Karachi, January 27, 2023 (PPI-OT): MLCF, LUCK and CHCC 2QFY23 result previews
We present 2QFY23 earnings expectations for Maple Leaf Cement Factory Limited (MLCF), Lucky Cement Limited (LUCK) and Cherat Cement Company Ltd. (CHCC).
We forecast 2QFY23 EPS at Rs1.9 for MLCF (+11% YoY), Rs10.1 for LUCK (+31% YoY) and Rs8.1 for CHCC (+34% YoY). Improvement in bottom-line is expected from better retention prices and stable gross margins over proactive cost management through increase in the quantum of local and Afghan coal in the fuel mix.
2QFY23 profitability to expand
In today’s note, we present 2QFY23 earnings expectations for three cement companies. We expect sequential betterment in volumes over low base from impact of monsoon and heavy flooding during 1QFY23. In addition, the sector also witnessed increase in retention prices this quarter. As a result, we expect top-line to expand in 2QFY23. On margins front, tilt towards Afghan and local coal in the coal mix for the past several months is expected to benefit the sector’s margins. However, higher finance cost may limit the aforementioned positives in the bottom-line.
MLCF: Increase in mix of local coal to support margins
For 2QFY23, we expect Maple Leaf Cement (MLCF) to post an EPS of Rs1.9, as against an EPS of Rs1.7 for 2QFY22 primarily due to better coal cost management. We expect gross margins to show a 3ppt QoQ improvement on the basis of higher quantum of local coal in the fuel mix and higher retention prices during the period. Operating margin is expected to improve by 3.4ppt on a QoQ basis with 2QFY23 EBIT clocking in at Rs3.5/share due to better volumetric sales and margins. Since the company has recently incurred CAPEX to kick start its 2mn tons new cement line, we do not expect any dividend announcement alongside the results.
LUCK: Margins to likely normalize
The board of Lucky Cement (LUCK) is scheduled to meet on 27th January, 2023 to discuss 2QFY23 financial results. We expect the company to post an unconsolidated EPS of Rs10.1, +31% YoY over better margins but declining by 16% QoQ likely due to absence of dividend income and lower margins compared to previous quarters. We expect gross margins to clock in at 27% (+4ppt/-4ppt YoY/QoQ). The company is expected to show this decline at the gross level due to normalization of inventory cost of coal. The company had very low cost South African coal inventory previously, resulting in exceptional gross level performance. Consequently, operating margins are also expected to come down from 21% on a sequential basis to 19%. Finance cost will likely see a 2x jump QoQ due to increase in borrowings.
On a consolidated level, the company is expected to post 2QFY23 earnings of Rs 21.1/share, +32% QoQ. We do not expect any dividend announcement alongside 2QFY23 results.
CHCC: Bottomline to sequentially improve
CHCC is expected to post an EPS of Rs8.1, +34%/+6% YoY/QoQ, primarily due to better retention prices and optimal coal mix. Despite inflationary pressures and elevated power costs, we expect gross margins to remain stable on a sequential basis at 32% (+5ppt/+0ppt YoY/QoQ). A major saving angle in CHCC is its ability to procure cheaper local and Afghan coal due to it being the closest to the Afghan border, this allows it to keep costs in check relative to peer companies. The company also had some support from its Solar power plant during the period. We do not expect the company to announce any dividend along with the quarter results.
Outlook
Recent uptick in demand has provided the sector room to pass on some impact of cost increases. Long-term prospects for the industry are intact and we hence stick to our Overweight stance on the sector, where LUCK and MLCF are 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 given its outstanding gross level performance broadly due to its aggressive cost control and low leverage ratios.