DGKC posted unconsolidated NPAT of PKR0.5bn (EPS: PKR1.33) in 2Q20, better than our projected NLAT of PKR1.5bn (LPS: PKR3.32). The decline in the quarter’s profitability is mainly due to (i) significant drop in retention prices in local and export markets, (ii) 63% yoy increase in finance cost, (iii) higher energy tariffs, and (iv) increase in transportation cost post implementation of axle load management. Note that 2Q results include one-off tax credit of PKR424mn, which increased profitability by about PKR1.0/sh.
Major deviations in 2Q results were much better GMs than expected and tax credit.
- Despite marked improvement in local and export dispatches by 15%yoy and 64% yoy, respectively, Net revenue was up by just 2%yoy. This was mainly on account of drop in local retention prices by 23%yoy to ~PKR272/bag (as per our estimates). Moreover, increase in clinker exports amid declining regional prices to US$30-32/ton, led to a further drop in realized prices per bag.
- The company booked gross profit of PKR1.6bn, resulting in a drop in GMs by 5ppt yoy. This was led by (i) lower retention prices, and (ii) the aforementioned cost pressures. Nonetheless, GMs have recovered sharply in 2Q on a sequential basis – from -5.9% to 13.2% – which can be attributed to a combination of (i) lower realized coal prices qoq, and (ii) greater fuel efficiency, in our view. We await quarterly accounts to shed more light on this.
- Finance cost surged by 63% yoy to PKR1.2bn, due to increase in debt amid higher working capital requirements and interest rates. This is in line with our estimate of finance cost. We expect finance cost to remain high in the coming quarters due to elevated debt levels.
- Other line items include: (i) reversal of tax charge amounting to PKR424mn, which supported bottom-line by PKR1.0/sh, (ii) PKR632mn as dividend income from investment in group companies, mainly MCB, and (iii) PKR524mn of distribution expenses (up 11%yoy) mainly on account of higher exports.
This is an impressive result, despite severe undercutting in cement prices by competitors in the past two quarters. However, DGKC’s high exposure to national grid in power mix and significant debt on books may create problems in coming quarters. New capacities will also dilute DGKC’s market share, in our view. Therefore, we do not think that GMs will sustain at 13%. Ultimately though, a potential reformation of cement pricing arrangement and better demand prospects through revival of government spending can help in rebounding profits. We have a Buy stance on the scrip with a June 2021 TP of PKR87/sh.