News Column

Morning Shout released by KASB Securities Limited and Economics Research

July 11, 2014



ICI, DGKC and Lucky: Raising POs on lower coal prices

KASB Securities Limited lifts KASB Securities Limited's POs for ICI by 10% (PRs429), Lucky by 3% (PRs432) and DGKC by 9% (PRs117) to incorporate cut in coal price forecast by BofAML Metals team. BofAML has revised down thermal coal (Newcastle fob) prices by 12%/13% to US$72/US$78/t and coking coal prices by 6%/7% for FY15E/FY16E to US$129/US$138/t to account for expanding global supply overhang.

For ICI Pakistan, KASB Securities Limited's awaits clarity on returns on infant milk business to revise KASB Securities Limited estimates further.

Lucky enjoys dual benefit from coal downtrend: via higher margins in core cement operations and through increased earnings contribution from ICI.

KASB Securities Limited reiterates KASB Securities Limited's Buy rating for Lucky Cement and DG Khan Cement, and retain KASB Securities Limited's Neutral rating for ICI Pakistan.

ICI Pak, Lucky Cement and DGKC: Raising POs on cut in coal prices KASB Securities Limited raises KASB Securities Limited 'sPO for ICI Pak by 10% to PRs429, Lucky Cement by 3% to PRs432 and DGKC by 9% to PRs117 to incorporate the earnings impact from savings in costs from the cut in KASB Securities Limited's coal price forecast. KASB Securities Limited reiterates KASB Securities Limited's Buy rating for both DGKC and Lucky Cement; KASB Securities Limited retains KASB Securities Limited's Neutral rating on ICI Pakistan.

Coal prices hit new lows amid falling demand and oversupply

BofAML Global Metals team have revised down Newcastle coal price for FY15E/FY16E from US$82/US$90 to US$72/US$78/t.

Coal prices have continued to decline in 4QFY14 around the world because of 1) the warm winter in Europe and weak coal demand for power generation in Asia kept coal inventories at high levels; 2) the return of Drummond exports (Colombia's largest exporter) in April following a 3 months export ban; and 3) weak demand in China and falling domestic coal prices. With abundant downside risks amid oversupply, the weak coal pricing environment is expected to persist.

Oversupply of coking coal persists; positive for Soda ash

BofAML Global Metals team have also lowered the prices of hard coking coal (HCC - used as a proxy of pet coke which is a feed for ICI's soda ash plant) by 6%/7% for FY15E/16E to US$129/138 per ton to account for global surplus over the next several years as more capacity cuts at the higher end of the global cost curve are needed to offset additional capacity in Australia and China.

Given the limited and questionably sticky capacity closures KASB Securities Limited sees little upside to FY15E benchmark prices as the market remains in oversupply and China is sourcing its own incremental demand.

ICI Pakistan: PO raised by 10% to PRs429; reiterate Neutral

KASB Securities Limited lifts KASB Securities Limited's PO to PRs429 from PRs391 and raise KASB Securities Limited's FY15E/16E earnings by 5.0% to price in the 1) decline in BofAML prices of thermal and coking coal; along with 2) revision of KASB Securities Limited's estimates for fuel oil prices and other inputs.

KASB Securities Limited awaits clarity on potential returns on infant milk business to revise KASB Securities Limited's estimates from current levels. KASB Securities Limited reiterates KASB Securities Limited's Neutral rating on the stock. Both these coal price cut will increase FY15E/FY16E Soda ash EBITDA by 4.5%/5%.

DGKC: Improving core earnings as coal cost decline; reiterate Buy

KASB Securities Limited raises KASB Securities Limited's SOTP based PO for DG Khan Cement by 9% to PRs117 and FY15E/FY16E EPS by 4%/11% to incorporate the 1) decline in BofAML's coal price forecast and 2) rolling forward of KASB Securities Limited's valuations to Jun 15.

KASB Securities Limited also adjusts KASB Securities Limited's FY14 EPS estimate for DGKC to PRs12.9 (from PRs14.0) to account for below expected domestic cement prices in the North during 2HFY14 (prices trended flat compared to PRs10/bag hike anticipated by us). KASB Securities Limited now expects local cement price to rise in 1QFY15. Reiterate KASB Securities Limited's Buy rating for DGKC.


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Source: Pakistan Press International


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