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PIOC: Positives priced in




Elixir Securities Pakistan (Pvt.) Limited


17 Dec 2013





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Fairly valued Our Jun-14 price target of PKR36/share offers an upside potential of 5% along with an FY14 dividend yield of 12%. We believe that the recent price performance has elevated the stock to fair levels. With FY14 PER of 5.6x, we initiate with a HOLD stance on the stock. A major beneficiary on the volume growth theme PIOC’s capacity utilization clocked in at 59% during FY13, significantly lower than industry utilization of 76% during the same period. With expected growth of 6% in local demand going forward, PIOC shall likely emerge as a major beneficiary of demand growth owing to significant surplus capacity. Attractive margins due to lower fixed costs PIOC posted EBITDA margin of PKR112/bag during 1QFY14, 8% higher than our cement universe average of PKR104/bag. In fact, on a comparative basis, PIOC’s EBITDA margin was the fifth highest in our cement universe. PIOC achieves attractive margins largely on the back of lower fixed costs. During FY13, PIOC posted fixed costs (which includes selling and administration costs) of PKR6/bag, 72% lower than industry average of PKR22/bag WHR to reduce variable costs PIOC is planning to invest in a ~8MW WHR project to reduce its reliance on the national grid. The project is expected to come online by the end of FY15 and is expected to fulfill ~20% of PIOC’s total electricity requirement upon commencement. In addition, its already-installed TDF plant and prospective replacement of internal motors and cement mills pose further upside to our estimates. Break-even analysis further solidifies position Based on FY13 volumes and utilization levels, PIOC posted the third lowest break-even retention price of PKR222/bag on a pre-tax basis. This suggests that PIOC is a low risk bet in the cement sector as it remains relatively sheltered in the event of a price war. Price-up cycle has helped reduced debt burden Net debt of the company stood at PKR588mn as of 1QFY14 as compared to PKR3.9bn in FY09. Consequently, finance costs have also declined from PKR387/ton in FY09 to PKR138/ton during FY13. Going forward, lower financial leverage shall significantly improve PIOC’s bottom-line and cash flows. Corporate governance to safeguard investors Vision Holdings Middle East Limited (VHMEL), an SPV registered in British Virgin Islands holds a majority stake (47%) in PIOC as of FY13. Actions of the changed ownership and management imply an increased focus on efficiency enhancement projects and a healthy pay out theme. Foreign currency denominated debt exposes PIOC to exchange rate risk Though it significantly reduced its debt burden over time, PIOC has a large proportion of foreign currency denominated debt. Positions in JPY and USD loans constitute 49% of PIOC’s outstanding debt and expose the company to significant exchange rate risk.

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