Thatta Cement Company Limited (THCCL) – Sharply Improving Fundamentals; BUY with a PkR 133.6/sh target.
We initiate Thatta Cement Company Limited (THCCL) coverage with a BUY rating. Our Jun 25 target price for the stock stands at PkR 133.6/sh, offering a potential upside of 157% along with the dividend yield of 4%, taking the total return to 161%. Our investment case is based on the following premise:
Utilization levels are rising: Thatta Cement’s plant operating rates have risen sharply over the past two years compared to industry peers. Historically, its capacity utilization stood around 20pps below the southern region’s cement industry. During FY23 and FY24, its utilization rates came on par with the area. Given the company’s exit from the APCMA forum, we foresee its higher utilisation rates in the coming years.
Monetary easing cycle to support construction activities: The prevalent monetary easing cycle will likely benefit Thatta Cement through increased construction activity. Falling interest rates may also induce demand from large-scale public sector projects as a lower debt servicing burden may create fiscal space to fund these projects.
THCCL may benefit as the southern region’s prices converge: South cement players, including THCCL, may benefit from windfall gains as the southern region’s cement prices converge towards the northern region’s pricing. Historically, south pricing was 8-10% higher than its north counterpart as the south region’s utilization rate was significantly higher. In recent years, however, the northern region’s price hikes have outpaced the south because of higher demand and an increased royalty charge. The northern pricing now stands 10% higher than its southern counterpart. As demand resumes, the pricing differential may narrow, benefitting THCCL from higher margins.
Heightened focus on production efficiencies: Thatta Cement is enhancing efficiency through green technologies, installing 3.5MW solar panels and a 4.8MW windmill to reduce reliance on the national grid. The company’s current solar capacity is 3.4MW, and its waste heat recovery (WHR) stands at 4.0MW, contributing PkR 3.3/share to its bottom line.
Courtesy – BMA Research
