Equity Analysis /
Pakistan

Cherat Cement: Q4 FY 19: Tax drags bottom line

    Intermarket Securities
    7 August 2019

    Cherat Cement (CHCC) has posted 4QFY19 NLAT of PKR487mn (LPS: PKR2.76), taking FY19 profitability to PKR1763mn (EPS: PKR9.98), down 17%yoy. The drag in earnings was mainly on account of (i) reversal in tax credit of PKR489mn, (ii) drop in gross margins by 1.3%/4.3% yoy/qoq, and (iii) a 6.1x fold increase in finance cost. On a PBT basis, profitability in 4Q came in at PKR1mn, but this was better than our expected loss of PKR380mn, mainly due to higher than expected GMs. The result announcement accompanied bonus shares of 10% in addition to a final cash dividend of PKR1.0/sh.

    Key Highlights in Q4 FY 19:

    • Net revenue increased by 45%yoy to PKR4,702mn owing to higher dispatches (potentially on account of increased market share post expansion). However, the impact of increased market share was diluted due to subdued local demand, in our view.
    • GMs clocked in at 16% (down by 1.3/4.3ppt yoy/qoq) on account of lower domestic cement prices and PKR devaluation. However, this was partially offset by drop in international coal prices. 
    • On a PBT basis, 4Q profits declined to PKR1mn vs. PKR326mn in the same period last year. The decline in profitability is explained by a 6.1x yoy increase in finance cost. The company reported finance cost of PKR546mn, whereas this was capitalized last year. 
    • CHCC booked a tax charge of PKR489mn on account of revision in tax credit rates (revised down to 5% for FY19 as compared to 10% previously) on investment in new plant and machinery of Line III in-line with Federal Budget FY20 (benefit available under section 65B of Income Tax Ordinance). In comparison, company booked a tax credit of PKR904mn in 3QFY19.

    With intermittent pricing disruption expected in FY20f, CHCC’s higher debt financing and operating leverage are likely to raise cash-flow concerns, in our view. Hence, we maintain our Sell stance on CHCC with a Jun’20 TP of PKR26/sh.

    Risks: (i) Drastic increase in coal prices, (ii) decline in local dispatches growth, and (iii) break-down in pricing mechanism.