Equity Analysis /

Heidelberg: Substantial margin contraction leads to Q2 loss; reiterate Hold but cut TP

    IDLC Securities
    25 July 2019
    Published byIDLC Securities

    HEID BD reported Q2 CY 19 loss of BDT41mn (EPS: BDT -0.72), vs a profit of BDT238mn (EPS: BDT4.21) in Q1 CY 18. Lower margin (-1030 bps yoy) and lower net financial income (-70% yoy) led to the poor result. H1 CY 19 NPAT stood at BDT152mn (EPS: BDT2.69), versus H1 CY 18 NPAT of BDT540mn (EPS: BDT9.55).

    Reiterate Hold (ETR 11.4%). HEID BD trades at 22.6x 2019f PE, 10.2x 2019f EV/EBITDA. We reiterate our Hold recommendation with the expectation that increased price in the retail market will help to recover the incurred loss. However, we lower our TP by c4% to BDT244.

    Key Highlights: 

    (i) Gross margin fell to the lowest ever since Q1 CY 11 to 7.3% mainly due to higher clinker price, (fob price is USD38.9/t in March 2019 vs USD33.5/t in 2018 ytd). The company could not pass on the whole increased cost to the customers because of price competition with local grinders due to industry overcapacity. 

    (ii) Revenue increased to BDT 2864mn (3% yoy) mainly driven by higher retail price in Q2 but not enough to maintain absolute value of margins like Q1. 

    (iii) Cash balance declined to BDT1127mn in Q2 CY 19 from BDT1893mn in Q2 CY 18, which resulted in lower financial income. Decline in cash balance is attributed to increased capital expenditures. Decrease in opex/sales (7.0% in Q2 CY 19 vs 7.7% in Q2 CY 18) was largely offset by this decrease in net financial income (70% yoy & 14% qoq) which eroded the profit further. 

    (iv) The company paid BDT76 mn income tax which denotes that the company maintained payment of minimum turnover tax of c3% resulting to effective tax rate of 216% hence incurring highest ever loss in a single quarter.