Karachi, October 24, 2022 (PPI-OT): Cements: Normalized tax to offset sequential decline in PBT
We present 1QFY23 earnings expectations for Cherat Cement Company Ltd. (CHCC), Lucky Cement Limited (LUCK), Pioneer Cement Limited (PIOC) and DG Khan Cement Company Limited (DGKC).
Despite stable gross margins, we expect pre-tax profits to witness a decline on a QoQ basis over dull cement sales during 1QFY23.
We however expect normalized taxes to almost offset increase in finance costs, resulting in bottom-line expansion for these companies, barring LUCK.
Normalized taxes partially offset impact of lower sales
In today’s note, we present 1QFY23 earnings expectations for four cement companies. Due to increasing global coal prices for the past several months, cement industry participants have chosen to significantly increase the amount of the cheaper local and Afghan coal in their coal mix. We therefore anticipate gross margins of these companies to remain at 4QFY22 levels.
Nonetheless, sequential decline in volumes is expected to decline absolute profits, piled with higher finance costs. Albeit, absence of one-time 10% super tax charged in 4QFY22 would likely support sequential bottom-line improvement.
CHCC: Increase of local coal usage to support margins
The board of Cherat Cement Company Ltd. is scheduled to meet on 26th October, 2022 to discuss 1QFY23 financial results. For 1QFY23, we expect Cherat Cement to post an EPS of Rs5.7, +8% QoQ, primarily due to absence of 10% super tax charge. Despite inflationary pressures and elevated power costs, we expect gross margin decline to limit to 0.7ppt QoQ over energy efficiencies and higher retention prices.
We expect contribution of local coal in the fuel mix to increase during the quarter. 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 support from its solar power plant during the period. We do not expect the company to announce any dividend along with the quarter results.
LUCK: Margins to normalize this quarter
The board of Lucky Cement is scheduled to meet on 26th October, 2022 to discuss 1QFY23 financial results. We expect the company to post an unconsolidated EPS of Rs11.29, down 8% QoQ over a higher base set in 4QFY22 for core profitability. We expect gross margins to clock in at 28% (0ppt/-11ppt YoY/QoQ). The company is expected to show this decline at the gross level due to normalization of inventory cost of coal. To recall, the company had used South African coal during the previous quarter with an average cost of ~Rs35,000/ton, resulting in exceptional gross level performance. Consequently, operating margins are also expected to come down from 32% on a sequential basis to 21%. Finance cost will likely see a 2x jump QoQ which is likely to comfortably be offset by the dividend income from ICI.
On a consolidated level, the company is expected to post 1QFY23 earnings of Rs 21.7/share, -20% QoQ. We do not expect any dividend announcement alongside 1QFY23 results.
PIOC: Bottomline to sequentially improve
We preview 1QFY23 EPS of Pioneer Cement (PIOC) wherein earnings are estimated to clock in at Rs664mn translating into an EPS of Rs2.9, as against a loss of Rs578mn in the previous quarter mainly on back of the absence of the one-time incremental 10% super tax charge.
We expect gross margins to remain stable at 25% (1ppt/0ppt YoY/QoQ) as the company utilized its captive plant rather than solely relying on the national grid for power supply. PIOC also availed better retention prices during the period. However, due to 11% QoQ decline in top-line, we expect the company to report sequential decline on the PBT level. No dividend announcement is expected alongside the results.
DGKC: Dividend income to provide support
The board of DG Khan Cement Company is scheduled to meet on 25th October 2022 to discuss 1QFY23 financial results. We expect DGKC to post earnings of Rs810mn translating into an EPS of Rs1.8, as against a loss of Rs647mn in the previous quarter.
We expect gross margins to remain firm QoQ as higher retention prices were able to offset impact of higher coal prices. Absolute gross profit is however expected to drop sequentially due to marked lower volumetric sales. Company is expected to post higher other income compared to last year primarily due to dividend income from MCB Bank, Adamjee Insurance and Nishat Mills. We do not expect the company to announce any dividend along with the results.
Outlook
The negativity hovering over cement sector in the past few months has been due to increasing input costs (mainly coal prices) amid rupee devaluation and dull demand due to monsoon and floods. Dispatches have however started to pick up lately which will help cement players pass on the impact of cost hikes. The sector does offer potential in the long run, also reflected in FY24 P/Es. We reiterate that earnings of cement players are expected to improve going forward as coal prices normalize amid demand pickup post winter season. Quicker than anticipated turnaround in coal prices would be a further plus for the sector.