LafargePakistanCement

Deleveragingtodrivegrowth

MondayMarch 25,2013 Lafarge Pakistan (LPCL) witnessed a turnaround in its profitability as CY12 PAT of the companyrosetoPKR1.49bn(EPSPKR1.13)comparedtoanetlossofPKR118mn(loss persharePKR0.09)inCY11 Though we do not cover the stock, we present result review for the outgoing year with our indicative target price of PKR7.3/sh, providing an upside of 11% with dividendyieldof6%forCY13 Despite a 3%YoY decline in cement dispatches, the net revenues for CY12 soared by 23% to PKR9.6bn compared to PKR7.8bn in same period last year. This increase was primarilyattributabletoa12%increaseinaveragelocalcementprices With cement prices expected to stay strong coupled with a decline in coal prices, we believe the case of expanding margins would continue to lure investors attention towardscementstocks. Our conviction towards the stock stems from 1) deleveraging of balance sheet by repayments of long term long debt and2) initiation of dividend payouts (26% payout ratio)whichwouldkeepthescriptotradeinpremiumtoothercomparablepeers

LPCLBUY
TargetPriceDec13:PKR7.3 CurrentPrice:PKR6.5
Bloomberg Reuters MCAP(USDmn) 12MADT(mnsh.) SharesOutstanding LPCL.PA LPCL.KA 88 6.18 1313

Valuations
EPS DPS DividendYield(%) CapitalGain(%) TotalGain(%) 2010 0.72 2011 0.09 2012 1.13 0.3 6% 11% 17%

LPCLvs.KSE100RelativeChart
KSE100Index 180 165 150 135 120 105 90 Mar12 Apr12 May12 Jun12 Jul12 Aug12 Sep12 Oct12 Nov12 Dec12 Jan13 Feb13 Mar13 LPCL

Allhailtoalltimehighlocalcementprices,fallingpricesoffeedstock(coal)inlaterhalfof the year despite a 3% decline in volumetric off takes, Lafarge Pakistan (LPCL) witnessed a turnaround in its profitability as per the recent full year result announcement, which also ledcompanytopayoutPKR0.3/shascashdividend.LPCLannouncedanexceptionalresult for CY12 where profitability rose to PKR1.49bn (EPS PKR1.13) compared to a net loss of PKR118mn (loss per share PKR0.09) in CY11. Alone in 4QCY12 the company was able to post earnings of PKR720mn (EPS: PKR0.55) compared to PKR208mn (EPS: PKR0.16) in 4QCY11 on account of 650bps increase in gross margins thanks to average PKR34/bag increaseincementpricesand~20%lowercoalprices. Wheninvestorsarekeenlyfollowingcementstocksespeciallycompanieswithturnaround stories, LPCL is a potential investment choice. Though we do not actively cover the stock, we present result review for CY12 with our indicative target price of PKR7.3/sh, providing an upside of 11% from current levels with a dividend yield of 6% for CY13. The scrip on account of expectation of its first ever cash payout has rallied by 14% in the current month,outperformingthevolatilebenchmarkindexby15%inthesameperiod.

12%highercementpricespullednetrevenuesupby23%
LPCL Profile: Lafarge Pakistan Cement is
primarily engaged in the manufacturing and selling of cement in Pakistan. The plant of the company is situated at Chakwal in the province of Punjab, an area rich in lime stone reserves. The installed capacity of the plant stands at 2.4mn tons with a capacity utilization of 70%. The company operated under the umbrella of well renowned Lafarge group engaged in constructionmaterialsbusinesses.

Despite a 3%YoY decline in cement dispatches, as the company wasnt able to proceed with industrys export growth, the net revenues for CY12 soared by 23% to PKR9.6bn compared to PKR7.8bn in same period last year. This increase was primarily attributable to a 12% increase in average local cement prices, where company enjoys 5% market share. On the profitability front, the company also enjoyed the impact of falling coal prices (down 20%) which pushed its gross margins up by 11.3pps to 32.5% compared to 21.2% in CY11. Alone in 4QCY12, LPCLs net revenue increased by 19% YoY to PKR2.6bn compared to PKR2.2bn in the corresponding period last year; in line with an 8% increase of local cement prices. Moreover with 20% decline in coal prices, the gross margins expandedby6.5ppstohefty37%duringtheperiod.

FaridAliani
farid@bmacapital.com +92111262111Ext:2059

Distributioncostdown,Admincostup
With major concentration towards local dispatches and already settled local network, the distribution cost per ton continued to decline. The distribution cost reduced by 9% to PKR226mn compared to PKR246mn last year, which was as high as PKR492mn in CY10. Contrastingly, admin expenses stood at PKR628mn compared to PKR488mn in CY11, diluting the impact of higher gross profits to some extent. The result was also supported by absence of any other operating expense and meager other income of PKR12mn which fell down from PKR56mn in CY11. The most important factor which usually determines the profitability of small cement manufacturers i.e. finance cost also stayed flat at PKR1.0bn in CY12, attributable to lower policy rates, loan repayments and better cash flows. Thanks to better cash generation, the company also repaid PKR1.0bn of long term loansduring9MCY12.

Outlook:Keepfollowingthecementprices
Amid expectations of strong cement prices along with continuous decline in coal prices, we believe the case of expanding margins would continue to lure investors attention towards cement stocks. In addition to soaring cement prices, seasonal uptick in cement dispatches during 4Q FY13 would also enhance the sectors profitability, we believe. Though we have not added Lafarge Cement inour cement sector universe; ourconviction towards the stock stems from 1) deleveraging of balance sheet by repayments of long term debt and 2) initiation of dividend payout (26% payout ratio) which would lead the scriptotradeatapremiumtoothercomparablepeers.