Earnings Report /
Pakistan

Kohat Cement: 2Q20 review – Margins slide despite a relatively better quarter for pricing

  • KOHC posted 2QFY20 EPS of PKR0.05, worse than our estimated EPS of PKR0.64

  • Major deviation was the yoy decline in GMs by 30ppt yoy to mere 1.3% vs. expected 6%

  • We maintain our Neutral stance with a TP of PKR96/sh on the scrip

Intermarket Securities
27 February 2020

Kohat Cement Company Limited (KOHC) posted 2QFY20 NPAT of PKR10mn (EPS: PKR0.05), worse than our estimated profit of PKR129mn (EPS: PKR0.64). The yoy decline in 2QFY20 profitability is mainly led by lower retention prices due to significant price cuts following expansion. Major deviation in the result was observed on account of yoy decline in GMs by 30ppt yoy to a mere 1.3% as against our expectation of 6%. 

Key Highlights in 2QFY20

  • Net sales declined by 38%yoy to PKR3.0bn in 2QFY20 on the back of (i) flat domestic dispatches (up 5%yoy), (ii) in our view, net retention prices have declined significantly to PKR285/bag as compared to PKR335/bag in 2QFY19 (by our estimate).
  • GMs declined by 30ppt to 1.3% owing to (i) lower retention prices as a result of price cuts to gain domestic market share, and (ii) higher taxes in terms of FED, which the company could not pass on. These are the lowest GMs in our cement universe so far (similar to MLCF, which posted gross margins of 1.6%)
  • Among other line items: (i) other income declined to PKR51mn (down 40%yoy), (ii) the company has booked tax credit of PKR6.5mn which avoided a loss for the period. 

This is a very disappointing result by KOHC which posted lower GMs in 2QFY20 as the company is trying to grab its market share in a highly competitive environment. We believe that the last two quarters of FY20 will be more challenging for the whole industry, and we anticipate that KOHC will also post losses in 3QFY20. We maintain our Neutral stance with a TP of PKR96/sh on the scrip.