Karachi, May 23, 2012 (PPI-OT): The Cement sector has continued attracting the limelight of-late, outperforming the benchmark KSE-100 Index by 70.9%CYTD.
According to AKD Securities, this strong rally can be attributed to several factors, key amongst them being the rise in product prices and the expected reduction in FED in the upcoming FY13 Budget (tentatively scheduled for Jun 1’12). Over the past month however, the sector has underperformed the Index by 5.2% with this decline occurring on the back of reduction in cement prices by PkR20-PkR25 per bag. At yesterday’s close, Cement sector scrips were up significantly with the stocks within AKD Securities’ coverage, LUCK and DGKC, increasing by 4.3% and 4.1% to close at PkR127.3 and PkR41.9 per share, respectively. Yesterday’s uptick, after a week of lackluster performance, came on market murmurs of a reversal in price declines, with word of a potential PkR12 per bag increase. In today’s Daily, AKD Securities assesses the reasons for the cement sector’s performance to-date coupled with AKD Securities’ expectations going forward.
Prices – the main trigger! Improving fundamentals, primarily led by consecutive price increases and improved local volumes, (+9.3%YoY in 1OMFY12) were the main drivers behind strong cement sector price performance during Jan12-May12. In this regard, cement prices increased from an average of PkR34S per bag in 2QFY12 to currently stand at -PkR37S per bag (high of -PkR395 per bag). While prices recently reduced by PkR2O-PkR25 per bag last week owing to lower sales (lower labour availability due to harvest season), the same are expected to be reversed by the end of the current month – murmurs regarding a price increase of PkRI2 per bag were afloat yesterday, leading to intraday upper circuits on both LUCK and DGKC, with the scrips ending at the day with gains of 4.3% and 41%, respectively.
What to look forward to? Going forward, price momentum for Cements will likely be dictated by the direction of prices and magnitude of FED cut in the FY13 Budget. While prices are expected to increase by the end of the month, unchanged prices could be a momentum dampener. Moreover, AKD Securities believes the upward movement in share prices since mid Apr12 has been on the back of expected positive developments within the Budget. As such, while some positives have likely already been priced in, higher than expected FED decline! PSDP allocation could result in one more hurrah for cement stocks’ price movement. Currently, FED decline of PkR200-PkR2SO per ton and PSDP allocation of about PkR825bn in Budget13 are largely expected in the market. Post Budget however, potentially disappointing 4Q results (lower than expected sales in May12 as well as lower prices) could provide room for interim profit taking. Note that the ongoing dip in coal prices will manifest in 1HFY13.