AKD Quotidian about — Construction and Material: 1OMFY13 Review and Outlook

Karachi, May 14, 2013 (PPI-OT): As per the latest off take numbers quoted in news reports, total cement dispatches for I OMFY1 3 have increased by 4%YoY to 27.6mn tons where local dispatches were up by 6%YoY to 20.7mn tons while exports have declined by 2%YoY to 6.9mn tons.

According to AKD Securities believes that local cement dispatches will increase in the remaining two months of the FY13 on account of seasonal pickup in cement demand. Subdued coal prices coupled with improved local retention prices are anticipated to further boost gross profit margins up in 4QFY13.Top picks remain LUCK (TP: PkR2O5/share) and DGKC.

IOMFYI3 dispatches review: As per the latest off take numbers quoted in news reports, total dispatches for 1OMFY13 have increased by 4%YoY to 27.6mn tons where local dispatches were up by 6%YoY to 20.7mn tons while exports have declined by 2%YoY to 6.9mn tons on account of lower exports to Afghanistan. For the month of Apr13, local off take depicted an expected decline of 7%MoM to 2.37mn tons mainly due to the temporary halt in construction activity due to the wheat harvesting season in the Northern region. At the same tii re, export dispatches were down by 2%MoM to O.76i r in tons, bringing total Apr’i 3 dispatches to 3.1 2mn tons, down 6%MoM, but up 4%YoY.

Dispatches outlook: AKD Securities believes that local cement dispatches will increase in the remaining two months of the FY13 on account of seasonal pickup in cement de’ r and. Going forward, taking AKD Securities cue fro’ ii PML-N’s traditional focus on infrastructure development, AKD Securities foresees a rise in construction activity particularly across the Northern region, which should drive domestic sales higher in FY14 (base-case: 7%-8% YoY growth).

That said, with Afghanistan imposing additional levies on cement imported from Pakistan and competition from smuggled Iranian cement, AKD Securities foresees a decline in exports to Afghanistan in the near-term. This plunge in exports to Afghanistan could hurt most cement companies situated in the Northern region, especially DGKC, CHCC and FCCL. On the flipside, AKD Securities foresees potential improved relations with India to potentially trigger improvement in cement exports to India, benefiting DGKC, MLCF and LPCL.

Investment perspective: Coal prices have declined by 25%YoY in 9MFY13 and currently stand at US$86/ton. Subdued coal prices coupled with improved local retention prices are anticipated to further boost gross profit margins up in 4QFYI3. Together with expected sequential improvement in dispatches, this should allow cement manufacturers to end FY13 on a strong note. As a result, even as the cement sector has outperformed the KSE-100 Index by 9.4%CYTD, AKD Securities expects price performance to retain traction. At current levels AKD Securities preferred cement sector plays are LUCK (TP: PkR2O5/share) and DGKC.