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Working capital normalisation, loan deferral to improve Maple Leaf Cement liquidity

LAHORE: Normalisation of working capital and deferral of loans will help improve liquidity of Maple Leaf Cement Factory Limited (MLCF), analysts say.

Shahrukh Saleem, an investment analyst at AKD Securities Limited, said after adjusting working capital cycle, incorporating details of deferred loans under State Bank of Pakistan (SBP’s) scheme and recent announcement of extension in Waste Heat Recovery (WHR) capacity to 25MW from 16MW, AKD has revised its estimates for MLCF.

While the industry went through a down cycle, discounts increased and working capital cycles became stretched to penetrate into the market and counter increased competition, he added.

Consequently, MLCF’s working capital cycle increased to 68 days in FY20 against an average of 22 days from FY13-18, while short term borrowing stood at Rs6.6bn as of June 2020 against Rs4bn as of June 2019.

“Moving forward, taking cue from recent rationalisation of discounts and high demand growth, we expect the cycle to normalise at 35/30 days for FY 21/22 (stood at 32 days for 1QFY21),” Saleem opined. “However, if demand remains strong, further strengthening of the working capital cycle will reduce the need of short term borrowing (as witnessed in FY15-16), thus opening up prospects for further upside.”

Saleem noted that to mitigate impact of Covid-induced slowdown, SBP announced a deferral policy, allowing companies to defer repayment of loans for a period of one year.

He said with accounts providing exact details of new timelines of loan repayment, further improvement in liquidity is expected, as some loans have been extended for one year against earlier assumption of deferment over remaining period of loan, uplifting AKD’s earning per share (EPS) predication for FY21/22 by Rs0.08/0.05.

Increase in WHR capacity to uplift earnings 

MLCF has recently announced expansion of WHR capacity to 25MW from 16MW.

The said measure will provide more credence to MLCF’s status as one of the lowest cost producers (Rs234 per bag cash cost of production for FY20—second lowest from our universe), Saleem said.

He shared that the civil work for the project has already commenced while the total cost stands at Rs1.8bn, entirely financed through debt.

The company has utilised SBP’s Temporary Economic Refinance Facility in this regard and enjoys a subsidised rate of 5pc for the facility. Expected to commence in September 2021, power cost savings are expected to uplift EPS of FY22/23 by Rs0.20/0.23.

Speaking to Profit, MLCF’s Chief Executive Officer (CEO) Sayeed Tariq Saigol lauded the SBP for its swift and decisive action in providing much needed liquidity to companies as Covid hit Pakistan.

He added that this along with the drastic reduction in interest rates allowed businesses to not only weather the storm but, in fact, provided a solid platform to get back to full production levels.

“We have worked hard to reduce the working capital cycle of the business through better management/recoveries and I feel in this high demand scenario, as witnessed in the past two months, this will no longer be an area of concern,” the cement manufacturer added.

He maintained that the increase in the company’s power mix through waste heat recovery is of paramount importance. “It provides cheap and environmentally friendly electricity and is a step towards a more sustainable business model for the company,” Saigol said.

Investment Perspective 

Saleem predicted that on the back of upbeat demand and improved pricing dynamics, AKD expects MLCF to post earnings growth of 29pc from FY21-24 where additional impetus will be provided by expansion in WHR’s capacity.

That said, recent runs in the stock price (19pc in the last 3 weeks) on the back of upbeat demand numbers for October 2020 have resulted in little upside.

“Consequently, our June 2021 Take Profit (TP) of Rs47.4 per share (upside: 11.2pc) offers a Neutral stance,” he added.


Source: Profit

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