Earnings Report /
Pakistan

Lucky Cement: 2QFY20 review: Pricing indiscipline and weak demand hurt margins

    Intermarket Securities
    30 January 2020

    LUCK posted unconsolidated NPAT of PKR0.98bn (EPS: PKR3.03) in 2QFY20, down 67% yoy but up 3.2% qoq, lower than our projected NPAT of PKR1.14bn (EPS: PKR3.53). The major deviation from our result was (i) lower-than-expected GMs (reported at 15%) and (ii) higher distribution expenses owing to the increase in exports. Though the GMs of 15% are the lowest posted by LUCK in recent times.

    On an unconsolidated basis, LUCK reported 2QFY20 NPAT of PKR1.94bn (EPS: PKR6.0), down 32% yoy and up 52% qoq basis. The decline in earnings is mainly attributable to (i) dismal core cement operations, and, (ii) potential losses on its JV and auto investments. But it is better than 1QFY20, owing to an exceptional result posted by its subsidiary ICI Pakistan and possibly a contraction of losses on their auto investments.

    2QFY20 Key result highlights (Unconsolidated):

    • Net revenue declined by 15%yoy to PKR11.6bn mainly on account of (i) decline in local dispatches by 10%yoy to PKR1.43mn tons, (ii) lower regional cement and clinker export prices as a result of regional competition, and (iii) lower domestic retention prices amid pricing indiscipline among producers. Domestic retention prices have dropped by 12%yoy to PKR295/bag (as per our estimates).
    • The company booked gross margins of 15%, down by 15ppt yoy. The decline in GM is mainly led by lower retention prices in (i) domestic market amid price cuts and fierce competition among producers, and (ii) lower regional cement and clinker prices for exports. Moreover, build up in cost pressure emanating from higher gas tariffs and axel load also dragged margins.
    • Other line items include: (i) effective tax rate of just 17%, which supported the bottom line, (ii) other income declined by 19% yoy to PKR779mn due to lower cash balance, amid spending on power plant and Pezu expansion, and (iii) PKR919mn of distribution expenses (up 28%yoy) on account of higher clinker exports.
    • The commercial operations of the new brownfield expansion of 2.8mn tons in Pezu was announced in December 2019. This will enhance LUCK’s capacity to 12.2mn tpa with capacity-based market share of 17% (LUCK have become the largest cement manufacturer in Pakistan post expansion). Moreover, its ongoing investment in 660MW coal-based power plant is moving as per schedule where CoD is expected by March 2021.

    Even though LUCK needs the lowest cement price to breakeven within our cement universe and can withstand retention prices even below PKR280/bag (retail price of PKR541/bag), we believe pricing consensus is important for healthy EBITDA generation to fund equity injection in LEPCL. This is also important at a time when some of its investments i.e. DR Congo and Kia Lucky Motors are a drag on earnings. We are presently Neutral on the stock with a June 2020 TP of PKR544/sh.