Equity Analysis /

Lucky Cement: Q2 FY 20 analyst briefing takeaways and outlook

    Intermarket Securities
    30 January 2020

    Key result highlights

    • In Q2 FY 20, LUCK posted unconsolidated NPAT of PKR0.98bn (EPS: PKR3.03), down 67% yoy but up 3.2% qoq. The main reason behind the decline was (i) lower retention prices amid industry pricing indiscipline, (ii) increase in FED, and (iii) significant buildup in cost pressures due to gas and power tariff hikes. Q2 GMs of 15% are the lowest LUCK has posted in recent times. 
    • On a consolidated basis, LUCK reported Q2 FY 20 NPAT of PKR1.94bn (EPS: PKR6.0), down 32% yoy and up 52% qoq. The decline in earnings is mainly attributable to (i) dismal core cement profits, and, (ii) potentially larger losses on its JVs abroad. But, it is better than Q1 FY 20, owing to an exceptional result posted by its subsidiary ICI Pakistan and Kia-Lucky Motors becoming profitable.

    Business performance and outlook 

    • The company has successfully commissioned its new capacity of 2.8mn tpa in Pezu by end of December 2019, which is presently operating at nearly full utilization level.
    • Overall, its market share has fallen by 1ppt in Q2 FY 20, as other players have been offering discounts to grab market share. But after Pezu’s new capacity, LUCK’s management is optimistic about increasing its market share, commensurate with its total capacity.
    • Current retail price of cement (MRP) is around PKR450-460 per bag. The management expects pressure on prices to remain in the coming months, in our view.
    • LUCK expects industry total dispatches would grow by 3-4% in FY 21f (owing to low base effect from dim FY 20 sales).
    • LUCK has geared up ammunition to mitigate unfavorable regulatory changes. Reinstatement of the CNIC condition for dealers (by February 2019) would not materially affect LUCK’s sales as most of its dealers are registered. Moreover, when Axle load will be implemented again, LUCK will not face significantly higher transportation costs, as it has been upgrading its logistics network by adding its own fleet.
    • LUCK’s automobile venture, Kia Lucky Motors (KLM) has begun turning profits during Q2 FY 20 and it is selling around 500-600 units per month. Note that KLM has become profitable in just two months of operations, which is contradictory to market’s expectation of multiyear of losses; this is a testament of healthy demand and operational efficiencies of KLM, in our view.
    • The company is satisfied with the progress of its coal based power plant. Until December 2019, about PKR12bn has been invested and further PKR12bn will be invested in future. Major shipment of plant and machinery is due in Q3 FY 20. The plant is targeted to be online by Q3 FY 21.
    • Iraq’s operation have relatively improved. LUCK’s plant is situated in the South, while poor law and order conditions have affected the North of the country. LUCK is on track to commission its integrated cement plant in Iraq by Q2 FY 21. 
    • Their DR Congo cement plant is also performing better. Current price of cement are US$125/ton and its gross margins have also improved to about 30%.