LUCK: Robust margins to propel earnings growth in FY11

Result expectation: Lucky Cement is scheduled to announce its full year FY11 result on July 30, 2011. We expect the company to post a PAT of PKR3,988mn, up 27% YoY (EPS: PKR 12.33) with 4QFY11 PAT expected at PKR1,513mn, up 163% YoY (EPS: PKR4.69). Growth in profitability will come on account of improved EBITDA margins and increased local dispatches during FY11 due to strong growth in the south region.  We also expect the company to declare final dividend of PKR5/share.

Higher margins to propel earnings growth: Catalyst for bottom-line growth during FY11 will likely be higher EBITDA margins. We expect EBITDA margins to show an increase of  35% YoY during FY11, along with a 29% QoQ increase during 4QFY11, both proliferating from higher retention prices coupled with pre-buying/inventory pile up of coal at USD 110/ton.

Strong local dispatches while exports to remain under pressure: We expect LUCK’s FY11 local dispatches to rise by 11% YoY to 3.45mn tons driven by stalwart growth in the southern region, whereas export offtake for LUCK is likely to have plunged by 33% YoY during FY11 to 2.36mn tons due to dismal demand from the GCC region.

Investment perspective: At the last closing price of PKR73.3/share, LUCK offers an upside of 23% to our Jun-12 price target of PKR90/share and trades at FY11/12 PER of 5.9x/5.4x. BUY!

Higher margins to propel earnings growth

Amid 12% YoY decline in total dispatches during FY11, impetus for bottom-line growth will likely be higher EBITDA margins. We expect EBITDA margins to show an increase of  35% YoY during FY11, along with a 29% QoQ increase during 4QFY11, both proliferating  primarily  from higher retention prices coupled with pre-buying/inventory pile up of coal at USD110/ton. However, EBITDA margins will increase by 135% YoY during 4QFY11, due to low base effect of 4QFY10. EBITDA margins for LUCK nose-dived post 1QFY10 and bottomed out in 4QFY10 at PKR 627/ton, following which they have been on a rising trend.  Average retention for FY11 is expected at PKR 4,453/ton (up 20% YoY); due to increase in domestic cement prices, which shall offset 18% YoY increase in COGS/ton.

Strong local dispatches while exports to remain under pressure

We expect LUCK’s FY11 local dispatches to rise by 11% YoY to 3.45mn tons driven by stalwart growth in the south region. Dispatches in the south region were up by 20% YoY during FY11 as a result of uptick in post flood reconstruction efforts along with an increase in sub-urban development driven by higher farmer liquidity from a bumper crop season. Export offtake for LUCK is likely to have plunged by 33% YoY during FY11 to 2.36mn tons due to sluggish construction activities coupled oversupply of cement in the GCC region. However, cement demand from Africa and Afghanistan is likely to have mitigated the magnitude of decline from the GCC region. With limited avenues to explore on the export front, LUCK is likely to have focused more on local sales during FY11 due to higher retention prices in comparison to exports. We estimate local retention to have averaged PKR4,112/ton during FY11, whereas export retention, after adjusting for logistic charges is estimated at PKR3,553/ton.

Investment perspective

At the last closing price of PKR73.3/share, LUCK offers an upside of 23% to our Jun-12 price target of PKR90/share and trades at FY11/12 PER of 5.9x/5.4x. BUY!

Economic & Political News

Ogra fines 6 OMCs

The Oil and Gas Regulatory Authority (Ogra) has imposed fine worth PKR6.1mn on six Oil Marketing Companies (OMCs), which failed to keep 20-days fuel stock. Muhammad Ijaz Chaudhary, Secretary Ministry of Petroleum and Natural Resources. Giving the details of the Oil Marketing Companies, which were fined, he said that an amount of PKR2mn as a fine has been imposed on Admore, PKR1.5mn on Oscar, PKR1mn on Byco, PKR0.5mn on OTC, PKR0.3mn on Pak-Re and PKR0.8mn on Hascol.

Banks again miss agriculture credit target by PKR7bn

Commercial and specialised banks again missed indicative agriculture credit disbursement target of PKR270bon for the fiscal year 2010-11 by PKR7bn, mainly due to slow economic activity and floods in the country. Banks have been missing indicative agri credit target since fiscal year 2008-09 and this is third consecutive fiscal year where the commercial and specialised banks have not achieved the target set by the State Bank of Pakistan.
Analyst Certification:
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Disclaimer

The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

Contributed By