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Heidelberg: 1Q earnings up tenfold riding on +44% topline and +555bps GPM; Upgrade to BUY

  • 1Q 21 NPAT swelled 10x to BDT465mn (EPS: BDT8.23) vs 1Q 20 NPAT of BDT44mn (EPS: BDT0.77)
  • Revenue increased to BDT5.5bn (+44% yoy) riding on govt infra-push, higher retail price & higher contribution from ECBL
  • +555bps yoy GPM in 1Q. We upgrade our TP from BDT136 to BDT384 (+182% revision), implying ETR +59.8% and Upgrade to BUY

HEID BD reported 1Q CY 21 NPAT of BDT465mn (EPS: BDT8.23), implying 968% growth against NPAT of BDT44mn (EPS: BDT0.77) in 1Q CY 20. Historic high quarterly revenue (BDT5.5bn, +44% yoy), +555bps GPM expansion, 210bps improvement in opex ratio, and lower finance expense boosted the earnings. The company also posted CY 20 loss of BDT80.8mn (EPS: BDT-1.43), vs CY 19 loss of BDT186mn (EPS: BDT-3.30). 4Q 20 EPS stood at BDT1.60, vs 4Q 19 EPS of BDT-3.47.

1Q 21 Revenue increased to BDT 5,506mn (+44% yoy) mainly driven by volume growth from govt infrastructure projects, higher retail price, and higher contribution from Emirates Cement (ECBL). According to our market survey, the per bag price for ScanCement (a brand of HEID) was BDT460-470 in Feb/Mar 2021, which was BDT430-440 in Jan/Feb 2020. ECBL posted revenue of BDT865mn, implying +271% yoy.

1Q CY 21 GPM stood at 17.4%, up by 555bps YoY, which can be attributed to higher retail price in 1Q 21 than that in 1Q 20 and cheaper raw material import in Q3/Q4 20 compared to that in Q3/Q4 19 amid global demand dent in coronavirus pandemic. Clinker import price stayed at US$46/tonne in 4Q 20 from US$50/tonne in 4Q 19.

Opex ratio fell to c5% in 1Q 21 vs c7% in 1Q 20, attributed to dual impact from HEID’s own efficient distribution & synergic advantage from HEID-Emirates Cement amalgamation. Also, lower Net finance cost (BDT1.4mn vs BDT49mn in 1Q 20) extended the earnings further.

We upgrade TP from BDT136 to BDT384 (+182% revision), implying ETR +59.8%. We upgrade our previous Hold recommendation to Buy with TP up-gradation from BDT136 to BDT384, which implies 2021f and 2022f PE of 21.5x & 15.1x and EV/EBITDA of 11.8x & 8.9x.

Based on the quick recovery of cement sales & construction activities, we revised HEID’s 2021f top-line forecast from BDT12.1bn to BDT16.3bn (+35% revision) and bottom-line forecast from BDT100mn to BDT1,008mn (+908% revision). Our TP up-gradation reflects the impact of top-line growth expectation of c16% 2021f-2027f which was c11% previously. We changed our previous 2021 GPM & NPM expectations from c12% to c16% and from c1% to c6% respectively as we expect price competition among grinders to remain muted and cement makers will be able to pass on the raw materials costs to the customer by doing business profitably.

Construction rebound is expected to remain buoyant on the back of the long-term growth drivers.

  • We expect the country’s remittance inflow to remain at the H1FY21 level of USD2bn monthly in Q4FY21 totalling USD25bn in FY21 (+36% yoy). Construction activities in rural areas, as well as urban areas, are expected to remain afloat on the back of buoyant remittance inflow.

  • Govt. has taken several mega infrastructural projects and their completion time spans from 2021 to 2028. Cement makers are expected to see profits riding on these mega infra-projects.

  • Bangladesh entered the low-interest rate regime with the imposition of a rate cap in April 2020. Most banks have started taking a cautious stance in case of lending after the imposition. Also, monetary stimulus from the government and higher remittance flow injected liquidity into the financial system. Deposit rates have been on the lower side. The weighted average deposit rate came down 4.6% in Nov 2020 vs 5.5% in 2018. All these led the investors to revise their investment options. Hence, some spill-over investment has already come to the real estate sector. Also in the FY2019-20 budget, flats and plots purchase using undisclosed money without being questioned was opted in. Along with that reduction of bank loans' interest rates and giving government officials housing loans on easy terms prop up a strong real-estate rebound.

All these are expected to drive the demand for construction materials like cement. We expect HEID to post BDT16bn CY21f top-line, implying +47% growth from the expected 2020 top-line of BDT11bn.

Impact of volatility in the commodity market is expected to be eased by the retail price increase. The global commodity market remained volatile in 4Q 20 and 1Q 21 after its nadir in 2Q 20. Local grinders sourced raw materials at a cheaper rate in 3Q and 4Q 20. Also with the strong demand-side riding on quick recovery of construction activities, retail price increased too. Per bag cement price increased from BDT410-420 to 440-450 in Dec 2020 and BDT460-470 in March 2021. As the global commodity market is expected to remain volatile, local grinders are expected to pass on the costs to customers and continue doing business with the higher retail price to remain profitable. On the back of that, we expect HEID to post 21f GPM of c16% (+590 bps from 9M 20 level)

Price competition to remain muted. Cement makers postponed their capacity expansion plan for now as they are intended to recover quickly from the pandemic slump and do business profitably. As the pandemic is still prevailing, manufacturers are less likely to resume their expansion plan and start push sales resulting in a price war. With that optimism along with the strong demand-side driven by govt infra push, we expect the margin pressure to be eased.

Risks to our valuation include resumption of unplanned capacity additions, higher imported clinker costs, and gas tariffs increase for indigenous power. Previously, most companies have adopted unplanned capacity expansions just to hold their market share. If the unplanned capacity additions resume, the oversupply will increase, resulting in the resumption of price competition. Moreover, if the imported clinker price and local gas tariffs increase, margins will come under pressure again.


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