Morning Call about Changing Dynamics in South – Arif Habib Limited

Karachi, December 17, 2013 (PPI-OT): Impact of rising Cement prices and changing market pie

Cement prices jump PKR 20/bag in Southern region
As per media reports, cement prices in the southern region of the country have increased by PKR 20/bag, which now hover between PKR 520-505 per bag.

According to Arif Habib Limited, as per the latest figures available, average cement prices in the southern region hovered around PKR 484/bag. Lucky Cement Limited (LUCK) is expected to be the major beneficiary of this price hike compared to its peers operating in south, who would be utilizing this price increase to pass on the impact of rising electricity costs.

Price gap between Northern and Southern regions narrowing
With said increase, the gap between cement prices in the northern and southern region has narrowed once again. Upon looking at the chart below, it is cleared that the price gap had widened during Jul-Sep’13, when cement manufacturers in the southern region did not follow their counterparts in the north. Thus, Arif Habib Limited does not see any major price hike by the northern players till the start of spring next year.

Lucky focusing southern market – GMs to touch 50% in FY14
Traditionally, southern plant of LUCK has been an export play for the company as close proximity to the ports enables the company to tap African and Sri Lankan markets. However, for past couple of years, Arif Habib Limited has been witnessing a diverging trend towards domestic market as higher retention makes local market attractive.

With price gradually increasing in the domestic market coupled with falling prices in exports has led the company to focus more towards southern domestic market. Evident from its market share, which has jumped to 46% in Dec’13 so far, compared to 39% in Nov’13 (38% in FY13). This increased market share coupled with 36% higher retention prices in the domestic market is expected to take gross margins to 48% and 50% in 2QFY14 and 3QFY14, respectively, from 44.6% realized in 1QFY14.

Arif Habib Limited has incorporated the recent price hike and higher domestic market share in Arif Habib Limited’s financial model, increasing Arif Habib Limited’s earnings estimates and target prices by 7-24% and 14%, respectively.

LUCK Earnings Revised            FY14       FY15       FY16       Target Price
Current (PKR)                    39.75      47.84      50.60          336
Previous (PKR)                   37.10      38.88      40.68          294
Change                              7%        23%        24%          14%
Source: AHL Research

ACPL not far behind
Though LUCK’s onslaught in the southern domestic market is taking ACPL’s share of the pie (ACPL’s domestic market share down to 24% in Dec’13 from 29% in FY13), increase in cement prices is sufficient enough to not only absorb the domestic volume drop but will also result in revenue growth. Upon incorporating these developments in Arif Habib Limited’s financial model for ACPL, Arif Habib Limited expects FY14-16 EPS to improve by 18%-22% while target price improves by 28% to PKR 164/share.

ACPL Earnings Revised            FY14       FY15       FY16       Target Price
Current (PKR)                    21.04      22.69      25.42          164
Previous (PKR)                   17.78      18.93      20.78          128
Change                             18%        20%        22%          28%
Source: AHL Research