Maple Leaf Cement (MLCF) announced today that it has exchanged notices with Pioneer Cement (PIOC) regarding a possible acquisition. Currently, MLCF, together with Maple Leaf Capital (MLCL), owns 18.6% of PIOC. The Habibullah group owns around 58% of the company through multiple holdings. In contrast, the remaining stake is with the general public, according to a report from Topline Pakistan Research.
If the acquisition proceeds, MLCF’s total capacity and market position will be significantly enhanced to 13.02 million tons from the current 8 million tons, as PIOC has the capacity of 5.2 million tons. The company’s capacity-based market share in the north region is expected to increase from 12% to 19%.
Current Valuation: Based on Nov 12 closing prices, MLCF’s (investment adjusted) EV/ton stands at US$33.6, while PIOC’s EV/ton is US$37.8/ton. To highlight, the Industry is currently trading at an EV/ton of US$46/ton.
§ Currently Attock Cement (ACPL) is also being acquired by Fauji Cement and KAPCO, with market talks suggesting price in range of Rs300-350 per share, which translates into EV/ton of US$43-48/ton on capacity of 4.3mn tons. However, if we exclude its two old lines from 1988 (0.8 million tons) and 2006 (1.04 million tons), the EV/ton valuation would be US$75/ton for the new capacity of 2.5 million tons.
§ We believe that an EV/ton valuation for PIOC should command a premium over an ACPL valuation due to its presence in the north region (a high consumption area) along with a 30MW coal-fired power plant. Pioneer Cement also owns three lines of cement, with the first one inducted in 1992 (optimized in 2005), Line II in 2005, and Line III in 2020. Line 3 is the largest of all, with a capacity of 10k TPD or 3 million tons.
§ Assuming valuation of US$50-60/ton (premium of US$5-10) at total capacity of 5.2mn tons, total EV stands at US$260-312mn, translating into Rs73bn to Rs88bn. Adjusting for net debt, the equity value reaches around Rs309-373 per share. If we value just the new line of 3 million tons with an EV/ton of US$80-85 (a premium of US$5-10 over ACPL), the equity value arrives at Rs285-303.
We also anticipate synergies between the two companies due to the proximity of 120km between their factories. MLCF’s railway infrastructure can also be utilized to reduce the transportation cost of the PIOC when importing international coal.
Impact on Maple Leaf: Assuming the acquisition of a 70% stake (57.5% by the Habibullah group and 12.5% in the Public Portion), the funding requirement at a valuation of US$50-60/ton (based on total capacity) will be Rs50-60 billion. With 75:25 debt equity ratio, the debt financing would be Rs38-46bn. We believe the existing EBITDA of Rs 12 billion of the PIOC will safely manage the debt servicing of the funding and will start contributing to the profitability of MLCF decently in subsequent years post-deleveraging.
