Inter

Market Pulse Research Entity Number – REP-085

7 March 2018

Pakistan Cements Syed Waqas Imam

waqas.imam@imsecurities.com.pk
KOHC: Raise TP on incorporation of expansion; Buy +92-21-111-467-000 Ext: 102

• We reiterate our Buy stance on KOHC and raise our Jun’18 TP to PRs245/sh, up 29%
from our previous TP of PRs190/sh, on account of 7800tpd brownfield expansion
Kohat Cement Company Limited
expected to come online in Mar’20. As per management, the expansion is being
carried out as per schedule and we now incorporate in our estimates. Price (PRs/sh) 156.06
TP (PRs/sh) 245.4
• A cash-rich balance sheet (PRs63/sh in cash & investments) limits downside risk for the
Stance Buy
company, which will have less debt burden than peers if industry dynamics become
Upside 57.3%
tough. Resolution of grinding capacity constraints and a potential installation of WHR
will likely sustain earnings growth even if cement prices are soft. Fwd D/Y 4.8%
Total Return 62.1%
• KOHC’s cheapest valuations (EV/ton of US$59 vs cement sector average of US$82) Bloomberg / Reuters KOHC PA / KOHC.KA
make it the most attractive in IMS cement universe. Recent industry price increases Mkt Cap (US$mn) 218.1
took advantage of a buoyant demand season; however, the scenario following DGKC’s 52wk Hi-Low (PRs/sh) 279.7/115.49
expansion in the next two months will determine the true pricing dynamics, in our 3m Avg. Daily Vol ('000 shrs) 153
view.
3m Avg. Traded Val (US$mn) 0.20
Expansion incorporated; TP rises to PRs245/sh
We revise up Kohat Cement’s (KOHC) Jun’18 TP to PRs245/sh from PRs190/sh earlier, on
incorporating the brownfield expansion of 7800tpd (due online in Mar’20). KOHC’s balance- KOHC - Valuation Snapshot
sheet strength and defensive attributes limit its downside, in our view. The company FY17A FY18F FY19F FY20F
currently holds PRs63/sh worth of cash and investments on its balance sheet, which will limit EPS (PRs) 22.94 19.35 24.66 35.53
debt burden if industry dynamics become tough. On EV/ton, KOHC is the cheapest trading at EPS Growth (%) -19.6% -15.6% 27.4% 44.1%
US$59 compared to an average of US$82 for our cement universe. We think valuations PER (x) 6.80 8.06 6.33 4.39
(FY18F EV/EBITDA of 4.5x vs 6.9x for the industry) do not reflect positives from imminent DPS (PRs) 14.00 7.50 10.00 14.00
resolution of grinding bottlenecks and a cash-rich balance sheet, which can both comfortably DY (%) 9.0% 4.8% 6.4% 9.0%
finance the upcoming expansion and sustain healthy payouts. KOHC, however, does suffer PBV (x) 1.58 1.41 1.24 1.06
from low liquidity which may partially explain some of the valuation discount. On balance, ROE (%) 23.2% 17.4% 19.6% 24.2%
KOHC is our top pick in the Cement space. EV/EBITDA (x) 3.43 4.47 4.38 3.32
Source: IMS Research
Management has affirmed expansion plans
Latest management guidance suggests that the expansion is progressing as per schedule and
will come online by Mar’20. The brownfield expansion of 2.3mn tpa will cost c.PRs14bn. We
have conservatively assumed financing mix of 65%/35% Equity/Debt while also maintaining EV/EBITDA EV/Ton
2018F DY (%)
payout ratio of 40%. Raising debt of c.4.5bn will not be problematic for the company which (x) (US$)
has recently deleveraged significantly and has adequate internal buffers. Although the Cement 6.9 82.0 4.2%
company initially announced a WHR plant to complement the new line, there is little DGKC 8.6 83.6 4.8%
progress on this front. To recall, company’s existing 18MW WHR is sufficient enough to cater LUCK 7.0 103.7 3.0%
to the new line as it is already under-utilized. MLCF 6.3 104.8 5.2%
CHCC 8.7 108.9 3.1%
FY18/19F EPS estimates slightly revised down FCCL 7.2 110.2 6.0%
We have lowered our FY18F EPS estimate owing to higher average coal prices during the year ACPL 5.9 62.4 8.0%
(US$90/ton vs our previous estimate of US$85/ton). Our new EPS estimates for FY18/19F are KOHC 4.5 59.4 4.8%
PRs19.35/24.66, down 4%/1%. The 103tph grinding mill is under-construction but it is PIOC Under - Review
delayed till Apr’18. We did not change our cement price assumptions due to recent price Source: IMS Research
increases as we had already projected some normalization post winter season.
KOHC - Price performance
Cement sales in a sweet spot
Construction season has jump-started as weather conditions have normalized along with the Absolute Rel. Index Index Abs.
1M -1% -1% 0%
strong impetus from pre-election spending. Our channel checks suggest that since political
3M 20% 11% 10%
parties have jumped on to campaign-mode earlier than expected, incumbent government is
6M -18% -23% 6%
bent upon completing unfinished projects before the caretaker government takes over. We
12M -44% -33% -12%
believe the demand-price paradox that prevailed during most of 1HFY18 is expected to FYTD -32% -26% -6%
normalize to an extent as dealers push prices before the lean period kicks in i.e. in May 2018 CYTD 10% 2% 8%
(Ramadan and Caretaker setup). We, however, caution that industry dynamics in the Source: IMS Research
medium term will only be determined once mammoth expansion of DGKC comes online.

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 3 & 4

To find our Research on Bloomberg, please type - IMKP <GO> www.jamapunji.pk
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KSE100 Index & Volume Earnings yield vs. T-bill spread

54,000 1,000 7.0%
50,000 6.0%
750 5.0%
46,000
4.0%
42,000 500 3.0%
38,000 2.0%
250
34,000 1.0%
30,000 -
0.0%

Jul-17

Sep-17

Feb-18
Jan-18
Jun-17

Dec-17
Aug-17
May-17

Oct-17
Apr-17

Nov-17
Mar-17
Jul-17

Sep-17

Jan-18
Dec-17
Aug-17
May-17
Apr-17

Nov-17
Mar-17

Mar-18
Vol. Shares (mn) - Rhs KSE100 Index pts. Earnings Yields - 12m Tbills Spread
Source: PSX Source: Bloomberg, IMS Research

Sectorwise FIPI Flows (US$mn) Portfolio Flows

Sectors 06-Mar-18 MTD CYTD FYTD (US$mn) Current WTD* MTD 12M FYTD CYTD
Others (0.64) 5.8 22.4 20.9 Total FIPI (0.29) (11.30) (11.3) (298.7) (112.8) 42.4
Cement 0.70 0.9 29.8 (2.0)
Individuals 2.41 (1.70) (0.8) (49.2) 18.2 14.4
Banks (0.64) (1.6) 1.4 (58.4)
Fertilizer (0.13) 0.1 (1.9) (18.7) Companies (1.36) 12.84 14.6 97.1 67.8 (4.0)
Food 0.67 (0.0) 0.7 9.3 Banks / Dfi (1.85) (7.01) (5.3) (33.2) (8.6) (62.9)
E&P (0.41) 0.2 (6.4) (55.7)
NBFC 0.67 (3.54) (3.4) (10.8) (8.5) (0.8)
OMCs 0.12 0.2 7.6 13.7
Power 0.01 (17.4) (11.7) (18.8) Mutual Funds 1.59 15.58 11.4 101.8 (73.2) (21.9)
Telecom (0.02) 0.2 0.4 (6.9) Other Organization (0.97) (4.41) (5.1) 40.0 55.7 8.6
Textile 0.05 0.0 (0.1) 3.8
Broker Trading 2.04 1.75 2.0 (13.3) (20.9) 5.3
Total (0.29) (11.3) 42.4 (112.8)
Source: NCCPL
Source: NCCPL
*Last 5 working days
World Indices Commodity Prices
Last Close DoD Δ DoD Δ (%) CYTD Δ (%) FYTD Δ (%) Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%)
Pakistan 43,705.1 -124.0 -0.28% 8.0% -6.1% Gold - US$/oz 1,334.17 13.74 1.0% 8.9% 2.4% 7.5%
China 3,289.6 32.7 1.00% -0.5% 3.0% Oil- US$/bbl 62.50 -0.09 -0.1% 17.5% 3.4% 35.8%
Hong Kong 30,510.7 624.3 2.09% 2.0% 18.4%
Cotton US₵/lb 82.43 0.00 0.0% 5.2% 4.8% 20.2%
India 33,317.2 -429.6 -1.27% -2.2% 7.7%
Coal - US$/MT 94.15 0.00 0.0% 13.8% -1.1% 20.9%
Indonesia 6,500.1 -50.5 -0.77% 2.3% 11.5%
CRY Index 196.76 0.10 0.1% 3.9% 1.5% 12.6%
Malaysia 1,848.4 5.8 0.31% 2.9% 4.8%
Source: Bloomberg
Japan 21,417.8 375.7 1.79% -5.9% 6.9%
3,491.9 53.3 1.55% 2.6% 8.2%
Forex & Money Market
Singapore
Korea 2,411.4 36.3 1.53% -2.3% 0.8% Close DoD Δ YoY Δ bps CYTD Δ bps FYTD Δ bps
Taiwan 10,784.3 141.4 1.33% 1.3% 3.7%
6m Tbill yield (%) 6.30 0.0 33.0% 29.5% 29.0%
Bangladesh 5,847.8 12.5 0.21% -6.4% 3.4%
10Y PIB yield (%) 8.68 0.0 47.0% 29.0% 51.0%
Sri lanka 6,533.5 -19.4 -0.30% 2.6% -3.2%
6m Kibor (%) 6.40 (0.0) 33.0% 24.0% 26.0%
Philippines 8,360.2 -26.0 -0.31% -2.3% 6.6%
Thailand 1,799.1 -9.8 -0.54% 2.6% 14.2%
1,120.3 26.8 2.45% 13.8% 44.3% Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%)
Vietnam
USA 2,728.1 7.2 0.27% 2.0% 12.6% PkR/US$ 110.58 0.00 0.00% 5.5% 0.1% 5.5%
UK 7,146.8 30.8 0.43% -7.0% -2.3% PkR/EUR 136.43 0.14 0.10% 22.8% 3.2% 14.0%
Germany 12,113.9 23.0 0.19% -6.2% -1.7% PkR/JPY 1.043 0.00 -0.44% 13.1% 6.4% 11.4%
Source: Bloomberg Source: Bloomberg
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I, Syed Waqas Imam, certify that the views expressed in the report reflect my personal views about the subject securities.
I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific
recommendations made in this report. I further certify that I do not have any beneficial holding of the specific securities
that I have recommendations on in this report.

Ratings Guide* Upside

Buy More than 15%
Neutral Between 0% - 15%
Sell Below 0%
*Based on 12 month horizon unless stated otherwise in the report. Upside is the percentage difference between the Target Price and Market
Price.

Valuation Methodology: We use multiple valuation methodologies in arriving at a Target Price including, but not limited
to, Discounted Cash Flow (DCF), Dividend Discount Model (DDM) and relative multiples based valuations.

Risks: (i) Drastic increase in the coal prices (ii) delay in commencement of the grinding mill, (iii) delay in expansion and, (iv)
breakdown in pricing mechanism.

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