Equity Analysis /
Pakistan

Pakistan Cements – 3QFY21 previews – Profitability to continue impressing

  • The IMS Cement Universe is expected to post combined profitability of PKR11.25bn for 3QFY21 up 37% qoq.

  • Despite the increase in variable cost, higher local prices and volumes will increase average GMs by 5ppt to 28% in 3Q.

  • DGKC earnings are expected to upsurge significantly qoq basis due to resumption of MCB dividend and higher GMs

Intermarket Securities
6 April 2021

The IMS Cement Universe is expected to post combined net profits of about PKR11.25bn for 3QFY21 results, which will be a c.37% qoq rise from the cumulative profits of PKR8.23bn in the previous quarter.

Key drivers were both greater volumes and higher local retention prices. All cement companies in our coverage, including DGKC and PIOC, are expected to post decent earnings for the period.

Despite the recent correction in Cement sector stock prices, we believe that strong profitability show from 3QFY21 onwards will push the rally forward, all else the same. We prefer DGKC, KOHC, FCCL and LUCK as their earnings growth is likely to outperform the sector average.

Higher sales and prices will elevate profitability in 3Q

We expect the IMS Cement Universe to post combined net profits of about PKR11.25bn for 3QFY21 – up c.37% qoq. Despite the increase in variable costs due to higher international coal and oil prices, robust domestic sales (up 35% yoy and 5% qoq) along with higher local and retention prices are key drivers of earnings growth. DGKC and PIOC, which remain highly leveraged and had posted relatively moderate profitability in 2Q due to lower export prices and high energy costs, respectively, are expected to show better earnings growth than peers in 3Q. Additionally, in the coming quarters, these two can continue outperforming the sector’s earnings growth, because of higher export prices and installation of new coal-based CPP and WHR – where the improvement in cost per unit will complement the benefit of higher retail prices. While we remain Overweight on the sector, our top picks are LUCK, DGKC, FCCL and KOHC.

GMs will continue to improve hereon

Average gross margins are expected to rise by 31ppt yoy to 28% (ex-LUCK) in 3QFY21 – 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 higher local and export prices and discounts, coupled with (ii) growth in cement dispatches (lower fixed costs per unit). Note average retail prices rose significantly during the quarter – up 16% yoy in the North to PKR590/bag and PKR640/bag in South (up 3% yoy). On a sequential basis, gross margins are expected to improve by 5ppt from an average of 24% in 2QFY21 (ex-LUCK). We expect GMs to improve further in the coming quarters, potentially towards an average level of c.32% by 2QFY22.

Local dispatches have surged significantly

During 3QFY21, local cement sales rose 35% yoy to 13.1mn tons, up from 9.75mn tons in 3QFY20. However, exports declined 8% yoy to 1.9mn tons. Overall industry utilization averaged c.87% (vs. c.68% in the same period last year). Strong private demand stirred by lower interest rates and the Construction Package, along with PSDP disbursements, 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 with previous quarters, despite a decline in exports. This was mainly because of reduced selling from North producers in the South market in addition to robust demand from the private sector. Note that higher local sales against exports improves overall gross margins.

Higher variable cost is no more a threat

We expect that local cement demand will post double-digit growth in FY21/22f. Also, we assume that the sector has regained significant pricing power in South – partly because of the PKR80/bag increase in North prices in 3QFY21. On the other hand, international coal prices have surged by c.56% from c.US$62/ton in October 2020 to around US$97/ton presently. However, the cost escalation is almost completely passed on in the prices; and recent PKR appreciation is another boon. Lastly, we expect that international coal prices will come off to about US$80/ton by 4QFY21 amid lower demand in summer and a third wave of Covid-19 raging globally.