AKD Securities Limited – Cement Sector: Concerns overblown

Karachi, February 20, 2015 (PPI-OT): As per a Bloomberg ticker, DGKC has once again affirmed its stance on expanding its current plant capacity (~4.2mn tons) to ~6.7mn tons by way of a greenfield expansion where the company will be installing a new plant near Hub, Baluchistan. The lead time from the financial close of the project to the commencement of operations is expected to be ~30-36 months where the company will likely rollout its first production in 1HCY18. In addition, as per management guidance, DGKC expects to earn NPAT of ~PkR7.5bn (EPS: PkR17.12) in full-year FY15F, up 26%YoY.

The Cement Sector has opened sharply in the red today, with investors ostensibly fearing an outbreak of a price war. That said, as per DGKC management the Bloomberg announcement is not a new development but a repetition of the company’s earlier announcements (KSE notice in Sep’13 and a mention in the last two results). AKD Securities Limited concurs, where considering the proposed new plant will take up to 3yrs to come online, fears of an immediate price war appear overblown. In this regard, with local cement dispatches up ~10%YoY in 7MFY15, AKD Securities Limited believes cement players are likely to concentrate on further strengthening their margins rather than under-cutting each other.

AKD Securities Limited takes immediate-term pressure on Cement sector scrips as an opportunity to build fresh positions. At current levels, AKD Securities Limited’s preferred plays are LUCK (TP: PkR583/share; upside: 11%), MLCF (TP: PkR68/share; upside: 21%) and DGKC (TP: PkR153.5/share; upside: 19%).