KASB Research – Cement Sector – Value Begets Value
Demand coming full circle will help overcome headwinds
– Over more than a decade, i.e since 2008, the cement sector has never witnessed such push from authorities to address the housing backlog in Pakistan which currently stands at more than 10mn and counting. Every year, the growth in this number continues to add to the shortage. Both the government and central bank continue to bring structural changes in the country whereby the construction activity is likely to take cement demand growth to an unforeseen level while it will also rejoice demand of allied industries (i.e. steel, glass, consumer durables, etc.). In all this foray of the government and relevant authorities, cement consumption is likely to be pushed full circle as removal of key impediments are being overcome by hook or by crook.
– Every 100,000 houses being built require an average of 6mnMT cement (13% of current domestic demand). Extrapolating this on to 10mn homes portrays a more than ideal picture (more than 600mnMT), which is too good to be true. However, at least one-tenth of this demand can generate a number which the current cement sector can easily address over a span of 3-5 years. This bodes well for the nation.
– We have reasons to believe this can materialize over the course of next few years where Pakistan is slated to witness aggressive demand growth in the medium term. Pakistan’s banking space has never witnesses this brute force from the authorities where they have to now scale at least 5% of private sector loans to housing and construction projects. Simultaneously, the ordinance to redeem the foreclosure law after 13 years has given banks a reason to become the most active ingredient of intermediation and provide subsidized loans under the Mera Pakistan Mera Ghar housing scheme. In this regard, regulatory changes are being made to overcome the housing impediments and quick loan processing is being enabled.
– The government is adopting add-ons to enable housing and overcome the risks related to intermediation by the banks. The initiation of international techniques of Mortgage-Backed Securities (MBS) via Pakistan Mortgage Refinance Company (PMRC) is set to multiply the liquidity towards these loans. This is augmented by formation of a Credit Guarantee Trust (CGT) which shields 40% of default risk on housing loans.
– All of the housing and construction amnesty based flows are an addition to the staple cement demand growth in Pakistan which normally is a result of private entities who only address the higher-income group of population. This will be added on by the infrastructure activity in the country which is likely to progress faster this year, underpinned by 61% higher PSDP allocations to the tune of PKR 2.1tn.
In this demand backdrop, most cement players have been able to pass on cost pressures from rising coal prices (which is already in backwardation). Our investment case carries an upside risk as and when coal starts coming off from its recent highs and cement producers are able to sustain prices. We have an OVERWEIGHT stance on the sector with LUCK, DGKC and MLCF as our top picks.