Maple Leaf Cement Emerging Stronger

Topline Securities has reiterated its “buy” stance on Maple Leaf Cement (MLCF). It believes MLCF to reap the benefits of 1) improved local demand outlook, 2) timely expansion, 3) efficient power and energy mix, 4) strong pricing power in spite of low utilization and 5) deleveraging.

The industry channel checks suggest that local sales in FY24 are expected to perform better than earlier estimates. Initially, the brokerage house was expecting flattish local sales in FY24. However, based on 2MFY24 sales numbers and industry feedback, it has revised local sales assumption from flattish to growth of 5% in FY24. Moreover, it has assumed 7% growth in local sales for FY25 and FY26 amid expectation of economic stability in the country.

MLCF was one of the cement companies that embarked on its fourth expansion cycle with a capacity of 2.1 million tons to 7.8 million tons. With the addition of a new production line, MLCF is the fourth largest player in the North region. This timely expansion has raised MLCF’s market share in the North from 11% in FY22 to 12% in FY23 and brokerage house expects the company to maintain its market
share in coming years.

The brokerage house expects MLCF gross margins to improve from 26% in FY23 to 31-35% over FY24-FY26 mainly due to decline in coal price, and improvement in power and fuel mix. It expects international coal prices of US$110/ton in FY24 and US$100/ton in remaining years based on its
discussions with industry players.
MLCF is one of the efficient player in the sector and has the ability to utilize local coal with a higher sulfur content and also benefits from a favorable power mix, including a coal-fired power plant, WHR (Waste Heat Recovery), and a solar plant.

The discussions with industry players suggest that cement prices will not change significantly on either side. That said, the brokerage house has assumed a 5% increase in retail cement prices per bag for FY24 and FY25. Furthermore, MLCF's superior-quality product has enabled it to charge higher price, leading to a higher retention price.

In FY23 MLCF repaid PKR5.1 billion in debt as a result of which total interest bearing debt reduced from PKR22.9 billion in June 2022 to PKR17.8 billion in June 2023. Of which PKR4 billion is low cost Temporary Economic Refinance Facility (TERF) loan that has an interest of 2-3%. This deleveraging will continue due to strong cash generation and this will substantially reduce financial charges going forward.

MLCF has announced its second buyback of 100 million shares (PKR3 billion) with the intention to cancel the shares. If completed then the free float of the company will reduce to 383 million (36% of capital) shares from 483 million shares (45% of capital).

On EV/ton, MLCF is trading at US$20/ton, compared to its cost of the last brownfield expansion of 2.1 million tons, which was approximately US$52/ton, and a replacement cost of around US$75/ton. MLCF is also cheaper than the top 5 players based on capacity, which have an average EV/ton of US$24.4/ton.

MLCF is trading at EV/EBITDA of 2.5x vs top 5 players average EV/EBITDA of 4.1x. Similarly MLCF is also generating higher EBITDA/ton of US$7.9/ton compared to top 5 players’ average of US$6.1/ton.

Key Risks facing the company are: 1) Lower than estimated sales, 2) decline in cement prices due to lower capacity utilization, and 3) higher than expected increase in coal prices.

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