Kohat Cement Co. Ltd (KOHC) has posted 4QFY22 NPAT of PKR0.4bn (EPS: PKR1.96), compared with net profit of PKR1.0bn (EPS: PKR4.81) in SPLY. The result came in lower than our expected EPS of PKR4.17, where higher-than-expected effective tax rate is the major deviation. Despite a weak quarter for earnings, full-year profitability has jumped 44% to PKR5.0bn (EPS: PKR25.01) in FY22.
Net sales have increased by 49% YoY and 8% QoQ to PKR9.3bn. Increase in sales emanated from a surge in local cement prices, which in turn led to elevated retention prices. Whereas, total offtake has reduced to 0.85mn tons down 8% QoQ and 3% YoY.
The company has posted gross margins of 27.6% in 4QFY22, up by 1.5ppt YoY but down 1.6ppt QoQ. This is higher than our expected margins of 26%. Higher coal inventory at lower cost and more than adequate increase in cement prices have helped KOHC to sustain higher gross margins.
Among other line items: (i) Other income has surged by 4.7x YoY to PKR289mn on account of higher cash balances and elevated policy rate, and (ii) KOHC has booked an effective tax rate of 84% vs. 29% in 4QFY21 owing to a high one-off super tax. Whereas, our calculations for ETR were 65%, which led to major deviation.
Despite higher tax rate and reduced earnings, KOHC has posted impressive GMs and operating profitability in 4Q, majorly attributed to elevated retention prices and better inventory management. Looking ahead in 1HFY23, the earnings of the company will likely to decline amid lower demand due to recent floods; however, we believe that potential decline in international coal prices and elevated demand will help the company to post decent profitability going forward. Our liking for KOHC comes from its discounted valuations as the company trades at an EV of USD18/ton against USD27/ton of IMS Cement universe. We reiterate our Buy stance with a TP of PKR200/sh.