Earnings Report /
Pakistan

DG Khan Cement: Q3 FY 20 review – In line with expectations; better results than peers so far

  • DGKC posted NLAT of PKR1.0bn (LPS: PKR2.29) in 3QFY20, in line with our expectation of PKR920mn (LPS: PKR2.10)

  • The company booked gross profit of PKR56mn, resulting in a drop in GMs by 16ppts yoy (to 0.6%).

  • We have a Buy stance on the scrip with a June 2021 TP of PKR94/sh

Intermarket Securities
23 April 2020

DGKC posted unconsolidated NLAT of PKR1.0bn (LPS: PKR2.29) in 3QFY20, in line with our expectations of NLAT of PKR920mn (LPS: PKR2.10). This took 9MFY20 LPS to PKR4.22.

The decline in the quarter’s profitability is attributed to the combination of: (i) significant drop in retention prices in both local and export markets, (ii) a 5.3x yoy increase in finance cost, (iii) higher energy tariffs, and (iv) increase in transportation cost post implementation of axle load management. Note that 3Q results include one-off tax credit of PKR633mn, which reduced losses by about PKR1.4/sh.

Key highlights:

  • Despite marked improvement in local and export dispatches by 1% yoy and 77% yoy, respectively, Net revenue declined by 9% yoy. This was mainly on account of drop in local retention prices by 15%yoy to ~PKR295/bag (as per our estimates). Moreover, increase in clinker exports amid declining regional prices to US$30-32/ton, led to a further drop in realized prices per bag.
  • The company booked gross profit of PKR56mn, resulting in a drop in GMs by 16ppt yoy (to 0.6%). This was led by (i) lower retention prices, and (ii) the aforementioned cost pressures. GMs also declined sharply in 3Q on a sequential basis – from 13.2% to 0.6% – which can be attributed to a combination of (i) higher realized coal prices qoq, and (ii) elevated electricity and gas tariffs, in our view.
  • Finance cost surged by 23% yoy to PKR1.2bn, due to increase in debt amid higher working capital requirements and interest rates. We expect finance cost to remain the same in the coming quarters due to elevated debt levels.
  • Other line items include: (i) reversal of tax charge amounting to PKR633mn, which supported bottom-line by PKR1.44/sh, (ii) PKR587mn as dividend income from investment in group companies, mainly MCB, and (iii) PKR436mn of distribution expenses (up 22%yoy) mainly on account of higher exports.

This is a relatively better result, compared to the other cement results so far, due to severe undercutting in cement prices by competitors in the past two quarters. However, DGKC’s high exposure to national grid in power mix and significant debt on books may create problems in the coming quarters. New expansions will also dilute DGKC’s market share, in our view. Ultimately though, a potential reformation of cement pricing arrangement and better demand prospects through revival of government spending can help in rebounding profits. We have a Buy stance on the scrip with a June 2021 TP of PKR94/sh.