Pearl Securities Limited – Kohat Cement Company Limited

Karachi, February 03, 2015 (PPI-OT): Synopsis

After witnessing strong industry sales, the cement sector is expected to announce strong financials for 1H FY15. Kohat Cement Company Limited (KOHC) is scheduled to unveil financial accounts on the 6 th of Feb’15 where Pearl Securities Limited expects the firm to boast 17% YoY growth in earnings with NPAT reaching PKR 1.73bn (EPS: PKR 11.20) against net income of PKR 1.47bn (EPS: PKR 9.54) achieved in the same period last year. Expected growth is based on substantial increase in Top-Line with moderate support from better other income and reduced finance costs.

Primarily due to significant rise in domestic sales, 2Q FY15 NPAT is expected to clock in around PKR 1.05bn (EPS: PKR 6.78) which is greater by 22% YoY and 53% QoQ. Total dispatches for the term are expected around 0.536mn Tons, increasing by 12% YoY and 24% QoQ.

2QFY15* 2QFY14 Change 1HFY15* 1HFY14 Change
SALES 3,642 3,209 13% 6,567 5,853 12%
Cost of goods sold 2,130 1,833 16% 4,017 3,469 16%
Gross sales 1,512 1,377 10% 2,550 2,384 7%
Selling and distribution expenses 26 23 12% 43 38 14%
Administration and general expenses 34 30 14% 62 54 15%
Other income (48) (24) 101% (86) (40) 113%
Other charges 92 87 5% 161 150 7%
Operating profit 1,408 1,260 12% 2,371 2,182 9%
Finanace cost 22 36 -39% 48 80 -40%
PROFIT BEFORE TAXATION 1,386 1,224 13% 2,323 2,102 10%
Taxation 339 366 -7% 594 628 -5%
PROFIT AFTER TAXATION 1,047 858 22% 1,729 1,474 17%
EPS 6.78 5.55 22% 11.19 9.54 17%

Strong dispatches, strong revenues

Cement sales data, as provided by the APCMA, shows northern industry dispatches during 2Q FY15 increasing significantly by 23% YoY and by 28% QoQ. Based on this data, Pearl Securities Limited expects KOHC to have dispatched at total of 0.535mn Tons of cement during the period, which is greater by 12% YoY and by 24% YoY against sales of 0.477mn Tons in 2Q FY14 and against 0.431mn Tons in the previous quarter. With such strong sales and average retention price maintained at PKR 340/bag, Pearl Securities Limited expects 2Q FY15 revenue to clock in around PKR 3.64bn, up by 13% YoY and by 25% QoQ.

Total dispatches for 1H FY15 are expected to be around 0.966mn Tons, up by 9% YoY against volume of 0.886mn Tons in the same term last year. Revenue for the period is expected at PKR 6.57bn, greater by 12% YoY.

Margins to be grounded YoY

Declining coal prices are expected to improve margins on quarterly basis, however, impact of raised power tariffs will be apparent in moderate gross margin deterioration. 2Q FY15, gross margin is expected at 41.2% which significantly greater by 6.6% QoQ, however will be lower by 171bps YoY. Mild margin deterioration is expected due to a rise in power tariffs while cement prices were not increased. 1H FY15 gross margin is expected to be around 39%, lower by 190bps YoY.

Moderate support from other income and lower finance costs

Strong core operations will likely be assisted by greater other income from investment activities and reduced financial costs from reduced financial commitments. Other income is expected around PKR 87mn, up by 116% YoY while finance costs are expected to be around PKR 48mn, down by 40% YoY. Combined positive impact on EPS is expected to be around PKR 0.51/share. A relatively small impact, however, will support final earnings.

About the Company

Kohat Cement Company is among prominent cement producers in the country and is registered at all stock exchanges in Pakistan. The company’s registered office and production facility are located in Kohat, KPK. Annual production facility is 2.95mn Tons of cement. The firm produces both grey and white types of cement.

Company Outlook

Moving forward in to 2H FY15, the company will benefit from maintained demand on the domestic front and decision to reduce power rates. Improved margins backed by strong sales are expected to improve profitability in coming terms. Based on continued decline in cost (mostly in coal), improvement in earnings estimates and increased demand, Pearl Securities Limited upgrades TP to @PKR235/share for June’15 time horizon with the lower multiple of (FY15E) P/E (x) 9x as compared to the Sector P/E(x) of 9.61x.