Karachi, May 24, 2012 (PPI-OT): Outperformance to continue
The stock of Fauji Cement Company Limited (FCCL) has increased by 37% since Arif Habib Limited’s initiation with a Buy call in Mar-12, comprehensively outperforming the benchmark KSE-100 Index by 30% during the same period.
According to Arif Habib Limited believes that the stock has a lot more to offer as fundamentals like downwards sticky cement prices, declining coal price and strong volumetric growth are intact. Looking at the resilience in the cement prices, Arif Habib Limited has increased Arif Habib Limited’s ex-factory price assumption for FY12-14. This has improved Arif Habib Limited’s target price to PKR 10/share, offering a sizeable upside potential of 62%; Arif Habib Limited thus reiterates Arif Habib Limited’s Buy stance.
Strong pricing is painting a rosy picture
Arif Habib Limited has revised upwards Arif Habib Limited’s FY12-14 ex-factory price assumption by 6%-18% as summarized below. Arif Habib Limited believes that revival in the cement demand coupled with the strong pricing power of the cement manufacturers will keep the price decline risk on the lower side. Earlier this week, the rumour regarding another price war downplayed on the market sentiment, causing negativity in cement stocks. However Arif Habib Limited’s discussion with the industry sources suggests that there was not any price war scenario and prices have reverted back to the previous levels.
High pricing scenario may lead to lower capacity utilisation
FCCL has a history of operating its plant at full capacity (99% in FY09-11), which Arif Habib Limited fears might not be replicated in medium term with its new 7,200 tpd expansion capacity on line, since any attempt to increase its capacity utilization may induce a price war in the industry. Assuming a 4% CAGR (FY12-15) in industry volumes and keeping a market share of 8%, FCCL capacity utilization may remain in the region of 54% in FY12 to 68% in FY15. Consequently Arif Habib Limited has reduced Arif Habib Limited’s FY13 and FY14 volumetric sales assumption of 15% and 18%, respectively.
|
FY12 |
FY13 |
FY14 |
|
| Ex-Factory Price Assumption |
|
|
|
| Current Price (PKR per bag) |
371 |
365 |
360 |
| Previous Price (PKR per bag) |
350 |
315 |
305 |
| Change |
6% |
16% |
18% |
| Dispatches |
|
|
|
| Total Dispatches Current (mn tons) |
1.92 |
2.18 |
2.25 |
| Total Dispatches Previous (mn tons) |
1.89 |
2.58 |
2.75 |
| Change |
2% |
-15% |
-18% |
| Earnings |
|
|
|
| Current EPS (PKR) |
0.40 |
1.00 |
1.08 |
| Previous EPS (PKR) |
0.19 |
0.61 |
0.77 |
| Change |
108% |
64% |
41% |
| Source: AHL Research |
Bottom line tells a compelling story
FCCL achieved a turnaround in profitability in 3QFY12 by posting net earnings of PKR 243mn (EPS: PKR 0.18) compared to net loss of PKR 206mn (LPS: PKR 0.16) in 2QFY12, taking 9MFY12 EPS to PKR 140mn (EPS: PKR 0.11). This was mainly on account of a 13% QoQ jump in dispatches, coupled with a 7% QoQ improvement in the average retention price. This has improved gross margin by a hefty 10 percentage points to 29% in 3QFY12 from 19% in 2QFY12. Finance cost on the other hand dropped by a 23% QoQ as company suffered lower exchange loss due to relatively stable exchange rate movements.