Bestway Cement Limited (BWCL)

Brief history Bestway Cement Limited (PSX: BWCL) is a subsidiary of Bestway Holdings incorporated in the UK. Bestway Group which was founded by Sir Mohammed Anwar Pervez during the early 80s. Currently, the is a market leader in terms of capacity with nearly 18 percent of the market share taking top spot 2015 when it acquired Lafarge Cement.
The Bestway group has one of the most diversified portfolios apart from his thriving cement business. The group is involved in banking, wholesale cash & carry business, retail, real estate, food and beverage, & rice milling. The group owns UK's second largest cash & carry chain; is a joint owner of the Pakistan's third largest commercial bank UBL (holding 7.65 percent of shares), and owns one of the biggest rice milling facilities in Pakistan.
The company is a success story with mergers, acquisitions and expansions to its credit. Its first plant was set up in Hattar with an initial capacity of one million tons annually. The plant's capacity was enhanced to 1.2 million tons per annum in 2002 and two years later, the company set up a 1.8 million tons per annum plant in Chakwal. In 2005, Bestway acquired its third cement plant, Mustehkam Cement following an offering by the Privatization Commission. This plant had an installed capacity of 0.66 million tons and was not operational. Later, this plant's capacity was enhanced to over 1.2 million tons. Bestway then set up its fourth cement plant in Chakwal with a capacity of 1.8 million tons per annum. After acquiring Lafarge, Bestway Cement has a market capacity of over 8 million tons annually. In FY17, the company was running on 98 percent capacity utilization.
Bestway has a wide product range including Ordinary Portland Cement, High Early Strength Cement (Stallion), Sulphate Resistant Cement (SRC), innovative tile bond (Xtreme Bond) and grout (Xtreme Grout). The company set up its first Waste Heat Recovery (WHR) unit at the Chakwal plant in 2009 and continued to set that up at other locations. The Kallar Kahar site of the acquired Lafarge Cement has had a WHR of 12 MW operational since Dec-16. Meanwhile, the company is gearing up for 6,000 tons per day (1.8 million tons annually) of clinker capacity enhancement at its Farooqia site along with the WHR.
Shareholders, acquisitions, investments & efficiency Over 54 percent of the company's shares were owned by Bestway Holdings Limited according to Annual Report in 2017, while 23 percent are held by individuals in the public. Another four percent are held by Bestway Foundation, five percent are held by Dawood Parvez who is a Director in the company while four percent of the shares are held by the Chairman, Mohammed Anwar Pervez.
In 2015, Bestway acquired Pakcem Limited (formerly Lafarge Pakistan Cement Limited) with a successful bid for 75.86 percent of Lafarge Pakistan's shares at an enterprise value of $329 million. The company acquired another 12.07 percent shares of the company through the public offering process, taking its shareholding in Lafarge Pakistan to 87.93 percent. This is plant located in Chakwal with a capacity to produce 2.5 million tons annually.
Along with the company's investment in UBL, Bestway also acquired 50 percent of the issued share capital in Ecocem Pakistan (Private) Limited held by Lafarge Industrial Ecology International for a consideration of Rs 22.4 million during FY16. Ecocem is in the business of sorting, processing and selling solid municipal waste. However, Ecocem has been in losses and is liquidating the company with Bestway's investment not recoverable.
Operational and financial performance The company saw a huge jump in revenues during FY16 after boosting capacity. In fact, in the 70 days to 30 June 2015, according to the company's annual report, Lafarge's plant contributed revenue of Rs 2.18 billion and profit of Rs 209.66 million to Bestway's financials. Combined capacity utilization for FY16 stood 73 percent compared to 70 percent in FY15 with the Farooqia and Hattar plant running at over 85 percent capacity. In FY17, the company with all its plants running at maximum capacity together ran at 98 percent and so the upcoming expansion of 1.8 million tons is coming at the right time.
The company has been consequently improving its margins by cutting down on costs with an active use of WHR at each of its plants. Its power and energy costs constitute about 60-70 percent of all costs so power tariffs and prices for imported coal play a predominant role in the direction margins take at a given level of sales. In fact, due to fluctuations in coal prices, power costs were 60 percent of total cost of sales in FY15 brought down to 53 percent in FY16 but rising to 69 percent in FY17 where margins resultantly fell.
The company's net margins went up from one percent to 29 percent between FY11 and FY15 and despite falling gross margins in FY17, managed to retain its profit margin at 26 percent same as FY16. Where during FY16, administrative expenses went up from 2 percent to 5 percent of sales; during FY17, the company managed to keep overheads at 10 percent of sales. With falling exports, overheads per unit of sales are likely to keep low.
So far, the company's finance costs have reduced (as at FY17) which comes due to the substantial repayments of loans enabled by "healthy cash flows and efficient cash management", according to the Annual Report of Bestway. Giving credit where it is due, it is true that the company has done remarkably well on that front and the new plant expansion is being financed by internal cash. Speaking to BR Research, the company's Financial Controller Musadiq Ali Khan said that the company may be seeing debt financing in the future but so far, it is managing well by investing back cash into the business.
Snapshot of Q1FY18, and outlook Last year, Bestway was in the midst of the hype on who gets the Dewan Cement plant that was up for grabs and several players were bidding for it. Bestway announced that it would acquire the plant and assets after a competitive bid but only a few months of announcing that, it bowed out of that potential deal. Addition of another one million tons of cement would have ensured Bestway remained on top. Even so, after taking into account all the expansions about to come through, Bestway will manage to be top 3 alongside DG Khan Cement and Lucky Cement.
Competition in the north will get fiercer and such has already started to translate into lower retention prices. In fact, in Q1FY18, retention price on average came down by Rs 250-which along with the nearly 60 percent increase in the price of coal has lower margins significantly in the outgoing quarter of FY18.
So despite, registering an average growth of 12 percent in sales in Q1FY18; the company saw a six percent drop to its bottom-line. As exports fall, distribution costs are lower than in the past and so the company managed to bring down its overheads per unit of sales to 9 percent in Q1FY18, against 11 percent in Q1FY17.
Competition in the north will soon be getting tougher as more expansions come through and retention prices are likely to head south. The companies right now can bank on lowering of coal prices as they will continue to put a huge dent on margins going forward given their hefty share in costs. Logistics and transportation costs are also higher for players in the north as inputs need to transport via ports in the south. To double down on that, Bestway signed an MOU with Pakistan Railways for the transportation of coal from Port Qasim-with about 14,000 tons of coal moving from Bin Qasim to Khattar and about 6,000 tons to Pind Dadan Khan. This is the smartest move as it will bring down the added cost that players in the north pay compared to those in the south.
On the revenue side, the company gives price discounts which isn't great for the bottom-line but remains a common practice among players. However, with such a strong balance sheet, and a solid presence and marketability of the Bestway brand, the company's is well-placed to capture the rising demand.
However, much of it will come from domestic markets as exports have been falling for the industry on the whole and continue to do so. As more capacity comes onboard, local demand will not be able to absorb the whole of expansion and the sector will be left with idle capacity. Given exports are falling, that becomes dangerous territory. The sector must spend marketing dollars on reaching out to other markets so when there is a supply glut in the local market, it can ship it off to markets where demand exists even if it has to take a price cut on it.

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Bestway Cement Q1FY18

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Rs (mn)                           Q1FY18      Q1FY17    YoY

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Sales                          12,913.72   11,579.56    12%

Cost of Sales                   8,042.40    6,208.24    30%

Gross Profit                    4,871.33    5,371.31    -9%

Administrative                    559.36      569.53    -2%

Distribution costs                314.35      422.01   -26%

Other operating expenses          268.83      281.58    -5%

Finance cost                      170.88      300.99   -43%

Profit before tax               4,043.18    4,357.19    -7%

Taxation                        1,046.72    1,154.75    -9%

Net profit for the period       2,996.46    3,202.44    -6%

Production (mn tons)                8.20        8.07

Utilization of cement capacity       98%         72%

Earnings per share (Rs)             5.03        5.37    -6%

GP margin                            38%         46%   -19%

NP margin                            23%         28%   -16%

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Source: PSX notice

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Prominent shareholding (as at June 2017)  Shares           %

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Associated companies                 359,685,800         60%

Bestway Holdings Limited             321,170,905         54%

Bestway Foundation                    23,323,432          4%

Bestway Northern Limited              15,191,463          3%

Directors, CEOs and family            92,931,036         16%

Dawood Parvez- Director               28,188,568          5%

Mohammed Anwar Pervez- Chairman       21,640,779          4%

General Public                       137,132,051         23%

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Source: Company accounts

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Production, Capacity & Utilization

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                     FY17          FY16

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Hattar

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Capacity        1,230,177     1,170,000

Production      1,217,777       944,860

Utilization           99%           81%

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Farooqia

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Capacity        1,204,994     1,109,700

Production      1,204,993       914,719

Utilization          100%           82%

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Chakwal

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Capacity        3,428,700     3,428,700

Production      3,284,640     2,446,909

Utilization           96%           71%

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PakChem

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Capacity        2,375,911     2,367,090

Production      2,375,911     1,516,982

Utilization          100%           64%

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