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Karachi, February 16, 2015 (PPI-OT): Following recent positive developments on both the macroeconomic front and the company’s fundamental outlook, AKD Securities Limited updates AKD Securities Limited’s investment case for DG Khan Cement (DGKC), where AKD Securities Limited raises FY15F earnings by 13% to PkR15.28/share, while upping up AKD Securities Limited’s 3yr CAGR from 7% to 11%. Resultantly, AKD Securities Limited also raises AKD Securities Limited’s June’15 TP by 24% to PkR153.4/sh where DGKC’s well diversified portfolio contributes PkR50.4/sh (after 40% discount) to AKD Securities Limited’s TP.
DGKC is scheduled to announce its 2QFY15 results on 17th Feb’15 (tomorrow), where AKD Securities Limited expects the company to post net earnings of PkR1.89bn (EPS: PkR4.32) vs. NPAT of PkR1.60bn (EPS: PkR3.66) in 2QFY14, up by 18%YoY. The growth in bottom line is expected to be driven by improving GMs, up by ~370bps to 37.4% in 2QFY15.
While recognition of dividends from the investee companies will keep the “other income” steady, deleveraging is expected to further cut the borrowing cost. Subsequently, 1HFY15 earnings are expected to clock in at PkR3.05bn (EPS: PkR6.96) against NPAT of PkR2.67bn (EPS: PkR6.09) in 1HFY14, exhibiting growth of 14%YoY. The scrip trades at FY15F P/E of 8.4x and offers a potential upside of 20% based on AKD Securities Limited’s revised TP of PkR153.4. BUY!
1HFY15 result preview: DGKC is scheduled to announce its 2QFY15 results on 17th Feb’15 (tomorrow), where AKD Securities Limited expects the company to post net earnings of PkR1.89bn (EPS: PkR4.32) vs. NPAT of PkR1.60bn (EPS: PkR3.66) in 2QFY14, up by 18%YoY.
This growth is expected on the back of improving gross margins, up ~370bps to stand at 37.4% in 2QFY15 vs. 33.8% in 2QFY14. While recognition of dividends from the investee companies (MCB, NML, NCL and AICL) will keep “other income” steady, deleveraging is expected to further cut the borrowing cost. Subsequently, 1HFY15 earnings would clock in at PkR3.05bn (EPS: PkR6.96) against NPAT of PkR2.67bn (EPS: PkR6.09), exhibiting growth of 14%.
Moreover, AKD Securities Limited estimates effective tax rate to clock in at 23.0% for 2QFY15, that being said, on two occasions in the past three years effective tax rate for the company has been materially lower in 2Q on a sequential basis. Keeping this in mind, higher earnings might be on the cards if the company does not charge Alternative Corporate Tax (ACT). An effective tax rate of ~15% would pull AKD Securities Limited’s projected earnings up by ~10%, taking it to PkR2.09bn (EPS: PkR4.76) for 2QFY15.
Is expansion on cards? As per FY14 financials, the company operates at ~95% capacity utilization level; fast approaching to its maximum capacity. Thus, in order to further grow volumetrically, the company will have to undertake expansion in the coming future, or will have to modify its current 75% to 25% local to export ratio.
For the former, company stays in excellent financial health (phenomenal cash generation from operations accompanied with a very low debt to equity ratio of less than 10%), and is well poised to undertake expansion. In this regard, other than a mere line item indicating a new plant at Hub, no other official announcement has yet been made by the company.
That said, any expansion plan will likely raise questions over the pricing dynamics of the sector. Recall that, expansion announcement by DGKC in FY14 provoked a threat to a price war where AKD Securities Limited sees prices coming off immediately. However, management of various players remains confident over the stability of the current pricing mechanism. For the latter, company is already looking to increase its proportion of local sales versus its export sales as evident in the last few quarters (local approaching to 80% in the sales mix).
Investment Perspective: Having gained 16% CYTD, the scrip still offers an upside potential of 20% based on AKD Securities Limited’s revised June’15 TP of PkR153.4/sh. Following revision in AKD Securities Limited’s macro assumptions and upward revision in AKD Securities Limited’s dispatches and margin estimates, AKD Securities Limited upgrades AKD Securities Limited’s earnings estimate for FY15F to PkR15.28/sh, up by 13% vs. previous estimates. Incorporation of these factors inches up AKD Securities Limited’s 3yr projected NPAT CAGR to 11% from 7% earlier. Furthermore, DGKC’s well diversified portfolio also remains a strong supporting factor, contributing PkR50.4/sh (after 40% discount) to AKD Securities Limited’s TP.