Cements: Contrarian hypothesis coming true!
Recent reports indicate an increase in cement prices by PkR10-PkR12 per bag in the Northern region, corroborating our view of an imminent increase in cement prices. While current prices now stand at about PkR250-PkR260 per bag in the North, we believe another round of price increase will likely take place before the end of the current fiscal year in order for prices to reach a level of profitability sustenance for cement companies. Moreover, cement manufacturers have already started focusing on different strategies to achieve cost savings and coming up with alternate revenue sources. These include installation of waste heat recovery systems, seeking investments abroad etc. At current levels, DGKC remains our top pick in the sector with a target price of PkR48 per share.
AKD Research
January 14 2010
Lucky: Moving towards diversification
In the 2nd move this month to bolster profitability and reduce reliance on vagaries of the domestic pricing agreement, Lucky Cement has signed a 10-year power sale agreement with supply strapped power utility KESC.
Pricing/return details remain murky at this point but the deal should be earnings accretive for Lucky where our initial calculations suggest as much as 2.5-6.2% EPS upside for Lucky post 2010E.
Key swing factor that would determine Lucky’s profits is the extent of sharing of waste heat recovery benefits between the power supplier and buyer. In case Lucky does not pass through the gains from WHR to KESC, potential gains for the cement major would double vis-a-vis a case of full benefit sharing.
While KSE cheers re-enforcement of Lucky's position as industry groundbreaker, we caution that earnings impact of recent ventures would be visible post ~12-mths and in the interim, prospects of price consensus restoration (and near term margin recovery) may be weakened.
KASB Securities and Economics Research
January 13 2010
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