Foundation Research Equities

PAKISTAN
23 May 2013
P/E comparison
6.5 5.5 4.5 3.5 2.5 ACPL DGKC FY13E LUCK FCCL FY14E MLCF

Maple Leaf Cement

Deleveraging draws attention
Event
We highlight the market is yet to fully appreciate turnaround in fortunes
of Maple Leaf Cement Factory (MLCF). A turn around in pre-tax profit in 9MFY13 led primarily by margin has started to impact the companys leverage. Debt to Asset is down 67% in 9M and our preliminary calculation shows dip to 47% within 2-yrs. Among peers, MLCF remains the only player with significant room for volume growth without capacity expansion. Valuation are attractive at FY14E P/E of 5.44x, 9% discount to peers and implies further room for stock returns post 50% run-up in CY13 to date. Impact

Significant room for improvement

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DGKC LUCK ACPL FCCL MLCF

Likely areas for improvement: MLCFs 9MFY13 performance indicates

a wide room for improvement in 3 key areas; (1) focus on exports, (2) improvement in margins, and (3) utilization levels. Exports contribute only 10% to MLCFs total 9M offtake which is below the industry average of 24%. Within FS universe, Luckys focus is more towards exports with a contribution of 40%, followed by ACPL, DGKC and FCCL with 31%, 30% and 23%, respectively, in 9MFY13. Furthermore, gross margin of MLCF stood at 34% which is lower relative to its peers (it is 7% lower than the average gross margin of LUCK, DGKC). MLCF utilized its capacity at 64% in 9MFY13 which is below the average utilization level of big cement players (76% in 9MFY13).

Deleveraging is anticipated to improve bottom line: MLCF started

FY13 with a debt level of PKR17bn translating into debt/asset ratio of 52%. However, the company has paid PKR 2.9bn during 9MFY13 (debt/asset dropped to 49%). We believe MLCF can significantly delever its balance sheet in the next 2 years as it should be able to generate strong EBITDA of PKR6.6bn p.a in the next two years. This will help reduce the financial burden if the company prepays its debt for which we see high chances. Interest cost saving alone can contribute PKR400mn p.a in MLCFs bottomline.

Exports % 9MFY13 Cap. Utilization 9MFY13

Source: Foundation Research, May 2013

MLCF PA rel KSE100 performance

500% 400% 300% 200% 100% 0%
Apr-12 Jun-12 Aug-12 Nov-12 Jan-13 Apr-13

4Q to fare better: We have assumed a tax rate of 5% in 4Q on the back

of unused tax losses of ~PKR1.04bn. We expect MLCF to post PKR5.51/sh in FY13 on account of (1) higher net retention prices, (2) improved margins, and (3) deferred tax asset.

9MFY13 performance: During 9MFY13, topline surged by sizeable 14%

YoY to PKR 12.7bn as a result of 14% YoY increase in average net retention prices to PKR6,519/tonne. On YoY basis, volumes remained flat at 1.9mn in 9MFY13 whereas 3Q offtake of MLCF have declined by 2% QoQ. 18% YoY decline in coal prices led COGS to remain under control at PKR8.4bn in 9MFY13. Consequently, gross profit has posted robust growth to PKR6bn, up by 55% YoY. On the other hand gross margin dropped by 300bps to 34% in 3QFY13 owing to (1) 5% QoQ increase in coal prices reaching to USD90/tonne and, (2) flat average retention prices. Action & recommendation
sonia.agarwal@fs.com.pk Ext 335

KSE100
(all figures in PKR unless noted)

MLCF

Source: Bloomberg, Foundation Research, May 2013

Analyst
Sonia Agarwal 92 21 5612290-94

We highlight the market is yet to fully appreciate turnaround in fortunes

of MLCF. Sustainability of profitability and likely deleveraging of balance sheet should improve market confidence and can trigger further shrinkage

Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. FSL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the m aterial at the same time. FSL, their respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. FSL may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. FSL may have recently underwritten the securities of an issuer mentioned herein. This document may not be reproduced, distributed or published for any purposes.

Maple Leaf Cement

May 23, 2013

of valuation discount MLCF trades versus its peers. MLCF trades at FY13E P/E & EV/EBITDA of 3.97x & 5.25x, respectively compared to the FS universe average P/E and EV/EBITDA of 6x and 4.18x.
MLCF - Financial Highlights PKR Mn Net Sales Cost of Sales Gross Profit Distribution Cost Administrative Exp Operating Profit Other operating exp Other operating income EBIT EBITDA Finance Cost Profit before Tax Taxation Profit after taxation EPS (Diluted) Gross Margin Operating Margin Net Margin Effective tax rate *Preliminary calculation Source: Company data, Foundation Research, May 2013 FY11A 13,073 10,898 2,175 1,647 231 298 162 450 585 1,821 2,166 (1,581) (188) (1,769) (3.35) 17% 2% -14% N/A FY12A 15,461 11,447 4,015 846 258 2,910 150 34 2,795 4,014 2,351 444 52 496 0.94 26% 19% 3% -12% FY13E 17,234 11,503 5,731 770 254 4,707 142 37 4,602 5,637 1,732 2,870 (93) 2,777 5.26 33% 27% 16% 3% FY14E 18,936 13,402 5,534 892 292 4,350 178 38 4,210 5,204 1,382 2,828 (707) 2,121 4.02 29% 23% 11% 25%

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