FCCL: Earnings hiked but downgraded to ‘Hold’

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    FCCL

    • We revise up our earnings estimates for FCCL by 4%/1%/1% over FY14E/15F/16F. The revision is mainly on account of tweaking up our operating margin assumption.
    • Consequently, we raise our DCF based target price to Rs20.9 from Rs19.1 previously. That said, given the recent run up in FCCL’s stock price (+13% in June 2014), we downgrade FCCL to ‘Hold’ from ‘Buy’.
    • Recall that FCCL reported a PAT of Rs1,996mn (Basic EPS: Rs1.50) in 9MFY14 vs. PAT of Rs1,570mn (Basic EPS: Rs1.18) in 9MFY13, up 27%YoY (highest growth rate within the JS Cement Universe).
    • FCCL is trading at FY15F P/E of 8.9x compared to the JS Cement Universe FY15F P/E of 8.7x. We believe the premium valuations of the stock are justified given that FCCL offers a FY15F dividend yield of 7% (highest in the JS Cement Universe). However, post the recent surge in the stock price, we believe that strong fundamentals of the company are now largely priced in.

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    Earnings estimates raised on strong margins

    We raise our earnings estimates for Fauji Cement Company Limited (FCCL) over FY14-FY16F by 4%/1%/1%. The revision is mainly on account of tweaking up our operating margin assumption. Note that the company’s recent strategy of concentrating in the core markets (i.e markets which are at close proximity to the plant) has resulted in lower transportation costs for the company. Successful implementation of this strategy is also due to market dynamics where FCCL is the main beneficiary of the Rawalpindi-Islamabad Metro Bus project. Total cement demand from the project is approximately 550,000 tons (the project expected to be completed by December 2014) with peak cement demand from the project expected during May-July 2014. The fruits of this strategy are likely to reflect more prominently in the company’s 4QFY14 results where we expect the company to clock in basic EPS of Rs0.66 (+19%QoQ). Meanwhile our FY14E basic EPS estimate now stands at Rs2.16 (+37%YoY).

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    FCCL’s EPS growth amongst the highest in cement sector

    Recall that FCCL reported a PAT of Rs1,996mn (Basic EPS: Rs1.50) in 9MFY14 vs. PAT of Rs1,570mn (Basic EPS: Rs1.18) reported in 9MFY13, up 27%YoY. In terms of earnings growth, note that FCCL topped the list within the JS Cement Universe as well our extended sample of 10 cement companies (reflecting 76% of the total cement market cap). Meanwhile, other key takeaways from the result were 1) gross margin expanding by 2 ppts YoY to 34%, 2) Selling, General and Administrative expenses dipping by -3%YoY and 3) financial charges decreasing by 31%YoY on account of lower debt balance. 

    Recommendation: Downgraded to ‘Hold’

    On a relative basis, FCCL is trading at FY15F P/E of 8.9x compared to the JS Cement Universe FY15F P/E of 8.7x. We believe the premium valuations of FCCL are justified given that the stock offers a FY15F dividend yield of 7% (highest in the JS Cement Universe). That said, FCCL’s stock price rose sharply since June 2014 (+13%) and is now hovering close to our revised TP. With the stock now offering a relatively nominal total return of 7.9% we downgrade FCCL to ‘Hold’ from ‘Buy’. The key upside risk to our investment thesis is higher than expected growth in cement volumes.

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