August 2010

Cement Sector

LUCKY CEMENT
LUCK: RIDING ON EXPORT

Company Update
URL: www.we.com.pk
 Follow us on Twitter
http://twitter.com/weonlinebiz
Join our group on Facebook
http://facebook.com/group.php?gid=277011316824
Company Update

Luck: Riding on Export

Continuation of coverage with BUY stance on LUCK with 16% upside
potential

We continue our detailed coverage on Lucky Cement Company (LUCK) with

a DCF value of Rs 77.2/share. We like LUCK due to 1) timely expansion giv-
ing Company an edge 2) export market share of more than 30% 3) simulta-
neous Presence in both Northern and Southern region of the country 4)
attractive price multiples (it is currently trading at FY11 PER and PBV of
KEY DATA
5.98x & 0.72x). We recommend 'BUY' on LUCK.
KATS code LUCK
Reuters code LUCK.KA Coal encompass more than 60% of Total cost
Current price (Rs) 66.79
Year high, low (Rs) 84.31, 58 During the period FY11 cement sector of Pakistan to remain under pressure
Year ADV (mn) 2.1 because of sharp surge in the international coal prices during 2HFY10. The
Adjusted Beta 1.2 coal price contributes more than 60% of total cost & such a high surge in
Market cap (RS'bn) 21.54 coal prices is main concern for whole industry as well as for Lucky.
Market cap (US$ mn) 252
Shares outstanding (mn) 323
Free float (%) 40
Major shareholder Younus Brothers
Fair value (Rs) 77.2
Upside potential (%) 16

Index Price Relative to KSE 100 Index PKR

10,500
100 Scenario Analysis (Coal vs. EPS)
80
9,000
60
Optimistic-case Base -case Pessimistic-case
7,500
Coal price per ton
6,000 40
(Landed-Cost) $ 145 155 165
4,500 20
EPS-FY11 12.42 11.60 10.78
May-09

Jul-09
Aug-09

Aug-10
May-10

Jul-10
Feb-10
Mar-10
Jan-09
Feb-09
Mar-09
Apr-09

Jun-09

Sep-09
Oct-09
Nov-09
Dec-09

Apr-10

Jun-10
Jan-10

Source: WE Research
KSE 100 INDEX LUCK
Market share to remain 20% during FY11

The market share of LUCK during the FY08 stands at 16% & 23% on the
local & export front respectively, however its exports market has improved a
lot to the level of 33% during FY10. Whereas we expect the company's mar-
ket share will boost to the extent of 20% of total cement dispatches of the
country by the end of FY11 (currently stands at 19% in FY10).

Risk to our valuation

Risk to our valuation include 1) expected price per bag to decrease due to
Supply glut 2) increase in political wrangling in Pakistan to raise country risk
3) Delay in construction of water reservoirs by the new political democratic
set-up.

Scenario Analysis (10PIB vs. fair value)

Optimistic-case Base -case Pessimistic-case

10 Yr PIB 12.5 13.00 13.5
Fair value (Rs per share) 82 77.2 73.5
Source: WE Research

WE RESEARCH IS AVAILABLE ON THOMSON REUTERS & BLOOMBERG

2
 Follow us on Twitter
http://twitter.com/weonlinebiz
Join our group on Facebook
http://facebook.com/group.php?gid=277011316824
Company Update

Valuation remain terrific

LUCK with Fair value of PKR 77.2/ share offering an upside potential of
15.6% from current level. We have value LUCK on Discounted cash flow
method (DCF). Trading at FY11E PER of 5.98x, with estimated ROE of
13.31 for the period FY11, we believe LUCK trades at a discount to its worth.

FY09A FY10A FY11F FY12F

EPS (Rs) 14.21 9.70 11.60 10.98
Book value (Rs/share) 71.90 77.60 88.80 97.25
DPS (%) 4.00 4.00 3.50 4.00
PE (X) 4.70 6.89 5.76 6.08
P/BV (X) 0.93 0.86 0.75 0.69
Dividend Yield (%) 6.0 6.0 5.2 6.0
Dividend Payout (%) 28.1 41.2 30.2 36.4
Source: Company reports & WE Research

Sales revenue to remain lackluster going forward

Net sales revenue of the company is
expected to touch Rs. 28.6 billion during
FY13
Net sales revenue of the company is expected to touch Rs. 28.6 billion dur-
ing FY13 which will be the highest revenue stream in the form of net sales
by LUCK. However net sales of the company have remained weak during
the past couple of years owing to the domestic dreary cement prices.

Cement dispatches of the company to remained dreary

Going forward we expect cement dispatches of the company to remain drea-

ry primarily due to the above mentioned reason of lower exports volumes
due to the massive regional expansion. However cement dispatches on the
local front is expected to remain balanced on the back of government con-
tinued focus on infrastructure development and work on the floods effected
areas to boost local cement consumption.

Vertical integration to bright the future

Lucky has also made an arrangement with the European company to extract
coal locally from the Thar coal field (the largest coal field in Asia). However
we expect it to be positive for the company in the longer run as 5% lower
coal cost boosts company's EPS by 9%. Moreover as per our estimation
extraction cost should not be more than $10 per ton if extract in bulk, thus
around 5% of cost saving in the present scenario and is expected to
increase further, as extraction cost tend to decrease with the passage of
time.

Power sale agreement is also another diversification strategy

Lucky Cement Company is the largest cement producer of the country,

expanding its wings to the huge different contracts such as 10-year agree-
ment of power sale with KESC having strapped facility. The company's
power sale agreement with KESC is a take and pay agreement of 49.5MW
power supply from its Karachi plant. Sale is expected to start from the start
of FY11 with the link to Lucky's power generation unit to KESC's grid in
Karachi. However we expect the company will be able to supply only 30MW
of excess power utility to KESC out of its total power capacity of 95MW in
the South.

WE RESEARCH IS AVAILABLE ON THOMSON REUTERS & BLOOMBERG

3
 Follow us on Twitter
http://twitter.com/weonlinebiz
Join our group on Facebook
http://facebook.com/group.php?gid=277011316824
Recurring Earnings of the company will
grow at a 3 year CAGR of 7% to Rs 3.5
billion as against Rs 3.1 billion in FY10
mainly due to lower base effect in FY10
earning
WE RESEARCH IS AVAILABLE ON THOMSON REUTERS & BLOOMBERG
Company Update
Earnings are expected to grow at 3-year CAGR of 7%
Recurring Earnings of the company will grow at a 3 year CAGR of 7% to Rs
3.5 billion as against Rs 3.1 billion in FY10 mainly due to lower base effect
in FY10 earning. We have positive stance on the company owing to its
simultaneous presence in both the region of the country as well as proximi-
ty to sea is another major advantage for the LUCK.
Source: Company Reports & WE Research
Rs in million Profit after Taxation
4,500
4,000
3,500
3,000
FY09A FY10A FY11F FY12F
Source: Company Reports & WE Research
Closure of PEZU plant operated on 9th August.
As per news reports, production at Lucky Cement's Pezu plant has been
halted for 5 days (23rd July to 28th July) after 50 unauthorized persons, who
claim to be union leaders, have infiltrated the premises. However as per our
discussion with management the plant is operational from Monday 9th
August, 2010. As per discussion and analysis out of 15 days closure the
working days was around 12 and as per 300 working days in a year the com-
pany has around 65 reserve day to adjust orders and incidental shifts. We
expect it to be Neutral for company's profitability in FY11 except lower
cement dispatches in the month of July only.
4
 Follow us on Twitter
http://twitter.com/weonlinebiz
Join our group on Facebook
http://facebook.com/group.php?gid=277011316824
the recent floods in the country have
destroyed the hopes of 4.5% GDP
growth. We have now revised our GDP
growth assumption to 3% for FY11
WE RESEARCH IS AVAILABLE ON THOMSON REUTERS & BLOOMBERG
Company Update
Sector update
Cement consumption strongly correlated with country's core funda-
mentals
Cement consumption & GDP growth are strongly correlated variables all
over the world. Pakistan has also emerged as one of the developing nations
during FY00-07 attained sustainable growth rates in the range of 5% - 8.5%.
After that global economic crisis has destroyed the country core fundamen-
tals, however some recovery have witnessed during the past few months but
the recent floods in the country have destroyed the hopes of 4.5% GDP
growth. We have now revised our GDP growth assumption to 3% for FY11.
Sector's eminence by the end of FY10
Pakistan's extensive cement sector consists of 25 cement companies.
These companies are operating with a combined 29 cement plants. Out of
these plants, 19 are located in the northern region of the country and
remaining 10 are located in southern region.
The total production capacity of the cement sector stands at 44.82 MTPA
(million tonnes per annum) as per data issued by APCMA. Going forward,
this capacity will increase during FY11, owing to expansions undertaken by
Fauji cement and Gharibwal Cement (GWCL), all based in the northern part
of the country. Taking cue from that, we estimate total capacity of the indus-
try to touch 47.5 MTPA during the current year FY11-FY12.
In light of this, Pakistan's leading producers such as Lucky Cement (LUCK),
DG Khan Cement (DGKC) and Attock Cement (ACPL) have taken a first
mover advantage by undergoing expansions and they are in line with tap-
ping local demand as well as export opportunities emanating from
Afghanistan, UAE, far east and African countries.
5
 Follow us on Twitter
http://twitter.com/weonlinebiz
Join our group on Facebook
http://facebook.com/group.php?gid=277011316824
PSDP to remain driver again in FY11 due
to the government focus on small Dams,
infrastructural development and construc-
tion and rehabilitation work on floods
affected areas.
There are 29 cement units working which
are producing 44 million tonne per annum
WE RESEARCH IS AVAILABLE ON THOMSON REUTERS & BLOOMBERG
Company Update
Demand drivers
1) Local cement demand has grown by 1.6x the GDP growth over the last
ten years.
2) Housing demand.
3) Government's spending on development-related projects.
4) Relatively price inelastic, so price not a major demand influencer.
5) Standardized product.
Cement consumption strongly correlated with country's core funda-
mentals...
Cement consumption & GDP growth are strongly correlated variables all
over the world. Pakistan has also emerged as one of the developing nations
attaining sustainable growth rates in the range of 5% - 8.5% since FY00. For
FY11, we expect the country to attain GDP growth of 3.0%.
Housing growth to spur consumption going forward
According to public sector based House Building Finance Corporation
(HBFC) figures, the average population per housing units in Pakistan is
approximately 9 people per housing unit as compared to the global average
of around 6 persons per housing unit. The units required for a population of
165 mn, Pakistani should have 27.5 mn housing units, an addition of 6.7 mil-
lion to the current 20 mn units. We anticipate an increase in per capita
income that will translate into construction of at least 6 - 7 mn homes.
This aspect is facilitated by banking sector's renewed mortgage finance
business. At present this business is merely less than 1% of GDP in
Pakistan (total size of mortgage liabilities is nearly Rs 55bn) as against 3%
- 4% in neighboring India. Banking industry is aiming for a target of at least
Rs 300 bn till FY11-12 under the guidance of State Bank of Pakistan and
International Finance Corporation (IFC).
PSDP allocation & disbursement- key to cement consumption
At present Pakistan's PSDP program accounts for nearly 45% of the total
domestic cement consumption. Government's increased focus towards
infrastructure development in the country over the last few years has also
given impetus to our assertion. It has been a main driver of cement con-
sumption in recent years. However PSDP cut and its disbursement
remained a major cause of concern during FY10. We expect PSDP to
remain driver again in FY11 due to the government focus on small Dams,
infrastructural development and construction and rehabilitation work on
floods affected areas.
Pakistan per Capita Consumption
Pakistan currently has a per capita consumption of 135kg cement which is
comparable to that of India's 150kg per capita. However it is just a third of
China's but substantially below the world average of 300kg and the region-
al average of over 400kg for peers in Asia and over 600kg in the Middle
East.
6
 Follow us on Twitter
http://twitter.com/weonlinebiz
Join our group on Facebook
http://facebook.com/group.php?gid=277011316824
We expect cement dispatches of the
county is expected to remain stagnant
YoY in FY11 to 34mn tons (local sales of
25mn tons and export sales of 9mn tons).
The primary reason behind stagnant
sales is expected drop in cement exports
due to massive regional expansions
TDAP has announced 35% subsidy on
inland freight subsidy on sea routed
exports in April. However we do not
expect it's to continue going forward
owing to the government budgetary con-
straints on the revenue side
WE RESEARCH IS AVAILABLE ON THOMSON REUTERS & BLOOMBERG
Company Update
Global Cement Production: Pakistan yet to make its mark
Pakistani cement sector is still not in world ranking because of low per pro-
duction capacity and its utilization. Currently there are 29 cement units work-
ing which are producing 44 million tonne per annum. But our neighboring
countries China and India are on the 1st and 2nd rank in Asia with 900 mil-
lion tonnes and 185 million tonnes per annum. If we go through world com-
parison USA, Japan and Russia ranked below India and China.
Cement profitability to boost in FY11
We expect cement dispatches of the county is expected to remain stagnant
YoY in FY11 to 34mn tons (local sales of 25mn tons and export sales of 9mn
tons). The primary reason behind stagnant sales is expected drop in cement
exports due to massive regional expansions. On local cement consumption
we expect it to grow significantly on the back of improvement in private sec-
tor construction activities and construction and rehabilitation work on floods
effected areas with construction work on small dams.
Sales tax increase to pass through easily
In the recent budget sales increase in the GST by 1% to 17% is expected to
pass through to the end users easily (i.e. Rs 2.5/bag). On the other hand
lower cement prices is an issue for the small and inefficient producer where
they cannot compete with the giants Lucky and DGKC.
FED on gas is not a worry for cements
Enhancement in the rate of FED from 5.09% to 10% (per MMBTu) on natu-
ral gas is neutral for the cement sector owing to no gas allocation to cement
plants in the country and the sector is fulfilling its 90% percent of energy
requirement form coal.
Inland freight subsidy if continued may be a trigger
In the budget FY11 the topic of inland freight subsidy totally eliminated. The
TDAP has announced 35% subsidy on inland freight subsidy on sea routed
exports in April. However we do not expect it's to continue going forward
owing to the government budgetary constraints on the revenue side. On the
other hand if TDAP continues with the current inland freight subsidy in FY11
it will boost the country's cement exports routed through sea.
7
 Follow us on Twitter
http://twitter.com/weonlinebiz
Join our group on Facebook
http://facebook.com/group.php?gid=277011316824
Company Update

FY10 Result Review

Lower domestic prices keep FY10 in dark

The primary reason behind massive earn-
ings decline is owing to dreary domestic
prices during the 1HFY10 which resulted
in a YoY lower retention prices for the
company
Lucky Cement Company Limited (LUCK) announced its results for FY10.
The company posted after tax earnings of Rs 3,137 million (EPS; 9.70 per
share) as compared to Rs 4,596 million (EPS; 14.21 per share) in FY09. The
company has also announced cash dividend of Rs 4.0/share i.e. (40%), is
highest payout ratio in the company's history which is around 42%. The pri-
mary reason behind massive earnings decline is owing to dreary domestic
prices during the 1HFY10 which resulted in a YoY lower retention prices for
the company. The domestic prices during the 1HFY10 as remained as low
as Rs 235/bag at the retail level in the North. Moreover the volumetric sales
of the company grown significantly by 12.3% to 6.63 million tons for FY10
(26% increase in local sales and 2.2% increase in exports).

Sales revenue remained stagnant

Top line of the company has showed a
decent performance over all with the
sales revenue declined by nominal 6%
during FY10 to Rs 24,508 million as
against Rs 2,6330million during FY09
Top line of the company has showed a decent performance over all with the
sales revenue declined by nominal 6% during FY10 to Rs 24,508 million as
against Rs 2,6330million during FY09. The major cause behind this stagnant
sales revenue despite 12% increase in volumetric sale is only because of
lackluster cement prices on domestic level (Net retention prices for domes-
tic sales remained around Rs 3,320 per ton on average for Lucky cement
during the FY10).

Production and other cost showed balance

Cost of sales during the FY10 remained poise as during the same period
last year to Rs 16,529 million as compared to Rs Rs 16,519 million during
FY09. Such stable cost of sales is mainly because of lower coal prices YoY,
while increase in volumetric sales to balance the cost of production to FY09
level. Moreover the distribution cost of the company boosted by massively
due to increase in company's inland transportation cost and ocean freights.
On the other hand delay in the disbursement of inland freight subsidy funds
also resulted in a massive increase in distribution cost. In the end finance
cost of the company showed decent improvement because of the compa-
ny's switching to low cost export refinance.

Rs in million FY10A FY09A YoY

Net Sales 24,508 26,330 -6.92%
Cost of Sales 16,529 16,519 0.6%
Gross Profit 7,978 9,811 -18.68%
Operating Profit 4,242 7,217 -41-22%
Financial Charges 569 1,236 -53.96%
Profit before Taxation 3,417 5,177 -33.99%
Profit after Taxation 3,137 4,596 -31.74%
EPS (Rs) 9.70 14.21 -31.74%
Source: Company Report

Outlook and Recommendation

Lucky cement is one of the largest cement manufacturers in the country with
the added advantage of simultaneous presence of both the regions of coun-
try. We expect the ongoing development of waste heat recovery in the com-
pany's plant and other business diversification to boost the company's mar-
gins in the sky during the years to come. We maintain our Buy rating on the
Lucky cement with 1-year target price of Rs 77.2/share.

WE RESEARCH IS AVAILABLE ON THOMSON REUTERS & BLOOMBERG

8
 Follow us on Twitter
http://twitter.com/weonlinebiz
Join our group on Facebook
http://facebook.com/group.php?gid=277011316824
Company Update

Assumption Summary
FY2009A FY2010 FY2011F FY2012F
Dispatches Forecast
Local Dispatches (mn-tons) 2.46 3.12 2.76 3.12
Exports Dispatches (mn-tons) 3.4 3.51 2.95 2.65
Cement prices Assumptions
Gross Local prices (M.tons) 6106 5050 5275 5578
Exports Prices (US$/ton) 53.5 51 53 55
Coal Prices Assumptions
C&F Coal (US$/ton) 106 88 98 110
Economic assumption
Inflation (%) 20.77 11.73 12.4 11.2
Exchange Rate average (US$) 78.96 84.55 89.5 93.5
Source: WE Assumptions

Background
Lucky Cement Limited was incorporated in Pakistan on September 18, 1993
under the Companies Ordinance, 1984 (the Ordinance). The shares of the
company are quoted on all the three stock exchanges in Pakistan. The
Company has also issued GDRs which are listed and traded on the
Professional Securities Market of the London Stock Exchange. The principal
activity of the company is manufacturing and marketing of cement. The com-
pany has two production facilities one at Pezu, District Lakki Marwat in
Khyber Pukhtunkhwa and the other at Main Super Highway in Karachi,
Sindh.

WE RESEARCH IS AVAILABLE ON THOMSON REUTERS & BLOOMBERG

9
 Follow us on Twitter
http://twitter.com/weonlinebiz
Join our group on Facebook
http://facebook.com/group.php?gid=277011316824
Company Update

Financials
Income Statement

Rs in million FY09A FY10A FY11E FY12F

Net Sales 26,547 24,508 24,583 25,666
Cost of Sales 16,519 16,529 16,233 17,814
Gross Profit 10,027 7,978 8,349 7,851
Selling & Admin Expenses 2,594 3,736 2,704 2,480
Other Income 23 2 118 (47)
Other Charges 827 257 520 506
Profit before Taxation 5,177 3,417 4,676 4,556
Taxation 580 280 924 1,005
Profit after Taxation 4,597 3,137 3,752 3,551

Balance Sheet

Rs in million FY09A FY10A FY11E FY12F

Share Capital 3,234 3,234 3,234 3,234
Total Equity 23,252 25,095 28,719 31,451
Non-current Liabilities 6,042 3,572 3,337 2,762
Current Liabilities 9,043 9,641 5,117 4,092
Total Liabilities & Equity 38,337 38,310 37,173 38,305
Non-current Assets 30,479 31,438 29,774 29,068
Current Assets 7,858 6,871 7,398 9,237
Total Assets 38,337 38,310 37,173 38,305

Cash Flow Statement

Rs in million FY09A FY10A FY11E FY12F

Cash from operation 8,422 4,247 4,942 4,557
Cash from Investing activities -5,788 -1,377 -510 -541
Cash from financing -1,855 -2,241 -4,494 -2,924
Net Change in cash 779 629 -62 1,092
Beginning Cash Balance 270 1049 1679 1617
Ending Cash Balance 1049 1679 1617 2709

Key Ratios Analysis

Key Ratios FY09A FY10E FY11F FY12F

EPS 14.21 9.70 11.60 10.98
DPS 4.00 4.00 4.00 4.00
PER (x) 4.70 6.89 5.76 6.08
PBV (x) 0.93 0.86 0.75 0.69
EV/ton (USD) 55.3 44.0 36.7 31.4
Gross Margin 37.8 32.6 34.0 30.6
Operating Margin 28.0 17.3 23.0 20.9
EBITDA Margin 28.7 22 26.5 23.6
Pretax Margin 19.5 13.9 19.0 17.8
Net Margin 17.3 12.8 15.3 13.8
Return on Fixed Assets 16.2 11.6 12.7 12.3
ROE 19.8 12.5 13.1 11.3
ROA 12.0 8.2 10.1 9.3

WE RESEARCH IS AVAILABLE ON THOMSON REUTERS & BLOOMBERG

10
 WE Financial Services
Corporate Office:
1112-1115, Eleventh Floor, Park Avenue,
24-A, Block 6, P.E.C.H.S.
Karachi - 75400
Tel: (92 21) 455-2886, 455-2846 455-2889
Fax: (92 21) 452-3048
URL: www.we.com.pk
E-mail: info@we.com.pk

Our Network
Sargodha Branch
1st Floor Ala Ahmed Plaza
University Road
Sargodha.
Tel: (92 048) 3017377
Fax: (94 048) 3769961

Jauharabad Branch
236-B, Main Bazar College Road
Jauharabad, District Khushab
Tel: (92 454) 723357-58
Fax: (92 454) 721927

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accu-
rate and reliable at the time of publishing. However, we do not accept any responsibility for its accuracy & completeness and
it is not intended to be an offer or a solicitation to buy or sell any securities. WE Financial Services & its employees will not
be responsible for the consequence of reliance upon any opinion or statement herein or for any omission. All opinions and esti-
mates contained herein constitute our judgment as of the date mentioned in the report and are subject to change without notice.

URL: www.we.com.pk