Earnings Report /
Pakistan

Cherat Cement: Q2 FY 20 review: Higher-than-expected GMs curtail net losses

    Intermarket Securities
    12 February 2020

    Cherat Cement (CHCC) has posted 2QFY20 NLAT of PKR222mn (LPS: PKR1.14), vs a profit of PKR596mn same period last year. This takes 1HFY20 loss to PKR560mn (EPS: PKR2.88), compared to a PKR1,027mn profit (EPS: PKR5.29) in 1HFY19. The 2QFY20 result is however better than our expected loss of PKR2.3/sh.

    The yoy drag in earnings was mainly due to (i) a drop in gross margins by 10ppt yoy to 9.3%, (ii) an increase in finance cost by 5.1x yoy. On a PBT basis, loss in 2Q came in at PKR332mn, which is better our expected loss of PKR628mn, mainly due to higher-than-expected gross margins.

    Q2 FY 20 key result highlights (unconsolidated):

    • Net revenue increased by 36%yoy to PKR5,031mn owing to higher dispatches (potentially on account of higher market share than last year post expansion). However, the impact of higher market share was diluted by subdued local demand. Also, CHCC is also selling less than its capacity share to protect margins (lower discounts), in our view.
    • GMs clocked in at 9.3% (down by 10ppt yoy and up 5.1ppt qoq). The decline is mainly led by lower retention prices in (i) domestic market amid fierce price competition among producers, and (ii) lower regional cement and clinker prices of exports. Moreover, build-up in cost pressures emanated from higher gas tariffs and axel load.
    • Other line items include (i) Finance cost which increased by 5.1x yoy to PKR658mn from PKR130mn in 2QFY19 on account of new debt taken for Line III and higher interest rates, but (ii) CHCC booked a tax reversal of PKR110mn, which supported the bottom line.

    After Attock Cement and LUCK, CHCC has also posted sequentially higher gross margins but current cement prices suggest that the company will see larger losses in the coming quarters, in our view. Also, CHCC’s higher debt financing and operating leverage will likely raise cash-flow concerns. Hence, we maintain our Sell stance on CHCC with a June 2021 TP of PKR48/sh.