LafargeHolcim Bangladesh (LHBL BD) reported 1Q CY 20 NPAT of BDT523mn (EPS: BDT0.45), implying c45% growth against NPAT of BDT358mn (EPS: BDT0.31) in 1Q CY 19. Gross margin expansion (+300 bps YoY) along with lower net finance cost (BDT32mn in 1Q 20 vs BDT66mn in 1Q 19) led the earnings boost. The bottom-line grew further on lower tax payment (turnover tax at c2% in 1Q 20 vs c3% in 1Q 19) as the government reduced advanced income tax (AIT) to the previous rate of 3%.
Revenue slid a bit by c2% to BDT 5,128mn which can be attributed to volume fall in late March as the Covid-19 pandemic loomed. Retail price in 1Q 20 was higher compared to that of 1Q 19. According to our market survey, per bag price for Supercrete and Holcim was BDT430-440 in Jan/Feb 2020 against BDT410-420 in Jan/Feb 2019. We anticipate further demand fall in 2Q 20 amid the Covid-19 crisis. We expect just 30% of normal consumption in 2Q 20 with hopes of a gradual increase in H2 20.
1Q CY 20 GPM stood at 22.4%, up by 300bps YoY. Higher retail price in 1Q 20 dwarfed the 4Q 19 raw material price increase and led the GPM expansion. Although LHBL started to import clinker after the Lafarge-Holcim amalgamation, it maintains some cushion to clinker price hike due to its source of raw materials (clinker).
Net finance cost stood at BDT32mn in 1Q CY 20 vs BDT66mn in 1Q CY 19 due to quicker loan repayment resulting in a significant improvement of interest coverage ratio (20.7x in 1Q CY 20 vs 9.0x in 1Q CY 19) and 19% YoY growth in PBT.
The government backed off on imposition of 5% non-adjustable AIT and decided to charge the previous rate of 3% from January 2020, although kept it non-adjustable. Effective tax rate for LHBL BD was c17% in 1Q 20. Also, the company paid a lower turnover tax of c2% in 1Q 20 (c3% in 1Q 19).
Reiterate Hold (TP BDT32 for Dec 2020, ETR -8.1%). We expect cement demand to slump amid the COVID-19 crisis, translating to a 35% decline in LHBL’s CY 20 top-line. Though we are hopeful about consumption rebound from CY 21, LHBL BD may need until 2022 to reach the pre-corona top-line level (BDT19bn). Although price competition among grinders is expected to get worse in the next 1-2 years, we think LHBL BD will suffer less margin dent (c300bps from current 24% by CY 22) compared to other manufacturers due to its cost-benefit and can keep its volume growth buoyant. We reiterate our Hold recommendation with a lower TP of BDT32, which implies 2020f & 2021f PE of 51.1x & 40.4x and EV/EBITDA of 16.2x & 14.2x.