case assumption we expect coal prices to be set around USD

59.0/ton during FY17 from an average of USD 104.4/ton in FY12. Thus, we expect LUCK’s

margins to stay cushioned over a medium-long term horizon.

Expansionary and diversified mode of driving

LUCK is undertaking four major expansion and diversification projects including i)

Green field cement plant with nameplate capacity of 2.25mn tons located in Northern

Region, ii) 1.2mn tons/annum green field project in Democratic Republic of Congo, iii)

50MW Wind power plant in Jhimpir (Sindh), and iv) 660MW coal-based power plant at

Port Qasim (Sindh). The company is expected to bear a capital expenditure of around

PKR 48bn during FY16-19 to invest in these projects.

Key Risks

We recognize the following risks to our earnings outlook and target price: i) Price

reduction/war among cement players, ii) nosedive in local cement demand as well as

exports, and iii) delay in the materialization of long term investments.

Exhibit: 1 Key Financials

FY14A FY15A FY16E FY17F FY18F

EPS PKR 35.1 38.4 39.3 48.1 51.9

DPS PKR 9.0 9.0 10.0 11.0 12.0

P/E x 11.1 13.5 17.4 14.2 13.2

P/B x 2.5 2.8 3.2 2.7 2.3

Dividend Yield % 2.3 1.7 1.5 1.6 1.8

Source: Company Financials, AHL Research

BUY

791.9

667.1

18.7

Shares (mn) 323

40.0

2,055

3M 6M 12M

17.2 32.3 18.0

348.4 331.9 359.7

667.1 667.1 667.1

544.4 448.9 448.9

Source: Bloomberg

Analyst:

www.arifhabibltd.com

E: [email protected]

UAN: +92 21 111 245 111, Ext: 248

215,730

– Yunus Group

Price Performance

Major Shareholders

Price Performance

Avg. Volume (000)

High Price - PKR

Low Price - PKR

Return (% )

Market Cap. (PKR mn)

Tahir Abbas

F:+92 21 3242 0742

D:+92 21 3246 2589

LUCK PA

Free float (% )

Upside (% )

Current Price

Target Price (Dec'16)

Recommendation

Market Cap. (USD mn)

Best Domestic Equity House – 2016

80%

90%

100%

110%

120%

130%

140%

150%

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

LUCK KSE100

http://www.jamapunji.pk/

Lucky Cement Limited

LUCK - Cements

Recommendation

Our SoTP-based Dec’16 target price for the company works out to PKR 791.9/share,

translating into an upside potential of 19% from current price levels.

Our valuation is based on a 14.1% cost of equity and 3 year adjusted beta of 1.1 for the

core business of LUCK. Moreover, we have valued the Iraq project (50% LUCK stake) and

DR Congo plant (50% equity stake) on DCF basis, while Lucky Cement Electric Power

Company (100% indirect stake) and Yunus energy (20% stake) on DDM basis. Moreover,

we have marked to market the investment in ICI Pakistan Limited (56% indirect stake) into

LUCK’s portfolio with a 25% portfolio discount.

The stock is currently trading at a lucrative FY17E PER of 14.2x and offering dividend yield

of 1.6%, thus we recommend ‘Buy’.

Exhibit. 2 Sum of the Parts Valuation

(PKR mn) Holding Total Value PKR/share Discount PKR/share

Core 100.0% 190,041 588.4 - 588.4

ICI 56.4% 23,029 71.3 25% 53.5

Iraq Project 50.0% 6,101 18.9 - 18.9

Congo Project 50.0% 13,175 40.8 - 40.8

660 MW Coal Power Plant 100.0% 27,151 84.1 - 84.1

Wind Power 20.0% 2,038 6.3 - 6.3

Total 791.9

Source: AHL Research


LUCK - Cements

Key Risks to Valuation

Cement Price Risk

Our valuations are very sensitive to the cement prices, which is evident from the fact that

for every PKR 5.0/bag change in our ex-factory price, our earnings would change by an

estimated PKR ~1.2/share or 2.5% for FY17E.

International Coal Price Risk

Coal is the biggest cost component of the cement manufacturing process constituting

around 27.5% of the total manufacturing cost. We have hanged our coal price assumption

with international crude oil price and we are expecting coal prices to average around USD

60.0/ton in FY17F. Additionally, for every USD 5.0/ton change in coal price forecast our

FY17 EPS will change by PKR 1.1 or 2.3%.


LUCK - Cements

LUCK: The Cementing Star

Established by the Tabba family in 1996 and sponsored by the Yunus Brothers Group,

Lucky Cement Limited (LUCK) has grown to be one of the largest producers and exporters

of cement in Pakistan. With a nameplate capacity of 7.75mn tons p.a and 25,000 tons/day,

at present LUCK has two production facilities strategically located at Pezu (Khyber

Pakhtunkhwa) and Karachi (Sindh). Meanwhile, recent plans to establish another

Greenfield 2.25mn tons p.a cement plant in North, shall further allow the company to

spread its footprint in the northern region of the country. Besides, with a captive power

plant of ~180MW, LUCK remains one of the lowest cost producers of Ordinary Portland

Cement in the country, operating at a utilization level of over 94% in FY16.

In-tandem, LUCK prides in single-handedly being the sole owner and operator of an

ultramodern loading and storage terminal at the Karachi Port with a capacity of 24,000

tons. This has undoubtedly been very resourceful for the direct pumping of loose cement

into sea bound vessels for export to numerous territories over the years across Asia and

Africa. The company also happens to be one of the few Pakistani companies with a global

presence. After successful commissioning of a cement grinding facility in Basra (Iraq) of

0.87mn tons (EPS impact of PKR 1.5/share), the company is about to commission a 1.18mn

tons cement manufacturing plant in the Democratic Republic of Congo (Africa) in FY17.

Having said that, the company also has a diverse profile with holdings ranging from i)

56% effective stake in ICI Pakistan engaged in the manufacturing of polyester, chemicals

etc., ii) 100% indirect stake in Lucky Electric Power Company Limited (LEPCL) devoted to

the 660MW coal-based power plant, as well as a iii) 20% equity investment in Yunus

Energy Limited for a renewable energy project of 50MW wind farm.

Being the largest conglomerate in the cement industry with net asset value of over PKR

65bn, we view that LUCK is poised well for future growth amid betterment in the economic

outlook of the country along with the benefits directly and indirectly from the CPEC and

its timely diversification strategy.


Lucky Holdings Limited (LHL)

(75% ownership)

ICI Pakistan Limited

(75% ownership of LHL)

NutriCo Pakistan (Pvt) Limited

(40% ownership of ICI Pakistan )

LCL Holdings Limited (LCLHL)

(100% ownership)

Lucky Electric Power Company Limited

(LEPCL)

(100% ownership of LCLHL)

LCL Investment Holdings Limited

(LCLIHL)

(100% ownership)

LuckyRawji Holdings Limited

(50% ownership of LCLIHL)

CIMKO/Nyumba Ya Akiba S.A (NYA)

(100% ownership of LuckyRawji)

Lucky Al-Shumookh Holdings Limited

(50% ownership of LCLIHL)

Al Mabrooka Cement Manufacturing

Company Limited (AMCMC)

(100% ownership of Lucky Al-Shumookh)

Yunus Energy Limited

(20% ownership)


LUCK - Cements

Demand to remain buoyant

Government’s infrastructure spending through Public Sector Development Program

(PSDP) remains a major demand driver for cement. PSDP spending and cement demand

are strongly knit together, visible via a strong positive correlation of 0.97. This relationship

has been more noticeable since FY15, where higher infrastructure spending under PSDP

and a spurt of construction schemes resulted in highest ever domestic demand of 28mn

tons in FY15, a 3.26% YoY increase, which jumped by another 11.30% YoY in FY16.

We expect this trend to further take a turn for the better in the medium-to-long term with

focus fixed on infra-development prior to upcoming elections in 2018 and gradual

materialization of CPEC-related projects. While other strategic projects of the gov’t in-line

with vision 2025 (concentrating on growth in the energy sector) would create new avenues

for demand. The federal authorities have already undertaken various Hydel energy

projects which, in particular, consume a massive amount of cement; ongoing projects with

completion expected by 2022 and beyond shall generate ~13,788 MW’s of electricity (two

vital projects include the Diamir Bhasha and Dasu Dam with a capacity of 4,500 and 4,320

MW, respectively).

Figure. 1 Dispatches grew by 10-YR CAGR of 7.6% Figure. 2 Industry capacity, dispatches and utilization

Source: APCMA, AHL Research Source: APCMA, AHL Research

-20%

-10%

0%

10%

20%

30%

40%

0

10

20

30

40

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

11M

FY

16

Local Exports Growth (RHS)(mn tons)

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

30.0

35.0

40.0

45.0

50.0

55.0F

Y14

A

FY

15A

FY

16E

FY

17F

FY

18F

FY

19F

FY

20F

Dispatches Capacity Utilization (RHS)(mn tons)


LUCK - Cements

PSDP: the key demand driver

In the past, construction and cement demand has exhibited an upsurge in conjunction

with the growing Public Sector Development Program (PSDP) allocations. With a generous

Federal PSDP target under Budget FY17 at PKR 800mn (and an additional PKR 875mn

under provincial), we expect this trend to persist in the upcoming year. While, with the

USD 6.7bn IMF program expected to reach successful conclusion for the first time

(Sep’16), we believe the incumbent government shall undertake rigorous efforts to tie the

budgeted amount without any curbs to infrastructure-based expenditure by the said

organization.

Figure. 3 Historical trend of PSDP Figure. 4 Actual & Budgeted PSDP

Source: MoF, AHL Research Source: MoF, AHL Research

324 435 489 661 800

372 431

499

732 875

0%

10%

20%

30%

40%

50%

-

500

1,000

1,500

2,000

FY13A FY14A FY15A FY16R FY17B

Federal PSDP Provincial PSDPBudgeted PSDP YoY Change (RHS)

(PKR bn)

32.0

34.0

36.0

38.0

40.0

400

600

800

1,000

1,200

1,400

1,600

FY-12 FY-13 FY-14 FY-15 FY-16

Actual PSDP

Cement Dispatches (RHS)(mn tons)(PKR bn)


LUCK - Cements

Strong housing demand to keep demand prospects bright

Meanwhile, Pakistan’s cement consumption per capita (139kg) is ~50% lower than the

regional average and one of the lowest in Asia. Low utilization, coupled with factors like

steady economic growth, rising middle class, population skewed towards youngsters (with

55% of the population under the age of 24 years), and accelerated pace of urbanization

would keep the prospects of long-term cement growth bright. It is also pertinent to note

the current housing shortage in Pakistan (~9mn units/annum as per WB). Therefore, high-

end housing projects underway across the country by construction giants such as Bahria

(4 current and 6 upcoming projects including Bahria Town Lahore) and DHA (4 current

and 5 upcoming projects including DHA Lahore/Karachi) as well as several small scale

projects penetrating the economy, shall only bode well for cement demand in the next 5

years.

Exhibit. 3 Housing Scheme Snapshot

DHA Bahria town

Current Projects Current Projects

DHA Lahore Bahria Town Lahore

DHA EME, Lahore Bahria Town Rawalpindi/ Islamabad

DHA Karachi Bahria Town Karachi

DHA Islamabad/Rawalpindi Bahria Town Nawabshah

Upcoming Projects Upcoming Projects

DHA Lahore, Rahbar Sector Bahria Farmhouse Karachi

DHA Gujranwala Chapter Karachi Trade and Commodities Centre

DHA Multan Chapter Trade and Business Zone Karachi

DHA Bahawalpur Chapter Palisades Apartments, Islamabad

DHA City, Karachi Bahria Golf City, Islamabad

Bahria Garden City, Rawalpindi



LUCK - Cements

Local demand to replace exports going forward

We have been witnessing a shift in LUCK’s sales strategy since FY15, whereby the company

started to magnify its focus towards the domestic market due to a growing appetite for

local demand while the export market shrunk given i) a downward spiral in global

commodities prices (and cement prices likewise) dwindling export margins, ii) anti-

dumping duty (17%) imposed on exports made to South Africa, and iii) greater

competition in Afghanistan as Iran gradually becomes active post lifting of sanctions. For

instance LUCK’s exports accounted for 38% of total dispatches in FY14, which has dropped

considerably to around 24% in FY16. This renewed interest in domestic sales has enabled

LUCK to attain a share of 16% in the domestic volumes. Despite suffering a 29% YoY

decline in exports, LUCK still holds the largest share in exports (28%), followed by BWCL

with 15% share in the export pie.

Figure. 5 Local sales prioritized


Exhibit. 4 Hydel Investment Projects (Dams)

Projects Sponsor Capacity (MW) Expected COD

Diamir Bhasha Dam WAPDA 4,500 Beyond 2020

Dasu Dam WAPDA 5,400 Beyond 2022

Karot Hydropower Project Karot Power Company Pvt Ltd 720 2022

Suki Kinari Hydropower Project S.K Hydro Pvt Ltd 870 2022

Azad Pattan Hydropower Project Alamgir Power Pvt Ltd 640 2022

Chakothi-Hattian Hydropower Project Suhail Jute Mills Ltd 500 2022

Kohala Hydropower Project China International Water & Electric Company 1,100 2023

Kaigah Hydropower Project – 548MW Telecom Valley Pvt Ltd 548 2024

Mahl Hydropower Project na 590 2024

Source: PPIB, WAPDA, AHL Research

How will demand progress?

Given the strong infrastructure-led economic performance in the last two tenures, we

foresee total industry demand to grow at a CAGR of 5% by FY20 (LUCK: 8%), mainly on

account of greater expected utilization of PSDP spending, realization of energy projects

(particularly hydel), urban housing schemes and revival of the private sector credit offtake,

going forward. This shall be fueled by strong consumer financing amid rising housing

demand and low interest rate scenario.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FY

12

FY

13

FY

14

FY

15

11M

FY

16

Local Exports

Exports Growth (RHS) Local Growth (RHS)(mn tons)


LUCK - Cements

Pricing to remain at par with current levels

Prices in the retail market averaged at PKR 517/bag during FY16 similar to levels witnessed

in FY15 (prices in the North region too remained stagnant since last year at PKR 507/bag

while South witnessed a slight dip of 1% YoY to PKR 541/bag). The immense pricing power

of domestic cement players has also been evident over the past few years; this can be

illustrated by the recent price hike of PKR ~34/bag in the wake of a change in the FED to

a fixed rate basis. Hence we expect prices to remain stable in the period to come.

Pricing outlook still remains attractive

In our discussion with the management of cement companies, we have learned that the

industry is far from any price war. Our confidence in their claim is solidified with the fact

that the current pricing environment may prevail owed to massive demand and financial

commitments of big players for future growth.

Figure. 6 Cement Prices Trend

Source: PBS, AHL Research

Pricing sustainability

The current pricing levels have enabled large and medium cement manufacturers to

consolidate their position by capacity expansions given higher foreseeable demand. While

small players on the other hand are further broadening market share and investing in

energy efficient projects. Thus, the industry as a whole is emerging as a winner under this

scenario.

Hence we remain upbeat about the continuation of this pricing scenario with our

Retention price assumption of PKR 338/bag and PKR 348/bag in FY17 and FY18,

respectively. Albeit, it is pertinent to note that every PKR 5.0/bag uptick in our assumption

augments bottom-line by PKR ~1.1/share; as summarized in the sensitivity table below.

Exhibit. 5 Sensitivity Analysis of Retention Prices

EPS (PKR) Target Price FY17F FY18F FY19F

Base Case Cement Prices 337.85 348.20 358.82 791.94

Scenario1: Increment by PKR 10/bag 50.40 56.90 61.81 945.16

Scenario2: Increment by PKR 5/bag 49.27 54.38 57.77 868.52

Scenario3: Base Case 48.14 51.86 53.75 791.94

Scenario4: Reduction by PKR 5/bag 47.01 49.35 49.72 715.36

Scenario5: Reduction by PKR 10/bag 45.89 46.83 45.70 638.78


350

400

450

500

550

600

1Q-12

2Q-12

3Q-12

4Q-12

1Q-13

2Q-13

3Q-13

4Q-13

1Q-14

2Q-14

3Q-14

4Q-14

1Q-15

2Q-15

3Q-15

4Q-15

1Q-16

2Q-16

3Q-16

4Q-16

South Average North AveragePKR/bag


LUCK - Cements

Revenues are expected to jump at 12% CAGR

With stable pricing scenario coupled with healthy volumetric growth we expect the net

revenues of the company to jump by a 12% CAGR (FY16-20) to PKR 72.8bn.

Figure. 7 Sales to grow by a 5-Yr CAGR of 12% Figure. 8 Sales mix and utilization

Source: Company Financials, AHL Research Source: Company Financials, AHL Research

25%

28%

30%

33%

35%

35

40

45

50

55

60


Sales Net Margins(PKR bn)

80%

90%

100%

110%

120%

-

2,000

4,000

6,000

8,000

10,000


Local Exports Utilization (RHS)(000 tons)


LUCK - Cements

Range bound coal prices to keep margins lucrative

Over the years coal prices have retracted from their highest-ever 2008 levels, a trend

consistent with crude oil. During FY16 they collapsed to multi-year low levels (down 18%

YoY to USD 52.78/ton-Richard Bay). This can be attributable to i) sluggish Chinese

demand, ii) a shift towards natural gas-based production given shale boom in US, and iii)

stringent environmental regulations to reduce harmful emissions.

We have pegged our coal price assumption with international crude oil price because of

their strong correlation (0.88) and an R2 of 0.77. While crude prices have recovered from

their record-low levels (to recall WTI prices made a CYTD high of USD 51.23/bbl. in Jun’16),

they continue to remain range-bound as the US Energy Information Administration (EIA)

expects the global average inventory buildup to settle at ~0.8mn barrel/day during

2HCY16, keeping oil prices in check. In our base case assumption we expect coal prices

to be set around USD 59.0/ton during FY17 from an average of USD 104.4/ton in FY12.

Figure. 9 Declining coal / Stable cement prices Figure. 10 Coal and crude go hand-in-hand

Source: Bloomberg, PBS, AHL Research Source: Bloomberg, AHL Research

To remain the lowest cost producer

Economies of Scale and energy efficiency make LUCK the lowest cost producer in the

domestic market. As per the latest available accounts, LUCK produces a ton of cement at

PKR 2,821/ton (15% lower cost than the industry average of PKR 3,335/ton), giving it a

dominance of PKR 514/ ton (PKR 26/bag) in case price competition materializes in the

industry. LUCK has a lead of PKR 6/bag over its closest cost competitor, BWCL, which

requires PKR 2,933 to produce one ton of cement. This further strengthens our stance

about competitiveness of LUCK and its ability to command the price war situation, if it

arises.

Figure. 11 Current Cost per Bag Figure. 12 Current Gross Margins


421

455

511 522 517

40

50

60

70

80

90

100

110

400

420

440

460

480

500

520

540

FY

-12

FY

-13

FY

-14

FY

-15

FY

-16

Cement Coal (RHS)PKR/bag USD/ton

30

50

70

90

110

130

1Q-12

2Q-12

3Q-12

4Q-12

1Q-13

2Q-13

3Q-13

4Q-13

1Q-14

2Q-14

3Q-14

4Q-14

1Q-15

2Q-15

3Q-15

4Q-15

1Q-16

2Q-16

3Q-16

4Q-16

Coal Crude OilUSD/ton, bbl

100

120

140

160

180

200

LUC

K

BW

CL

KO

HC

FC

CL

DG

KC

PIO

C

MLC

F

AC

PL

CH

CC

FE

CT

C

Cost per bag Average(PKR)

30% 35% 40% 45% 50%

FECTC

CHCC

ACPL

PIOC

MLCF

DGKC

KOHC

BWCL

FCCL

LUCK


LUCK - Cements

Our earnings forecast and valuations are sensitive to coal price assumption, as coal

constitutes around 27.5% of the total production cost of LUCK. The exhibit below displays

a sensitivity analysis we have run suggesting that every USD 5.0/ton reduction in coal

price assumption increases our earnings estimates by PKR 1.1/share.

Exhibit. 6 Sensitivity Analysis of International Coal Prices

EPS (PKR) Target Price

FY17F FY18F FY19F

Base Case Coal Prices 59.00 63.13 63.13 791.94

Scenario1: Increment by USD 10/ton 45.91 46.67 45.45 628.96

Scenario2: Increment by USD 5/ton 47.02 49.26 49.59 710.42

Scenario3: Base Case 48.14 51.86 53.75 791.94

Scenario4: Reduction by USD 5/ton 49.26 54.46 57.90 873.47

Scenario5: Reduction by USD 10/ton 50.38 57.07 62.06 954.99



LUCK - Cements

Margins and Earnings Outlook

Stable cement prices, lower coal prices and WHRP have started to reap results as LUCK

has already achieved an 8-YR high gross profit margin of 48% in 9MFY16. Going forward,

we expect the company to post gross margins at a healthy average of 42% over the next

5 years due to steady pricing outlook and range-bound coal prices. Moreover, our robust

earnings outlook implies a 21% CAGR over FY16-20F.

Figure. 13 EPS Trend & Forecast Figure. 14 Margins Trend & Forecast


16.4%

9.6%

5.1%

24.5%

5.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

25.0

30.0

35.0

40.0

45.0

50.0

55.0


EPS Growth (RHS)(PKR)

20.0%

30.0%

40.0%

50.0%

60.0%


Gross Margins Net Margins EBITDA Margins


LUCK - Cements

Diversified investment base

ICI Pakistan

The company has registered a growth of massive 37% YoY during 9MFY16. The growth is

witnessed mainly due to i) 35% YoY jump in operating income of Soda Ash segment, ii)

52% YoY increase in operating income of Life Science Segment, and iii) 32% YoY increase

in operating income of chemical segment. We expect, the company to post earnings of

PKR 30.4/share in FY16 and pay a dividend/share of PKR 15.0.

Coal turbine project on PSF has eased the energy cost, however, declining margins are

likely to keep the business segment under pressure. Capacity expansion projects of Soda

Ash shall further improve the Business’s performance in the future. The outlook for the

Life Sciences and Chemicals Businesses also remains positive.

Expansion in North

Given Punjab’s significant presence in the country for accommodating mega infra-

development projects under CPEC (and otherwise) at an adamant pace, the company has

instigated setting up a 2.25mn tons clinker line with an approximate capex of USD 200mn

in Northern region. With a robust outlook for volumetric growth within the domestic

market, we expect this project to add PKR 5.44, 7.16 and 8.91/share during FY20F, FY21F

and FY22F (assuming utilization levels of 40%, 50% and 60%, respectively) to the

company’s bottom-line post operational commencement (FY19).

DR Congo Plant

Meanwhile LUCK is in the process of constructing a cement plant at DR Congo (a 50%

joint venture with Rawsons Investments Limited), strategically located at 250km’s from

the capital Kinshasa. With the African country recovering from civil war, we may witness a

boom in rebuilding and upgradation of infrastructure. Hence, this plant with a nameplate

capacity of ~1.2mn tons/annum (expected Commercial Operations Date by Oct’16), shall

bode well for the local cement demand in DR Congo. As per our initial workings, this

translates into a full year earnings impact in terms of dividend (with 50% payout) of PKR

2.84/share (and PKR 5.12/share assuming 90% payout) and adds PKR 41/share to our

Dec’16 target price.

660MW Coal Power Plant

Operating in a country crippling with the ongoing energy problems, LUCK is another

company that has jumped the bandwagon to help resolve this crisis via alternative

solutions (660MW coal-based power plant estimated at USD 1.08bn). Located at Port

Qasim (Deh Ghangario), Lucky Electric Power Company (LEPCL)-a 100% indirectly owned

subsidiary of LUCK, has been accorded a Letter of intent by the PPIB for this plant which

shall sell all the generated electricity to the National Transmission & Dispatch Company

(NTDC). Assuming a 27% RoE on a 30 year PPA and a debt to equity ratio of around 75:25,

the company has targeted Aug’16 for financial closure. The project will add PKR 84/share

to our Dec’16 target price; expected commissioning by FY19 end.

Wind Power Plant

Simultaneously, LUCK has made a 20% equity investment in Yunus Energy Limited for a

renewable energy project of 50MW wind farm (Jhimpir, District Thatta, Sindh), for the

supply of power to the national grid. It is expected to achieve COD by the end of Jul’16.

It adds PKR 6/share to our Dec’16 target price.

Waste Heat Recovery - The way forward

• 5 MW WHR Plant at Karachi Power Plant

completed

• 10 MW WHR plant at its Pezu Power Plant to

be completed by Dec’16

Greenfield cement manufacturing plant in

North

• Capacity of 2.25mn tons

• Cost of USD 200mn

Joint Venture investment in cement plant in

DR Congo

• Capacity of 1.2mn tons.

• 50% share in the net assets of the DR Congo

plant

Investment in 1 x 660MW, coal based power

project- LEPCL

• 660-MW imported coal-based generation

facility at Bin Qasim, Karachi.

• An estimated cost of PKR 108.2bn and

financed in the debt/equity ratio of 75:25.

• Investment of ~PKR 27bn and holding 100%

equity stake.

Equity Investment in Associated Company in

50 MW Wind Farms

• Expected to be completed by the end of July

2016.

• Investment of approximately PKR 835mn.


LUCK - Cements

About the Company

Lucky Cement (LUCK) is the largest cement manufacturer in Pakistan with an installed

capacity of 7.75mn tons. LUCK operates two cement plants, strategically located in Pezu,

close to Afghanistan boarder and Karachi, a coastal city in Pakistan. This location gives

the company freight advantage over its competitors in exporting cement to Afghanistan

and through sea. The company has the largest market share of 28% in exports and second

biggest local market share of 16%.

Exhibit. 7 Shares Held (as of Jun'15) Figure. 15 Aggregate Shares Held

No of Shares

% of Shares

Associated Companies & Directors

Directors 75,239,317 23.3%

Associated Cos. & Related Parties 40,205,256 12.4%

NIT & ICP 179306 0.1%

Modarabas & MFs 18,545,188 5.7%

Public Sector 1,157,188 0.4%

Banks, DFIs, NBFIs 3,999,018 1.2%

General Public

Local 46,636,175 14.4%

Foreigners 127,055,574 39.3%


About the Sponsors

Starting off as a trading house in 1962, origins of the Yunus Brothers Group can be traced

back over five decades. Today it is a renowned conglomerate in Pakistan with investments

ranging in multiple sectors like Textiles, Cement, Construction, Real Estate, Energy/Power

Generation and Commodity trading. Its business concerns include:

Lucky Textile Mills (1983): With a captive power generation facility, Lucky Textile Mills

is a fully automated weaving and stitching unit with an annual processing capacity of

83mn meters p.a.

Gadoon Textile Mills Limited (1988): Currently the largest spinning mill in the country

with ~250K installed spindles, GTML distinguishes as first of the two companies in the

world producing Compact Core Spun yarn.

Lucky Cement Limited (1996): It is one of the largest cement manufacturing

companies in Pakistan, currently has a capacity of producing 25,000 tons/day of dry

process cement.

Yunus Textile Mills Limited (1998): Since its inception, YTML (a fully integrated textile

unit) has grown to become the largest exporter of Home Textiles and acquired a

competitive position among American and European brands.

Yunus Energy Limited (2011): The Company has been given generation license for a

50MW renewable energy wind farm project.

Lucky Commodities (2013): The largest importer of coal in Pakistan at present for

utilization in the Cement, Textiles, Oil, Paper and Chemical sectors.

23%

12%

39%

25%

Directors Associated Companies Foreigners Others


LUCK - Cements

Financials Snapshot

Exhibit. 8 Income Statement

(PKR mn) FY14A FY15A FY16E FY17F FY18F

Net Sales 43,083 44,761 46,097 50,331 56,188

Gross Profit 18,690 20,183 21,967 21,879 23,367

EBITDA 16,565 18,207 20,752 23,381 25,437

Operating Profit 14,548 16,138 18,742 19,081 20,459

Other Income 978 1,241 1,228 3,326 3,743

Financial Charges 34 26 27 28 29

Profit after Tax 11,344 12,432 12,712 15,568 16,771

EPS PKR 35.1 38.4 39.3 48.1 51.9

DPS PKR 9.0 9.0 10.0 11.0 12.0


Exhibit. 9 Balance Sheet

(PKR mn) FY14A FY15A FY16E FY17F FY18F

Shareholders' Equity 49,792 59,259 68,737 81,071 94,285

Non-Current Liabilities

Long Term Loan - - - - -

Total Non-Current Liabilities 5,521 6,396 6,523 6,587 6,718

Current Liabilities

Trade and Other Payables 4,096 6,382 5,396 5,891 6,577

Total Current Liabilities 4,484 7,431 6,444 9,940 10,625

Total Liabilities and Equity 59,798 73,086 81,704 97,598 111,628

Assets

Non-Current Assets 40,198 46,068 48,224 64,244 69,278

Current Assets 19,600 27,018 33,480 33,354 42,350

Total Assets 59,798 73,086 81,704 97,598 111,628


Exhibit. 10 Ratio Analysis


Gross Margins % 43.4 45.1 47.7 43.5 41.6

EBITDA Margins % 38.4 40.7 45.0 46.5 45.3

Net Margins % 26.3 27.8 27.6 30.9 29.8

ROE % 25.0 22.8 19.9 20.8 19.1

ROA % 20.6 18.7 16.4 17.4 16.1

Dividend Yield % 2.3 1.7 1.5 1.6 1.8

P/E x 11.1 13.5 17.4 14.2 13.2

P/B x 2.5 2.8 3.2 2.7 2.3



LUCK - Cements

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have any influence or control over the compensatory evaluation of the Analyst(s).

Equity Research Ratings

Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as December 2015

for Target Price. In addition, return excludes all type of taxes. For more details kindly refer the following table;

Rating Description

BUY Total return of subject security(ies) is more than +10% from last closing of market price(s)

HOLD Total return of subject security(ies) is between -10% and +10% from last closing of market price(s)

SELL Total return of subject security(ies) is less than -10% from last closing of market price(s)

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Following valuation technique is used to arrive at the target price of subject security (ies);

Sum of the Parts (SoTP)

Risks

The following risks may potentially impact our valuations of subject security (ies);

Market risk

Interest Rate Risk

Exchange Rate (Currency) Risk

Disclaimer: This document has been prepared by Research analysts at Arif Habib Limited (AHL). This document does not constitute an offer or solicitation for

the purchase or sale of any security. This publication is intended only for distribution to the clients of the Company who are assumed to be reasonably sophisticated

investors that understand the risks involved in investing in equity securities. The information contained herein is based upon publicly available data and sources

believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be

relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information given

in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information

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its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance.

This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes

the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent

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arise to any person from any inadvertent error in the information contained in this report.

© 2016 Arif Habib Limited: Corporate Member of the Karachi, Lahore and Islamabad Stock Exchanges. No part of this publication may be copied, reproduced,

stored or disseminated in any form or by any means without the prior written consent of Arif Habib Limited.


LUCK - Cements

Contact Information

Shahid Ali Habib Chief Executive Officer [email protected] +92 -21-3240-1930

Shahbaz Ashraf, CFA Head of Research [email protected] +92-21-3246-2589

Tahir Abbas AVP- Senior Investment Analyst [email protected] +92-21-3246-2589

Syed Fawad Basir AVP- Investment Analyst [email protected] +92-21-3246-2589

Rao Aamir Ali Investment Analyst [email protected] +92-21-3246-2589

Syed Shiraz Zaidi Investment Analyst [email protected] +92-21-3246-1106

Muhammad Waleed Rahmani Investment Analyst [email protected] +92-21-3246-1106

Misha Zahid Investment Analyst [email protected] +92-21-3246-1106

Arsalan M. Hanif Management Trainee [email protected] +92-21-3246-1106

Muhammad Hasnain Madni Officer- Database [email protected] +92-21-3246-1106

Azhar Javaid VP- International Sales [email protected] +92-21-3246-8312

Usman Taufiq Ahmed AVP- International Sales [email protected] +92-21-3246-8285

M. Yousuf Ahmed SVP- Equity Sales [email protected] +92-21-3242-7050

Syed Farhan Karim VP- Equity Sales [email protected] +92-21-3244-6255

Farhan Mansoori VP- Equity Sales [email protected] +92-21-3242-9644

Afshan Aamir VP- Equity Sales [email protected] +92-21-3244-6256

Atif Raza VP- Equity Sales [email protected] +92-21-3246-2596

Furqan Aslam AVP- Equity Sales [email protected] +92-21-3240-1932

Research Team

Equities Sales Team

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