JS Securities Limited - JS Research.

Karachi -- November 03, 2022 (PPI-OT)

Cement - How are money managers positioning?

An underperformance of 22% by cement sector vs KSE100 in 7MCY22 has been followed by 8% outperformance in last 3 months. We spoke with various money managers and present key takeaways regarding any shift in views. Average allocation of domestic mutual funds in cements now stands at 14%, up from 12% in Jul-2022 (KSE-100 weight: 8%).

With consistently declining coal prices and attractive multiples, the sector is being seen as a potential alpha play. Coal has declined by 29% since Jul-2022, after a sharp rise of 2.4x during 7MCY22.

While our sample of investors agrees on fundamental positives of the sector, it does not rule out concerns on macros. Moreover, unfavourable repercussions of upcoming capacity additions by cement manufacturers are also among key concerns.

Change in investor sentiments emerge in cement sector

Russia Ukraine tussle resulting in higher coal prices and a harsh monetary stance by the State Bank of Pakistan (SBP) coupled with dull cement demand led to cement sector underperforming KSE-100 by 22% in 7MCY22 (KSE-100: -10%).

The sector was at its lowest in late July from where it has shown an 8% rise on back of retreating commodity prices. The change in sector sentiments also reflects in asset allocation of some investors. To note, average allocation of domestic mutual funds in same now stands at 14%, up from 12% in Jul-2022.

Nonetheless we have observed that allocation has been higher than index weight as cement sector's weight in KSE-100 stands at ~8%. We take a straight average of allocations to ensure that average is not swayed by differing assets sizes of funds. We spoke with various money managers regarding their current views on the sector and present key takeaways from our discussions.

Key takeaways

Unanimous view that the sector is trading at cheap valuations

Our sample of money managers was almost unanimous regarding the structural attraction of the sector. Investors are on board with the notion that valuations are at unprecedented levels, alongside better expected volumes during the next year over low base effect and rehabilitation demand due to damages caused by floods.

Moreover, the broader investor base also expects a reduction in interest rates during CY23. They are nonetheless concerned over political pressures impacting stock performance in the coming months.

View on the upcoming expansions in the cement sector

A key concern...