Earnings Report /
Bangladesh

Heidelberg: Q1 CY 20 – Higher finance cost wipe out earnings; reiterate Sell with lower TP

  • Higher finance cost from new loan for acquisition and investment in subsidiary

  • Sequential gross margin expansion driven by lower clinker import price due to global demand dent

  • Cement demand to slump amid the Covid-19 crisis; we expect a 38% decline in HEID’s CY 20 top-line

IDLC Securities
28 April 2020
Published byIDLC Securities

HEID BD reported 1Q CY 20 NPAT of BDT44mn (EPS: BDT0.77), implying c77% de-growth against NPAT of BDT193mn (EPS: BDT3.42) in 1Q CY 19. Increased finance expenses from loans for acquisition and investment in subsidiary eroded the quarterly profits. Higher sequential gross margin (+400 bps QoQ approx.) along with 6% YoY top-line growth kept the earnings positive. The company also posted CY 19 loss of BDT186mn (EPS: BDT-3.30), vs CY 18 NPAT of BDT810mn (EPS: BDT14.33), implying c123% de-growth. 4Q 19 EPS stood at BDT -3.47, down by c231% YoY, vs 4Q 18 EPS of BDT2.64.

HEID BD acquired 100% shares of Emirates Cement Bangladesh (ECB) and Emirates Power Company (EPC) – subsidiaries of India’s renowned UltraTech Cement Ltd (UTC) – at an enterprise valuation of BDT2.5bn (USD29.5mn) in December 2019. According to the disclosure, the amount of consideration payable will be approximately BDT1.8bn (USD21.5mn). After acquiring ECB’s 0.5mtpa grinding unit, HEID’s capacity reached 3.43mtpa (including 0.55mtpa of capacity expansion). The company also invested around BDT900mn in 4Q 19 in its wholly-owned subsidiary, Meghna Energy Ltd. (MEL). Hence, the company had to take a loan of BDT2800mn in 4Q 19 to meet these expenses along with 0.55mtpa capacity expansion expenses.

As we mentioned earlier, the acquisition does not offer significant implications on our views on HEID. First, the transaction value implies 1.0x of ECB’s FY 19 sales, whereas HEID is trading at around 0.7x of LTM sales. Therefore, the acquisition is not cheap. Second, ECB’s FY 19 earnings of BDT435mn may not be sustainable. The company has a volatile history of earnings (Table:2) with a reserve deficit of BDT567mn. So, ECB may not be an efficient company to start with and HEID BD may require a year or more to get a substantial contribution from the company itself.

Revenue increased to BDT 3,826mn (+6% YoY) mainly driven by higher retail price in 1Q 20 and moderate volume growth amid peak construction season. According to our market survey, per bag price for ScanCement (a brand of HEID) was BDT420 in Oct/Nov, which increased to BDT430-440 in Jan/Feb.

1Q CY 20 GPM stood at 11.8%, down by 230bps YoY, which can be attributed to lower retail price in 1Q 20 than that in 1Q 19 and higher raw material import price in 1Q 20 compared to that in 4Q 18 & 1Q 19. GPM expanded sequentially (approx. +400bps QoQ), driven by higher cement retail price and lower raw material import price due to global demand dent in coronavirus pandemic. Clinker import price fell to US$45/tonne in 1Q 20 from US$50/tonne in 4Q 19. We anticipate a further decline in import price in 2Q 20 on the back of clinker price fall and oil price slump amid poor global demand, hence uptick in GPM to c12%. We expect just 30% of normal consumption in 2Q 20 with hopes of a gradual increase in H2 20.

Net finance cost stood at BDT49mn in 1Q CY 20 vs net finance income of BDT26mn in 1Q CY 19 due to HEID’s new loan for the acquisition of ECB & EPC and investment in MEL, resulting in a significant deterioration in interest coverage ratio (3.7x in 1Q CY 20 vs 70.8x in 1Q CY 19) and 56% YoY de-growth in PBT.

The government backed off on imposition of 5% non-adjustable advance income tax (AIT) and decided to charge the previous rate of 3% from January 2020, although kept it non-adjustable. As a result, effective tax rate for HEID BD was c66% in 1Q 20 though the company paid lower turnover tax of c2% in 1Q 20 (c3% in 1Q 19).

Reiterate Sell (TP BDT114 for Dec 2020, ETR -18.4%). We expect cement demand to slump amid the Covid-19 crisis, translating to a 38% decline in HEID’s CY 20 top-line. Though we are hopeful about consumption rebound from CY 21, HEID BD may need till 2022 to reach the pre-corona top-line level (BDT11bn). We expect production utilization rate of local cement industry to fall to c35% in CY 20 from c60% in CY 19 and price competition among grinders to get worse in the next 1-2 years. Though the local grinders will delay the declared capacity expansion, they are expected to be involved in severe price rift to push sales when the coronavirus situation improves. Also, the non-adjustable minimum turnover tax will erode the profits of cement manufacturers if not changed. Among all these setbacks, we reiterate Sell recommendation and revise our previous TP down to BDT110.