Cement sector: High finance costs drag 1HFY19 earnings down by 19%

MG News | March 01, 2019 at 01:10 PM GMT+05:00

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March 1, 2019 (MLN): In line with an analysis carried out on financial earning reports of several major listed companies in Pakistan, the cement sector witnessed a growth of 1% YoY in Profit after Tax for 2QFY19 as compared to same period last year, whereas it suffered an estimated decline of 19% for the 1HFY19 as compared to same period last year.

The topline earnings of the sector reported positive growth of 17% for 2QFY19 and 10% for 1HFY19, owing to increase in cement dispatches and prices.

It is pertinent to mention that the rise in coal prices in 1QFY19 was expected to have a significant impact on the gross margins of 2QFY19. However, the sector managed to report decent growth of 27% in GP margin after taking into account the hike in coal prices.

A lower effective tax rate played a major role in dragging up the net profit margins, as the Profit before Tax for the sector was down by a considerable margin as compared to Profit after Tax.

The sector’s profits after tax were mainly affected by the finance cost, as it was up by 202% YoY during 2QFY19 and 179% during 1HFY19. This was a result of enhanced demand for debt to fund ongoing or upcoming expansions. Moreover, the State Bank of Pakistan recently hiked benchmark interest rate by 450 bps to 10.25%, leading to enhanced finance costs.

Cement Sector Industry Analysis: PKR (million)
	2QFY19	2QFY18	YoY	1HFY19	1HFY18	YoY
Turnover — net	75,692	64,718	17%	137,695	125,202	10%
Cost of sales	-57,097	-44,955	27%	-104,673	-87,182	20%
Gross profit	18,594	14,641	27%	33,021	38,019	-13%
Distribution costs	-2,706	-2,192	23%	-5,080	-4,027	26%
Administrative expenses	-1,510	-1,920	-21%	-2,674	-3,573	-25%
Other expenses	-1,630	-115	1311%	-2,978	-7,848	-62%
Other income	1,658	1,782	-7%	3,378	3,490	-3%
Finance costs	-2,234	-740	202%	-4,088	-1,464	179%
Profit before taxation	12,623	15,561	-19%	22,450	30,546	-27%
Taxation	-1,123	-4,160	-73%	-3,048	-6,706	-55%
Net profit for the period	11,499	11,401	1%	19,402	23,839	-19%

On an individual basis, DGKC emerged as the top performer during 2QFY19 as its net profits observed an increase of 81% YoY. Tax benefit of Rs.1.1/share and higher gross margins were attributed to better utilization of South plant. To note, the company is entitled to a 5-Year tax holiday on South plant which came online in 2H2018.

On the flip side, FCCL outperformed the rest of the companies during 1HFY19 by witnessing a growth of 44% YoY in net earnings, due to colossal growth in other income.

PKR (million)	Symbol	2QFY19	2QFY18	% change	1HFY19	1HFY18	% change
Bestway Cement	BWCL	4622	3197	45%	6880	6194	11%
Lucky Cement	LUCK	2975	4409	-33%	6137	8576	-28%
DG Khan Cement	DGKC	1330	733	81%	1672	3466	-52%
Fauji Cement	FCCL	1022	823	24%	1823	1267	44%
Cherat Cement	CHCC	596	743	-20%	1027	1349	-24%
Maple Leaf Cement	MLCF	748	1174	-36%	1334	2247	-41%
Pioneer Cement	PIOC	269	320	-16%	527	737	-28%
Total		11562	11399	1%	19400	23836	-19%

The analysis is based on the financial result of seven major listed companies, which represent around 77.15% of the total market capitalization of cement industry.

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