Attock Cement Pakistan Limited, Warden of the South – FSL Research
By: Yousuf M. Farooq,
Fortune Securities Ltd.
We are reinitiating coverage on Attock Cement Pakistan Limited (ACPL) with a FCFE based Dec-14 target price of PKR 178/share presenting an upside of 28% along with a dividend yield of 10%. BUY! ACPL trades at a FY14 PE of 6.7x and a FY15 PE of 5.7x. Our liking for the company stems from the plant being located in the southern region where industry capacity utilization stood at approximately 92% through FY12-13. Higher capacity utilization in the south zone and a lower number of cement producers make a price-war less likely, making ACPL less risky than cement firms situated in the north. Unlike cement firms in the north-zone, ACPL has multiple avenues for export by sea and has no exposure to declining cement sales in Afghanistan. ACPL sells cement at a premium price due to its well known brand (Falcon Cement).
Unmatched Balance sheet strength
Along with being debt free, ACPL as on 31st December 2013 held cash and short term investments of PKR 2.34bn (PKR 20.45/share). Owing to higher levels of cash and short term investments we expect other income to rise. ACPL trades at an EV/ton of USD 75 which is at a steep discount to replacement cost of over USD 100/ton. With further cash generation we expect ACPL’s EV/ton to drop to USD 53/ton by the end of FY16.
Payout could increase on rising cash reserves
With gas and water shortage in Tehsil Hub, a gas or coal based captive power plant seems to have moved to the back burner. The company could decide to increase its payout as cash and short term investments would rise to PKR 5bn (PKR 44/share) by the end of FY15 if the current payout ratio of 60% is maintained.
Recent price hike to revive margins
For the first time since the start of the up-cycle, local cement prices in the south zone have risen above cement prices in the north zone. ACPL is currently selling OPC for PKR 540/bag which is at a premium to Lucky Cements PKR 520/bag. Net prices for ACPL currently stand at approximately PKR 8,100/ton compared to PKR 6,795/ton in 2QFY14. We expect this increase in cement price to help ACPL increase its gross margin from 27.5% in 2QFY14 to 33.2% in 3QFY14.