KOHC is expanding its capacity by 2.3mn tons, expected to come online in FY24

· Kohat Cement Company (KOHC) remains one of the best plays to capitalize on the upcoming margin enhancement of the cement sector with the company being relatively more sensitive to coal prices compared to peers while on the other hand, it is also moving forward with capacity expansion of 2.3mn tons, which will take total capacity of KOHC to 7.2mn tons by FY24.

· Coal prices have been on upsurge (increasing by 67% since Dec’20) and registered an all-time high of USD238/ton during Oct’21 as global energy crunch led to an increase in demand for coal-based power generation. However, prices have lately receded to USD145/ton as China placed price controls locally while also asked local miners to scale up production. On other hand, after initially being unable to pass on the impact due to increased oversight by authorities, cement players have lately increased prices by PkR50-60/bag to ~PkR710/bag during last 1-2 months, in a bid to pass-on the impact. Even though KOHC’s margins are expected to contract during next two quarters on the back of high fuel cost, all the signs indicate towards coal prices declining post winter as power demand decreases in developed economies while coal production is also expected to increase, leading to increase in cement sector’s profitability. KOHC, in this scenario, will be one of the prime beneficiaries with the company being one of relatively sensitive players to change in coal prices.

· Additionally, KOHC is expanding its capacity by 2.3mn tons, expected to come online in FY24. The expansion costing PkR25bn is expected to take company’s market share to 10.3% from 9.1% currently with the company increasing capacity by 49% against rest of the industry expanding by 22% (~14mn tons). Moreover, company continues to trade at discounted EV/EBITDA of ~3.5x compared ~6.2x of AKD cement universe (excluding LUCK and DGKC). Even though company has historically traded at a discount, even incorporating a 20% discount to current EV/EBITDA of our sample group, we arrive at target EV/EBITDA of 4.9x, which results in a TP of PkR275/sh for the stock – 42% upside.

Courtesy – AKD Research

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