FOR the calendar year 2014, the cement sector, with a market capitalisation of Rs295bn, provided a 70pc return to equity investors — far more than the benchmark KSE-100 index’s return of 27pc.

It marked the third consecutive year where the sector outperformed the broader market. Among cement companies, Kohat Cement Company (KOHC) provided the third-highest return of 97pc, after Pioneer Cement’s 135pc and Lafarge Pakistan’s 134pc.

Nabeel Khursheed, an analyst at Topline Securities, attributed Kohat’s performance to ‘improved production efficiency and swift deleveraging’.

Aizaz Mansoor Sheikh, the company’s CEO, told shareholders that KOHC’s pre-tax profit had grown 20pc to Rs4.38bn in FY14, from Rs3.77bn in the previous year. “Stable coal prices, better cement rates in the local market and growth in dispatch volumes contributed towards improved profitability,” he said.

Most analysts project a bright future for cement producers owing to a resumption of private construction activity as the spring season approaches

And Kohat Cement is looking forward to the installation of a 15MW waste heat recovery plant (WHRPP), which is expected to mitigate the rising electricity costs. “The WHRPP is currently under construction, with a projected completion date of June 30, 2015,” the CEO said.

Despite all that, sounds reverberated in the market of spanners being thrown in the works of KOHC. Most sector analysts delivered the bad news of mine owners moving a petition in local courts against the company for non-payment of their dues, which was said to have led to a ban on excavation of essential minerals by the company.

However, the investor panic subsided on Friday afternoon following a clarification by KOHC’s company secretary, Khurram Shahzad, who said in a filing with the stock exchange that “the company has valid leasing rights from the KP government for the excavation of minerals from the leasehold land against payment of royalty and excise duty to the government…. At the present point in time, no stay orders are in the field debarring the company to exercise its valid and legal rights for the excavation of the materials”.

And the company assured investors: “The management is expecting cement dispatches [to] resume at their desirable level from next week”.

Waqar Uddin Salim, an analyst at Summit Capital, anticipates KOHC’s profitability to rise to Rs3.75bn in FY15. The industry’s dynamics remain healthy, with the Topline analyst anticipating cement sales to grow 6.8pc annually in the next three years to reach 21.8m.tonnes by FY17 and exports to rise to 7.9m tonnes per annum. The industry’s capacity utilisation is expected to mount to 89pc.

Meanwhile, Kohat has witnessed a big deleveraging in its balance sheet, with the ratio of long-term debt to total assets dropping to just 1pc in FY14, from a tall 35pc in FY10, and has room to increase capacity utilisation.

KOHC has an annual capacity of 2.8m tonnes of grey cement and 150,000 tonnes of white cement. In his report, the CEO, Aizaz Sheikh, wrote that “New grey cement line operated at 79.78pc capacity utilisation during 2014, while the old grey cement line didn’t produce any clinker as the new line alone fulfilled the market’s demand”.

In 2014, clinker production stood at 1.63m metric tonnes and cement production at 1.90m metric tonnes. Local sales amounted to 1.90m metric tonnes and exports 0.291m metric tonnes.

The company paid a cash dividend of 30pc in 2012 after several blank years, and raised it to 50pc for 2013, along with declaring a bonus of 20pc. For 2014, it declared a cash dividend of 20pc. Its total assets stood at Rs14.15bn by the end of FY14.

Kohat’s paid-up capital stands at Rs1.55bn, with 15.96pc shares held by the general public. During FY14, six out of seven directors of the company and their family members (the sponsors) transferred an aggregate 70.8m shares — 55pc of the then-total paid-up capital — to ANS Capital (Private) Limited (the holding company).

From 2012 to 2014, KOHC’s turnover rose to Rs12.8bn from Rs9.3bn; operating profit to Rs4.5bn from Rs841m; after-tax profit to Rs3.2bn from Rs1.7bn; and shareholders’ equity to Rs8.6bn from Rs3.8bn.

“KOHC has been able to establish hefty cash reserves of Rs5bn (including short-term investments), with annual operating cash generation of Rs4bn,” says analyst Sajjad Hussain at BMA Capital. He believes that ‘other income’ would greatly add to the growth in bottom line. For the quarter ending September 30, the company posted a profit-after-tax of Rs682m, up 10.89pc from Rs615m in the same quarter of the previous year.

Most analysts project a bright future for cement producers owing to a resumption of private construction activity as the spring season approaches. Yet, the caveats include the breach of price agreement among producers, an extraordinary increase in coal prices, and a rise in the production capacity of competitive companies.

Published in Dawn, Economic & Business, January 12th, 2015

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