Equity Analysis /
Pakistan

2QCY19 results – Tax charge leads to a higher loss; in line on PBT

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    6 August 2019

    FCEPL posted 2QCY19 loss of PKR322mn (LPS: PKR0.42) vs. 2QCY18 NPAT of PKR210mn (EPS: PKR0.27). The loss was higher than our projected LPS of PKR0.18 due to a taxation charge; on a pre-tax basis, the result is inline with our projections. This brings FCEPL’s 1HCY19 loss to PKR239mn (LPS: PKR0.31) vs. a profit of 511mn (EPS: PKR0.67) in 1HCY18. The company did not announce any interim dividend, as was expected.

    Major takeaways from the quarter include: 

    • Strong revenue growth of 22% yoy, with sales crossing PKR10bn for the first time since 4QCY16.  This seems to indicate that the legacy products are holding up, while the new product launches (in powder) are meeting with early success. 
    • Gross margins receded to 15.0% vs. 17.9% in the previous quarter. This is perhaps due to the impact of a weaker PKR on imported raw materials. Margins may rise going forward, in our view, if the company chooses to raise prices. 
    • Interestingly, there has been a 15%yoy reduction in selling expenses, despite the revenue jump, indicating strong cost controls. 
    • FCEPL has booked a tax charge in the quarter, despite PBT being in the red. We think this may have resulted from the application of minimum taxation (on 1.5% of revenue).

    Although the 2QCY19 loss is higher than estimated, this is largely due to a tax charge. We believe revenue crossing PKR10bn is the more important metric for FCEPL. Margins are on the lower side but can increase going forward if the company increases prices, in our view. 

    Risks: (i) Dilution of market share due to new entrants, (ii) failure to gain meaningful share in the milk powder market, and (iii) retrospective sales tax on tea whitener Tarang.