• International Cement Group (SGX:KUO)'s FY21 revenue of S$181.4m (+28.1% y-o-y) was driven by full year contribution from Alacem cement plant in Kazakhstan, slightly offset by slowdown in construction activities in Tajikistan and Singapore’s aluminium segment. Gross margin improved 1.2% pt to 41.2% due to lower cost of raw materials in Kazakhstan.
• Overall, International Cement Group's net profit increased by 3-fold to S$26.5m, coming 15.8% ahead of our estimate largely due to stronger than expected growth in revenue, which exceeded our forecast by 15.7%.

International Cement Group's Near Term Headwinds

• Near term headwinds to International Cement Group include...
  • Year-to-date, Kazakhstani Tenge has depreciated against US$ by ~17%. International Cement Group will incur forex loss as they pay EPC contractors in US$ while operating expenses are in local currency. We forecast that International Cement Group will incur ~S$8m of forex loss in FY22E.
  • International Cement Group is anticipating increased competition in Tajikistan. Another cement producer is adding a big cement plant in the country and will be operational in 2023. The entry of the new competitor is expected to negatively impact cement price in the region and reduce International Cement Group’s Tajikistan sales by an estimated 10% in FY23E and FY24E annually, before growing at 3% thereafter following consolidation in the market.
  • Higher oil prices is driving up cost of sales, which include transportation costs for raw materials and running fuel costs for the plants. We expect margins to be slightly affected with an estimated 1.2% pt erosion on gross margin.

New Cement Plant to Contribute in 2023

• International Cement Group is setting up 2 new cement plants in Kazakhstan.
  • Sharcem, in East Kazakhstan, is expected to commence commercial sales in 2H22, however we expect to see significant contribution in FY23. With an annual production capacity of 1m tonne, we expect Sharcem to add ~S$60m and ~S$15m to International Cement Group's top and bottom line in FY23E.
  • In addition, construction of the Korcem cement plant in the Jambyl region is also underway. The output will be exported to Kyrgyzstan in 2025.
• International Cement Group will fund the construction of Sharcem through shareholders’ loan and internal resources, while Korcem is funded via vendor financing and internal resources. Cement demand in Central Asia is underpinned by the reconstruction, urbanisation and infrastructure growth plans.

Maintain BUY Call on International Cement Group With a Lower Target Price

• Maintain BUY call on International Cement Group at significant forex loss.
• While we are optimistic about ICG operations and long term growth plan, the revised price reflects the higher cost of equity required by the current market environment.

Source: SAC Capital Research - 23 Mar 2022