Cement sector hasn’t performed well in the recent rally. The impact of floods has also dwindled it’s demand. Coal prices are also showing a higher trend as 2QFY 11 price averaged 97.4$ per ton which is 10% higher on QoQ basis. However, remember there is also a seasonal effect here as we know cement sector usually face low demand in winter. Despite this, the expectation of post flood construction activities and rising cement prices are two positives of this sector.
Our current focus in cement sector is on Attock Cement (ACPL). It is the most unleveraged company in company sector. Secondly, the company is installing waste heat recovery plant of 12MW which will help it to reduce energy cost which subsequently will improve gross margins. The plant is expected to come online by July 2011. Given the fact that company is unleveraged and there are many companies in cement sector not able to earn profits, there is a chance that company will go for expansion. Remember company was considering the acquisition of Al-Abbas Cement in FY2010 but the deal did not materialize.
The company is expected to post an EPS of PKR 13.5 with dividend of PKR 5 in FY 2011. Company is currently trading at around 62-63 range so the P/E is just 4.6. Therefore, as you can see the company is trading at a very low multiple. Since the market is trading in a 8-10 range, this unleveraged and strong company should not trade at this discount for too long. However it can be expected to trade at a discount because of its low dividend yield and cyclical nature but we believe that current discount is just too high. Brokerage houses are quoting a target prices of PKR of 80-90. The capital gain of 30-45% is expected.