The Bell about –KOHC: Deleveraging and margin/volume growth to drive rerating – Elixir Securities Limited

Karachi, May 14, 2013 (PPI-OT): Profitability growth continued in 9MFY13: Kohat Cement Company Limited (KOHC) posted profit of PKR1.9bn (EPS: PKR14.8) in 9MFY13, up 91% YoY. 3QFY13 earnings clocked in at PKR732mn (EPS: PKR5.7), up 64% YoY.

According to Elixir Securities Limited strong growth in earnings was primarily driven by margin expansion while dispatches were also higher on YoY basis.

Higher prices led to increase in margins: Average retention price for 9MFY13 clocked in at PKR6,224/ton, up 16% YoY. Higher cement prices contributed to strong EBITDA margin which averaged at PKR2,412/ton for 9MFY13, up 72% YoY. For 3QFY13, the EBITDA margin increased by 42% YoY to PKR2,689/ton.

Lower finance cost further supported earnings: Finance cost for 9MFY13 decreased by 56% to PKR204mn. This was on account of lower interest rate and rapid retirement of debt. Elixir Securities Limited expects the company to retire all of its debt by FY14E.

Rerating likely: At current levels, KOHC is trading at attractive FY13/14 PERs of 3.9/3.5x. The stock offers the highest upside within Elixir Cement universe of 72% to Elixir Securities Limited PER based Dec-13 PT of PKR136/share. BUY!

Key Financials                                Shares Outstanding: 129mn 

(PKR mn)                  3QFY12A  3QFY13A  YoY  9MFY12A  9MFY13A   YoY 
Net Sales                  2,463   3,117    27%    6,537    8,185   25% 
Gross Profit                 794   1,246    57%    1,843    3,172   72% 
Operating Expenses            32      39    20%       84      108   28% 
EBITDA                       819   1,296    58%    1,711    3,172   85% 
Finance cost                 123      48   -61%      463      204  -56% 
Profit before tax            610   1,109    82%    1,248    2,730  119% 
Taxation                     164     377   130%      248      819  231% 
Net Income                   446     732    64%    1,001    1,911   91% 
EPS (PKR)                   3.46    5.68    64%     7.77    14.84   91% 
Dispatches (mn tons)        0.43    0.48    12%     1.22     1.32    8% 
Avg. retention (Per Ton)   5,697   6,466    14%    5,372    6,224   16% 
COGS (PKR/Ton)             3,859   3,881     1%    3,857    3,812   -1% 
EBITDA (PKR/Ton)           1,894   2,689    42%    1,406    2,412   72% 

Source: Elixir Research 
 

Higher prices led to increase in margins
Average retention price for 9MFY13 was reported at PKR6,224/ton, up 16% YoY. This was on account of higher local and export retention prices. This drove EBITDA margins to PKR2,412/ton for 9MFY13, up 72% YoY. For 3QFY13, the EBITDA margin increased by 42% YoY to PKR2,689/ton driven mainly by higher cement prices. Elixir Securities Limited expects the cement prices to remain stable in 4QFY13.

Lower finance cost further supported earnings
Finance cost for the 9MFY13 decreased by 56% to PKR204mn. For 3QFY13, finance cost reduced by 61% YoY to PKR48mn. This was on account of lower interest rate and rapid retirement of debt. The company reduced its debt by 61% to PKR1.2bn during 9MFY13 from PKR3bn at FY12 end. Elixir Securities Limited expects the company to retire all its debt by FY14E.