By: Karim Punjani, IGI Finex Securities Limited
We initiate our coverage on Attock Cement Company Limited (ACPL) with a target price of PKR 251/share offering an upside potential of 22% from last closing price of PKR 205.65/share. At current price level stock is trading at a P/E of 9.5x, with earnings growth of 23% and 15% and an attractive D/Y of 20% and 15% in FY15 and FY16, respectively. This growth is primarily due to (i) reduction in power tariff (ii) and decline in coal prices. Moreover, in our investment case we integrate the potential strategies of ACPL which will trigger its earnings to substantial growth in future ‐ BUY!
ACPL is highly dependent on the national grid (K‐Electric) as it requires 22MW (EX‐WHR) for its operations, consequently power cost of the company is approximately 25% of the total production cost. The recent power tariff cut of 11.5% (PKR 1.64/kwh) is expected to reduce the power cost by 10%YoY, which has an earnings impact of PKR 1.31/share in FY15E.
Attock cement has benefitted through 12%YoY decline in coal prices, resulting in savings of approximately PKR 208mn (7.4%YoY) in the head of fuel cost. Coal prices are following a downward trajectroy, a decline of 28% to USD 59.4/ton is witnessed since January 2014, This is due to the economic slowdown in China and increase in production mainly from Pacific Basin. On account of fluctuation in coal prices ACPL has taken preventive measures to avoid inventory losses as it is now procuring imported coal from the local market and reducing its inventory turnover from 3‐months to 1‐month Our forecast for Coal prices in FY15E and FY16F is USD 65/ton and USD 67/ton 1 month. Our forecast for Coal prices in FY15E and FY16F is USD 65/ton and USD 67/ton.