Pioneer Cement Limited

Pioneer Cement Limited (PIOC) was incorporated as a public listed company in 1986 and is principally in the business of production and sales of cement. The company was established as part of the Noon Group of Companies, a prominent business group with subsidiaries including Nurpur Foods, Noon Sugar Mills and Noon Pakistan. The PIOC plant is located in Chenki district Khushab on the banks of Jhelum River near Sargodha catering to the northern block. The company commissioned its first production line in 1992 and started off with a production capacity of 2,000 tons of clinker per day which was later brought up to 2,350 tons per day in 2005. The facility started using coal fired system replacing furnace oil. In 2006 a second production line was introduced with a capacity of 4,300 tons of clinker per day.

Company's holdings

The majority stake of the company was held by Noon Group but in 2009, 24.6 percent (49.1 million shares) of the company's shares were bought by Vision Holdings Middle East Limited (VHMEL) registered in British Virgin Island. Until the outgoing FY15, VHMEL held 47 percent (106 million shares) of the company's shares whereas 5 percent were held by Banks, 13.4 percent by mutual funds, 17.8 percent by local public and 7 percent by other foreign companies. The total foreign stake in PIOC currently stands at 54 percent.

Six-year operational and financial performance

PIOC current holds 4 percent of the total cement production capacity making it one of the smaller cement players in the industry. Its capacity stands at 1.9 million tons of clinker and 2 million tons of cement production per annum but the company has had idle capacity between 40-45 percent in the past six years.

Clinker production fell from 1.1 million tons of clinker to 1 million tons between 2010 and 2015 while cement production fell to 1.21 million tons from 1.26 million tons in this period. Dispatches on the other hand to the domestic rose-going from 1 million tons to 1.143 million tons. Exports' share to total dispatches went from 15 percent to 6 percent between FY10 and FY15; total dispatches fallen by 64 percent to 68 thousand tons in FY15 against 192 thousand tons in FY10.

Net revenues however show an encouraging picture, with a jump of 118 percent-from Rs 3.8 billion in FY10 to Rs 8.4billion in FY15. While the company incurred (after-tax) losses of Rs 591 million in FY10, the company bounced back with a robust after-tax profit of Rs 3.5 billion in FY15. Between FY11 and FY12, the company's profits grew by 398 percent and more than doubled in FY13.

Gross profit margins are a good indicator in this case demonstrating how far the company has come-climbing from negative 2 percent to 32 percent in FY13 and 38 percent in FY15. In the last quarter of FY15, margins stood at 42 percent. To put these margins in perspective, between FY10 and FY15 where margin soared to 38 percent, total dispatches fell by 5 percent with a significant fall in exports and an increment increase in local dispatches (6 percent).

Snapshot of 9MFY16 and Q3FY16

In the nine-months ending March 2016, production of clinker reached 0.8 million tons, up by 20 percent from 0.7 million tons in 9MFY15. Cement production went up by 14 percent in year-on-year growth, reaching 0.98 million tons in 9MFY16. Total dispatches also grew by 14 percent. Capacity utilisation in 9MFY15 stood at 49 percent that went up significantly to 59 percent in 9MFY16. Margins were an impressive 41 percent in 9MFY16 against 36 percent in 9MFY15.
Quarterly results are even more impressive: in Q3FY16, margins stood at 43 percent against 39 percent in Q3FY15 bragging profits of Rs 1 billion in Q3FY16 against Rs 0.7 billion Q3FY15.

Stock performance

PIOC stock has rallied against the KSE-index maintaining strength in the past year. The stock climbed from Rs 82.5 at the tail end of FY15 to Rs 107 by June of 2016, a jump of 30 percent against a 16 percent growth in the benchmark index. The stock price fell between June to December 2015, down to its lowest yet of Rs 77.03 but soon bounced back with a much stronger second half of the year.

Opportunities and future outlook

Domestic demand for cement is expected to grow massively with the upcoming infrastructure development for the next three to five years- Rs 188 billion has been budgeted for the construction of roads, highways and bridges for FY17 with an increased budget of Rs 800 billion in PSDP together with CPEC projects kicking in. There will be plenty for all the players to get a share in. PIOC with its smaller market share would do well to market its products strategically in key locations as it is competing with Lucky running at 99 percent of its capacity; Fauji at 75 percent and Attock at 100 percent of their capacities.

A cursory look at gross profit to sales ratio shows that almost all the firms recorded margins ranging from 34 percent to 42 percent in the last fiscal. From that perspective, PIOC too is not far behind and holds a healthy position recording a margin of 41 percent in its nine-month accounts ending FY16.

Two areas where PIOC has lagged behind are energy efficiency and lack of future planning. In anticipation of 15-16 percent growth in local demand of cement, most cement firms have announced expansions plans to add 11 to 19 million tons of capacity in the next three years but no such expansion plans have been announced by the company in the near future.

However, keeping in mind its lower capacity utilisation and efficiency, PIOC signed an agreement with CITIC industries to purchase a Waste Heat Recovery System (WHR) for its plant in Punjab. The cost of the project is Rs 1.5 billion and will add 12 MW till FY19 with an installed capacity of two million tons. The plant is expected to meet about 38 percent of the company's total electricity requirement.

The increased FED of Re 1/ per kg of cement (Rs 1000 per ton) will result in a price hike between Rs 30-35 per bag and industry wide expansions could also elicit a tough price competition which could affect margins for smaller companies like Pioneer.

On the international trade front, exports with key players will likely continue to fall. Pakistani exports to Afghanistan have been falling throughout the year due to Iranian cement reaching that market faster. Total dispatches to Afghanistan grew in May but overall the market does not seem receptive to Pakistani cement. PIOC's proximity to Lahore makes it a choice supplier to India and Nepal but again other more suitably placed cement producers have a better chance, plus the low-priced competitors from the ASEAN region.

Overall, outlook is positive with rising local demand that would cater to PIOC's idle capacity, and the 12 MW of power generation through WHR is a welcome addition that would release reliance on the national grid. With the economy growing and stabilising considerably, with high prospective spending on construction and real estate in the offing, now is the ideal time for the company to think about reinvesting the company's profits into new expansion plans.