Bangladesh cement: Preferential tariff discontinued; Low impact on valuation

  • LHBL to pay BDT902.5mn on account of the pending gas bills; the company opted for arbitration proceedings
  • The new tariff would cost LHBL an extra fuel expense of around BDT500.4mn per annum
  • c3% negative impact on our valuation

LHBL to pay BDT902.5mn on account of the pending gas bills. The Honourable Court directed LHBL to pay the disputed amount to Jalalabad Gas Transmission & Distribution Systems Ltd. (JGTDS). The dispute started when both of the parties formed different interpretations regarding the gas tariff, resulting in JGTDS demanding BDT10.7 per cubic meter for gas consumption in cement manufacturing plant instead of BDT7.8 per cubic meter, a preferential rate that LHBL expected to enjoy till 16 January 2026.

The new tariff would cost LHBL an extra fuel expense of around BDT500.4mn per annum. As of CY20, LHBL paid BDT1,886mn for gas fuel expenses. As LHBL starts paying the new tariff directed by the Court, there would be additional BDT500.4mn fuel expenses per annum. On an after-tax basis, the impact would be BDT378.0mn additional cash outflow per annum.

However, LHBL has opted for arbitration proceedings. The arbitration proceedings are currently ongoing before an Arbitration Tribunal under United Nations Commission for International Trade Law (UNCITRAL) Rules. During the interim period, LHBL will pay all payments set by the Court’s directive which includes BDT902.5mn pending gas bills and BDT500.4mn additional fuel expenses. However, when the arbitration continues under UNCITRAL, LHBL is likely to report the amounts as “advance payment receivable” in its balance sheet instead of making a provision in the income statement.

c3% negative impact on our valuation. Previously our valuation incorporated the impact of higher gas tariff (BDT10.7/cubic meter) from 2026 and onwards. For the 2021-25 period, we considered BDT7.8/cubic meter. Now that the Court has directed LHBL to pay the pending gas bills and consider higher tariffs from now on, it will result in an additional cash outflow of BDT2,775mn (BDT2.4/share) during the 2021-25 period. In terms of earnings, if LHBL provisions the amounts in the income statement, our EPS estimation would revise down from BDT3.16 to BDT2.48 (-22%) in 2021 and from BDT4.02 to BDT3.35 (-17%) in 2022. We incorporate the impact in our valuation, suggesting a downward revision in valuation from BDT58 to BDT56 (-3.4%). Our updated TP offers ETR -2.8% and therefore we reiterate HOLD. We also note that should LHBL win the arbitration, there would be an upward reversal in valuation by a similar amount.

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