Earnings Report /
Pakistan

Maple Leaf Cement: Q4 FY 19 results: Tax credit supports Q4 profits; rights issue announced

    Intermarket Securities
    20 September 2019

    Maple Leaf Cement Factory (MLCF) announced 4QFY19 consolidated NPAT of PKR568mn (EPS: PKR0.96), down 53%yoy/25%qoq. This takes the FY19 profitability to PKR2.46bn (EPS: PKR4.14), down 46%yoy. On PBT basis, earnings declined to PKR2.66bn as compared to our estimates of PKR2.76bn in FY19 thus almost in line with our estimates. The company announced a final cash dividend of PKR0.5/sh. Along with the result, MLCF announced 85% right shares at PKR12/sh (premium of PKR2.0/sh) in order to improve the liquidity and reduce debt burden. 

    Key Highlights in 4QFY19:

    • Revenue is recorded at PKR7.64bn on consolidated basis vs PKR6.38bn in same period last year mainly as a result of increase in domestic dispatches post CoD of Line III (2.3mn tons) in May’19. 
    • Gross margins clocked in at 15% in 4QFY19 on consolidated basis, implying significant drop in cement retention prices and higher depreciation expense of new plant. On sequential basis, margins have shed by c. 8.2ppt qoq despite some relief from decline in coal prices. Based on the cement results announced so far, GM’s have shed substantially across the industry amid pricing rift amongst producers. 
    • MLCF booked a tax credit of PKR355mn, contributing PKR0.6/sh to the profitability in 4QFY19. The credit is on account of recently commissioned grey cement line III which is entitled to tax credit of 5% on plant and machinery. 
    • The purpose of 85% right share at PKR12.0/sh is to improve the company’s liquidity position and enhance its solvency ratios. In the event of complete subscription, this will raise PKR6.01bn from the right proceeds. To highlight, MLCF has cumulative debt of PKR24bn on its book (last reported) with D/A of 36%. This is the highest D/A after CHCC in our cement universe. Also, in order to fund the working capital of KTML (Holding Company) which is also facing liquidity issues, MLCF will provide loans to the parent company worth PKR1.5bn.  
    • Among other line items: (i) distribution expense declined by 54%yoy to PKR140mn owing to lower export sales, (ii) other expenses jumped to PKR345mn mainly on account of exchange losses.

    During FY19, the profitability was down by 46%yoy to PKR2.46bn on the back of (i) lower cement dispatches, (ii) decline in cement retention prices, (iii) build up in cost pressure, and (iv) higher finance cost (higher interest rates and increase in borrowings). This is despite the tax credit on new plant recorded in 4Q. 

    We believe (i) pricing indiscipline within the industry (pressure on cement prices), (ii) impact of higher finance cost (expensing interest cost) and (iii) subdued demand, will weigh on profitability in the coming quarter as well. The right announcement is a testament of the company feeling pressure to operate at profitable levels and pay debt in a timely manner. Since KTML itself has cash flow issues, it will be difficult for the right to be fully subscribed, in our view. We maintain our Neutral stance on the stock.

    Risks: (i) Breakdown in pricing consensus, (ii) further rise in coal prices, and (iii) levy of additional taxes.