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Elixir Securities Limited – The Bell

Karachi, October 16, 2015 (PPI-OT): DGKC: Expansion – a race against time; Reiterate BUY!

Bottom line expansion to continue in FY16; Reiterate BUY! DGKC posted a robust earnings growth of 28% YoY (i.e. PKR17.40/sh) in FY15 beating street consensus. Elixir Securities Limited expects DGKC to continue to post expansion in bottom line in FY16 albeit at normalized levels as the company booked non-recurring tax reversals related to its group tax losses in FY15. 1QFY16 earnings are estimated to grow by 29% in the backdrop of 5% growth in dispatches amidst declining fuel costs and flat power costs. DGKC is currently trading at FY16 PER of 8.7x, an 18% discount to industry average. Elixir Securities Limited maintains Elixir Securities Limited’s Buy call on the stock with Jun-16 PT of PKR176.0/sh offering a total potential upside of 24% to last closing.

South Expansion – a race against time Elixir Securities Limited’s latest correspondence with company management indicates that progress on its green field expansion in South is going smoothly with total forex component of approximately ~PKR15-18bn. While, progress on its expansion initially was in a go-slow mode with regards to uncertainty over installing captive coal power plant at the new site owing to water shortage in the area (Note that ACPL’s plant which is also located in the same area is also facing a similar issue with regards to its plans of setting up a 40MW coal power plant).

However, since the announcement of tax credits (five year tax holiday) by federal govt in FY16 budget for industrial units setup in Balochistan before FY18, DGKC has stepped up its expansion pace with the company signing plant equipment contracts with two foreign suppliers and is targeting to achieve CoD by 4QFY18.

Capital call risks minimalThe company, as per its notice on the KSE has established LC’s for import of Pyro processing equipment from FLSmidth, a Denmark based cement supplier with an estimated total cost at around ~PKR6.5bn (~EUR55mn) while it has also signed an agreement to procure raw, cement and coal grinding mills from a German based supplier (Loesche GmbH) with an estimated cost of PKR6.2bn (~EUR52mn). Furthermore, the company is also currently in negotiations to source conveying and bagging/packaging equipment from a foreign supplier named Haver and Boecker, based in Germany, with an estimated cost of PKR2.3bn (EUR20mn).

With average annual FCFE generation estimated at ~PKR5.9bn for FY16-18, DGKC is comfortably placed to finance the expansion with a mix of internal cash flows and debt.Efficiency gains from Coal fired boiler to augment earnings by PKR1.37/shDGKC is currently installing 30MW captive coal fired power plants at its DG Khan Plant location with a total capital outlay of ~PKR3.5bn which shall allow its DG Khan Cement unit to completely shift away its reliance from expensive grid electricity.

With coal prices expected to remain subdued in the medium term owing to deteriorating supply demand dynamics of the commodity, Elixir Securities Limited believes the project would results in sizable energy savings and is estimated to add PKR1.37/sh to the bottom line in FY17.1QFY16 result previewDGKC is shortly expected to announce its 1QFY16 earnings. Elixir Securities Limited estimates earnings to clock in at PKR3.41/sh, up 29% YoY but down 34% QoQ.

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