AKD Quotidian about — DGKC: Rally to Continue

Karachi, December 18, 2013 (PPI-OT): AKD Securities believes a PkR15/bag increase in cement prices in the north is right around the corner, considering that cement producers have recently increased prices by PkR15-20/bag in an effort to pass on the impact of an increase in electricity tariffs.

According to AKD Securities, on the cost front AKD Securities expects DGKC’s new WHR plant at the Khairpur plant to be fully operational in 3QFY14, resulting in significant cost savings especially with the suspension of gas supply for two months during 3QFY14. At the same time, declining exports to Afghanistan due to stiff competition from cheaper Iranian cements will allow DGKC to utilize more of its capacity for local dispatches.

The combination of higher selling prices, more weightage to local sales and energy cost savings should result in margin improvement for DGKC going forward where AKD Securities sees DGKC posting NPAT of PkR5,317mn (EPS: PkR12.14) in FY14F. DGKC is currently trading at a FY14F P/E of 6.86x and offers an upside of 27% to AKD Securities’ revised TP of PkR105.5/share. Buy!
Declining exports, improving margins: Declining exports to Afghanistan due to stiff competition from cheaper Iranian cements will allow DGKC to utilize more of its capacity for local dispatches. Within the backdrop of limited availability of excess capacity to enhance production coupled with higher margins for local sales, an increase in the proportion of local sales should result in incremental margin improvement for DGKC. In this regard, a switch of 1% in sales composition in favour of local sales will result in an annualized EPS impact of 1.1%.

Delay in waste heat recovery: Implementation of the Waste Heat Recovery (WHR) project has taken longer than expected where the project was initially expected to come online towards the end of FY13. However, teething problems with the project caused delays in commercial operations of the plant.

The new plant will increase electricity generation capacity from WHR Profit before tax by 83% and will result in significant cost savings of PkR11.38/bag by providing cheap electricity in 3QFY14. This is particularly pertinent within the backdrop of the GoP’s announcement of a complete suspension of natural gas during Jan’14 and Feb’14 where DGKC will have to switch production to the national grid and FO. AKD Securities expects a full-year annualized EPS impact of PkR1.54 from the additional WHR capacity.

Increase in cement prices around the corner: AKD Securities believes a PkR15/bag increase in cement prices in the north is right around the corner, considering that cement producers in the south have recently increased prices by PkR15-20/bag in an effort to pass on the impact of an increase in electricity tariffs. Furthermore, there may be an additional PkR10/bag increase during Feb’14 to pass on the complete impact of the increase in electricity tariffs to the end customer. Further price increases following any increase in gas tariffs cannot be ruled out.

Investment Perspective: AKD Securities expects DGKC to post earnings of PkR5,317mn (EPS: PkR12.14) in FY14F, lower by 3%YoY due higher power costs but a respectable number nonetheless. With DGKC expected to depict incremental margin improvement on the back of consistently higher cement prices, the stock is trigger loaded in AKD Securities’ view. DGKC currently trades at a FY14F P/E of 6.9x and offers an upside of 27% to AKD Securities’ revised Jun14 TP of PkR105.5/share. Buy!