AKD Securities Limited – Crumbling coal to further cream cement players’ margins

Karachi, April 10, 2015 (PPI-OT): Owing to faltering demand (Chinese consumption down), which has created somewhat of an oversupply situation, resultantly, global coal prices have been under-pressure in CY15TD (Richard’s bay down 12.3%CY15TD to US$58.0/ton while Newcastle down 12.8%CY15TD to US$55/ton).

That said, with coal constituting a significant proportion of manufacturing cost for cement sector, AKD Securities Limited believes the aforementioned development will bode well for cement players as it will further bolster their already impressive margins. Though AKD Securities Limited does not changed coal price assumption in AKD Securities Limited’s models as yet AKD Securities Limited estimates with every 5% decline in coal prices, AKD Cement Universe’s FY16F earnings will grow in the range of 2-3%.

Chinese market’s: Demand and supply scenario remains the key factor exerting pressure on int’l coal pricing fundamentals. Such has been the negativity on the demand front that China is likely to curtail its coal imports despite the expectation to keep its coal production restricted. China’s anticipated move to promote usage of local coal (expansion of mines) over imported coal can further pile pressure on the already faltering global coal market dynamics.

This is further evident by the supply glut persisting in global steel market where China is the leading player (having 48% of global steel market share). To make matters worse, excess local Chinese supply might also head towards countries like Korea, Japan, and Taiwan amongst others. A move that could hurt Indonesian and Australian coal prices.

Earnings would appreciate: Due to ongoing slowdown in demand, Coal prices have come off by 12.3%CY15TD. Coal constitutes a heavy proportion of the manufacturing costs within the cement sector where the aforementioned development is likely to result in margin expansion which would in turn push AKD Cement Universe’s earnings upward and further raise AKD Securities Limited’s TPs of the individual scripts (Note: AKD Securities Limited does not changed coal price assumption in AKD Securities Limited’s models as yet). In this regard, AKD Securities Limited performs a sensitivity analysis over the breaking of the coal prices. Expected revision in AKD Securities Limited’s earnings estimates, if the coal prices implode, is show cased in the following table.

Investment perspective: AKD Securities Limited continues AKD Securities Limited’s liking for Pakistan Cement space where AKD Securities Limited Overweights stance on the sector as it remains the prime beneficiary of the on-going monetary easing cycle. Having gained 1.3% in CY15TD, Pakistan cement sector remains the prime beneficiary of the current monetary easing cycle. In addition to this, the sector’s fortunes are likely to further improve on the margins’ front as int’l cement prices have come off by 12.3% in CY15TD. In this regard, MLCF remains AKD Securities Limited’s top pick in the cement sector space due to encouraging dispatches number and continuous deleveraging, followed by DGKC.