Karachi, April 13, 2023 (PPI-OT): MLCF, FCCL and DGKC 3QFY23 result previews

We present 3QFY23 earnings expectations for Maple Leaf Cement Factory Limited (MLCF), Fauji Cement Company Ltd. (FCCL) and DG Khan Cement Limited (DGKC). We forecast 3QFY23 EPS at Rs1.6 for MLCF (+41% YoY/-28% QoQ), Rs1.0 for FCCL (10% YoY/-13% QoQ) and Rs1.2 for DGKC (-64% YoY/-3% YoY).

MLCF is expected to show a sequential decline in gross margins and earnings over lower sales volume and higher fuel costs owing to increase in the quantum of Afghan coal and imported coal versus local coal in fuel mix. The company is also likely to see a higher depreciation cost and higher financial charge as the new line starts production.

We have an Overweight stance on the cement sector as long-term fundamentals remain durable. With international coal prices declining consistently and hopes of an uptick in volumes in the next year, sector would likely stay in the lime light.

MLCF: Margins to dip QoQ

The Board of Maple Leaf Cement is scheduled to meet on 17th April, 2023 to discuss 3QFY23 results. We expect MLCF to post an unconsolidated EPS of Rs1.6 for the quarter, as against an EPS of Rs1.1 for 3QFY22 primarily due to better coal cost management compared to last year. On a QoQ basis, however, we expect the company to post a decline in earnings. We expect gross margins to show a 2.8ppt QoQ decline largely on the basis of lower quantum of local coal in the fuel mix as the company would likely not have preferred to use local coal on the new plant. The company is also expected to book a higher depreciation and financial charge for the period as Line-4 commences production. To recall, the company had used local and Afghan coal of lower rates during 2QFY23, which resulted in exceptional gross level performance. Operating margin is expected to drop by 3.3ppt on a QoQ basis mainly due to lower gross margins. We do not expect any dividend announcement alongside the results.

FCCL: Earnings to sequentially drop

Board of Fauji Cement (FCCL) is scheduled to meet on 19th April, 2023 to discuss 3QFY23 financial results. We expect the company to post earnings of Rs2.4bn translating into an EPS of Rs1.0, 13% lower on a QoQ basis due to higher costs of production and higher finance costs. During the quarter, top-line is expected to clock in at Rs 19.5bn, +153% YoY, largely due to the merger impact with Askari Cement (executed in 4QFY22). Since the company has recently kick started its new 2mn tons cement line at Nizampur and is going for another expansion of 2mn tons at DG Khan, we do not expect any dividend announcement alongside the first quarter results given capital expenditure commitments.

DGKC: Margins to improve this quarter

DG Khan Cement’s (DGKC) board is scheduled to meet on 19th April, 2023 to discuss 3QFY23 financial results. We expect DGKC to post earnings of Rs528mn translating into an EPS of Rs1.2, -3% QoQ. During the quarter, top-line is expected to clock in at Rs 18bn, +12% QoQ, largely due to increase in dispatches owing to noticeable increase in the quantum of exports coupled with better overall retention prices. DGKC is expected to show a sequential improvement in gross margins due to the reason mentioned above and proactive cost management through increase in the quantum of local coal in fuel mix. Other income is expected to also increase on a QoQ basis owing to higher dividend income to flow from MCB in 3QFY23. Finance cost, on the other hand is expected to elevate because of higher debt and increase in interest rates during the period. We do not expect any dividend announcement by DGKC alongside the quarter results as the company usually pays dividend in the last quarter.

Outlook

Long-term prospects for the industry are intact and we hence stick to our Overweight stance on the sector. We highlight LUCK and MLCF among our top selections from the sector, given their respective timely expansions that have the potential to capture higher market shares. We also highlight KOHC among top picks due to its efficient cost control and lower leveraged balance sheet.