Investment Analysts Bullish on Pakistan
By Riaz Haq
CA
Renewed construction boom in Pakistan has helped the nation’s cement producers significantly increase their sales and profits. Year over year, income at Lucky Cement, Pakistan’s largest producer of building materials, is up 33% while DG Khan Cement, the second largest cement company, has quadrupled its profits.
Cement production, an important barometer of national economic activity, was up 8% in 2011-12, according to a research report compiled by a Credit Suisse analyst.
CS analyst Farhan Rizvi says in his report that “higher PSDP (Public Sector Development Program) spending has led to a resurgence in domestic cement demand in FY12 (+8%) and with increased PSDP allocation for FY13 (+19%) and General Elections due in Feb-Mar 2013, domestic demand is likely to remain robust over the next six-nine months”.
Ongoing public sector projects include new large and small dams, irrigation canals, power plants, highways, flyovers, airports, seaports, etc. Most of these were already in the pipeline when the PPP government assumed control in 2008. Recent pre-election increases in PSDP funding allowed work to resume on these projects in 2011-12.
In addition to public sector infrastructure projects, there is a lot of privately funded real estate development activity visible in all major cities of the country. Big real estate developers like Bahria Town and Habib Construction are developing both commercial and housing projects in Islamabad, Karachi and Lahore. Other cities like Faisalabad, Hyderabad, Larkana, Multan, Mirpur, Peshawar and Quetta are also seeing new housing communities, golf courses, hotels, office complexes, restaurants, shopping malls, etc.
Credit Suisse is bullish on Pakistan’s cement sector in particular and Pakistani shares in general. CS analyst Farhan Rizvi has initiated coverage with “an OVERWEIGHT stance, as we believe compelling valuations, improving domestic demand outlook, better pricing power and easing cost pressures make the sector an attractive investment proposition. Despite better growth prospects (3-year CAGR of 17% over FY12-15E) and improving margins, the sector trades at an attractive FY13E EV/EBITDA of 3.8x, 49% discount to the historical average multiple of 7.4x. Moreover, FY13E EV/tonne of US$74 is approximately 29% discount to historical average EV/tonne of US$104 and 50% discount to the region”.
Another CS analyst Farrukh Khan, based in Credit Suisse’ Asia Pacific headquarters in Singapore, says in his research report that “liquidity in 2012 has been concentrated in stocks offering positive earnings surprises (e.g., United Bank, Lucky Cement, DG Khan Cement and Bank Alfalah), enabling them to be strong outperformers. With further improvements in liquidity, we expect a broad-based price discovery to take hold in attractively valued oil and fertilizer stocks as well.”
A string of strong earnings announcements by Karachi Stock Exchange listed companies and the Central Bank’s 1.5% rate cut have already helped the KSE-100 index gain 32% in US dollar terms year to date.
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