With the company being relatively more sensitive to coal prices than peers, Kohat Cement Company (KOHC) remains one of the best plays to capitalise on the upcoming cement sector margin enhancement. On the other hand, the company is also moving forward with capacity expansion of 2.3 million tonnes, which will bring total capacity to 7.2 million tonnes by FY24.
Coal prices have been on the rise (up 67 percent since December 20) and reached an all-time high of USD238/ton on October 21 as a result of the global energy crisis, which increased demand for coal-based power generation. However, prices have recently fallen to USD145/ton as China imposed price restrictions and ordered local miners to increase output. On the other side, after initially being unable to pass on the cost owing to heightened government control, cement producers have recently increased prices by PkR50-60/bag to PkR710/bag in order to pass on the impact in the last 1-2 months. Despite the fact that KOHC’s margins are likely to erode over the next two quarters due to high fuel costs, all signals point to coal prices falling after the winter as power demand declines in developed nations and coal supply rises, resulting in an improvement in cement industry profitability. In this situation, KOHC will be one of the biggest winners, as the firm is one of the most sensitive to changes in coal prices.
Additionally, KOHC is expanding its capacity by 2.3mn tons, expected to come online in FY24. The expansion costing PkR25bn is expected to take company’s market share to 10.3% from 9.1% currently with the company increasing capacity by 49% against rest of the industry expanding by 22% (~14mn tons). Moreover, company continues to trade at discounted EV/EBITDA of ~3.5x compared ~6.2x of AKD cement universe (excluding LUCK and DGKC). Even though company has historically traded at a discount, even incorporating a 20% discount to current EV/EBITDA of our sample group, we arrive at target EV/EBITDA of 4.9x, which results in a TP of PkR275/sh for the stock – 42% upside.