By: Yousuf M. Farooq
Fortune Securities Limited
Rolling forward target price to PKR 88/share. BUY!
We are rolling forward our target price for Fecto Cement Limited (FECTC) to June 2015, and have come up with a target price of PKR 91.6/share. FECTC currently presents a 33% upside from the current level. Buy maintained.
We expect FECTC to post earnings of PKR 709mn (EPS: PKR 14.13/share) in FY15 and PKR 750mn (EPS: PKR 14.96/share) in FY16. FECTC currently trades at an attractive FY15E PER of 4.88x and an FY16E PER of 4.61x.
FECTC currently trades at an Enterprise Value/ton of USD 50 which is at a steep discount to other firms in the sector and to its replacement value. MLCF has an EV/ton of USD 79 while KOHC and PIOC trade at an EV/ton of USD 73 and USD 79 respectively. As FECTC’s plant remains inefficient, we do not expect this difference in EV/ton to be eliminated completely but with reduced uncertainty regarding expansions and lower chances of a price war, we expect EV and PER multiples in the sector to generally converge.
Lower coal prices to support earnings
Due to its older plant and higher coal consumption per ton of cement, FECTC is one of the largest beneficiaries of lower coal prices. Over the past year, prices for coal have declined from USD 85/ton in January 2014 to current price of USD 67/ton and the price drop has offset some of the impact of the hike in electricity prices. The coal price drop has translated into a margin expansion of over PKR 250/ton for FECTC which was one of the hardest hit companies from the electricity price hike in June 2013.