The Cement sector has shed 10% Feb’15TD in tandem with the market decline of 10.9%. The recent bearish trend in the sector started off with a fundamental concern on anti dumping duty, with a potential to negatively impact cement manufacturers in the South. Moreover, the bearish sentiments were further compounded by indication of increase in gas tariffs from 1st Apr’15. However, given strong fundamentals (earnings growth: 16%), we believe the market has overreacted to the negative new-flows.
Going forward, we believe sector dynamics will remain encouraging on account of i) notable reduction in fuel and power expenditure due to falling global crude oil, ii) lower finance cost following 200bps reduction in interest rates, iii) substantial dispatch growth and iv) lower sea and inland freight. We believe these factors will far outweigh the risks of potential decline in the earnings resulting from aforementioned risks. Within BMA Cement Universe, we reiterate our liking for MLCF with a target price of PKR73/sh, offering a total return of 46%.
Risks present; however not material: The sector is facing two prime risks 1) the anti dumping duty case in South Africa and 2) Increase in gas tariffs from 1st Apr’15. Both of these risks affect only selected payers in the industry with limited sector impacts.