Foundation Research|

Equities

REK-192

Cherat Cement

PAKISTAN
18 February 2016
CHCC PA

Outperform

Stock price as of 17 Feb

Jun 2016 target
Upside/downside
Valuation

Rs
Rs
%
Rs

93.0
107.5
15.6
107.5

Rs bn
US$m
US$m
m

16.4
0.4
157
177

- DCF based

Cement Sector
Market cap
30-day avg turnover
Market cap
Number shares on issue

Investment fundamentals
Year end 30 Jun

2015A

2016E

m
m
%
m
%

6,565
1,969
29.99
1,288
(2.1)

6,643
2,328
35.04
1,507
17.0

10,265
4,042
39.37
2,582
71.3

14,473
5,508
38.06
3,444
33.4

EP S
PE

Rs
x

7.3
12.7

8.5
10.9

14.6
6.4

19.5
4.8

To tal DP S
To tal div yield

Rs
%

3.00
3.2

3.00
3.2

4.00
4.3

6.50
7.0

%
%
x
x

13.6
16.0
8.1
2.0

8.5
17.1
8.8
1.9

10.8
22.6
5.2
1.4

13.1
25.1
3.3
1.2

To tal revenue
EB ITDA
EB IT M argins
Net P ro fit
P ro fit growth

ROA
ROE
EV/EB ITDA
P rice/bo o k

2017E

2018E

New cement line to bump up earnings

Initiate with Outperform, TP set at PKR107.5/sh, 16% upside
We initiate coverage of Cherat Cement (CHCC) with a near term favorable outlook given first
mover advantage in upcoming expansion cycle. However, we highlight a robust profitability
growth in FY17/18 would immediately be followed by a period of underperformance as
other capacities come online. Hence, despite trading at a FY17/18 discounted PE of 6.4/4.8
(FSLs cement universe PE of 9.8/9.1), our Jun-16 TP of Rs107.5 provides a relatively limited
upside of 16%.

Impact of new line to be diluted when others catch up

Commissioning of new 1.3mn ton cement line by January 2017 would significantly improve
companys market share, particularly in FY17/18. We estimate sequential increase in the
companys market share to 3.8%/5.1% in FY17/FY18 from 2.4% currently. As a result,
earnings would shoot up to Rs14.6/19.5 in FY17E/18E versus Rs8.5 in FY16E. Nonetheless,
volumes are allocated on capacity basis and we expect market share will eventually be
normalized to 4.5% beyond FY18 when other players (LUCK, DGKC and ACPL) bring their new
capacities online. Subsequently, we see earnings to stabilize (Rs 13/sh) beyond FY18. Our
valuations reflect a conservative cement price assumption accompanying capacity addition
as suggested by historical precedence (see Fig 3)

Section 65B warrants early commissioning than January 2017

Though the company has highlighted commissioning of a new line by January 2017 (our
valuations reflect the same), odds are higher of early commissioning, in our view. We believe
the company would strive to complete the project by Jun-16 to avail the advantage offered
in Section 65B of Income Tax Ordinance. The section provides tax credit of 10% of
investment, provided the plant is purchased and installed by Jun-16. Early commissioning
can provide a one-time earnings gain of ~Rs6.8/sh. Furthermore, being set-up in KPK the
expansion also entitles the company to 5-yr tax holiday as announced in Federal Budget
FY16.

Lower FO prices have a meaningful earnings impact

CHCC PA rel KSE100 performance

CHCC have in-house power generation of 32MW (7MW Waste Heat Recovery Plant, 21MW
HFO based captive and 4MW diesel based captive) against the requirement of 16MW (on
current capacity). Hence, lower Furnace oil prices make the case for switching to HFO based
captive power plant from the expensive grid. Going forward, power cost would further come
down when new 6MW WHR plant comes online along with the new clinker plant.

1.4

CHCC

1.3

KSE100

1.2
1.1
1.0

Earnings

0.9
Feb-16

Jan-16

Dec-15

Nov-15

Oct-15

Sep-15

Aug-15

Jul-15

Jun-15

Apr-15

May-15

Mar-15

Feb-15

0.8

So urce: B lo omberg, Foundatio n Research, Feb 2016

(all figures in Rs unless noted)

Based on the aforementioned, we see earnings to bump up to Rs 14.6/19.5 in FY17/18 but

then normalize to Rs 13/sh beyond FY18.

Valuations
We have valued CHCC at Rs107.5/sh on DCF based methodology.

Key upside and downside risks

Analyst
Khurram M. Arif

Khurram.arif@fs.c om.pk

M. Arsalan Siddiqui

Arsalan.siddiqui@fs.c om.pk

92 21 35612290- 94

Ext 335

Price Catalyst (1) early commissioning of new plant, (2) cement prices to remain firm post
expansion, and (3) commissioning of WHRP.
Key downside risks (1) Technical faults in new plant and (2) lower than expected market
share.

Please Refer to last page for important disclosures and analyst certifications

Cherat Cement

February 18, 2016

Key Graphs
Capacity (RHS, mn tons)
Market share (LHS)

5.5%

80%
52.0

5.0%

CHCC

Industry

FY17

Fig 2: FY17/18 sales OP to be followed by FY19 UP

FY16

Fig 1: Mkt share to shuffle as new capacities come online

70%
60%

4.5%

50.0

4.0%

48.0

3.5%
46.0
3.0%

50%
40%
30%
20%

Source: APCMA, Foundation Research, February 2016

Source: APCMA, Foundation Research, February 2016

Fig 3: Expansion cycles exert pressure on prices

Fig 4: Implied PE converging to industry average

Local dispatches
Capacity
Price (Rs/bag, RHS)

50.0
45.0
40.0

400

14.0

350

12.0

300

35.0
30.0

250

25.0

200

20.0

150

CHCC

Industry

10.0
8.0
6.0

Source: APCMA, PBS, Foundation Research, February 2016

Foundation Securities (Pvt) Limited

0.0

Source: Foundation Research, February 2016

FY20

2.0

FY19

FY14

FY12

FY10

FY08

FY06

FY04

FY02

FY00

FY98

FY96

FY94

FY92

50

FY18

5.0

4.0

FY17

100

10.0

FY16

15.0

FY20

-10%

FY19

0%
FY18

FY20

FY19

FY18

FY17

FY16

FY15

42.0
FY14

2.0%

10%
FY15

2.5%

FY14

44.0

Cherat Cement

February 18, 2016

About the company

Cherat Cement Company Limited (the Company) was incorporated in Pakistan as a public company limited by shares under the
Companies Act, 1913 (now the Companies Ordinance, 1984) in the year 1981. Its main business activity is manufacturing, marketing and
sale of cement. The Company is listed on Karachi, Lahore and Islamabad Stock Exchanges. The registered office of the Company is
situated at Village Lakrai, District Nowshera, Khyber Pakhtunkhwa province.

Important disclosures:
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 material 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.

Research Dissemination Policy: Foundation Securities (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible
clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the
material at the same time.

Target price risk disclosures: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors
which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially
affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in
interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative
instruments, to manage certain of these exposures.

Analyst certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers
and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this
research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Foundation
Securities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Recommendations definitions
If
Expected return >+10%
Expected return from -10% to +10%
Expected return <-10%

Outperform.
Neutral.
Underperform.

Foundation Securities (Pvt) Limited