Earnings Report /
Pakistan

Fauji Cement: Q1 FY 20 review: Above expectation on lower expenses

    Intermarket Securities
    21 October 2019

    Fauji Cement Company Ltd (FCCL) posted Q1 FY 20 NPAT of PKR293mn (EPS: PKR0.21), down 63% yoy and 24%qoq, as compared to our estimate of PKR225mn (EPS: PKR0.16). The yoy decline in Q1 profitability is mainly led by (i) lower dispatches (domestic and exports), (ii) lower retention prices, (iii) higher energy tariffs, and (iv) increased transportation cost. On sequential basis, profitability is down by 24% yoy due to significant drop in GMs (down 9% qoq). 

    Key highlights:

    • Net sales declined by 21% yoy to PKR4.24bn on account of (i) decline in local and export sales by 10% yoy and 13% yoy, respectively, (ii) decline in cement retention prices by c5%yoy. 
    • GMs descended to 14% in Q1 20, down by whopping 13ppts yoy. The decline is mainly attributable to (i) lower retention prices (failure to pass on the impact of increase in FED by PKR25/bag) owing to pricing rift among North producers, (ii) higher energy tariffs, and (iii) increased transportation cost. Q1 GM is in line with our expectations.
    • Other line items include: (i) ETR of 27% in Q1 20 as compared to 29% in SPLY, (ii) finance cost of PKR28mn, down by 6% yoy, owing to lower debt financing.

    Though FCCL’s breakeven price level (owing to lower debt burden) is among the lowest in our universe (ex. LUCK), we believe declining market share in the backdrop of existing and upcoming expansions will negatively affect domestic sales. Hence, we maintain our Sell stance on the scrip with a Jun’20 TP of PKR13/sh. The scrip trades at an expensive P/E of 16.6x

    Risks: (i) breakdown in pricing arrangement, (ii) PSDP cut and (iii) rise in interest rates.