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Karachi, December 14, 2012 (PPI-OT): Cementing high core margins for future!
Arif Habib Limited reiterates Arif Habib Limited’s bullish stance on the stock of D.G. Khan Cement Company Limited (DGKC) with a Jun-13 price target of PKR 69.5, which offers an appealing upside potential of 22% from last closing.
According to Arif Habib Limited’s positive stance on DGKC mainly stems from continuously improving core operations as solid cement price levels and soft coal prices underscore significant jump in core business margins. In addition, interest rate cuts are also melting financial fiend on the company’s bottomline. And, even if coal turns costlier, energy efficiency measures like Waste Heat Recovery (WHR) and Refused Derived Fuel (RDF) in the pipeline will only add sustainability to company’s gross margins, going forward.
Strong pricing to keep margins buoyant
After witnessing a quantum leap of 23% YoY in FY12, ex-factory cement prices are expected to improve another 4% YoY to average around PKR 380/ton for DGKC. Further to this healthy price trend in the domestic market, the company would further benefit from improving export prices to Afghanistan, which jumped a substantial 10% YoY to USD 63/ton in FY12. With emerging pricing power of the cement manufacturers, Arif Habib Limited does not see any cracks appearing in the pricing scenario hinting at stronger profitability outlook for the company. Arif Habib Limited expects DGKC’s gross margins to average 35.3% in the next 3 years against last 3 years average of 25.3%.
While falling fuel costs to add fuel to ‘margins’
After trenching a 3-year low of USD 79.8/ton in early Nov-12, coal prices in the int’l markets have recovered to USD 89/ton, up 12.6%. However, with slowing demand in the emerging markets, Arif Habib Limited does not expect any sharp recovery in coal prices at least for the medium term. This diverging price movement in coal and cement is expected to widen gross margin to 39% in FY13 compared to 33% in FY12.
Addition of WHRP to enhance energy efficiency
The company is in advance stage to bring its 8.6MW WHRP online in Jan-13 at its Khairput Plant. This in addition to a 10.4MW WHRP of its DGKC site will take its WHRP capacity to 19MW. The importance of WHRP increases many folds at the time when the company has a strong reliance on the national grid for power generation due to persistent gas shortages. As per Arif Habib Limited’s estimates, 8.6MW WHRP is expected to have an annualized savings impact of PKR 0.38/share for DGKC.
Declining interest rate to cushion the financial burden
The combined effect of deleveraging and falling interest rates is expected to take financial charges down a hefty 32% YoY to PKR 1.1 billion in FY13 compared to PKR 1.7 billion a year back. Total debt, which occupies about 27% of the balance sheet, is expected to come down to ~20% by end FY13 (24% as of Sep-12).
Recommendation – ‘Buy’ with Jun-13 Price Target of PKR 69.5!
Arif Habib Limited reiterates Arif Habib Limited’s ‘Buy’ on DGKC with a Jun-13 price target of PKR 69.5 that offers a massive 28% from current levels. The scrip currently trades at 4.6 times FY13E earnings while Arif Habib Limited expects a DY of 6% this year, double the DY of FY12 with PKR 3/share cash payout by FY13 end.