Islamabad, January 24, 2024 : Pakistan Cement: Profitability likely to increase 10% YoY in 2QFY24; Gross margins to improve by 4% YoY in 2QFY24
- Topline Cement Universe is expected to post core profitability growth of 10% YoY to Rs12.6bn in 2QFY24 due to improvement in gross margin and higher other income.
- Net sales are anticipated to grow by 5% YoY to Rs93.5bn in 2QFY24 despite 12% YoY decline in local cement sales, thanks to 16% YoY increase in average local cement prices.
- Decline in cement dispatches in 2QFY24 is due to (1) imposition of axle load, (2) high cost of construction, and (3) high base effect of last year when cement dispatches began rising after floods.
- Capacity utilization of the cement sector clocked in at 61% in 2QFY24, compared to 65% in 2QFY23.
- Gross margin of the sector are anticipated to improve by 4% YoY to 29% in 2QFY24 due to lower coal prices and higher retention prices.
- During the 2QFY24, cement players in the south region mostly relied on Richards Bay coal, while those in the north region used a combination of Afghan and local coal. Richards Bay coal prices averaged at US$116 per ton in 2QFY24 as compared to US$238 per ton in 2QFY23 and US$109 per ton in 1QFY24, down 51% YoY and up 6% QoQ.
- Average retention price for 2QFY24 is estimated at Rs823/bag, up 17% YoY and 5% QoQ.
- Other income of the sector to estimated to clock in at Rs3.5bn in 2QFY24, up by 60% YoY. LUCK is expected to contribute 45% in sector’s other income.
- On QoQ basis, profitability is expected to decline by 10% due to higher coal prices with Quetta coal increasing by 16% QoQ, followed by Afghan coal up by 12% QoQ, and Darra coal up by 6% QoQ.
- We have a Overweight stance on Pakistan Cement sector with Luck Cement (LUCK), Maple Leaf Cement (MLCF) and Fauji Cement Company Limited (FCCL) as our top picks.
- Lucky Cement (LUCK): We expect LUCK’s consolidated earnings to grow by 39% YoY and decline by 18% QoQ to Rs49.74/share in 2QFY24. The substantial YoY increase in earnings is primarily attributed to higher profits from Lucky Electric Power. Moreover, QoQ earnings decline is attributed to 28% QoQ decline in earnings from cement operations due to lower dispatches and gross margin.
- On unconsolidated basis, LUCK likely to report EPS of Rs16.98, up 52% YoY while down 28% QoQ. The significant YoY jump in earnings is attributable to higher cement retention price, higher total volumes and likely higher other income. Gross margin is anticipated to clock in at 32% in 2QFY24 as compared to 25% and 37% reported in 2QFY23 and 1QFY24.
- Kohat Cement (KOHC): KOHC is likely to post EPS of Rs11.33 in 2QFY24 up 14% YoY mainly due to higher retention price by 17% YoY and higher other income by 2.1x YoY. Moreover, QoQ earnings are expected to remain flat due to 10% QoQ decline in total dispatches. Gross margins are expected to clock in at 28% in 2QFY24 vs 27% and 29% reported in 2QFY23 and 1QFY24.
- Fauji Cement (FCCL): We expect FCCL’s earnings to clock in at Rs0.93/share down 17% YoY. The decline in earnings is due to 2.2x increase in finance cost. On QoQ basis FCCL’s earnings are also expected to decrease by 13% amid lower dispatches and gross margin. Gross margin is likely to clock in at 30% in 2QFY24 vs 27% and 31% reported in 2QFY23 and 1QFY24.
- DG Khan Cement (DGKC): We expect DGKC to post unconsolidated EPS of Rs2.27, up 84% YoY mainly due to higher total volumetric sales, lower coal prices and higher retention prices. On QoQ DGKC to report earnings growth of 51% due to higher retention prices and higher total sales. Gross margins are likely to clock in at 20% in 2QFY24 vs 14% and 19% reported in 2QFY23 and 1QFY24.
- Maple Leaf Cement (MLCF): MLCF is likely to post consolidated EPS of Rs2.0, down 27% YoY due to higher distribution and finance cost. On QoQ basis earnings to grow by 32% due to 5% QoQ growth in local sales. Gross margins are anticipated at 33% in 2QFY24 vs 33% and 31% in 2QFY23 and 1QFY24.
