DG Khan Cement (DGKC) has posted an unconsolidated NPAT of PKR0.91bn (EPS: PKR2.07) in 1QFY22, up from a NLAT of PKR0.35bn (LPS: PKR0.80) in SPLY and higher than our EPS estimate of PKR1.40. Lower-than-expected COGS was the major deviation.
Key result highlights for 1QFY22:
Net sales have increased by 6% yoy but declined by 10% qoq to PKR11.2bn. The qoq decline is contributed by both lower local and export dispatches, by 8% yoy/47% qoq. A jump in local selling prices, however, somewhat offset the impact of lower volumes.
Gross margins have clocked in at 18.8% (up 9.2ppt yoy and 1.2ppt qoq), which are higher than our estimate of 11%. The increase in GMs is due to much higher retention prices, which increased to PKR405/bag (up 13% yoy and 35% qoq) in 1QFY22; this has offset the impact of an increase in variable costs amid a massive jump in global energy prices. Also, DGKC had procured coal inventory at much lower rates than presently, which explains the variance from our estimated GM.
Other income has increased to PKR543mn, up 7.7x yoy and 16% qoq. The yoy increase is due to the resumption of dividends from MCB, which was not paid in 1QFY21 amid restrictions from the SBP at the outset of Covid.
Among other line items: (i) Finance cost has declined by 6% yoy to PKR736mn, due to minimal decline in borrowings, (ii) distribution expenses have reduced by 48% yoy and 42% qoq to PKR317mn owing to a significant decline in exports, and (iii) effective tax rate during the quarter is reported at 23% vs. a tax reversal in 1QFY21.
Despite the significant cost pressure and reduction in sales volume, DGKC has posted decent quarterly result, thanks to elevated retention prices. Going forward, elevated global coal and oil prices will subdue profitability of the next two quarters. In the medium term, however, local demand and a further increase in cement prices should profitability amid cost pressures. We have a Buy rating on the scrip with a June 2022 TP of PKR110/sh.