The cement demand in Pakistan is expected to continue its growth momentum in Jan’21 led by upbeat construction activities from the private sector; and govt. support packages (construction package & amnesty scheme). Domestic cement demand is likely to witness an increase of 15% YoY to 3.74Mn tons in Jan’21, while on a sequential basis, the demand is likely to decline by 10.0% MoM. Company wise, PIOC and KOHC are likely to witness the highest YoY increase in sales volumes of 147/71% to 0.26/0.29Mn tons in Jan’21 followed by LUCK and CHCC which are expected to show an increase of 12/10% YoY to 0.77/0.29Mn tons respectively.
We continue to prefer LUCK and MLCF within our Cement Universe with Dec’21 TP of PKR 854/sh and PKR 59/sh, respectively.
Upbeat domestic sales uplifts overall cement demand:
To delve into details, North demand is expected to increase by 14% YoY to 3.1Mn tons whereas South demand is likely to surge by 16% YoY to 0.7Mn tons. On the other hand, exports may witness a decline of 20% YoY to 0.65Mn tons while on a MoM basis, exports may increase by 2% in Jan’21. Major decline came from North region where exports have declined by 22% YoY to 0.49Mn tons. Similar to North region, exports in the South region may also witness a decline of 13% YoY to 0.16Mn tons.
PIOC and KOHC are expected to witness highest increase in sales volume:
Company wise, PIOC and KOHC are likely to witness highest YoY increase in sales volume by 147/71% to 0.26/0.29Mn tons in Jan’21 followed by LUCK and CHCC which are expected to show an increase of 12/10% YoY to 0.77/0.29Mn tons respectively. The YoY increase in sales volume can mainly be attributed to PIOC (3.15Mn tons), LUCK (2.8Mn tons) and KOHC’s (2.5Mn tons) added capacity that came online in the latter half of Jan’21.
Price premium has shrunk to PKR 35/bag:
On the pricing front, the average cement price in North region have seen an increase of PKR 15/bag to PKR 578/bag in Jan’21 vs. average selling of PKR 564/bag in Dec’20; this takes cumulative price increase to PKR 63/bag since Jan’20. In South region, average prices have declined by PKR 33/bag YoY to PKR 616/bag, while on a sequential basis, the prices have remained relatively stable.
Note that price premium in South has squeezed to PKR 35/bag vs last four quarter’s average of PKR 101/bag and three year average of PKR 70/bag, bringing the differential close to historic levels. Going forward, we expect cement prices to increase further to pass on the impact of rising coal prices. Overall, capacity utilization of the sector is expected to remain above 80% in the near term which would also allow companies to pass on impact of rising costs.
Cement expansion on the cards:
As of Jan’21, five NOCs have been so far issued for setting up new cement plants while five more NOCs are expected to be issued in the remaining FY21. Given the higher demand outlook, cement players are gearing up to expand further as the players’ utilization has reached above 80% in 7MFY21. Note that the next Greenfield expansion cycle would roughly take 4-5 years to come online. It would be difficult for leveraged players to expand further given the expectations of a hike in interest rates.
We continue to prefer LUCK and MLCF:
Given the capacity-based market share and expectations of future expansion, we suggest a preference for companies with limited operational and financial leverage with diversified geographic presence. Hence, we prefer LUCK and MLCF within our Cement Universe with Dec’21 TP of PKR 854/sh. and PKR 59/sh, respectively.
(BMA Capital Management Ltd).