Cherat Cement Company: Still offering decent upside (From the sales Desk)
Earnings to remain strong in 2QFY13
Going forward, we expect 2QFY12 results for the company to remain robust as well on the back of 8% QoQ improved exports retention prices. For 2QFY12, we roughly expect Cherat cement to post 76% YoY improvement in after tax earnings to PKR276mn (EPS: PKR2.89) mainly driven by, 1) expected 4% QoQ growth in volumetric sales of the company, 2) strong domestic cement prices despite winter, 3) 8% QoQ increase in exports retention prices in Afghanistan.
Healthy operating cash flows (OCF) will help in deleveraging of balance sheet
The operating cash flows of the company have improved significantly over the past several quarters. In FY12, the company generated OCF of around 1.4bn (translating into OCF/share of PKR14/share), which the company exclusively used to retire its long term debt obligations. We estimate the company to record OCF of around PKR19.8/share in FY13. Strong cash flows will help the company to completely retire its debt, which will augment earnings in coming period.
Action and Recommendation
Though CHCC has provided decent returns during the past 1 year, we feel that stock will continue to fare well due, 1) improving cement sector dynamics, 2) geographical advantage (i.e. proximity to its key exports destination Afghanistan) and 3) higher export prices in Afghanistan. The company has also made an arrangement of coal imports from Afghanistan which is expected to reduce company’s freight costs in the coming years.
We remain fairly confident that the company will report double digit top-line and bottom line growth this year. Cherat cement in our opinion can post EPS in the range of 12.5-13.0/share, we feel that an ideal accumulation range would be in the P/E of 3.75-4.0x i.e. 45-50 rupees and deserves a target multiple of 5.0x, which is approximately PKR65/share. We also expect the company to announce total cash payout of around PKR5-6/share, which offers the highest dividend yield of 10-12% in the cement sector. Cherat Cement is one of the top picks at Foundation Securities sales desk.