Equity Analysis /
Bangladesh

LafargeHolcim: Q2 CY 19: Earnings grow by 46% amid gross margin contraction

    Joy Bhattacharjee
    Joy Bhattacharjee

    Research Associate

    IDLC Securities
    28 July 2019
    Published by

    LHBL BD reported Q2 CY 19 NPAT of BDT436mn (EPS: BDT 0.38), vs NPAT of BDT298mn (EPS: BDT0.26) in Q2 CY 18. Lower gross margin (-183 bps yoy) largely offset by lower financial expenses (-79% yoy & -50% qoq) due to quicker loan repayment and lower opex/sales (-198 bps yoy) along with c17% topline growth generated 46% yoy growth in earnings. 

    H1 CY 19 NPAT stood at BDT794mn (EPS: BDT0.68), vs H1 CY 18 NPAT of BDT527mn (EPS: BDT0.45) which is in line with our expectation. We expect the company to post higher earnings in the second half of the year driven by retail price hike from Q3. 

    Reiterate Hold (ETR -3.6%). LHBL BD trades at 21.2x 2019f PE, 10.2x 2019f EV/EBITDA. We reiterate our Hold recommendation.

    Key Highlights:                                                                              

    1. Revenue increased to BDT 4,498mn (17% yoy) beating our expectation, driven by higher retail price in Q2, and increased cement sales. Higher than mid-double digit growth is commendable considering current industry overcapacity. The merged company is being benefited from a larger distribution channel, which contributed to the increase in cement sales.
    2. Increasing clinker price has been affecting the margin since the company got a grinder (Holcim Bangladesh Ltd.) in the group. Gross margin fell to 24.2% by 183 bps yoy mainly due to higher clinker price (fob price is USD38.9/t in March 2019 vs USD31.6/t in March 2018). The company could not pass on the whole increased cost to the customers because of price competition with local grinders due to industry overcapacity.
    3. Due to quicker loan repayment, finance cost stood at BDT49mn in Q2 CY 19 vs BDT154mn in Q2 CY 18 resulting in significant improvement in interest coverage ratio (22.0x in Q2 CY 19 vs 3.8x in Q2 CY 18) and 63% yoy growth in PBT.
    4. Opex/sales ratio decreased to 8.3% in Q2 CY 19 from 10.3% in Q2 CY 18. The ratio went up by 570 bps from its usual level of c8% in 2017 due to several one-off expenses related to Lafarge-Holcim merger.