Lucky Cement aims to revive Pakistan GDR issuance

Strong regional demand for cement and an outperforming stockmarket are key selling points as Pakistan's largest cement producer goes on the road with a $150 million deal.
PakistanÆs largest cement producer, Lucky Cement, on Sunday started marketing a global depositary receipt (GDR) issue that could raise between $125 million and $150 million based on current market prices.

If successful, this will be the first GDR issue from Pakistan since United Bank raised $653 million in June last year. At that time, Pakistan had a healthy pipeline of GDR issuance candidates, but the political unrest that took hold in the third quarter, and led to the assassination of former prime minister Benazir Bhutto in December, put all share sale plans on hold. Bankers are optimistic that the issuance will resume now that the country has got a new government in place, but a successful completion of this first deal will be quite key for maintaining the interest from cash-rich international investors. The previous government had a privatisation fund raising target of about $15 billion over the next five years and whether that target remains in place or not, most analysts who follow Pakistan expect the new government will continue to sell stakes in various government entities.

Domestic investors have already shown their confidence in the economy by pushing the benchmark Karachi index 10% higher since the beginning of the year. This makes it the best performer among the major Asian markets year-to-date, ahead of Taiwan with a 6.7% gain. Apart from Sri Lanka, these are the only two markets that are up on the year.

Underpinning the investor optimism is an expectation that Pakistan will generate GDP growth of about 7% this year. This will benefit Lucky Cement through the governmentÆs infrastructure spending programme, but the company is also a large provider of cement in the Middle East where construction is booming. In the nine months to March this year, the company had an 18% share of the Pakistan cement market and accounted for about 40% of the countryÆs cement exports.

Its advances into countries such as Saudi Arabia and Kuwait and cities like Dubai and Abu Dhabi are helped by the fact that several other countries, including India and Egypt, have banned cement exports because of a shortage of the product in their home markets. But Lucky CementÆs location near the port in Karachi is also a key advantage as it is able to keep transport costs lower than many of its competitors. It is also a long-term exporter to Afghanistan and Iraq, while some of its newer markets include several African states, Russia and India.

The company is raising cash partly to pay for the addition of two new production lines at its Karachi plant, which will increase its annual cement production capacity by 2.5 million tonnes per annum to 9 million tonnes. Lucky Cement has pre-funded part of this project with loans, however, and construction is already well under way. By the end of this year, it will have boosted its production capacity to 7.5 million tonnes from 6.5 million tonnes at the end of 2007.

Lucky Cement, which is controlled by the Yunus Brothers Group û one of the largest export houses in Pakistan with businesses ranging from textiles to power generation û is offering close to 25% of its issued share capital in the form of 15.6 million GDRs that will be listed on the London Stock ExchangeÆs Professional Securities Market. Each GDR is equal to four common shares and, according to a company statement, all the DRs are targeted at institutional investors outside Pakistan. The price will be fixed in relation to the local shares and, if the three deals that have been completed since MCB Bank reopened the market in October 2006 after a 13-year draught of new GDR issuance are any guide, the discount is likely to be somewhere between 2% and 10%.

MCB Bank, which was the smallest of the three at $150 million, was priced at a 2.9% discount to the underlying shares. A month later, government-controlled Oil and Gas Development Corporation (OGDC) sold $813 million worth of GDRs at a 9.6% discount and last year United Bank fetched a 5.3% discount on its $653 million offering.

Merrill Lynch is the sole global coordinator and bookrunner for the Lucky Cement offering, which will remain open until May 7. KASB, which is a Merrill partner in Pakistan, is acting as financial adviser to the issuer.

Aside from the capacity expansion, Lucky Cement will use part of the proceeds for two other projects currently in the works. One is the construction of a storage silo facility at the port that will complement its recently established transportation and ship loading facility which can handle up to 6,500 tonnes per day. The second project is the conversion of an existing captive power generation facility at its Pezu plant in northern Pakistan from being fired solely by oil to being able to handle both oil and natural gas. This follows the discovery of natural gas reserves about 150 kilometres from the plant and should help reduce the companyÆs power costs as well as the cost of cement production.

ôThis is a great achievement and it will have a significant impact on the overall profitability of the company,ö Lucky Cement said in its latest annual report.

The company posted a 20% increase in net profit to PRs665.3 million ($10.3 million) in the three months to March from a year earlier. For the first nine months of this fiscal year (which ends in June), the net profit increased by 50% year-on-year to PRs2.0 billion.
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