The Bell about – FCCL: Downgrade to hold on strong price performance – Elixir Securities Limited

Karachi, June 04, 2013 (PPI-OT): Stellar earnings in 9MFY13: Fauji Cement Company Limited (FCCL) posted profit of PKR1,570mn (EPS: PKR1.18) for 9MFY13, up 10x YoY .

According to Elixir Securities Limited sharp increase in profitability was attributable to 1.0x higher EBITDA margin during 9MFY13. Profit for 3QFY13 was PKR647mn (EPS: PKR0.49), up 1.6x YoY.

Strong retention prices supported margins in 9MFY13: Average retention prices increased by 23% YoY during 9MFY13. This was on account of strong local prices. Elixir Securities Limited expects the retention prices to remain stagnant in the near term.

Lower finance cost also supported earnings: Finance cost declined by 4% during the 9MFY13 to PKR1.1bn mainly due to lower interest rates along with debt repayment during last year. The company’s debt has dropped by 15% during 9MFY13 to PKR11.5bn. Elixir Securities Limited expects FY14 finance cost to drop by 25% to PKR1,116mn.

Dividend estimates revised to PKR1.0/share: Elixir Securities Limited has revised FY13 dividend estimate to PKR1/share from PKR0.5/share. The upward revision of dividend estimates is because of strong cash position of the company as of 3QFY13.

Estimates tweaked; downgrade to HOLD: Elixir Securities Limited has revised down Elixir Securities Limited FY13-15 EPS estimates by 8-14%. Using PER of 6.0x on FY14 earnings, Elixir Securities Limited Dec-13 PT comes out to PKR11/share. The stock has outperformed KSE100 index by 22% since announcement of its 9MFY13 financial results. Elixir Securities Limited thus downgrade FCCL to HOLD!

Key Financials Outstanding Shares: 1,331mn 
(PKR mn)           3QFY12A   3QFY13A   YoY 9MFY12A  9MFY13A    YoY 
Net Sales           3,209      4,073   27%   7,466   11,639    56% 
Cost of Sales       2,290      2,742   20%   5,818    7,873    35% 
Gross Profit          919      1,331   45%   1,648    3,767   129% 
Operating Expenses     69         73    6%     154      243    57% 
EBITDA              1,167      1,576   35%   2,148    4,481   109% 
Other Income            7         30  352%      15       51   234% 
Other Charges          21         65  211%      14      166  1061% 
Finance cost          496        337  -32%   1,208    1,155    -4% 
Profit before tax     339        886  161%     287    2,253   685% 
Taxation               96        239  149%     146      684   369% 
Net Income            243        647  166%     141    1,570  1011% 
EPS (PKR)            0.18       0.49  166%    0.11     1.18  1011% 

Source: Elixir Research 

Strong retention prices supported margins in 9MFY13
FCCL’s earnings in 9MFY13 were mainly driven by strong retention prices during 9MFY13. Average retention per ton for 9MFY13 increased to PKR6,292/ton, up 23% YoY. This was on account of strong local prices. . Elixir Securities Limited expects the retention prices to remain stagnant in the near term because the peak season of February-March has passed without any major price increase.

Lower finance cost also supported earnings
Finance cost declined by 4% during the 9MFY13 to PKR1.1bn mainly due to lower interest rates amid debt repayments during last year. The company’s debt has dropped by 15% during 9MFY13 to PKR11.5bn. Elixir Securities Limited expects FY14 finance cost to drop by 25% to PKR1.1bn. Due to large amount of debt on its book, FCCL’s earnings are very sensitive to interest rate cycle. A 200 bps increase in interest rate can increase finance cost by 15% in FY14 (EPS impact of PKR0.1 or 5%).

Dividend estimates revised to PKR1.0/share
Elixir Securities Limited has revised FY13 dividend estimate to PKR1/share from PKR0.5/share. The upward revision in dividend estimate is because of strong cash position of the company despite payment of preferred dividend. As of 3QFY13, the company held cash balance of PKR1.5bn.

According to Elixir Securities Limited estimates, the company will have cash of PKR1.46/share at end of FY13 after scheduled debt repayment of PKR313mn during 4QFY13. Even after paying preferred dividend of PKR0.16/share, Elixir Securities Limited estimates the company to have cash of PKR1.3/share. Being on the conservative side, Elixir Securities Limited expects the company to pay PKR1/share as dividends to common share holders.