The Bell about Construction and Materials – Elixir Securities Limited

Karachi, January 01, 2014 (PPI-OT): FCCL: Positives overplayed; downgrade to Sell

According to Elixir Securities Limited,

Cements have rallied due to cement price hikes and expectations of better volumes
Cement sector has outperformed the benchmark index by 6pp during Dec-13 owing to increase in cement prices in the south amid improving dispatches and expectations of buoyant domestic demand going forward.

Positives overplayed for FCCL
FCCL has outperformed the cement sector by 10pp during Dec-13. However, Elixir Securities Limited believes that positives have been overplayed for the company. FCCL is currently trading at an expensive FY14E PER of 8.9x, relative to LUCK’s PER of 8.1x and sector average of 6.5x.

High multiples are not justified
Elixir Securities Limited believes that buoyant demand outlook does not justify such a high PE multiple since FCCL remains expensive even under an optimistic demand scenario. In order to judge the impact of a possible jump in cement demand on FCCL, Elixir Securities Limited has conducted a sensitivity of FY14 estimates to local dispatch growth. Even under an optimistic scenario of 20% local dispatch growth, FCCL trades at FY14E PER of 7.5x, higher than industry average of 6.5x.

Local Dispatch Growth              6%      10%    15%    20%    25%    30%
Assumption
FCCL                             Base Case
FY14E EPS (PKR)                    1.79    1.89   2.01   2.14   2.26   2.39
FCFE/share                         1.25    1.30   1.37   1.43   1.50   1.56
FY14E PER (x)                      8.9     8.5    7.9    7.5    7.0    6.7
Source: Elixir Research

Payout to remain limited
Elixir Securities Limited expects FCCL to generate FCFE of PKR1.25/sh in FY14 and pay the entire amount as cash dividend, translating into a dividend yield of 8% at last closing. The sensitivity above shows that it is highly unlikely that the company will generate free cash flows in excess of PKR1.5/sh, thus limiting its payout capacity.

It is also important to note that FCCL plans to invest ~PKR2.3bn in a WHR plant between FY14-15 and may reduce payout to finance this project. Elixir Securities Limited has currently assumed that FCCL will fund this project through additional loans.

Downgrade to SELL
Elixir Securities Limited’s Jun-14 TP of PKR11.5 and DPS expectation of PKR1.25 offers total downside of 20%. Owing to the recent price performance, Elixir Securities Limited downgrades Elixir Securities Limited’s stance on FCCL from HOLD to SELL.