Morning Shout released by KASB Securities Limited and Economics Research

Karachi: DGKC: Raising PO on improved earnings outlook

According to KASB Securities Limited,

• KASB Securities Limited reiterates KASB Securities Limited’s Buy rating on DGKC and raise its PO by 45% to PRs35 on 122%/82% higher FY12/13E EPS estimates.

• KASB Securities Limited likes DGKC for (1) strong earnings growth arising from stable prices, easing cost pressure and lower financial charges, (2) de‐leveraging of balance sheet, (3) strong equity portfolio, and (4) attractive valuations.

• DGKC trades at 4.48x FY12E EPS while core operations are at 2.6x compared to 5.8x for Lucky.

• The breakup of the industry agreement on domestic and Afghan prices is the key downside risk to KASB Securities Limited’s estimates.

Reiterate Buy, lift PO to PRs35
KASB Securities Limited reiterates KASB Securities Limited’s Buy rating on DGKC and raise its PO by 45% to PRs35 on 122%/82% higher FY12/13E EPS and expected narrowing in the discount to closest peer Lucky Cement. It trades at 4.48x FY12E EPS while the core operations are at 2.6x compared to 5.8x for Lucky. KASB Securities Limited likes the stock for (1) its three‐year EPS CAGR of 171% (FY11‐14E) on strong prices, easing costs and a drop in financial charges, (2) de‐leveraging of balance sheet, and (3) strong equity portfolio. At the current price, DGKC trades at a 21% discount to its current equity portfolio value of PRs35/share, with a strong rebound in core‐earnings, KASB Securities Limited expects DGKC’s stock price‐to portfolio discount to eventually disappear.

Rise in domestic and export prices fuelling FY12E growth
Domestic cement prices are up 21% YoY and are expected to stay there given no capacity additions in the pipeline and the industry’s pricing agreement. KASB Securities Limited expected cement price correction in the winter, but it remained firm. Pakistan exporters have also increased Afghan export prices from US$36‐40/t to US$50‐55/t. DGKC is expected to benefit from this as Afghanistan contributes around 30% to its exports. On these two factors, KASB Securities Limited raises KASB Securities Limited’s FY12E domestic price forecast by 3% and export prices by 15%.

Dividend income, de‐leveraging to aid post FY12E growth
KASB Securities Limited assumes domestic prices at 5% lower than current levels for FY13E, which, coupled with soft coal prices and fuel efficiency measures, leads to flat EBITDA for FY12‐14E. If domestic prices continue at current levels, this indicates 22% FY13E EPS upside and 7% EBITDA growth over FY12‐15E. However, even with flat EBITDA, KASB Securities Limited sees a three‐year EPS CAGR of 11% (FY12‐ 15E) due to support from growing dividend income and de‐leveraging.

Price remains the key risk to KASB Securities Limited’s estimates
The breakup of the industry agreement on domestic and Afghan prices is the key downside risk to KASB Securities Limited’s estimates. KASB Securities Limited highlights a 1% change in domestic sales would have a 1.5% earnings impact for DGKC while a 1% change in the domestic cement price would lead to 4% earnings sensitivity for the company.

2QFY12 earnings review
2QFY12 EPS came in 466% higher YoY to PRs2.20, which is almost double KASB Securities Limited’s as well as consensus expectations (PRs0.9‐1.2) taking 1HFY12E EPS to PRs2.92. 2Q cement sales fell 11% YoY to 0.98mn tons reflecting a 5% YoY decline in domestic sales and 22% YoY drop in exports. This indicates a 1% decline in domestic market share to 12%. Realized cement prices reflected a 36% YoY jump offsetting the impact of a 13% increase in cost/bag. Resultantly, gross margin/bag went up 89% to PRs117/bag in 2Q.