Topline Reiterates ‘Buy’ on Lucky Cement with 77% Total Return

Staff Report
Topline Pakistan Research has reaffirmed its “BUY” stance on Lucky Cement (LUCK), citing a revised June 2025 Sum of the Parts (SOTP) based Target Price (TP) of Rs1,561 per share. This new target offers investors a potential upside of 73%, with a total return of 77%.

According to Topline, Lucky Cement remains a top pick for several reasons:

1. Cement Business: The company is set to benefit from superior cement margins and profitability due to efficient operations and timely expansion of its new cement plant.
2. Automotive Sector: A reduction in the policy rate and the anticipated launch of new vehicle models are expected to boost auto and mobile sales.
3. LCI Expansion: Lucky Cement Industries (LCI) plans to expand its soda ash plant by 200k tons by FY26. Additionally, favorable developments in the Pharma sector, including the deregulation of non-essential products and Pfizer’s acquisition, are expected to enhance profitability.Lucky Cement: Mobile Segment Thrives, Auto Sector Grapples
4. Coal Power Plant: Improved recoveries in the coal power plant operations are contributing positively to the company’s outlook.
5. Foreign Operations: Strong margins and profitability from foreign cement operations, driven by changes in the fuel mix and expansion plans in Iraq, are expected to bolster overall performance.
6. Strong Cash Generation: The company anticipates strong annual cash flows, supported by exceptional EBITDA margins from its cement business and dividends from subsidiaries and associates.

Topline estimates a consolidated EPS forecast of Rs260.8 for FY25F and Rs294.2 for FY26F, with a 3-year (FY24-26) earnings CAGR of 21%.

The report highlights the superior margins and profitability of LUCK’s local cement business. Gross margins are expected to improve to 34-36% over FY24-FY26 (up from 27% in FY23) due to a decline in coal prices and the addition of 38MW renewables to its power mix. Cement dispatches are projected to grow at a CAGR of 6% during FY24-26, outpacing the industry average of 4%, thanks to the commercial operations of its brownfield expansion in the north region.

In the automotive sector, Lucky Motors is poised to benefit from a reduction in policy rates, which is expected to stimulate consumer financing for auto loans.

The launch of a new hybrid vehicle variant in late 2024 or early 2025 is projected to increase plant utilization to 27% by FY26. Additionally, the continuation of reduced sales tax rates on hybrid vehicles further strengthens the case for launching new hybrid models by KIA.

The mobile segment is also expected to see improved utilization, reaching 28% by FY26, following the removal of import restrictions.

Topline also notes the positive outlook for LCI, which is planning a significant expansion of its soda ash plant and benefiting from the deregulation of non-essential pharma products. LCI’s profits are projected to rise to Rs11.5bn/12.6bn in FY25/26 from Rs10.7bn in FY24.

For Lucky Electric (LEPCL), the report indicates improving cash flows amidst easing concerns over power sector circular debt. LEPCL operates at a fixed USD ROE of 27.5%, and recent improvements in power tariff revisions have significantly enhanced its collection ratio.

Foreign cement operations are another strong point, generating significant cash flows and eyeing expansion. Combined profits from foreign operations are expected to contribute 20-21% to LUCK’s consolidated income in FY25/26, driven by strong demand, efficient fuel mix, and planned expansion in Iraq.

Overall, Topline expects LUCK’s unconsolidated EBITDA (including dividends from subsidiaries) to improve significantly, reaching Rs55bn by FY27. If dividend income from Lucky Electric is included, the EBITDA could reach Rs80bn.

In terms of valuation, LUCK offers a potential total return of 77% to the June 2025 SOTP-based TP of Rs1,561 per share. The stock is currently trading at an FY25F PE of 3.5x, compared to its 10-year average PE of 10.0x (excluding the Covid-affected year FY20), representing a 65% discount. On EV/ton, LUCK is trading at US$43/ton, a 56% discount to its last 10-year historic EV/ton of US$97/ton.

Key Risks: The report identifies several key risks, including:

1. Lower-than-expected policy rate declines affecting cement, auto, and mobile sales.
2. Declines in local cement prices due to lower capacity utilization.
3. Higher-than-expected PKR depreciation leading to increased prices of coal, autos, and mobiles.
4. Lower-than-expected utilization of auto and mobile plants due to reduced demand.
5. Unforeseen government policies or geopolitical events affecting foreign cement operations.
6. Delays in the planned expansions of the soda ash and Iraq clinker plants.