Lucky Group earnings may remain at Rs89 per share: Report

Despite the economic slowdown and flooding situation, Lucky Group earnings are expected to be Rs 89 per share in the financial year (FY23).

Earnings from domestic cement operations are likely to arrive at Rs25/share, while those from foreign operations are likely to remain flat at Rs16/share.

Profits from the automobile business may contribute Rs10 per share. However, EPS of Rs19 and Rs17 from ICI (one-off) and LEPCL, respectively is likely to support group profitability in FY23.

Cement Sector contribution to Lucky Group Earnings

Cement Segment to contribute Rs41/share in FY23 Due to efficient inventory management and technical fee income from Nyumba Ya Akiba (Congo), the profitability of domestic cement operations improved by around 20 %YoY to Rs38/share in FY22.

With respect to foreign cement operations, earnings witnessed a significant jump of 44 %YoY (Rs16/share) in FY22 due to the full-year impact of the Najmat Al Samawah plant in Iraq which became operational back in 4QFY21.

While higher interest rates and surging prices of construction inputs are likely to weigh on recurring demand in FY23.

However, rehabilitation activities in the wake of recent floods may lead to a one-off spike in construction activities in 2HFY23.

On the foreign front, we expect demand in Iraq to remain firm in FY23 thanks to higher oil prices, while higher infrastructure spending is likely to lift volumes in Congo, Sherman Research said in a report.

 Hence, we expect domestic and foreign operations to contribute around Rs25 and Rs16 per share, respectively in FY23 group earnings.

Automobile Segment contribution

The automobile segment is likely to contribute Rs10/share despite multiple price hikes, exchange rate volatility coupled with restrictions on consumer financing by SBP negatively impacted the FY22 profitability of LMC.

Although, in collaboration with Samsung, the company started assembling cell phones during the year, however, this venture has relatively thin margins.

Thus, earnings declined by 16 % to around Rs19/share during FY22.

With the added pressure from restrictions on CKD imports on the automobile sector which was already burdened by higher refinancing rates/lower discretionary spending, analysts estimate a drastic decline in industry volumes of around 40 -45 %YoY in FY23. Consequently, we expect the automobile segment to post EPS of Rs10 in FY23.

Power segment contribution

Power Segment is likely to become the third largest earnings contributor in FY23/

During March 2022, LEPCL achieved COD of its 660MW low btu coal-fired power plant, which is currently running on ICI – 5 imported coal from Indonesia.

On the back of the recent hike in base tariff by NEPRA, we believe that higher recovery/better liquidity of WAPDA will result in timely payments to the IPPs.

Analysts expect LEPCL to receive payments on a priority basis being one of the cheapest power producers based on imported fuel.

Furthermore, with the likely completion of Sindh Engro Coal Mining Company (SECMC) Phase 3 by June 2023, the cost of generation is expected to reduce to around Rs 5 – 6/kwh since the plant will shift from imported coal to Thar coal. LEPCL’s earning contribution is expected at around Rs17/share in FY23.

Contribution of Chemical Segment

Chemical Segment is likely to remain resilient Despite the imposition of the super tax, ICI’s FY22 profitability grew by 52 %YoY to Rs91/share owing to a one-off gain on acquiring the controlling stake in Nutrico Pakistan Ltd . (impact of Rs20/share) and improved profitability from polyester, soda ash and nutrition segment, among others.

This resulted in an EPS contribution of Rs15 in LUCK consolidated earnings.

With the momentum of economic growth likely to decelerate in FY23, analysts expect ICI’s core profitability to arrive at Rs65/share, down 17 %YoY compared to Rs80 in FY22 (net of one-off gain and super tax).

However, due to the dilution of ICI’s stake in Nutrico Morinaga Ltd . by 21.7mn shares (26 . 5 %), the company is expected to book a one-off gain of around Rs60/share on the proceeds from this transaction.

ICI will retain around 24 . 5 % stake in Nutrico Morinaga post-dilution (current stake of 51 % ). Thus, earnings contribution from ICI in LUCK consolidated earnings are expected at around Rs19 in FY23.

Key upside triggers 1) Rehabilitation demand As per our understanding, rehabilitation activities in the aftermath of recent floods are estimated to generate additional demand to the tune of 4.5-5mn tons, which is expected to materialize in a staggered manner over a period of 1.5-2 years.

LUCK having a presence in both the north and south regions is likely to benefit from these reconstruction activities.

However, the additional demand hinges on the successful materialization of donations/relief being announced by the United Nations, World Bank, Asian Development Bank and other donor agencies/countries.

Recovery of overdue receivables

Due to the upward revision in base tariff by NEPRA, there are expectations for no further pileup of LEPCL’s circular debt in FY23.

However, in case of government divert funds collected from Fuel Charge Adjustment (FCA) to IPPs there are chances that LEPCL’s borrowings will reduce (estimated near Rs50bn) and consider a payout to the holding company.

Share buyback

LUCK recently announced a buyback of up to 10mn shares (around 9% of the free float) which is expected to commence over a period of 6 months.

Once this announcement reaches the implementation phase, we expect the sentiment of market participants will improve towards the script. Moreover, this will improve EPS and valuation going forward.