Equity Analysis /

Lucky Cement: FY19 results – Slightly better than expected on lower effective tax rate

    Intermarket Securities
    29 July 2019

    Lucky Cement Ltd (LUCK) posted 4QFY19 unconsolidated NPAT of PKR2.2bn (EPS PKR6.79), down 8% yoy and 21% qoq. This takes FY19 net profits to PKR10.5bn (EPS PKR32.44), down 14% yoy. The 4Q EPS was above our estimate of PKR6.0/sh mainly due to lower effective tax rate. On consolidated basis, profitability in 4Q was down by 28%yoy to PKR2.1bn (EPS PKR6.4), taking cumulative NPAT to PKR11.3bn (EPS PKR35.03) as compared with PKR14.8bn (EPS PKR45.83). The setback in earnings is observed as a result of (i) decline in core cement earnings of 14%yoy, (ii) a 25% drop from ICI (Fx losses in 3Q) and (iii) potential fall in earnings of its JVs. The results accompanied cash dividend of PKR6.5/sh.

    Key Highlights in 4QFY19: 

    • Net sales declined by 12%yoy to PKR10.5bn which is attributable to decline in cement price (especially in North) and lower dispatches. In 4Q, local and export dispatches declined by 13%yoy and 25%yoy, respectively. 
    • Gross margins (GMs) fell by c. 7ppt yoy to 26% in 4Q as compared to 33% in the same period last year, led by drop in retention prices amid industry pricing indiscipline and higher production costs (majorly energy). On qoq basis as well, weakening pricing power trimmed LUCK’s GM by 5ppt. 
    • Other highlights of the result include: (i) 3% yoy decline in distribution expenses – attributable to lower proportion of exports, (ii) 59% yoy rise in other income, and (iii) effective tax rate of just 11% as compared to 24% SPLY.
    • With regards to its investment projects, the Greenfield clinker production facility in Iraq is set to achieve commercial operations by 1QFY21. Additionally, brownfield expansion of cement line in North (capacity of 2.6mn tons) is on track to start production in 2QFY20.

    We have a Buy stance on LUCK with a TP of PKR543/sh (upside 43%), where we highlight its diversification in non-cement businesses as a key merit, despite sector headwinds. Also, LUCK requires the lowest cement price (PKR435/bag) among peers to break even (on cash basis).