Earnings Report /
Pakistan

Pakistan cement sector profit expected to double in 2QFY21

  • The IMS Cement Universe is expected to post combined net profits of PKR6.20bn in 2QFY21 results.

  • Key drivers were both greater volumes and higher local and export retention prices.

  • Average gross margins of IMS Cement Universe are expected to rise by 14ppt yoy to 19.4% (ex-LUCK) in 2QFY21

Intermarket Securities
15 January 2021

The IMS Cement Universe is expected to post combined net profits of PKR6.20bn in 2QFY21 results, which will nearly double from the profits of PKR3.66bn in the previous quarter.

Key drivers were both greater volumes and higher local and export retention prices. Importantly, companies such as DGKC and PIOC, which posted losses in 1QFY21, are likely to return to profits.

The sector rallied 80% during C20 from multiyear low stock price levels. Most expected triggers are not only well entrenched but are likely to accelerate hereon. Therefore, both profitability improvement and the rally should continue, in our view. We prefer DGKC, PIOC and LUCK in the space owing to better prospects for earnings growth.

Uptrend in both sales and prices will elevate profitability

We expect the IMS Cement Universe to post combined net profits of PKR6.20bn in 2QFY20, which will be a drastic improvement both sequentially and on a yoy basis. Despite increase in variable cost due to increase in international coal and oil prices, robust domestic sales (up 18% qoq and 13% yoy) along with higher retention prices will lift overall profitability. DGKC and PIOC, which remain leveraged and had posted losses in 1Q, are set to return to profits. Additionally, in the coming quarters, these two can outperform in terms of earnings growth, because of installation of new coal based CPP and WHR, which will significantly reduce fuel cost of both companies (details inside). While we are Overweight on the sector, our top picks in the space are LUCK, DGKC and PIOC.

GMs will improve despite higher variable costs

Average gross margins of IMS Cement Universe are expected to rise by 14ppt yoy to 19.4% (ex-LUCK) in 2QFY21 – notwithstanding the increase in variable cost owing to the increase in international coal and oil prices and a surge in inland freight of coal. This emanates from (i) higher retention prices amid lower FED and discounts, and (ii) coupled with growth in cement dispatches. Note,  however, that average retail prices did not increase much during the quarter – PKR550/bag in North (up 2% yoy) and PKR660/bag in South (up 1% yoy). On a sequential basis, gross margins are expected to improve by 3ppt from an average of 16% in 1QFY21 (ex-LUCK) following a surge in demand (mainly driven by the private sector). We expect gross margins to improve further in the coming quarters – potentially towards an average level of 23% by June 2021.

Dispatches have put on a good show…

During 2QFY21, local cement sales rose 13% yoy to 12.8mn tons, up from 11.3mn tons in 2QFY20. However, export sales declined to 2.3mn tons, down 2% yoy. Overall industry utilisation averaged c.74% (vs. 75% in SPLY but with the less capacities). Strong demand from housing projects amid low interest rates and amnesty for builders were the main drivers. We expect that local demand will sustain in the coming quarters as government infrastructure spending will also rise to kick-off low-cost housing projects. Besides this, cement demand in the South has improved considerably compared to previous quarters, despite a decline in exports. This was mainly because of reduced selling from North producers in the South market and higher demand from private sector. Note that a lower export-to-domestic sales ratio improves gross margins.