Global

Cherat Cement Company Limited

Pakistan Research

Expansion reinvigorates investment case

Daily Update

November 05, 2015

BUY

High growth justifies premium valuations

We initiate our coverage on Cherat Cement Company Limited (CHCC) with
a BUY stance on the company and a Jun16 TP of PKR 122/sh based on
Discounted Cash Flows. The scrip offers an upside of 42% from its last
close. As per valuations, CHCC trades at a FY16 P/E of 13.9x, implying a
premium of 30% to our Global cement universes FY16 P/E of 10.6x. We,
however, believe that ongoing expansion and the consequent surge in
earnings justify the premium valuations given to the company. The
company offers an estimated 5yr (FY16-20) earnings CAGR of 21%,
resulting in a FY16 PEG ratio of 0.66x, lowest within our cement universe.
Accounting for the exponential growth, the company gives the most
attractive valuation within the cement sector. Looking at multiples on a
regional basis, the cement sector of Pakistan trades at a discount of 25%
to its regional peers FY16 P/E of 18.4x. Moreover, in line with the
companys historical average, we estimate the company to offer an FY16
dividend yield of 2.0%.

Jun1
16 TP - PKR 122//sh

Bloomberg Code

CHCC PA

TTM Daily Avg Vol. (mn sh.)

0.01

TTM Daily Avg Value.(mn)

119.2

Market Cap. (PKR mn)

9,276

Market Cap. (USD mn)

88

Outstanding Share (mn)

105.14

Index Weightage (%)

0.53

Beta

1.32

Free Float (%)

65%

Price Performance
70%

Estimated expansion timeline

60%

mn MT

50%

12.00

8.00

30%

6.00

20%

4.00

10%

2.00

0%
-10%

0.00
FY15 FY18 FY19 FY15 FY18 FY19 FY15 FY18 FY19 FY15 FY19 FY20

Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Aug-15
Sep-15
Oct-15

40%

10.00

CHCC
CHCC

DGKC

ACPL

KSE 100 Index

LUCK

Source: Global Research, Company Accounts

No more an underdog
Cherat Cement is the first among its peers to realize the favorable
developing dynamics of the industry and is therefore expected to be the
first to materialize on its expansion plans. The company is one of the
smaller players within the industry and has been operating at more than
90% capacity utilization (94% average) for the past 8 years. The company
has started work on installing a new production line at its existing site in
Nowshera, KPK.
The company currently has an annual cement manufacturing capacity of
1.1mn MT/year (2.4% of the industry capacity) and will likely elevate to
2.4mn MT/year by 2H FY17 (5.3% of FY17 industry capacity) with both
production lines being sourced from Chinese manufacturers. While DGKC,
ACPL and LUCK followed suit, announcing expansions expected to run its
first full year during FY19, FY19 and FY20, respectively, CHCC remains
the first mover, all set to benefit from the presumed robust increase in
construction activity within the country.

Period
3 Months

High
92.39

Low
56.88

Avg Vol
1.57

6 Months

92.39

67.17

0.78

12 Months

90.61

77.91

0.48

Board Meetings
05-Nov-15

Security Leasing Corporation

06-Nov-15

Dandot Cement Co. Ltd

08-Nov-15

Shadman Cotton Mills Limited

Bilal Khan
bilal.khan@gslpk.com
+92.21.3245.7538

Please see page 10 for important disclosures

Global
Pakistan Research
Daily Update

Estimated capacity utilization

110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
FY14

FY15

FY16E

FY17E

Old Plant

FY18E

FY19E

FY20E

New Plant

FY21E

FY22E

FY23E

Total

Source: Global Research, Company Accounts

Cherat Cement has not only an edge over its peers because of its timely
expansion but it will also benefit from a 5-yr Income Tax holiday that the
company will likely qualify for. The Government in the Federal Budget FY15-16
announced a Tax holiday for all new manufacturing units set up in KPK
province between FY15-18. According to our estimation, the plant will start
commercial production during 4Q FY17, making the companys new cement
plant eligible for the Tax Holiday. The company plans to operate the new
cement plant at 100% capacity and route the additional production to the old
plant to take full advantage of the incentive.
Table 1: Earnings Sensitivity to Utilization
FY18E

FY19E

FY20E

FY21E

FY22E

FY23E

10% Higher Utilization

21.6

26.5

28.6

30.6

30.6

26.2

5% Higher Utilization

19.3

22.4

24.1

25.6

25.6

21.7

Base Case

17.2

18.6

19.9

21.1

20.9

17.5

5% Lower Utilization

14.8

14.6

15.5

16.2

15.9

13.0

10% Lower Utilization

12.6

10.8

11.3

11.7

11.3

8.9

Source: Global Research

Not lagging behind in efficiencies

The company has a 26MW FO based captive power plant capable of fulfilling
the entire power requirement of the company. The recent downturn in
international oil prices has made it feasible for the company to run its FO based
power plant. Moreover, fuel price adjustments have also flattened the
companys national grid tariff. In addition, Cherat Cement has installed an RDF
and a WHR plant to lower fuel and power costs. While RDF is no longer viable
amid depressed coal prices, it hedges the company from any potential recovery
in coal costs. Whereas, the 7MW WHR installed at the old plant contributes
around 38% to the existing power requirement of the company, facilitating the
company to substantially reduce its power costs. To maintain its efficiency, the
2

Global
Pakistan Research
Daily Update

company has also planned to install a 6MW WHR power plant for its new
production line to be completed simultaneously, with an estimated investment
outlay of ~PKR 1.0bn. Subsequently, the overall WHR contribution for the
company is estimated to come down to 33% by FY18. The following table
provides an estimated contribution from the WHR plant to the companys
earnings.
Table 2: Earnings Contribution from WHR
FY18E

FY19E

FY20E

FY21E

FY22E

FY23E

EPS (WHR Line 2)

17.2

18.6

19.9

21.1

20.9

17.5

EPS (Without WHR Line 2)

14.0

15.1

16.1

17.0

16.8

13.9

Source: Global Research

All set to benefit from the monetary easing scenario

The projected total investment required for the new production line is
approximately PKR 12bn, for which the company has obtained a syndicated
borrowing facility of PKR 9.5bn from MCB, AL Meezan and Bank Alfalah.
Moreover, the company issued right shares and raised PKR 1.8bn to finance
the expansion project. Even though the company has obtained a facility of PKR
9.5bn for the project, according to our analysis and discussions with company
officials, the company will require much less external funding as the company
will generate sufficient funds internally. Incorporating internal cash flow
generation, our estimates suggest the company will require PKR 7bn external
debt financing. Latest financial report depicts a debt ratio of 2.65%, one of the
lowest within the sector. This, however, is expected to increase to 34% by
FY16 on account of estimated borrowings needed to fund the expansion.
Interest rates are expected to increase going forward; hence, we believe its a
good time for the company to lever its books with interest rates hovering
around its multi-year low.
Increased leverage to rise finance cost
PKR Mn

PKR Mn

9,000

700

8,000

600

7,000

500

6,000
5,000

400

4,000

300

3,000

200

2,000

100

1,000
0

0
FY14

FY15

FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E

Debt(LHS)

Source: Global Research

Finance Cost(RHS)

Global
Pakistan Research
Daily Update

Cherat has got its timing right

We believe Cherat Cement has got its timing right for the expansion, aligning
its expansion with the expected increase in demand for cement. We believe the
cement sector of Pakistan is likely to remain robust on the back of construction
projects under the CPEC, increased PSDP budget, low interest rate scenario,
and major development projects, including motorways and hydro power
projects.
Cement Dispatch Correlation with PSDP
PKR bn

mn MT
30

1,300

28
1,100

26
24

900

22
20

700

18
500

16
14

300

12
10

100
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Local Dispatches(RHS)

Total PSDP(LHS)

Source: Global Research

Projects such as building of roads, rail networks, telecommunications,

development of Gwadar Port and major projects under the CPEC are likely to
provide significant boost to local industry in coming years. Pakistan and China
have jointly signed 50+ MoU of around USD 46bn under the CPEC. Moreover,
as cement off-take is highly correlated (+91%) with PSDP utilization, we
believe the 29% YoY increase in PSDP to PKR 700bn for FY16 will bode well
for the cement industry. The GoP has released PKR 151bn (22% release)
during the 4mo FY16 period compared to PKR 63bn (12% release) during the
same period last year. A higher PSDP release ratio is evidence of greater
interest from the government for development and higher economic activity
within the country. Furthermore, a major focus of the Govt. is on the LahoreKarachi motorway and construction of hydropower projects.
Such construction projects are likely to boost local demand for the cement
sector in the near future. Cherat Cements decision to expand becomes more
meaningful knowing that most of the hydro power projects are located in the
north region. Monetary easing cycle may also increase loan off-take and boost
construction activity in the near future. With commercial bank investments in
PIBs expected to expire next year, we believe loan off-take may pick pace,
consequently promoting construction activity. PKR 341bn relief package
announced by the PM for the agriculture sector is also expected to increase
farmer income; acting as a catalyst for cement demand growth.

Global
Pakistan Research
Daily Update

Interest Rate and Dispatches Correlation

mn MT
30

16.0%
14.0%

25

12.0%
20

10.0%

15

8.0%
6.0%

10

4.0%
5

2.0%

0.0%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Total Dispatches(RHS)

Avg interest rate(LHS)

Source: Global Research

A major concern for investors remains the low margins of the company,
averaging around 30% for FY15. Primary reason for lower than industry
margins is high portion of low margin exports, majority of which constitute
exports to Afghanistan. Going forward, we see CHCCs margins improving,
driven by economies of scale, higher contribution from local sales, depressed
coal prices and fuel price adjustments.
Expected Sales Mix
mn MT
100%
2.60

90%
80%

2.10

70%
60%

1.60

50%
40%

1.10

30%
0.60

20%

0.10

0%

10%
FY14

FY16E

FY20E

FY22E

Local Dispatches(LHS)

Export Discpatches(LHS)

Local contribution(RHS)

Export Contribution (RHS)

Source: Global Research

FY18E

Global
Pakistan Research
Daily Update

Exports shall continue to disappoint

We believe exports will continue to mar potential growth in total off-take for the
industry. Going forward, demand from Afghanistan will remain suppressed due
to global competition. Exports to India and South Africa remain at risk owing to
border tensions and anti-dumping duties, respectively. Another major threat to
the export market is the potential lift of sanctions from Iran, leading to lower
export volumes and margins. Quality conscious markets, however, may still
prefer Pakistani cement over Iran cement. Afghanistan comprises a major
portion of Cherat Cements exports as the company has the advantage of lower
transportation cost to the destination due to its plant location. We believe the
company will have to find other avenues to export cement or adjust lost sales
locally to maintain operating rates at viable levels. We have incorporated an
8% decline in exports every year going forward.
Estimated Industry Sales Mix
mn MT
12.00
10.00
8.00
6.00
4.00
2.00
0.00
FY02

FY04

FY06

FY08

Afghanishtan Exports

FY10

FY12

FY14

Total Exports

Source: Global Research

Mature price agreement likely to survive expansion wave

With the earliest plant expected to come online during 4Q FY17, we believe
any reaction to the expansions in the short term is unnecessary. In view of the
estimated increase in local volumetric sales (6-10% CAGR incorporated in the
model) due to growing demand on the back of increased PSDP, CPEC projects
and other pro-construction incentives passed in the FY16 budget, we anticipate
the industry will likely absorb a large portion of the 18% increase in the
industrys capacity by the time CHCC, DGKC, ACPL and LUCK plants come
online.
Table 3: Earnings sensitivity to price changes
FY18E

FY19E

FY20E

FY21E

FY22E

FY23E

FY18E

FY19E

Base Case

5.51

6.47

16.13

17.76

19.53

21.24

21.63

18.33

5% Decrease

4.46

5.60

12.40

13.77

15.13

16.44

16.84

14.06

10% Decrease

3.04

4.16

9.55

10.45

11.32

12.09

12.13

9.64

15% Decrease

1.61

2.71

6.70

7.13

7.51

7.74

7.43

5.22

Source: Global Research

Global
Pakistan Research
Daily Update

We expect the industrys overall capacity to jump from 46mn MT at present to

53mn MT by FY20. We, however, believe that the new plants may not operate
at full capacity as the estimated increase in supply is greater than the expected
off-take. Furthermore, looking at the past 5 years average capacity utilization of
the expanding companies and robust outlook on cement demand justifiy the
companies move to go forward with the expansion. During the last price war
scenario, average industry margins fell to 19% during FY10 compared to 36%
during FY15; hence, chances for cement companies to ruin this perfect
scenario by engaging in a price war are farfetched.
Estimated Industry Sales Mix
mn MT
55.0
50.0
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
FY01

FY03

FY05

FY07

Local Dispatches

Source: Global Research

FY09

FY11

FY13

FY15

Exports Dispatches

FY17E

FY19E
Capacity

Global
Pakistan Research
Daily Update

Key Ratios
Table 4: Financial Ratios
P/E

FY14

FY15

FY16E

FY17E

FY18E

FY19E

6.77

6.95

10.86

14.02

11.70

5.06

4.68

EPS (PKR)

7.0

7.5

7.3

6.2

7.4

17.2

18.6

EPS Growth

52%

7%

-2%

-15%

20%

131%

8%

P/BV

5.6

4.1

3.2

1.9

1.8

1.6

1.3

BVPS

21.0

27.5

45.4

49.6

55.1

68.8

83.4

DPS (PKR)

2.5

3.0

3.0

2.0

2.0

3.5

4.0

Dividend Yield

3%

3%

3%

2%

2%

4%

5%

ROE

33%

27%

16%

12%

13%

25%

22%

ROA

24%

24%

20%

14%

7%

6%

13%

Debt to Equity
EV
Energy Cost Per Ton

11:89

6:94

3:97

38:62

45:55

39:61

30:70

15,782

15,653

15,599

20,580

22,852

20,519

18,106

2,584

2,532

2,632

2,476

2,578

2,812

2,940

EV/EBITDA

8.11

7.92

7.86

9.08

7.85

4.54

3.82

Gross Margin

35%

33%

30%

34%

35%

35%

34%

EBITDA Margin

31%

31%

30%

34%

34%

34%

34%

Net Margin

20%

20%

20%

16%

15%

23%

23%

Source: Company Accounts, Global Research

FY13

Global
Pakistan Research
Daily Update

Financial Statements
Table 5: Cash Flow Statement
Net Income
D&A
Working Capital
Cash Flow from Operations
Interest expense
Capex
Investments
Free Cash Flow to Firm
Net debt
Interest expense
Free Cash Flows to Equity
Equity Issued
Net Cash Flow
Starting cash
Ending cash

FY13
1,228
251
(265)
1,744
109
433
(73)
1,493
(1,084)
109
300
(267)
33
38
71

FY14
1,316
261
1,088
489
29
195
61
262
(138)
29
95
(161)
(66)
26
17

FY15
1,288
276
(561)
2,125
38
3,745
203
(1,784)
(53)
38
(1,875)
1,874
(1)
17
18

FY16E
1,096
420
(384)
1,899
265
6,170
299
(4,304)
5,072
265
502
(353)
149
18
168

FY17E
1,313
605
412
1,506
607
3,397
(1)
(1,283)
2,759
607
870
(353)
516
109
625

FY16E
6,699
4,399
2,300
546
92
2,266
420
1,846
265
1,581
(485)
1,096

FY17E
8,554
5,592
2,963
657
2,911
605
2,306
607
1,699
(386)
1,313

FY18E
3,036
619
80
3,575
607
625
(1)
3,558
(341)
607
2,611
(618)
1,992
597
2,589

FY19E
3,286
619
162
3,744
521
625
(1)
3,641
(1,400)
521
1,720
(707)
1,013
2,588
3,602

Source: Company Accounts, Global Research

Table 6: Income Statement

Revenues
COGS
GP
SG &A
Other Income
EBITDA
Dep. & Amortization
EBIT
Fin. Cost
PBT
Tax
Net Income

FY13
6,294
4,104
2,190
511
15
1,945
251
1,694
109
1,585
(357)
1,228

FY14
6,451
4,349
2,103
463
77
1,978
261
1,716
29
1,688
(372)
1,316

FY15
6,565
4,582
1,984
476
201
1,985
276
1,709
38
1,671
(383)
1,288

FY18E
13,270
8,671
4,599
953
255
4,520
619
3,901
607
3,294
(258)
3,036

FY19E
14,037
9,275
4,762
1,006
359
4,734
619
4,115
521
3,594
(308)
3,286

Source: Company Accounts, Global Research

Table 7: Balance Sheet

Cash and Short term investments
Stores and Spares
Other Current Assets
PPE
Other LT Assets
Total Assets
Short Term Debt
Long Term Debt
Other Liabilities.
Accumulate Profit
Other Equity
Total Liabilities. and Equity
Source: Company Accounts, Global Research

FY13
26
968
527
3,427
116
5,065
237
204
915
2,753
956
5,065

FY14
1,259
1,181
351
3,362
278
6,431
99
163
1,304
3,813
1,051
6,431

FY15
618
983
509
6,831
522
9,464
88
122
1,228
6,260
1,766
9,464

FY16E
729
878
454
12,640
825
15,526
1,000
4,282
1,475
7,003
1,766
15,526

FY17E
1,555
1,597
447
15,461
1,357
20,417
800
7,241
2,647
7,963
1,766
20,417

FY18E
3,598
1,682
324
15,467
1,533
22,604
500
5,841
4,116
10,380
1,766
22,604

FY19E
4,672
1,784
482
15,473
1,505
23,916
500
4,441
4,249
12,960
1,766
23,916

Global
Pakistan Research
Daily Update

About the Company:

Incorporated in 1981, Cherat Cement is a premier name in the field of cement manufacturing, producing
high quality grey Portland cement using modern and sophisticated production facilities. The company
has a production capacity of 1,000,000 tons per annum and enjoys strong brand loyalty amongst its
customers both in Pakistan and abroad. The plant is located at Village Lakrai, District Nowshera, Khyber
Pakhtunkhwa (KPK) province. Due to plants geographical position, it is ideally located to export cement
to Afghanistan as well as to cater the local market needs in the KPK, FATA, Punjab and Azad Kashmir

Global Securities Pakistan Ltd.

th
4 Floor Muhammadi House|I.I. Chundrigar Road|Karachi|Pakistan|Tel: +9221 3245 7500
www.gslpk.com
This report has been prepared by Global Securities Pakistan Limited for distribution only under such circumstances as
may be permitted by applicable law, including the following: This report is intended solely for distribution to professional
and business customers of Global Securities Pakistan Limited. It is not intended for distribution to non-professional or
private investors. The report has no regard to the specific investment objectives, financial situation or particular needs of
any specific recipient. The report is published solely for informational purposes and is not to be construed as a
solicitation or an offer to buy or sell any security or options thereon. The report is based on information obtained from
sources believed to be reliable but is not guaranteed as being accurate, nor is it a complete statement or summary of
the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a
substitute for the exercise of their own judgment. Any opinions expressed herein are subject to change without notice.
Global Securities Pakistan Limited, and/or its directors, officers and employees may have or have had interests or
positions or traded or acted as market-maker in the relevant securities. Furthermore, they may have or have had a
relationship with or may provide or have provided corporate finance or other services to or serve or have served as
directors of the relevant Company. Global Securities Pakistan Limited accepts no liability whatsoever for any loss or
damage of any kind arising out of the use of all or any part of this report. Additional information will be made available
on request. Copyright reserved. No part of this report may be reproduced or distributed in any manner without the
written permission of Global Securities Pakistan Limited. Global Securities Pakistan Limited specifically prohibits the redistribution of this report, via the Internet or otherwise, to non-professional or private investors and accepts no liability
whatsoever for the actions of third parties in this respect.

10