JS Global Capital Limited – Research Beep

Karachi, May 30, 2016 (PPI-OT): Cement silo for FCCL reportedly collapses

Cement silo for FCCL reportedly collapses

As per JS Global Capital Limited’s channels check, the cement silo (storage for materials and cement) of Fauji Cement’s (FCCL) plant collapsed over the weekend, destroying the coal mill and damaging the new production line of the company. This line was commissioned in 2011 and has a nameplate capacity to produce 7,560 tons per day (2.268mn tons per annum) of cement (66% of total 11,445 tons per day total production capacity) and contributes a significant chunk towards profitability of the company. JS Global Capital Limited’s discussions with industry sources suggest that this could prove to be a major loss as company will not be able to replace damaged line for a whole year (FY17F). Potential implications of this incident on JS Global Capital Limited’s forecasts are provided below:

JS Global Capital Limited believes that proceeds from insurance claims (major insurers are Adamjee and Jubilee Insurance) will not be sufficient to cover the current replacement cost of the plant (JS Global Capital Limited assume $80/ton for replacement of damaged parts.

Under worst case scenario, JS Global Capital Limited’s earnings forecast from FY16E-FY18F period will be revised down by 8-73% from FY16E-18F period, assuming only one line of 3,885 tons per day of cement (old line) continues production in FY17F and new line is replaced by the mid of FY18F.

JS Global Capital Limited’s Industry sources suggest that damage assessment will potentially be completed in approximately 10 days after which accurate information will be made available.

JS Global Capital Limited believes that capex of approximately Rs21bn (assuming US$80/ton replacement cost) will have to be incurred in FY17F for replacement and a cut in dividend can be expected given the uncertainty surrounding insurance cover.

JS Global Capital Limited believes that North based manufacturers with closed proximity and unutilized capacities such as Pioneer Cement (PIOC), Kohat Cement (KOHC), Cherat Cement (CHCC), DG Khan Cement (DGKC) and Maple Leaf Cement (MLCF) will be key beneficiaries of this development.