Bestway Cement Limited (BWCL)

Bestway Cement Limited (PSX: BWCL) is a market leader in terms of clinker capacity with nearly 18 percent of the share in the market. It is a subsidiary of Bestway Holdings incorporated in the UK founded in the early 80s. The company has plants in four locations: Hattar, KP where in 1994, a plant was set up with an initial capital outlay of $120 million with a capacity of 1.0 million tons, which was upgraded to 1.27 million tons by 2004 with capital enhancements. In 2001, the fuel source of the plant was converted to gas from furnace oil, later on converted to coal with a further investment of $10 million. According to the company, the conversion to natural gas and then to coal reduced the energy cost component, which is about 65 percent of the total production cost.
Bestway acquired its second cement plant located in Farooqia, KP by bidding for 85.29 percent of equity of Mustehkam Cement Limited following an offering by the Privatisation Commission. This plant had an installed capacity of 0.66 million tons costing Bestway $70 million. Bestway further raised its capacity to over 1.2 million tons by investing another $50 million.
Another plant for Bestway is in Chakwal with a capacity of 1.8 million tons per annum and another line of similar capacity was added to the plant in 2006. What put Bestway on top spot was the acquiring of Pakcem Limited, formerly Lafarge Pakistan Cement Limited in Kallar Kahar in 2015 with a capacity to produce 2.5 million tons annually. The bid was for 75.86 percent of the shares at a 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.
The company supplies mainly to the north zone of the country but also exports to India, Afghanistan and Mauritius. Aside from portland cement, it also manufacturers sulphate resistant cement (SRC), tile bond and grout. Recently at the Farooqia plant, the company added another 6000 tons of capacity per day (approximately 1.8 million tons annually) which went online in June-18.
Shareholders, acquisitions and efficiency
The Bestway group itself is diversified into banking, wholesale cash & carry business, retail, real estate, food and beverage, and rice milling aside from cement, owing UK's second largest cash & carry chain. Bestway group is also a joint owner of the Pakistan's third largest commercial bank UBL, and owns one of the biggest rice milling facilities in Pakistan.
Though the annual report for 2018 does not specify the distribution of shares among associated companies, only indicating that 60 percent shares were held by them, in 2017, the pattern of shareholding suggested that of the 60 percent, Bestway Holdings held 54 percent, Bestway Foundation 4 percent and Bestway Northern Limited 3 percent of the company's shares. Bestway's directors held 17 percent of the shares in Jun-18 while the general public has about 21 percent of the shares.
The company set up its first Waste Heat Recovery (WHR) unit at the Chakwal plant in 2009 and continued to set similar units at its other sites. The Kallar Kahar site of the acquired Lafarge Cement has a WHR of 12 MW operational since Dec-16 while the new brownfield expansion that came online in June-18 also comes with a WHR of 9MW of capacity. Bestway has also installed water conservation systems and will begin to rain harvest through the construction of big rain harvesting reservoirs, which would reduce its dependence on ground water.
Operational and financial performance
Bestway Cement has been one of the most stable cement manufacturers in the country with continuously expanding capacity to chase that elusive market leadership. Revenues have continued to grow with growing production on the back of new plants and acquisitions. A massive jump came in FY16 for instance, after the company acquired Lafarge, which contributed to the revenue in just the 70 days that it was operational. Capacity utilisation has also grown to 98 percent in FY17, which led to the need of another expansion. The new plant became operational as FY19 kicked off. In cement, the company has a market share of 18 percent and above, but according to the company's annual report, the sale of clinker accounted for 60 percent of all industry clinker sales for Bestway.
Though the company has pursued energy efficiency measures through WHRs, the margins for cement makers play the tune of global commodity prices. During times of lower coal prices, margins grow substantially while rise in coal prices result in lower margins, though demand and retention prices also play a huge role. Greater price competition as the market enters excess capacity has resulted in lower retention prices for cement manufacturers particularly in the north. For instance, revenue per unit of sales in FY18 fell by 11 percent while costs per unit increased by 2 percent. Clearly the fall in margins to 36 percent from 44 percent were because of reduced revenue per unit of sale. Since FY15, exports had been falling due to lower receptiveness of the Afghan market but domestic demand was making up for it. Domestic demand is also where cement makers get a greater price per unit.
The company has managed a healthy cash flow over the years keeping finance costs low and likes to invest cash back into the business. During FY18, the company chose to utilise short term loans for the expansion project "in anticipation of surplus cash flows post completion of projects".
Snapshot of latest financials and outlook
The fate of cement manufacturers is tied to the construction industry, which is itself backed by mega government development projects. During the PML-N regime, the domestic demand boom came on the back of massive spending on infrastructure projects and PSDP expenditure. Even when exports were falling, the cement industry did not worry too much, and in fact, dedicated all efforts toward domestic markets. Too much has changed since then. In the first half of FY19, domestic demand has come down substantially, especially in the north zone. Though sea borne exports grew favouring the southern players, Afghanistan market remained subdued, which is where north players mostly viably export. There has also been an increased price competition in the north zone, and the need to grant discounts in the domestic market to get excess cement out in the market.
With that backdrop in mind, in 1HFY19, Bestway Cement showed a 5 percent growth in revenue (with volumes dropping in the first quarter but improving in the second) which translated to an 11 percent growth in the bottom-line, something unimagined perhaps without the company getting a tax reversal during the period. In fact, without the tax reversal, the company would have witnessed profits drop by 9 percent. To its credit, Bestway kept a massive check on its indirect costs, given that it was also not exporting too much, bringing down indirect costs as a share of revenue to 6 percent compared to 9 percent in 1HFY18.
Companies in the north have raised prices-despite competition-by up to 12 percent between Jul-Dec18, but these could not safe margins from falling since costs of production were much higher. Higher coal prices (up 10% on average) and increased import costs due to rupee depreciation (by 14%). Margins as a result fell to 33 percent in 1HFY19 from 37 percent in 1HFY18.
It seems that the end of the fiscal year would tell a sobering tale. Domestic demand will remain subdued as PSDP expenditure has been cut down. Exports may not revive as much for north players like Bestway since both Afghan and Indian market are proving to be difficult, especially now since India has withdrawn MFN and political tensions have heightened. On the costs front, coal prices may face a downward trend, which will bode well for local cement manufacturers but any further depreciation of the rupee could easily take away that positive affect. Meanwhile, any new government backed development spending is not on the cards, even if there has been a lot of noise on the subject of the Naya Pakistan Housing Plan. That plan, if it does in the capacity that is claimed by the government, will start to take shape in FY20.

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Bestway Cement: Unconsolidated half year

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Rs (mn)                        1HFY19      1HFY18      YoY

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Sales                       27,709.17   26,459.52     4.7%

Cost of Sales               18,606.62   16,557.34    12.4%

Gross Profit                 9,102.54    9,902.17    -8.1%

Distribution costs             793.21      710.24    11.7%

Administrative                 400.32    1,156.53   -65.4%

Other operating expenses       483.21      541.65   -10.8%

Other income                    60.49       82.31   -26.5%

Finance costs                  692.94      300.34   130.7%

Profit before tax            7,525.93    8,276.90    -9.1%

Taxation                       645.24    2,082.74   -69.0%

Net profit for the period    6,880.68    6,194.16    11.1%

Earnings per share (Rs)         11.54       10.39    11.1%

GP margin                         33%         37%   -12.2%

NP margin                         25%         23%     6.1%

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Source: PSX notice

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Pattern of Shareholding (as on June 30, 2018)

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Categories of Shareholders                           Share

Directors and their spouse(s) and minor children    17.16%

Associated Companies                                 60.3%

Banks, DFIs, NBFIs                                   0.29%

Insurance Companies                                  0.16%

Modrabas and Mutual Funds                            0.17%

General Public

a) local                                            20.61%

b) foreign                                           0.95%

Others

i) Foreign companies                                 0.03%

ii) Joint stock companies and trusts                 0.32%

Total                                                 100%

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