Spectrum Securities Limited

Transcription

1 Cement Sector Reveiw (REP-141) Cement Sector: Higher coal price & PKR devaluation errodes profit The cement sector performance was remained subdued posted a decline of 1% YoY in PAT however profit before taxation registered a decline of 24% YoY during FY18, revealing, higher deferred tax adjustment on expansion saved the bottom-line. Moreover, gross margin went down by 9% YoY in FY18 on account of higher coal prices (37% YoY to USD 105/ton) and rupee devaluation (16% YoY). To review sector performance, we have considered eight major cement companies including LUCK, DGKC, ACPL, BWCL, MLCF, CHCC, FCCL, and KOHC. From the stock market perspective, cement sector is one of the major sectors which registered a decline of 42% YoY in market capitalization. The sector under performed by 32% as KSE-100 index lost 10% in FY18. The sector contributed -2,260 points in the KSE-100 (49% weightage in total decline) whereas Index was down by -4,654 points during FY18. The foreigners were the major seller in the cement sector as they deivested USD 34.7mn during FY18. However, on local front individuals, banks and other organization were net buyers. Dispatches growth does not help to sustain profitability During FY18, total cement dispatches growth stood at 14% YoY to 45.9mn tons while topline of the sector barely increased by 6% YoY to PKR 223bn due to lower retention price (offering discount) and a surge in FED by PKR 0.25/ kg. Despite the increase in net sales, gross margin of sector dragged down by 9% to 31% in FY18, as coal prices augmented by 37% YoY to USD105/ton coupled with rupee devaluation of 16% YoY which damaged margins. (PKR mn) 4QFY18 4QFY17 YoY 3QFY18 QoQ FY18 FY17 YoY Net Sales 54,564 50,108 9% 58,043-6% 222, ,783 6% Cost of Sales (39,344) (32,022) 23% (40,675) -3% (152,708) (125,255) 22% Gross Profit 15,220 18,086-16% 17,368-12% 69,958 84,528-17% Dist. costs (2,252) (1,554) 45% (1,972) 14% (7,656) (6,996) 9% Admin Exp (1,380) (1,588) -13% (1,546) -11% (5,875) (5,746) 2% Other Operating Exp (2,693) (1,037) 160% (1,162) 132% (6,228) (5,622) 11% Other Income 2,305 2,191 5% 1,711 35% 7,802 7,611 3% Profit from Operations 11,200 16,097-30% 14,398-22% 58,001 73,776-21% Finance Cost (903) (530) 71% (709) 27% (2,807) (1,986) 41% Profit before Taxation 10,296 15,937-35% 13,707-25% 55,194 72,159-24% Taxation 6,092 (5,077) -220% (3,175) -292% (4,428) (20,904) -79% Profit after Taxation 17,822 10, % 10,532 69% 50,766 51,255-1% Gross Margin 28% 36% -8% 30% -2% 31% 40% -9% PBT Margin 19% 32% -13% 24% -5% 25% 34% -10% Net Margin 33% 22% 11% 18% 15% 23% 24% -2% Effective Tax Rate 59% -32% 91% -23% 82% -8% -29% 21% Sourec: Company Account, Spectrum Research Cement Sector: Financials 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Nov-17 Dec-17 Sep 26, 2018 ton (m n) F Y18 F Y17 YoY Lo ca l % E xp o rt % T ota l % 31% Abbas Haider abbas.haider@spectrumonline.com.pk + 92 (042) Ce m e nt D isptche s FY18 KSE-100 Price Performence Declining profitability Gross Margin 23% Cement Sector Net Margin 40% FY17 24% Page 1 of 2

2 Tax credit rescue bottom-line of the sector Net earning of the sector was supported by tax credits on the expansion of plant under income tax section 62B, moreover, KPK and balochistan based plants can also avail tax holiday for five years on the commencement of plant operation, wherein only CHCC and ACPL compensated from tax holidays during FY18. However, sector s profit before tax margin has dropped by 10% to 25% in FY18 from 34% in FY17 owing to lower gross margin and higher financial cost (41% YoY) as they require debt financing for capacity expansion. Outlook: Source: Richard_Bay Coal (USD/ton) We expect cement demand to decline despite the hype of constructing of two dams. However, GoP has slashed Federal PSDP by PKR 125bn to PKR 675bn from PKR 800bn, allocated previously in the budget FY Furthermore, the inflation rate has been increasing slowly but surely because of rising gas and Crude prices, which is likely to surge the Policy rate by another bps by FY19. Keeping this in mind, we expect that a hike in interest rate would increase the financing burden, which there forth would curtail demand PKR/USD Sep-17 Oct-17 Nov-17 Dec-17 Average Cement bag Price Region-wise North South Average J a n F e b M a r A p r M a y J u n J u l-1 8 A u g S e p Page 2 of 2

3 About the Company: The company ("SSL")was acquired from M/S Mazhar Hussain Securities (Private) Limited. Mazhar Hussain Securities (Private) Limited was constituted in December 19, Later, Spectrum Securities took over Mazhar Hussain Securities on October 27, 2014 and registered in the name of Spectrum Securities Limited. The management of SSL has stepped into the industry with its agenda to attract the Corporate Clients therefore they decided to come up with the new outlook, introducing a new management team of professionals. SSL is TREC Holder of Pakistan Stock Exchange Limited. Research Rating Categories SSL uses three rating categories, depending upon total return from current market price as follows, with Target period as June/December 2018 for Target Price ; Equity Valuation Methodology and the Risks that may impede achievement of the Target Price Following valuation Models are used to arrive at the target price of subject security(ies); Rating BUY HOLD SELL Description Total return of subject security(ies) is more than +10% from last closing of market price(s) Total return of subject security(ies) is between -10% and +10% from last closing of market price(s) Total return of subject security(ies) is less than -10% from last closing of market price(s) Free Cash Flow to Equity (FCFE) Free Cash Flow to Firm (FCFF) Dividend Discount Model (DDM) Price to Earning (PER) Risk Following risks may potentially impede the achievement of the Target Price of subject security(ies); Market risk Interest Rate Risk Exchange Rate Risk.

4 Disclaimer This document is prepared by Research analyst at SSPL. This report is for information purposes only and does not constitutes an offer, or invitation to make an offer, to buy or sell any securities. The information contained herein is based upon publicly available data and sources believed to be reliable. The information contained herein is based upon publicly available data and sources believed to be reliable. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. SSPL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, SSPL is under no obligation to update or keep the information current. SSPL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. SSPL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report. This report is prepared for the use of SSPL's clients and SSPL reserves the right for its distribution. No part of this publication may be copied, reproduced, stored or disseminated in any form or by any means without the prior written consent of SSPL Opinions and recommendations provided does not take into account specific investment objectives or particular investment needs of any specific person or group of persons who may receive this report. Analyst Certification: I, Abbas Haider, certify that all the views expressed in this report about the subject matter are an accurate depiction of my personal views and no part of my compensation or any other benefits, was/is/will be, directly or indirectly, related to the specific recommendation and views expressed in this report. In addition, compensation of the Analyst(s) is not determined nor based on any other service(s) that SSL is offering. Analyst(s) are not subject to the supervision or control of any employee of SSL's non-research departments, and no personal engaged in providing non-research services have any influence or control over the compensatory evaluation of the Analyst(s). Furthermore, I do not have any interest (financial or otherwise) in the subject scrip.

5 Contact Us: Registered Office: Room No , 4th Floor, Stock Exchange Building I.I. Chundrigar Road Karachi, Pakistan. Contact No Branch Office (Karachi):- Office No. 706, 7th Floor, Business & Finance Centre I.I. Chundrigar Road, Karachi, Pakistan. Contact No Branch Office (Lahore):- 1st Floor, Plaza No. 287, Block Y, Phase-3C, DHA, Lahore Cantt, Pakistan. Contact Person: Jamshaid Hassan ( ) Executives Ahmed Nabeel Chief Executive Officer (+92-21) Ext: 111 Imran Memon Chief Operating Officer (+92-21) Ext: 333 Equity Research Team Abdul Azeem Head of Research (+92-21) Ext: 222 Saad Bin Tahir Research Analyst (+92-21) Ext: 115 Sunny Kumar Research Analyst (+92-21) Ext: 114 Abbas Haider Research Analyst (+92-42) abbas.haider@spectrumonline.com.pk Junaid Javed Database Officer (+92-21) Ext: 113 junaid.javed@spectrumonline.com.pk Equity Sales Team Fawad Mansoor Senior Sales Executive (Institutions) (+92-21) Ext: 308 m.fawad@spectrumonline.com.pk Fahim Qasim Senior Sales Executive (Institutions) (+92-21) Ext: 306 fahim.qasim@spectrumonline.com.pk Muhammad Farhan Senior Sales Executive (Institutions) (+92-21) Ext: 304 m.farhan@spectrumonline.com.pk Naveed Motiwala Senior Sales Executive (Retails) (+92-21) Ext: 309 naveed.motiwala@spectrumonline.com.pk Aamir Sales Executive (Retails) (+92-21) Ext: 305 aamir.dejwani@spectrumonline.com.pk Jamshaid Hassan Branch Manager (Lahore Branch) (+92-42) jamshaid.hassan@spectrumonline.com.pk