Maple Leaf Cement Factory to become the largest player in North

MLCF had signed a contract with Chengdu Design & Research Institute, China, to supply 7,000 metric tons a day (2.1mn tons p.a.) grey clinker line in late March last year, with trial production expected in Aug’22. Despite weathering new COVID-19 waves, the company has remained dedicated to its expansion plan with COD of the plant targeted for Oct’22. This plant will bring in new efficiencies in the company. It will also give MLCF a prime mover advantage in the upcoming expansionary phase whilst also improving its presence in the North as the largest player with all lines of 7.7mn tons at one place.

Our liking for the stock stems from i) rave-worthy fuel mix amid early movers advantage with a switch to the Afghan coal, which trades at a steep 55% discount at present to its foreign counterpart (South African Richards Bay coal), ii) upcoming COD of the new 2.1mn tons Brownfield plant (line 4) rendering MLCF to become the largest player in North with all lines of 7.7mn tons at one place, and iii) efficient power mix with the company relying on captive generation through WHR, coal and gas plants.

We revise our estimates upwards and reiterate the BUY stance on Maple Leaf Cement Factory Limited (MLCF) with a Dec’22 target price of PKR 54/share.

Undeterred by industry challenges of a commodity super cycle

Smart policymaking and timely procurement of Afghan and local coal by the management has sheltered MLCF from the tornado in commodity (South African coal) prices. To recall, the company first began testing Afghan coal at its plant during May / Jun’21. Recently Richards Bay coal prices shot up from as high as USD 238/ton in Oct’21 to a historic high of USD 460/ton, rendering imported coal completely unviable with the cost at the plant at over PKR 90,000 per ton. Currently, RB2 is hovering at USD 370/ton (PKR 75,000 per ton). In comparison, Afghan coal trades at a positive delta of 55% at present, while PET coke costs 30% and local coal costs 60% less than RB2. The company is consuming a hefty 65-70% Afghan coal in its mix, with the remainder majorly comprising of PET coke, hence providing a natural hedge against the exponentially high imported coal and freight costs. We also find it necessary to highlight that the company has a few months of low coal inventory in hand, which signals a cushion to margins during the ongoing year.

Optimum power mix

Maple is one of the most power-efficient companies in the country currently, relying completely on its captive generation to power its plant operations. The company has a 25MW Waste Heat Recovery (WHR) plant, a 40MW coal power plant, a 15.8MW dual-fired (FO + gas) plant, and a 5MW solar plant. In addition, the company is expanding its solar capacity to 12.5MW, which is scheduled to come online with the next few months.

Pertinently, MLCF has been running its captive coal plant on Afghan coal and faced no problems thus far, which has materially saved power costs in the ongoing scenario. As a result, the company’s margins posted above street consensus levels of nearly 32% in the latest quarter (2QFY22), one of the highest in the sector.

Courtesy- AHL Research

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