Earnings Report /
Pakistan

DG Khan Cement: Q4 FY 19 results: Sharp decline in GMs and higher ETR drag on earnings

    Intermarket Securities
    16 September 2019

    D.G. Khan Cement (DGKC) announced 4QFY19 NLAT of PKR1.02bn (LPS: PKR2.32) on unconsolidated basis as compared to PKR3.87bn (EPS: PKR8.83) in the same period last year. The result was much below our estimates of PKR116mn (EPS: PKR0.26) mainly owing to (i) sharp decline in gross margins, down to 3.9% and (ii) higher effective tax charge of PKR604mn in 4Q. This took FY19 NPAT to PKR1.61bn (EPS PKR3.67), down by 82%yoy. The result announcement accompanied a final cash dividend of PKR1.0/sh. 

    Key highlights in Q4 FY 19:

    • Net sales surged by 39%yoy to PKR10.1bn as compared to PKR7.3bn in corresponding period last year mainly as a result of higher volumetric sales (both local and exports). 
    • GMs dropped by staggering 18ppt yoy to 3.9% in 4Q, dragging LBT to PKR412mn. The decline is primarily attributable to lower retention prices amid pricing rift within the producers and higher cost of coal inventory.
    • DGKC booked effective tax charge of PKR604mn as compared to tax credit of 3.12bn (tax credit on new plant in Hub) recorded in same period last year. The higher tax charge is on account of reversal of gains booked during preceding quarters owing to freeze in corporate tax rate to 29% in Federal Budget FY20.
    • Other highlights include (i) 44%yoy increase in distribution expenses on account of increase in exports sales, and (ii) 5.2x yoy increase in finance cost on account of higher debt financing and increase in interest rates.

    We maintain our Hold stance on the scrip with Jun’20 TP of PKR55/sh. In light of the recent rise in oil prices, risk of buildup in cost pressure remains high.

    Risks: (i) Breakdown in pricing consensus, (ii) further rise in coal prices, and (iii) levy of additional taxes.