Dear Clients,

Lucky Cement (LUCK) held its conference call today to discuss the financial results of 9MFY21 and provide an outlook for the ongoing quarter. LUCK posted standalone 3Q earnings of PKR 7.1bn (EPS: PKR 22.10), up 5x YoY, taking 9MFY21 earnings to PKR 11.7bn (EPS: PKR 36.14). While improvement in domestic cement demand can be inextricably linked to increase in profitability, another key highlight in unconsolidated statement is the dividend income from Lucky Motors Corporation (LMC).

On a consolidated basis, 9MFY21 earnings are up 3x YoY to PKR 23.1bn largely owing to turnaround in domestic cement operations and improved performance of chemicals (Polyester Staple Fibre – PSF) and automobiles (LMC – KIA Motors).

Key takeaways

– The management continued to foresee robust activity based on construction amnesty scheme, subsidized housing, multipurpose dam construction and hydropower projects. Mohmand dam construction has initiated with labour housing activity starting on the outskirts of the project

– SBP has also printed a promising number lately with additional housing to the tune of PKR 52bn over the last few months

– It is noteworthy that owing to slow demand in South region, LUCK ended up exporting clinker from Karachi plant to attain a higher utilization. The company has ended up losing capacity share in South owing to new plant commissioning (POWER)

– During 9MFY21, the gain of nearly PKR 8.75bn in earnings during 9M can be bifurcated into PKR 5.3bn from additional volume, PKR 3.25bn from improved prices, and PKR 1.86bn from efficient coal management

– LUCK continues to witness demand growth not only in the cement or auto sector, but also in chemicals based on the pent up demand in textile i.e. polyester staple fiber

-One key highlight is the first dividend in standalone financials from LMC from its profitable KIA sales, which augurs a high amount of additional income even though management categorizes it a non-recurring item

– An industry wide improvement was witnessed in all business segments during 9MFY21 with Cement rising 38%, Chemicals 7%, Automobile 255% and Others 183%

– Hinting towards expectations of a tighter fiscal environment ahead, already in place from reinstatement of intercorporate dividend tax, management still looks towards tax exemptions for new investments as the best case scenario

– The increase in COVID19 cases and possibilities of spread from the neighbour India has been a cause of concern for the management. Any spike in cases will shift business dynamics abruptly, going forward

– LUCK had an advantage of holding USD 56-57/ton of coal inventory during 3Q which has kept its costs at the lower end. Landed cost of coal currently hovers USD 100/ton and may likely average USD 90/ton in 4Q, denting margins slightly

– Disrupted supply of gas at its Pezu plant has increase the expensive FO consumption with company billing nearly PKR 100-115 per month at an FO price of PKR 60-65k per ton

– The company has availed TERF and LTFF for its 3.15mnMT expansion at Pezu (North). These facilities are not limited to line 2 at Pezu but also taken against improvement and upgradation of power projects at the site. The weighted average financing cost of nearly PKR 21bn of loans is a meagre 2.5%

– Automobiles continue to show promising growth with increasing market share and the agreement with Stellantis (Peugeot) coming to fruition. As per the management, recently launched KIA Sorento has received an overwhelming response

– International operations in Iraq have improved by a third over 9MFY21 while the company has also commissioned its new 1.2mnMT capacity in Al Salamwah, Iraq

– The company believes the ongoing quarter will not be as good as the 3Q, especially if there are countrywide lockdowns and coal continues to hover c. USD 100/ton. However, we expect Naya Pakistan Housing Scheme to have a continued positive impact on domestic operations

– The commissioning of Lucky Energy’s (LEPCL) 660MW coal fired is on the horizon (target Aug’21) where the company has invested equity to the tune of PKR 24.3bn till date with remainder equity of PKR 2.0bn to be injected in the coming months

We currently have an Outperform stance on LUCK with a target price of PKR 1,008/share. We are in the middle of revising our investment case and await company accounts to update.

Regards,
KASB Research