Earnings Report /
Pakistan

Maple Leaf Cement: Q1 FY 20 review: Loss worse than expected

    Intermarket Securities
    24 October 2019

    Maple Leaf Cement (MLCF) posted Q1 FY 20 NLAT of PKR982mn (LPS: PKR1.65), worse than our estimated loss of PKR689mn (LPS: PKR1.16). Despite marked improvement in cement dispatches (up 74%/6% yoy in local/export dispatches), the yoy decline in Q1 profitability is mainly led by (i) lower retention prices due to significant price cuts following expansion, (ii), higher fixed cost of the new plant, and (iii) 2.4x yoy increase in finance cost from debt financing of new plant. Major deviation in result was observed on account of yoy decline in GMs by 24ppts yoy to a mere 1.6% against our expectation of 5%. Note that savings due to lower transportation cost from railway contracts compared with industry peers could also not support GMs.

    Key highlights:

    • Net sales posted a healthy growth of 26% yoy to PKR7.15bn on account of (i) significant jump in local dispatches by 74% yoy, However, net retention prices declined by 26%yoy and 6%qoq to cPKR282/bag (as per our estimates).
    • GMs plunged to mere 1.6% in Q1 20, down by 24ppts yoy. The decline is mainly attributable to (i) lower retention prices as a result of price cuts to gain domestic market share, and (ii) higher fixed costs emanating from depreciation of new plant. These are the lowest GMs in our cement universe so far (even lower than 2% GMs of DGKC in Q4 19) during the past two quarters.
    • Finance cost surged to PKR800mn, up by 2.4x yoy. Note that company has cPKR23bn of debt on books (as per last reported) the finance cost of which was completely expensed in Q1 (previously partly capitalised).
    • Other line items include: (i) reversal of tax charge amounting to PKR42mn, and (ii) PKR174mn of distribution expenses.

    Despite MLCF being a premium brand in the North, this is a very disappointing result. The company almost posted a (gross) loss in Q1 as it ostensibly increased discounts and pushed sales in the South market (freight disadvantage) following expansion in May’19. Though cement prices have improved marginally in Q2 20, subdued demand and further capacity addition by LUCK and KOHC (c5.0mn tpa) will keep a check on prices. Also, upcoming expansions may result in market share decline for MLCF. We have a TP of PKR26/sh implying a Buy stance. However, we will revisit our estimates to incorporate the result.

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