Initiate with Outperform, TP set at PKR107.5/sh, 16% upside We initiate coverage of Cherat Cement Company Limited (CHCC) with a near term favorable outlook given first mover advantage in upcoming expansion cycle. However, we highlight a robust profitability growth in FY17/18 would immediately be followed by a period of underperformance as other capacities come online. Hence, despite trading at a FY17/18 discounted PE of 6.4/4.8 (FSL’s cement universe PE of 9.8/9.1), our Jun-16 TP of Rs107.5 provides a relatively limited upside of 16%.

Impact of new line to be diluted when others catch up Commissioning of new 1.3mn ton cement line by January 2017 would significantly improve company’s market share, particularly in FY17/18. We estimate sequential increase in the company’s market share to 3.8%/5.1% in FY17/FY18 from 2.4% currently. As a result, earnings would shoot up to Rs14.6/19.5 in FY17E/18E versus Rs8.5 in FY16E. Nonetheless, volumes are allocated on capacity basis and we expect market share will eventually be normalized to 4.5% beyond FY18 when other players (LUCK, DGKC and ACPL) bring their new capacities online. Subsequently, we see earnings to stabilize (Rs 13/sh) beyond FY18. Our valuations reflect a conservative cement price assumption accompanying capacity addition as suggested by historical precedence.

Section 65B warrants early commissioning than January 2017 Though the company has highlighted commissioning of a new line by January 2017 (our valuations reflect the same), odds are higher of early commissioning, in our view. We believe the company would strive to complete the project by Jun-16 to avail the advantage offered in Section 65B of Income Tax Ordinance. The section provides tax credit of 10% of investment, provided the plant is purchased and installed by Jun-16. Early commissioning can provide a one-time earnings gain of ~Rs6.8/sh. Furthermore, being set-up in KPK the expansion also entitles the company to 5-yr tax holiday as announced in Federal Budget FY16.

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By: Foundation Securities Private Limited

 

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