Karachi, May 03, 2023 (PPI-OT): LUCK: Near term gloom; unswerving if you zoom
Lucky Cement Company Limited (LUCK) conducted its Corporate Briefing yesterday to discuss 9MFY23 results and outlook of the company. Management acknowledged the demand pressure due to the difficult economic climate and expects it to persist during the remainder of FY23. To recall, 9MFY23 sector volumes reported an 18% YoY decline.
LUCK is one of the first companies to go for an expansion in the recent expansion cycle and commenced its 3.1mn tons expansion taking total capacity to ~15.3mn tons, providing opportunity to avail higher market share compared to most peers.
The company is continuously working to lower production costs, such as diversifying coal sourcing avenues, adding renewable-based power sources and ensuring uninterrupted production in the case of disruption in gas supply through other avenues.
Given earnings growth stored in with stable margins, we maintain an Overweight stance on LUCK with attractive upside of 59% from current levels to our SoTP based Target Price of Rs685.
Volumes to remain dull during 4QFY23
Lucky Cement (LUCK) held its post result Corporate Briefing session yesterday, in which the key area of concern discussed was prospective demand pressure during the remainder of FY23 due to the challenging economic situation. Management shared that it expects total volumes to follow a similar declining trend in 4QFY23 as the last 9 months. Effectively translating to 15-18% YoY decline in FY23.
Management also believes that exports may become viable if international coal prices continue on the downward trajectory. To recall, 9MFY23 total cement volumes reported a decline of 18% YoY.
Continuous focus on cost optimization
The company’s current weighted average cost of coal as per management is around Rs38-45k/ton. With efforts to considerably increase the quantum of local coal in the company’s coal mix at Pezu while the remaining would be Afghan coal. For its South plant, management shared that currently it doesn’t require further import of coal and would utilize the imported coal inventory available gradually increasing the quantum of local coal.
Plans to reduce electricity prices also in the works
LUCK’s 34MW Solar project at Pezu site has commenced operations while another Solar project announced during 3QFY23 for South plant with a capacity of 25.3MW is expected to commence from 2QFY24. After the Pezu solar plant, contribution from Solar in the power mix increases to 12%, which will further increase to 20% after commencement of Solar plant at Karachi. Management shared that weather conditions were not optimal for the Solar plant at Pezu and it expects that efficiencies will hopefully be reflected in the coming quarter. These solar projects are expected to provide support to margins going forward.
Subject to gas unavailability, the company uses other energy sources as an alternative for power generation, which are expensive compared to gas.
Some impediments with Thar coal for LEPCL
Management briefed that Lucky Electric Power Company (LEPCL) contributed positively to the consolidated profits of the company during 9MFY23. To recall, the company had some teething issues in the early phase which were resolved later. The 660MW plant had initially faced delays due to impediments in getting connected to the grid.
A mix of local and imported coal is supposed to be used for the coal plant but LEPCL has been using less quantum of Thar coal lately. The situation is expected to remain like this for the coming 6-8 months after which it is expected to improve. LEPCL eventually plans to shift completely to local coal. Management claims that LEPCL has the lowest electricity fuel cost in the country at Rs13.24/Kwh.
Company has a strong financial position and is not facing any cash flow issues as government is paying timely to the efficient IPPs. The subsidiary has a pending tariff true-up after which it can start dividend payments.
Import restrictions continue to strangle Lucky Motors
For LUCK's Auto and Mobile assembly divisions, import restrictions will continue to be a problem. In the coming months, sales would continue to be impacted by inflation-related price rises for automobiles. The mobile assembly and automotive industries are facing difficulties as a result of the new SBP circular instructing banks to only open LCs for vital firms. Additionally, no dividend was announced by the segments for the previous quarter. Management remains in contact with the government to discuss relaxation in regulatory constraints.
Company announces second buyback with the result
The board of directors of LUCK approved a second buy-back of up to 23.8mn of its shares (22% of free float). Company will buy these shares back over a period of time at prevalent prices during 2nd Jun-2023 to 20th Nov-2023. The company has recently completed buyback of 10mn shares costing Rs4,356.4mn at a price of Rs435.64/share compared to prevailing price of Rs431/share. Outstanding shares of the company will decrease to 289mn shares post transaction from current 313mn shares.
Long term potential remains intact
LUCK stands apart from the competition due to its diverse portfolio of assets, which includes investments in the power, chemical, pharmaceutical, and automobile sectors as well as its capacity to profit from global projects. We believe LUCK will have a competitive advantage over competitors after the latest expansion in terms of market share. We maintain an Overweight stance on LUCK with attractive upside of 59% from current levels to our SoTP based Target Price of Rs685.