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Lucky Cement exhibts strong profolio heading for growth

Topline Pakistan Research believes that Lucky Cement (LUCK)  is heading for growth through business diversification. The analyst recommended a buy call for it. We reiterate our “BUY” stance on Lucky Cement (LUCK) with a revised June 2025 Sum of the Parts (SOTP) based Target Price (TP) of Rs1,561/share, offering a potential upside of 73% (total return: 77%).

LUCK is our preferred pick due to (1) Cement: Superior cement margins and profitability because of efficiency and timely expansion of a new cement plant, (2) Autos: Reduction in the policy rate and likely launch of new model/variant to drive auto/mobile sales, (3) LCI: Soda Ash Expansion and multiple favourable stories in Pharma sector i.e. deregulation of non-essential, Pfizer acquisition, (4) Coal Power Plant: Improving recoveries in coal power plant, (5) Foreign Operations: Strong margins and profitability of foreign cement operations due to change in the fuel mix and expansion announcement in Iraq, and (6) Strong Cash Generation:  Strong annual cash flows due to exceptional EBITDA margins from cement business and dividends from subsidiaries/associates.

We estimate consolidated EPS forecasts of Rs260.8 and Rs294.2 for FY25F and FY26F, respectively. We expect a 3-year (FY24-26) earning CAGR of 21% on a consolidated basis.

Superior margins and profitability of local cement business: We expect LUCK (unconsolidated) gross margins to improve to 34-36% over FY24-FY26 (FY23: 27%) due to a decline in coal price to Rs37.3k/ton from Rs60.8k/ton in FY23, and improvement in power mix post addition of the renewables of 38MW. We expect LUCK to post dispatches CAGR of 6% during FY24-26, higher than industry CAGR assumptions of 4%, as the market share of LUCK is expected to increase owing to commercial operations of its 3.15mn tons brownfield expansion in the north region in 2QFY23.

Lucky Motors (LMC): Reduction in policy rate and launch of new model/variant to drive auto/mobile sales: We believe, like the auto sector, Lucky Motors will be a beneficiary of a reduction in policy rate due to expected pickup in consumer financing (auto loans). This and the likely launch of a new hybrid variant in late 2024/early 2025 will take plant utilisation to 27% (Double Shift) by FY26 (from earlier: 19%). The Finance Minister has also announced the continuation of reduced sales tax rates on hybrid vehicles, further strengthening the case of KIA launching new hybrid category models.

Similarly, after restrictions on imports are removed, we expect mobile segment utilisation to improve to 28% by FY26, which aligns with management’s guidance.

LCI: Soda Ash Expansion and multiple favourable stories in the Pharmaceutical sector, i.e., deregulation of non-essential products and Pfizer acquisition: LCI is planning a 200k tons expansion of its soda ash plant, which is expected to come online by FY26. This and the deregulation of non-essential pharmaceutical products will likely take LCI’s profits to Rs11.5bn/12.6bn in FY25/26 from the current Rs10.7bn in FY24.

Lucky Electric (LEPCL): Improving cash amidst easing concerns on power sector circular debt: LEPCL is operating at a fixed USD ROE of 27.5%; however, cashflows have remained the major concern due to circular debt. The collection ratio of power businesses has improved significantly amidst regular revisions in power tariffs, and based on our channel checks, LEPCL’s recovery ratio in 3QFY24 remained near 100%.

Foreign cement operations: Generating significant cashflows—eyeing expansion: As per the management guidelines, foreign cement operations are expected to post combined profits of Rs14.3/16.5bn in FY25/26; this will take foreign operations contributions to 20/21% in LUCK consolidated income in FY25/26, respectively, due to strong demand, efficiency in the fuel mix, and planned expansion of 1.82mn tons clinker in Samawah, Iraq.

Strong operating annual Cashflows: Due to the abovementioned reasons and dividends from subsidiaries/associates, we expect the company’s unconsolidated EBITDA (including dividends from subsidiaries) to significantly improve from Rs22bn in FY23 to Rs55bn in FY27. We have not taken any dividend income from Lucky Electric; however, with Lucky Electric’s 40% payout ratio, the dividend-included EBITDA of LUCK (unconsolidated) will reach Rs80bn.

Valuation: LUCK offers a potential total return of 77% to our June 2025 SOTP-based TP of Rs1,561/share. The stock is trading at an FY25F PE of 3.5x, compared to its 10-year average PE (Ex. FY20 Covid Year) of 10.0x, representing a discount of 65%. On EV/ton, LUCK is trading at US$43/ton, at a 56% discount to its last ten years’ historical EV/ton of US$97/ton.

Key Risks: (i) Lower than estimated policy rate decline affecting cement, auto and mobile sales, (ii) decline in local cement prices due to lower capacity utilisation, (iii) higher than expected PKR depreciation leading to higher prices of coal, autos, and mobiles, (iv) Lower than expected utilisation of auto and mobile plants due to reduced demand, (v) unforeseen government policies or geopolitics affecting foreign cement operations, and (vi) delay in planned expansions of Soda Ash and Iraq clinker plant.


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