AKD Quotidian about — Afghan aid pledge – Positive for Pak Cement?

Karachi, July 10, 2012 (PPI-OT): And the good news keeps on flowing for the cement sector! Following concurrent price increases, reduction in FED and turnover tax and fall in international coal prices, now comes the news flow concerning aid pledge to Afghanistan. At an international donor’s conference, about US$16 billion was pledged as civilian aid for economic development of Afghanistan over the next 4 years. Given that security related aid is separate from the civilian aid, most of the disbursements from the civilian aid will likely be used to enhance infrastructure in the war torn country, likely leading to a spurt in construction activities. In this regard, given the landlocked and largely non industrialized nature of the country, Afghanistan is likely to look towards its neighbours for building and construction materials boding well for Pakistan’s cement manufacturers. Note that over the last 3 years, Pakistan has exported in excess of 4 million tons each year to Afghanistan. In this regard, while all Northern manufacturers should ideally benefit, AKD Securities highlights LUCK (Pezu), KOHC and FCCL as likely major beneficiaries from probable increasing volumes to Afghanistan given their proximity to the country.

Afghan aid pledges increase – Positive for Pakistan Cements? As highlighted above, about US$16 billion worth of civilian aid has been pledged to Afghanistan at an international donor conference held in Tokyo. Should the aid materialize, this will likely lead to a spurt of development activity in the war torn country in which case, Pakistan will be a key beneficiary as Afghanistan will look towards its neighbor for provision of construction materials as well as a transit route for development materials from other countries. Cement manufacturers will likely come to the fore in this regard where AKD Securities highlights that Pakistan based manufacturers have already been exporting to Afghanistan volumes in excess of 4 million tons each year over the last 3 years. Northern manufacturers will obviously benefit, though AKD Securities particularly highlights LUCK (Pezu plant), KOHC and FCCL due to their proximity to Afghanistan. Currently, Northern manufacturers are operating at a capacity of -72% with about 9.7 million tons in idle capacity though AKD Securities highlights here that capital constraints and plant characteristics hamper manufacturers’ ability to achieve optimal capacity.

Investment Perspective: From a trading perspective, stocks highlighted above in particular and Northern manufacturers in general could show some movement in the short term. On a longer term basis, however, AKD Securities remains bullish on LUCK, which offers and upsides of 10.3% at current levels. AKD Securities remains Market weight’ on the Cement sector.