Earnings Report /
Pakistan

Cherat Cement: 3QFY20 – Barely positive gross margins lead to another loss

  • CHCC has posted 3QFY20 NLAT of PKR627mn (LPS: PKR3.23), taking 9MFY20 loss to PKR1.2bn (LPS: PKR6.11).

  • Net revenue decreased by 4%yoy to PKR3.9bn, despite increase in local & export dispatches by 31% yoy & 2.2x respectively

  • GMs clocked in at 0.17% (down by 20.4ppt yoy and 9.1ppt qoq).

Intermarket Securities
28 April 2020

Cherat Cement (CHCC) has posted 3QFY20 NLAT of PKR627mn (LPS: PKR3.23), taking 9MFY20 loss to PKR1.2bn (LPS: PKR6.11), from a profit of PKR2.2bn (EPS: PKR11.58) in 9MFY19. The drag in earnings came from (i) drop in gross margins by 20.4ppt yoy to 0.17%, (ii) increase in finance cost by 81x yoy. On a PBT basis, the loss in 3Q came in at PKR816mn, which is worse than our estimate of PKR709mn, mainly due to lower-than-expected GMs.

3QFY20 key result highlights

Net revenue decreased by 4% yoy to PKR3.9bn, despite the increase in local and export dispatches by 31% yoy and 2.2x respectively in 3QFY20. Lower retention prices (owing to higher discount to grab market share) have wiped out the gross margins of the company. CHCC’s retention prices declined by 20% yoy to PKR274/bag in 3QFY20.

GMs clocked in at 0.17% (down by 20.4ppt yoy and 9.1ppt qoq). The decline in GM is mainly led by lower retention prices in both (i) the domestic market amid price cuts, and (ii) exports, amid lower regional cement and clinker prices. Moreover, build up in cost pressures emanated from higher gas tariffs and axel load which also dragged margins.

Other notable line items include: (i) Finance cost increasing by 81% yoy to PKR666mn from PKR368mn in 2QFY19 due to new debt for Line III, (ii) CHCC also booked tax reversal of PKR189mn, which supported the bottom line.

CHCC has shown very thin positive gross margins (most other cement companies have seen worse in 3Q) but the present cement price and demand trend (amid Covid-19 outbreak) suggests that the company will post worse gross margins in the next two quarters, in our view. Also CHCC’s higher debt financing and operating leverage are likely to raise cash-flow concerns, in our view. Hence, we maintain our Neutral stance on CHCC with a June 2021 TP of PKR68/sh.