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Morning Call about D.G. Khan Cement Company Limited – Arif Habib Limited

Karachi: Strong retention price is paving the way for earnings growth

DGKC achieved 14x YoY jump in the profitability

D.G. Khan Cement Company Limited (DGKC) posted net earnings of PKR 318mn (EPS: PKR 0.73) in 1QFY12, a massive 14x YoY improvement, when compared with PKR 22mn (EPS: PKR 0.05) in the corresponding quarter last year.

According to Arif Habib Limited, this turn around in the profitability was on account of strong 30% YoY recovery in retention price coupled with a 5% YoY improvement in total dispatches.

 

Financial Highlights
PKR mn 1QFY12 1QFY11 YoY
Net Sales 5,088 3,528  44%
Cost of Sales 3,557 2,849 25%
Gross Profit 1,531 678 126%
Admin Expenses  51 42 22%
Selling Expenses 636 327 95%
Other Income 261 233 12%
Finance Cost 449 488 -8%
Profit after tax  318 22  1335%
EPS (PKR)   0.73 0.05
Source: Company financials

 

Strong pricing scenario has expanded the gross margin

Strong pricing scenario has resulted a 30% YoY increase in the average retention price during the period under review. This coupled with a 5% YoY increase in the total dispatches has led to a 44% YoY jump in the top line in 1QFY12. Consequently gross margin has improved by 11 percentage points (ppt) to 30% in 1QFY12 from a modest of 19% a year back.

Emphasis on exports has led to volumetric growth

Despite the low base effect due to last year’s floods, DGKC suffered a 12% YoY drop in the domestic sales during 1QFY12. However this decline was mitigated by a massive 64% YoY jump in the export dispatches, which reached ~350k tons during the period under review. The company aggressively explored East African markets, which has paid dividends in the form of healthy market share in exports. This led to ~2x jump in the selling expenses to PKR 636mn in 1QFY12.

Effective tax rate of 43%

The company charged its tax liabilities at an effective rate of 43% in 1QFY12 compared to 13% in the same quarter last year. This was on account of reduction in available tax losses as company’s export share increased during the period, which are not adjustable against exports.

Strong price outlook is paving the way for earnings growth

Strong pricing scenario appears to prevail in the upcoming winters as well, which would play a pivotal rule in the profitability of the cement manufacturers. Large cement manufacturers are likely to benefit the most out of this price flurry. Thus Arif Habib Limited expects DGKC to post a massive ~7x YoY profitability growth in FY12 to PKR 2.71/share compared to PKR 0.39/share in FY11.

Recommendation

Arif Habib Limited’s SOTP based, June 2012 target price of DGKC works out to PKR 33.1/share, which provides an upside potential of 57.6% from last closing price; thus Arif Habib Limited recommends Buy.

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