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Lucky Cement: Superior diversification on top of best-in-class cement operations

  • LMCL topline is expected to increase to PKR104/121bn in FY21/FY22f, mainly due to massive demand growth of its models
  • LUCK’s core GMs are expected at 36%/37% for FY22/23f, this is led by higher market share and increased cement prices
  • Dividend from LMCL & interest income on cash will elevate LUCK standalone earnings to at PKR64.50/83.75 for FY22/23f
  • We have upgraded our estimates for LUCK with a new TP of PKR1,300/sh (from PKR975/sh earlier) on the back of outperformance by both its core cements profits and non-core operations. We are particularly impressed by its auto venture, Lucky Motor Corporation Ltd (LMCL), the sales and profits of which have exceeded ours and market consensus.

  • Core cement profits (up 3.0x yoy in 9MFY21) will continue to grow, as LUCK is expected to regain domestic market share, substitute exports with domestic sales amid surging demand, and have possible energy cost savings. All these will be complemented by rising other income.

  • We now estimate standalone EPS of PKR64.50/83.75 for FY22/23f, rising 39%/30% yoy; these include dividends from LMCL and ICI. Based on these estimates, the stock is presently trading at an FY22/23f EV/EBITDA of 6.9x/5.1x – where the valuation premium over the market and peers is justified by superior diversification (already bearing fruits).

Upgrade TP to PKR1,300/sh, thanks mainly to Auto profits

We reiterate our Buy rating on Lucky Cement (LUCK) with an upgraded June 2022 TP of PKR1,300/sh (up from PKR975/sh previously). Our new consolidated EPS for FY22/23f are PKR133.10/153.26. The major driver behind the estimate revisions is Lucky Motor Corporation Ltd (LMCL, previously Kia-Lucky Motors), where unit sales and profit margins both have exceeded ours and market expectations. With new models and rising operating margins, the momentum in LMCL is likely to continue; we now expect its topline of PKR104/121bn for FY21/22f. Note that LMCL is also set to launch models of Peugeot (French automaker) alongside that of Kia. On the other hand, Lucky Electric Power (LEPCL) is expected to come online by August 2021 and it is expected to post earnings of PKR37/sh in FY22f on existing ROE. The better-than-expected performance by LMCL can also offset any downward revision in the ROE of LEPCL by the government (as happened with older IPPs), in our view.

Growth in core cement profits will also continue

LUCK’s cement gross margins are expected at 36%/37% for FY22/23f. This is led by the following expectations. First, LUCK will have a normalized market share as per its capacity; LUCK sold c.16% of total domestic sales in 9MFY21 vs. a capacity-wise share of c.17%. Second, cement prices in the North will increase by c.6% to PKR625/650 per bag in the North/South during FY22. Third, we assume more moderate energy costs in future as coal prices will come off to below US$90/ton, in our view. Lastly, we expect industry-wide domestic cement dispatches to grow by c.10%/8% in FY22/23f on top of c.20% in FY21. This will help LUCK to increasing substitute low-margin exports to domestic sales - hence, lifting revenues and margins. Core cement profits will be complemented by dividends from LMCL, along with interest income on cash. LUCK’s standalone EPS are expected at PKR64.50/83.75 for FY22/23f.

LUCK thus deserves premium valuations

The company is presently trading at FY22/23f EV/EBITDA of 6.9x/5.1x and P/E of 13.6x/10.5x. The valuation premium over the market and peers is justified by superior diversification (already bearing fruits as depicted above) on top of sector-leading cement profitability. At our June 2022 TP of PKR1,300/sh, the stock is offering a potential upside of nearly 50%. It is thus one of our top picks in the IMS Universe.


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