Lucky Cement prices GDRs at 9% discount

Pakistan's largest cement producer raises $109 million after corrections in the stockmarket and the value of the local currency conspire to reduce the anticipated deal size.
PakistanÆs largest cement producer, Lucky Cement, has brought proof that international investors have not lost interest in Pakistan after the political unrest in the second half of last year. Sure, the demand for the companyÆs inaugural issue of global depositary receipts (GDR), which was priced early yesterday, was not as overwhelming as for the three GDRs by Pakistani issuers in the fourth quarter of 2006 and last year, but it was solid enough û especially in light of the volatility that continues to hamper equity markets across Asia and which is still making investors hold a large portion of their assets in cash.

The GDR attracted more than 40 investors and about $290 million worth of demand, which was enough to cover the final deal size of $109 million two-and-a-half times over. In line with most other recent Asian deals, the orders were highly price sensitive though, and the price ended up at a 9% discount to WednesdayÆs local close of PKR132.

Merrill Lynch was the sole global coordinator and bookrunner for the offering, while KASB, which is a Merrill partner in Pakistan, acted as a financial adviser to the issuer.

The company, 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, sold 15 million GDRs, which was slightly less than the 15.6 million it initially offered. Each GDR is equal to four common shares and the total deal accounts for about 23% of the enlarged share capital. The price was set at $7.2873 per GDR, which translates into PKR120 per common share.

The final deal size was below the $125 million to $150 million talked about at the beginning of the roadshow, but aside from the slight reduction in the number of shares on sale and the fact that the discount was set towards the wide end of expectations, this was largely the result of a decline in the overall market during the marketing period. The benchmark Karachi 100 index fell about 6% and LuckyÆs own share price declined 8%, but perhaps even more importantly the Pakistani rupee lost about 8% of its value towards the US dollar while the deal was in the market, which further eroded the deal size in dollar terms.

However, Pakistan remains one of the best performing markets in Asia year-to-date with a gain of about 3% and at the time of pricing Lucky CementÆs share price was up 18% so far this year, in an environment where most stocks are still in the red. And even though the share price fell 5% yesterday in the wake of the deal, it remains an outperformer.

This obviously helped increase the attraction of the deal, but sources say the companyÆs Middle Eastern export story was also a strong buying argument. In the nine months to March this year, the company accounted for about 40% of the countryÆs cement exports and among other places it was supplying cement to companies in Saudi Arabia and Kuwait, as well as Dubai, where construction is booming. Aside from the beneficial location of one of its cement plants near the port of Karachi, its exports into the Middle East have also been 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.

Lucky Cement is also a long-term exporter to Afghanistan and Iraq, while some of its newer markets include several African states, Russia and India.

ôCement is a cyclical sector, but for the next two to three years, people expect the Middle Eastern story to continue to support Lucky CementÆs earnings,ö says one observer. The capital raised through the GDR issue will also allow the company, which already has an 18% share of the domestic market, to further differentiate itself versus other Pakistani cement producers, he adds.

Part of the money raised will be used 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 over the next three years.

It will also use part of the proceeds for two other projects currently in the works. One is the construction of a storage silo facility at the Karachi port that will complement its recently established transportation and ship loading facility and 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, analysts say.

The final 9% discount to the underlying common shares was wider than on the GDRs issued by MCB Bank and United Bank, which were priced at a gap of 2.9% and 5.3% versus their common shares. However, it was slightly smaller than the 9.6% discount obtained by government-controlled Oil and Gas Development Corporation (OGDC) on its $813 million GDR issue in December 2006.

Lucky CementÆs GDRs will be listed on the London Stock ExchangeÆs Professional Securities Market.
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