Cherat Cement (1)

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Please Refer to last page for important disclosures and analyst certifications

Foundation Research|

Equities

18 February 2016

CHCC PA Outperform

Stock price as of 17 Feb Rs 93.0 Jun 2016 target Rs 107.5 Upside/downside % 15.6 Valuation Rs 107.5 - DCF based

Cement SectorMarket cap Rs bn 16.4 30-day avg turnover US$m 0.4 Market cap US$m 157 Number shares on issue m 177

Investment fundamentalsYear end 30 Jun 2015A 2016E 2017E 2018E

To tal revenue m 6,565 6,643 10,265 14,473 EBITDA m 1,969 2,328 4,042 5,508 EBIT M argins % 29.99 35.04 39.37 38.06 Net Pro fit m 1,288 1,507 2,582 3,444 Profit growth % (2.1) 17.0 71.3 33.4

EPS Rs 7.3 8.5 14.6 19.5 PE x 12.7 10.9 6.4 4.8

To tal DPS Rs 3.00 3.00 4.00 6.50 To tal div yield % 3.2 3.2 4.3 7.0

ROA % 13.6 8.5 10.8 13.1 ROE % 16.0 17.1 22.6 25.1 EV/EBITDA x 8.1 8.8 5.2 3.3 Price/book x 2.0 1.9 1.4 1.2

CHCC PA rel KSE100 performance

Source: Blo omberg, Foundation Research, Feb 2016

(all figures in Rs unless noted)

Analyst

Khurram M. Arif [email protected] om.pkM. Arsa lan Siddiqui Arsa [email protected]

92 21 35612290- 94 Ext 335

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Cherat Cement

New cement line to bump up earningsInit iate with Outperform, TP set at PKR107.5/sh, 16% ups ideWe initiate coverage of Cherat Cement (CHCC) with a near term favorable outlook given firstmover advantage in upcoming expansion cycle. However, we highlight a robust profitabilitygrowth in FY17/18 would immediately be followed by a period of underperformance asother 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 limitedupside of 16%.

Impact of new line to be dilut ed when others catch upCommissioning of new 1.3mn ton cement line by January 2017 would significantly improvecompany’s market share, particularly in FY17/18. We estimate sequential increase in thecompany’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 benormalized to 4.5% beyond FY18 when other players (LUCK, DGKC and ACPL) bring their newcapacities online. Subsequently, we see earnings to stabilize (Rs 13/sh) beyond FY18. Ourvaluations reflect a conservative cement price assumption accompanying capacity additionas suggested by historical precedence (see Fig 3)

Section 65B warrants early commission ing than January 2017

Though the company has highlighted commissioning of a new line by January 2017 (ourvaluations reflect the same), odds are higher of early commissioning, in our view. We believethe company would strive to complete the project by Jun-16 to avail the advantage offeredin Section 65B of Income Tax Ordinance. The section provides tax credit of 10% ofinvestment, provided the plant is purchased and installed by Jun-16. Early commissioningcan provide a one-time earnings gain of ~Rs6.8/sh. Furthermore, being set-up in KPK theexpansion also entitles the company to 5-yr tax holiday as announced in Federal BudgetFY16.

Lower FO prices have a meaningful earnings impactCHCC have in-house power generation of 32MW (7MW Waste Heat Recovery Plant, 21MWHFO based captive and 4MW diesel based captive) against the requirement of 16MW (oncurrent capacity). Hence, lower Furnace oil prices make the case for switching to HFO basedcaptive power plant from the expensive grid. Going forward, power cost would further comedown when new 6MW WHR plant comes online along with the new clinker plant.

EarningsBased on the aforementioned, we see earnings to bump up to Rs 14.6/19.5 in FY17/18 butthen normalize to Rs 13/sh beyond FY18.

ValuationsWe have valued CHCC at Rs107.5/sh on DCF based methodology.

Key upside and downs ide risksPrice Catalyst (1) early commissioning of new plant, (2) cement prices to remain firm postexpansion, and (3) commissioning of WHRP.

Key downside risks (1) Technical faults in new plant and (2) lower than expected marketshare.

PAKISTAN

REK-192


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Cherat Cement February 18, 2016

2 Foundation Securities (Pvt) Limited

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CHCC Industry

Key Graphs Fig 1: Mkt share to shuffle as new capacities come online

Source: APCMA, Foundation Research, February 2016

Fig 2: FY17/18 sales OP to be followed by FY19 UP

Source: APCMA, Foundation Research, February 2016

Fig 3: Expansion cycles exert pressure on prices

Source: APCMA, PBS, Foundation Research, February 2016

Fig 4: Implied PE converging to industry average

Source: Foundation Research, February 2016


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Cherat Cement February 18, 2016

3 Foundation Securities (Pvt) Limited

About the company Cherat Cement Company Limited (the Company) was incorporated in Pakistan as a public company limited by shares under theCompanies Act, 1913 (now the Companies Ordinance, 1984) in the year 1981. Its main business activity is manufacturing, marketing andsale of cement. The Company is listed on Karachi, Lahore and Islamabad Stock Exchanges. The registered office of the Company is

situated at Village Lakrai, District Nowshera, Khyber Pakhtunkhwa province.

Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based uponinformation obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty,representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject tochange without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein arenot intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities orother financial instruments. FSL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysisbefore such material is disseminated to its customers. Not all customers will receive the material at the same time. FSL, their respective directors, officers,representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuersdescribed herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financialinstruments from time to time in the open market or otherwise, either as principal or agent. FSL may make markets in securities or other financialinstruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. FSL may haverecently underwritten the securities of an issuer mentioned herein. This document may not be reproduced, distributed or published for any purposes.

Research Dissemination Policy: Foundation Securities (Pvt.) Ltd. endeavors to make all reasonable efforts to diss eminate research to all eligible

clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive thematerial at the same time.

Target price risk disclosures: Any inability to compete successfully in their markets may harm the business. This could be a result of many factorswhich may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materiallyaffected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes ininterest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivativeinstruments, to manage certain of these exposures.

Analyst certi fi cation: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuersand no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in thisresearch. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of FoundationSecurities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Recommendations definitionsIfExpected return >+10% Outperform.Expected return from -10% to +10% Neutral.Expected return

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Cherat Cement (1)