Karachi, August 30, 2023 (PPI-OT): CHCC and KOHC FY23 result previews

We present 4QFY23 earnings expectations for Cherat Cement Ltd. (CHCC) and Kohat Cement Ltd. (KOHC), where we anticipate a reduction in bottom-line owing to higher financial and tax charges. This would be despite relatively better margins on gross levels.

We expect CHCC to post 4QFY23 EPS of Rs3.59 (-32% YoY/-45% QoQ) whereas KOHC is expected to post an EPS of Rs4.94 compared to EPS of Rs2.0 in the SPLY. We anticipate CHCC to announce a dividend of Rs1.5/share alongside the results. We highlight that deferred tax adjustments could further impact bottom-line for 4QFY23E.

Beyond FY23 results, we expect earnings growth momentum to gain support from sticky margins. We maintain a positive outlook on the Cement sector, considering its resilient fundamentals. With declining coal prices, sector would likely stay in the limelight.

Profitability to decline over higher tax charge

We present 4QFY23 earnings expectations for Cherat Cement Ltd. and Kohat Cement Ltd. Dull dispatches are expected to impact top-line of cement manufacturers but better retention prices would act as cushion for margins. On the cost front, cement players have opted to significantly increase the quantum of relatively cheaper local variant in their coal mix. Consequently, we expect sequential improvement in cement companies’ gross margins. Despite better margins, we expect earnings to take a substantial hit from the 10% Super tax charge to be taken in this quarter.

CHCC: EPS to decline owing to dull volumes and Super tax

The Board of Cherat Cement (CHCC) is scheduled to meet on 5th September, 2023 to discuss FY23 results. For 4QFY23, top-line is expected to clock in at Rs8.77bn showing a 6% QoQ decline, due to lower dispatches. Gross margins are, however, expected to improve owing to better retention prices for the quarter and lower coal costs. Finance cost is expected to elevate by ~25% QoQ because of increase in interest rates. Higher finance cost, and the Super tax charge take our earnings projection to Rs3.59/share for the quarter, down 45% QoQ.

In addition to the retrospective Super Tax charge in 4QFY23, deferred tax charge due to 6% increase in future tax rate (owing to Super Tax rising from 4% to 10% on a recurring basis) would result in a further dent for the company.

We expect a lower dividend announcement of Rs1.5/share in 4QFY23 compared to SPLY given the fact that company has already announced an interim dividend of Rs1.5/share in 3QFY23.

KOHC: Improved margins; Super tax offsets the benefit

The Board of Kohat Cement is scheduled to meet on 31st August, 2023 to discuss FY23 results. KOHC is expected to post 4QFY23 earnings of Rs992mn translating into an EPS of Rs4.94. During the quarter, top-line is expected to clock in at Rs 9.2bn, drop of 8% QoQ, largely due to decrease in total dispatches owing to slowdown. Gross margins are, however, expected to improve by 2.4ppts QoQ owing to higher retention prices and better coal management. Effective tax rate for the company is expected to clock in around 58% where a deferred tax charge could drag the company’s bottom-line further. We believe it is less likely to see any dividend announcement alongside the results.

Outlook

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