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JS Securities Limited – JS Research (November 24, 2022)

Karachi, November 24, 2022 (PPI-OT): MLCF: Efficient energy mix to keep margins elevated

Maple Leaf Cement Factory Limited (MLCF) is among the first companies to go for an expansion in the new cycle and has recently commenced its 2.1mn tons brownfield expansion taking total capacity to ~7.9mn tons, providing opportunity to avail higher market share compared to most peers.

Company has been able to consistently report stable gross level performance, which is expected to continue. In its Corporate Briefing session held yesterday, management cited better fuel and electricity mix as a key factor supporting margins. Moreover, MLCF is likely to remain a beneficiary of local coal consumption over close proximity to the source at Darra Adam Khel.

We maintain an Overweight stance on MLCF, highlighting the stock among our top picks from the Cement space, with a Target Price of Rs38 depicting attractive upside from current levels.

Timely capacity addition to increase market share

MLCF has recently commenced its brownfield expansion of 2.1mn tons at existing site in Iskanderabad, taking total capacity to ~7.9mn tons. To preserve its market share in the northern region, MLCF has been among the first cement companies to expand its capacity in the ongoing cycle. The earlier move is expected to help them avail a higher market share, as commencement of some peers’ expansions are estimated 2 years from now. To recall, almost 35-40% of the capex has been financed by preferential rate loans under Temporary Economic Refinance Facility (TERF) and Long-Term Financing Facility (LTFF).

Management shared that the capacity utilization of the industry stood at 72% as at FY22 end but will drop to 54% by FY23 end owing to the addition of 12.79mn tons in both the North and South regions. For FY22, the company sees a 10% YoY decline in volumes whereas up to 30% growth is expected in value terms due to better retention prices. Retention prices are hovering around Rs13,500/ton for grey cement and are expected to remain around these levels.

Efficient fuel and electricity mix supporting margins

The company has remained tilted toward the relatively economical Afghan and local coal over advantage of closer proximity (~2 hours from factory). The management shared that local coal from Darra Adam Khel constitutes 70% of the mix as of now and costs only Rs30,000/ton. This cost is noticeably lower than current South African coal cost of Rs59,000/ton. The company plans to continue using local coal in the near future even though it has a higher sulphur content as MLCF’s plants are designed to operate on Pet coke, tolerating high sulphur. The company holds 45 days of coal inventory, with current average cost at Rs 47,500/ton.

MLCF’s power mix comprises of 53% Coal captive plant, 32% WHR whereas National Grid contributes 12% to the mix. Solar plant contributes 3% to the power mix of the company. MLCF is not using Wartsilla gas generators for electricity generation due to high LNG rates and shortage of gas in the country.

Long term growth potential remains intact

We maintain an Overweight stance on MLCF with attractive upside from current levels to Target Price of Rs38. The company has been able to consistently pull off a stable gross level performance due to better cost management. We expect the company’s market share in the core business to expand because of the recent capacity addition giving MLCF an edge over peers. Unfavourable repercussions owing to the upcoming capacity additions remains a key risk, also highlighted by the MLCF’s management in the briefing yesterday.

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