Earnings Report /
Pakistan

Kohat Cement: Q3 FY 20 review: Negative gross margins lead to first loss in 10 years

  • KOHC posted Q3 FY 20 NLAT of PKR381mn (LPS: PKR1.90), worse than our estimated loss of PKR208mn (LPS: PKR1.04)

  • Net sales declined by 34% yoy to PKR2.6bn in Q3 FY20 despite a 9% yoy increase in domestic dispatches (total up 8% yoy)

  • We maintain our Neutral recommendation with a TP of PKR127/sh on the scrip

Intermarket Securities
23 April 2020

Kohat Cement (KOHC) posted 3QFY20 NLAT of PKR381mn (LPS: PKR1.90), worse than our estimated loss of PKR208mn (LPS: PKR1.04). This is the first loss by KOHC in the past 10 years. This took 9MFY20 LPS to PKR1.41. The yoy erosion of bottom-line in 3Q is attributed to lower retention prices amid significant price cuts following its expansion. 

Major deviation in the result was on account of negative gross margins versus our expectation of +2%. 

Key highlights:

  • Net Sales declined by 34% yoy to PKR2.6bn in 3QFY20 despite a 9% yoy increase in domestic dispatches (total up 8% yoy). This indicates that net retention prices (realised) declined significantly to PKR254/bag as compared to PKR349/bag in 3QFY19 (by our estimate). This was the result of steep price cuts by KOHC to gain domestic market share post expansion (commissioned in January 2020).
  • Hence, 3Q gross margin declined by a whopping 36ppts yoy to -9%, also because of higher taxes in terms of FED, which the company could not pass on. These are the lowest GMs in our cement universe in 3Q results so far (less than FCCL, which posted GMs of -2.7%). 
  • Among other line items: (i) other income declined to PKR28mn (down 66% yoy basis) on depletion of cash, (ii) KOHC booked a tax credit of PKR55mn, which contained the losses for the period, (iii) Finance cost jumped to PKR176mn from negligible levels last year (no longer capitalising the interest cost related to expansion).

This is a very disappointing set of results by KOHC because of the negative GMs as the company tries to grab market share in a highly competitive environment. We believe that next three quarters in 2020 will be more challenging for the whole industry, as overall volumes may continue to shrink amid sub-par construction activity, and we anticipate that KOHC will also post losses in 3QFY20. We maintain our Neutral stance with a TP of PKR127/sh on the scrip.