Equity Analysis /
Pakistan

Fauji Cement: Higher ETR drags Q4 profitability

    Intermarket Securities
    27 August 2019

    Fauji Cement Company Ltd (FCCL) posted Q4 FY 19 NPAT of PKR384mn (EPS: PKR0.28) versus our estimate of PKR262mn (EPS: PKR0.19). This takes FY 19 earnings to PKR2.8bn (EPS: PKR2.05), down by 18% yoy. The decline in Q4 profitability is mainly led by higher effective tax charge of 60%. The result announcement accompanied final cash dividend of PKR0.75/sh, taking FY 19 cumulative payout to PKR1.5/sh.

    Key highlights:

    • Net sales declined by 4% yoy to PKR5.2bn primarily owing to drop in local cement prices amid a pricing rift among North based manufacturers. 
    • The company booked GMs of 23% in Q4 FY 19 as compared to 26% in SPLY. GMs fell despite 33% yoy drop in coal prices to US$68 (avg. Q4) mainly as a result of (i) PKR depreciation, (ii) higher energy tariffs and (iii) lower realised cement prices. 
    • Distribution expenses declined by 68% yoy to PKR27mn as compared to PKR84mn in the corresponding period last year, partly because of lower exports.
    • FCCL booked ETR of 60% in Q4 FY 19 compared with a tax reversal of 18% in same period last year. We believe the higher tax charge is on account of reversal of gains booked (PKR695mn) during last year owing to a stall in corporate tax rates as announced in the FY 20 Federal Budget. However, we await clarity on this from management.

    With FCCL's declining capacity-based market share amid expansion for other players with a cumulative capacity addition of 7.5mn tons to be added in H1 FY 20, we maintain our Sell stance on the scrip with a Jun’20 TP of PKR13/sh. The scrip trades at an expensive PE of 16.3x.

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