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Cement sector outlook linked to property boom

Cement sector outlook linked to property boom

Cement is the most important component of the construction industry. Any hike in coal price contributes towards hike in cement price. At times, manufactures are able to pass on the increase in cost of cement to buyers, but at times, which sales are lean, passing on the cost may not be possible.

Anticipating the hike in construction cost is important not only for the construction companies, but also for the financial institutions in the business of mortgage finance. If the actual hike beats, the estimates, construction face the doubled-edged soward, on one hand pace of work slows down due to liquidity crunch and on the other hand recovery of the addition cost drags the completion time.

According to a report by Pakistan’s leading brokerage house, Topline Securities, cement companies included in its universe are expected to post earnings growth of 6%QoQ for 2QFY22 due to increase in cement dispatches by 19%QoQ. Net sales of the companies are anticipated to grow by 20% QoQ.

However, gross margins are anticipated to fall by 277bps to 23% for 2QFY22 due to higher coal prices and lower than corresponding increase in cement prices.

Total local dispatches during the period under review mostly remained flat on a YoY basis to 12.8 million tons, primarily driven by higher base effect given the pent up demand from COVID-19 as compared to last year. Along with this, rainy season coupled with transporters strike in 1QFY22 led local dispatches to a growth of 13%QoQ.

Aggregate exports witnessed a drop of 17%YoY, but rose at 19%QoQ. Exports recovery during the quarter was due to freefall of sea freight cost, evident from the Baltic Freight index that peaked in October 2021 and hence converged to its normal level in the later period of 2Q.

During 2QFY22, coal prices grew by 16.8%QoQ to US$163/ton. Our channel checks suggest local cement players’ imported coal cost fell in the range of US$120 US$160/ton. The cement industry has also used Afghan and local coal during the period to somehow dilute the cost pressure. Nevertheless, margins compression on a QoQ basis could not be ruled out due to higher coal cost.

The industry was successful in partially passing on this cost impact, whereas average cement prices in North during 2QFY22 increased to Rs723/bag, as against Rs659/bag in 1QFY22. Similarly, average cement prices in the South increased to Rs745/bag, as against Rs680/bag in 1QFY22.

The brokerage house has a market-weight stance on Pakistan Cement sector with Luck Cement (LUCK) and Maple Leaf Cement (MLCF).

Topline cement universe is expected to witness a marginal growth in quarterly profit of 6%QoQ. Increase in cement profitability is mainly driven owing to uptick in overall dispatches, partial cost pass on and use of local and Afghan coal in fuel and power mix.

Lucky Cement (LUCK) is expected to post consolidated EPS at Rs20.8 for 2QFY22, wherein unconsolidated EPS is likely to come in at Rs9.8 (down 3%QoQ) due to the lower margins led by cost pressure despite a jump of 8%QoQ in overall dispatches of the company. As per brokerage estimates, LUCK is one of the producer which has used less local and Afghan coal, around 5% to 10% in its overall mix during the period.

Kohat Cement (KOHC) is likely to post EPS of Rs6.9 for 2QFY22, flat QoQ. KOHC also used 30% of Afghan and local coal in its fuel and power mix which has diluted the impact on margins.

Fauji Cement (FCCL) is anticipated to post EPS of Rs0.9; down by 8%QoQ despite the volumetric sales of the company rising by 6%QoQ closed to one million tons. Brokerage house expects gross margin to contract to 24% in 2QFY22 as against 30% for 1QFY22. FCCL has also used Afghan and local coal to 20% in its overall energy mix.

  1. G. Khan Cement (DGKC) is expected to post EPS of Rs3.1, significantly up by 50%QoQ given its strong dispatches growth of 43%QoQ. Local dispatches grew by 15%QoQ whereas exports reached 700,000 tons.

Maple Leaf Cement (MLCF) is likely to post consolidated EPS of Rs1.00, up by 37%QoQ. Volumetric sales of the company are anticipated to rise to 1.2 million tons (up 7%QoQ). MLCF has also used 20% local and Afghan coal which bodes well for the company.

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TPL Properties

TPL Properties (market cap of Rs12 billion/US$70 million) is a property development arm of TPL Corporation engaged in the business of real estate development, development management, asset management and property management.

Centrepoint was company’s first property project which was completed in 2013 and has been sold in May 2021 against sales proceeds of Rs7.7 billion, generating an IRR and ROI of 22% and 130%, respectively.

The proceeds from the sale of Centrepoint have been used for the retirement of debt and development of new upcoming projects.

TPLP is currently developing three projects including One Hoshang, Technology Park, and Mangrove.

Under the current corporate structure of TPLP, the Company holds these three projects, TPL Property Management, TPL REIT Management Company (TPL RMC), and TPL logistics Park. The Company is planning to launch Pakistan’s first Hybrid REIT Fund which will be managed by TPL REIT Management Company (TPL RMC) and all the three projects will be transferred to TPL REIT Fund.

SECP has registered and approved the REIT scheme and the company is aiming its financial close soon.

The initial fund size of REIT is expected to be Rs19 billion with a target fund of US$500 million. TPLP will be a strategic owner in REIT fund as the Company plans to invest around 40% in the REIT fund as a unit holder. It will also hold 100% of TPL RMC and will get 1.5% of Net Asset Value of the fund and 15% of performance fee.

One Hoshang is a Luxury Residential tower covering 280,000 square feet of residential and retail space located at Hoshang Road, Civil lines, Karachi. Technology Park is a tech park being developed in Korangi industrial area, Karachi which will include offices and business hotels covering 600,000 square feet. “Mangrove” is a Mid-rise waterfront multiple towers project having a built-up area of over 10 million square feet in Korangi, Karachi currently under development.

Pakistan’s growing population, increasing urbanization, and favorable taxation regime is driving growth in construction and property sector of Pakistan. The government and central bank has announced various incentives schemes for construction sector that have led to increased demand.

These incentives include concessional financing schemes, increased housing finance targets for commercial banks, tax relaxation for REIT schemes etc. Pakistan property plot index has grown at a 10-Year (2012-2021) CAGR of 14% as per It was also one of the best performing asset class in Pakistan in 2021 posting return of 23%.

Key risks for the company include: 1) project completion delay, 2) delay in regulatory approvals, 3) regulatory changes that impact REIT and real estate sector and 4) macroeconomic slowdown.[/box]

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