Recommendation HOLD We initiate our coverage on Maple Leaf Cement Factory with a HOLD Current Price 75.79 stance on the scrip, offering an upside potential of 6.05% including 3.37% of dividend yield. MLCF is currently trading at a trailing and forward P/E Target Price 77.82 multiple of 8.43x and 11.73x. The 3-yr average $EV/Ton of the stock is D/Y 3.37% $120/Ton. Upside 6.05% Key Stats Demand is Intact Demand for cement is to remain upbeat on the back of increased activity in government and Market Cap (PKR bn) 45.715 private sector housing scheme, rising urbanization, CPEC related infrastructural projects, Market Cap (USD mn) 394.89 construction of motorways, water reservoirs and various hydel power projects and with election just around the corner, we believe demand for cement to remain sturdy during the 52w Low - High 63.05 – 128.82 remainder of the current fiscal year. Outstanding shares 593.7 mn Free float 45% KATAS RAJ - Blessing in Disguise As per MMDP report, since MLCF lies in the safe zone and relies on own sources of water, it is Adj. Beta 1.29 highly plausible that the company may be given green light by the Supreme court while other Relative Performance Graph companies in the negative zone will have to search for other alternatives or cede expansions. This is likely to bode well for MLCF in setting strong foot hold in the region. 30.00% 20.00% 10.00% Brownfield Expansion – Effort to Retain Market Share 0.00% In order to retain its market share MLCF has also announced a brownfield expansion project -10.00% (line-3) to be setup at its existing site, thereby taking total capacity to 7.3 MT. The project is -20.00% worth PKR 23Bn, financed through 48% debt and 52% of equity out of which 19% was raised -30.00% May-17 Dec-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Jan-18 Feb-18 Mar-18 Jun-17 through issuing 12.5% right shares. Energy Mix is All Set to Get Efficient Source: PSX, ASDAIndex Research Performance MLCF Performance The Installation of 40MWcoal fired plant will further lower its dependence on national grid Source: PSX, ASDA Research and thus will eventually make MLCF self-reliant on captive power plants. It was established April 18, 2018 through 100% wholly owned subsidiary ‘Maple Leaf Power Limited’. The plant was imported from Chinese firm ‘Sinoma Energy Conservation limited’ and is build in vicinity to MLCF Iskanderabad plant to ensure uninterrupted power supply. Valuation The target price is derived using Discounted cash flow method (FCFF). The target price for Samia Umer June 2018 is valued at PKR 77.82. This offers a total return of 6.05% including 3.37% of Investment Analyst dividend yield. [email protected] Key Investment Risks +92 21 32435322 The risks to our target price is 1) Further devaluation of PKR 2) Hike in Interest rates 3) Lower than anticipated demand 4) Unexpected surge in coal prices 5) Price war as a result Refer to last page for important disclosures. of supply glut and 6) Delay in commencement of operations of new plant. ASDA Research Reports are available on Thomson Reuters 1 Investment Thesis Earlier when other companies were announcing expansions, Maple leaf on the other hand prudently focused on effective and effective utilization of its business. We base our investment case for Maple Leaf Factory Cement (MLCF) on the back of robust demand as a result of increased urbanization and government spending on infrastructural and CPEC related projects, escaping production halt over Katas Raj and other environmental issues, 2.3 MT of expansion project at its existing site and addition of 40MW coal fired power plant to its already cost effective power mix. Demand is Intact With increasing population, urbanization and several infrastructural projects, reasonable growth in construction sector was observed over the last decade. The size of the total construction sector is PKR 320bn (FY17) and on average it contributes 2.5% to the national GDP. During current government of PML-N, the size of the contribution has risen sharply with incumbent’s strong focus towards mega infrastructural projects and hefty government spending in this regard has led the growth rate of construction to outpace growth rate of GDP. Relative GDP to Construction Growth 3.0% 20.0% 2.5% 15.0% 10.0% 2.0% 5.0% 1.5% 0.0% 1.0% Growth -5.0% Construction Cont. 0.5% -10.0% 0.0% -15.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Const. contribution to GDP GDP Growth Const. contribution growth Source: PBS, SBP, ASDA Research Pakistan also enjoys fair share in the world cement industry of 0.77% and is ranked amongst top 20 producer which constitutes 87% of global cement industry. China being the single largest producer covers 57% of world cement industry, followed by India (6%) and USA (1.7%). However in terms of per capita consumption Saudi Arabia is well ahead (1,683kgs) closely followed by China (1,581kgs), South Korea (911kgs) and Iran (770kgs) whereas Pakistan’s consumption is well behind its peers at 140kgs, which implies significant room for growth. Since the year 2000 Pakistan cement industry has also grown at a CAGR of 9%, dispatches which were only 9.62mn MT now stands at 40.32mn MT (FY17). Going forward demand for cement is to remain upbeat on the back of increased activity in infrastructure and housing sector. Government and private sector housing scheme, rising urbanization, CPEC related infrastructural projects, construction of motorways, water reservoirs and various hydel power projects are the key reasons for increased cement consumptions and with election just around the corner, we believe demand for cement to remain sturdy during the remainder of the current fiscal year as only PKR 607bn (60%) is released so far for PSDP as against total allocated budget of PKR 1,001bn (as of March 30, 2018). Any further release of these funds will have direct benefit on the cement sector. ASDA Research Reports are available on Thomson Reuters 2 Maple Leaf Cement Factory (MLCF) is primarily engaged in producing grey cement. Besides this MLCF company also manufactures white cement and enjoys a healthy market share of more than 90%. Since white cement sells at a premium of 10%-20%, thereby contributing its fair share in maintaining highest retention level in the industry. Another key product is sulphate resistant cement, which is used in the construction of dams and barrages especially in the areas where there is high sulphur content in the water. In the back drop of power and water shortage, as per WAPDA a total 21 water dams and hydel power projects are underway. Out of these, three hydro power projects (Kurram Tangi Mohmand dam, and Tarbella - fifth extension are expected to complete in the ongoing year whereas eight other projects are ready for construction including much anticipated mega dams of Diamer- Bhasha and Dasu. Moreover, 12 additional projects are also on the table for which detailed feasibility report is being prepared. Most of these projects are located in North with Kurram Tangi Mohmand and Tarbela dam (fifth extension) in close proximity to MLCF plant in Iskanderabad. Since MLCF is the fourth largest player in the cement industry and given its strong brand image, the company in our view is well-poised to capture demand growth. In the backdrop of above stated scenario, we believe this will further augment volumetric sales and topline of the company going forward. Major Hydro Projects within 800 km to MLCF 1) Diamer-Bhasha Dam 2) Kurram Tangi Dam 3) Dasu kohistan Dam 4) Maple Leaf Cement Factory 5) Golen Gol 6) Bunji hydro power 7) Tarbella 5th Extension Source: Google Maps, WAPDA , ASDA Research On a conservative basis, these projects are expected to complete over 4 to 15 years assuming preliminary work to start off by next year though past record suggests delay is highly probable and same have been incorporated in our estimates. As per our research, on average 58,807mt/km2 of cement in the ratio of 1:2:4 (cement, gravel, mud) is required for hydro projects which is likely to generate total cement demand of around 8.92 mn MT over the prescribed period (0.667mn MT/annum). The grid below illustrates specification of hydel projects in close proximity to MLCF. Cement Consumption Power Capacity Water Storage Hydro Projects Distance (km) (mn MT) (MW) Capacity (MAF) Kurram Tangi Mohmand 164 0.53 800 1.2 Tarbela 5th Extension 229 0.93 1410 N/A Dasu Kohistan 507 3.46 4320 11.4 Diamer-Bhasha 588 3.56 4500 8.107 Bunji Hydro power 623 0.45 7100 0.2 Sum 8.92 18130 20.91 Source: WAPDA , ASDA Research ASDA Research Reports are available on Thomson Reuters 3 KATAS RAJ - Blessing in Disguise Supreme Court on Katas Raj case has directed all companies located near Katas Raj Temple to EBITDA Mn seek prior approval before undergoing expansionary projects. Moreover, Mines and Mineral 2022 11714 Department of Punjab (MMDP) also conducted a feasibility report to evaluate impact on 2021 11388 2020 9203 ecology with respect to new addition of cement plants in the Salt Range region. As per 2019 7726 report, MLCF is located in the safe zone plus the company relies on own sources of water 2018 7807 mainly extracted from tube wells situated within the plant while other companies that 2017 9,087 appeared in the negative zone consumed more water than were actually allowed.