Fauji Cement Company Limited scores FY13 earnings growth of 279% YoY – Global Research
By: Yousuf Rahman,
yousuf.rahman@gslpk.com
+92.21.3245.7543
Global Securities Pakistan Ltd
Attractive on strong potential payout
Fauji Cement Company Limited (FCCL) posted earnings of PKR 2,095mn (EPS: PKR 1.42) for FY13, substantially up by 279% YoY compared with earnings of PKR 553mn (EPS: PKR 0.28) posted during FY12. The company also paid preferred dividends of PKR 211mn during the period. Along with the result, the company announced an encouraging final cash dividends of PKR 1.25/sh.
3mo ending
D
3mo ending
D
12mo ending
D
PKRmn
Mar13
Jun13
%
Jun12
Jun13
%
Jun12
Jun13
%
Sales
4,073
4,329
6
4,057
4,329
7
11,523
15,968
39
COGS
2,742
3,014
10
2,647
3,014
14
8,455
10,887
29
Admin Exp
42
71
69
33
71
116
129
205
59
S&D
31
35
13
35
35
2
102
144
42
Finance Cost
337
359
6
618
359
(42)
1,825
1,514
(17)
PBT
886
832
(6)
680
832
22
966
3,084
219
PAT
647
528
(18)
412
528
28
553
2,095
279
Pref. Dividend
-
211
176
211
176
211
EPS (PKR)
0.49
0.24
0.18
0.24
0.28
1.42
DPS (PKR)
1.25
-
1.25
-
1.25
Source: Company Accounts
FY13 financial result review
FCCL recorded revenues of PKR 15,968mn during FY13, jumping 39% YoY. The main reason for the rise in revenues was a 17% YoY increase in dispatches to 2.5mn MT during FY13. Dispatches increased due to capacity expansion as approximately 0.5mn MT was added to the company’s production line during FY13. In addition, local cement prices rose 7% YoY to PKR 449/bag during FY13 pulling retention to PKR 6,500/MT during FY13.
FCCL’s gross margins increased by 5pps to 32% during FY13 due to a 20% YoY decline in coal prices to USD 85/MT. On a quarterly basis, gross margins of the company declined by 3pps to 30% during 4Q FY13 on account of inflationary pressures, such as higher transport charges and salaries.
Local prices to act as a trigger
Local cement prices were jacked up by PKR 35/bag on account of the transport charges hike. As a result, local cement prices were increased to PKR 515/bag during Jul13 in the northern region. However, once cement demand started to decline during Ramzan and the monsoon season, local prices in the northern region started to gradually descend to reach PKR 494/bag during Sep13.
Rumors surfaced that cement manufacturers were increasing cement prices by PKR 30-35/bag to pass on the recent increase in Power Tariff. However, Lucky Cement (LUCK), DG Khan Cement (DGKC) and Maple Leaf Cement (MLCF) had reservations about this increase due to low demand for cement. We, however, anticipate that once local demand picks up post-monsoon season, the manufacturers will likely increase cement prices by PKR 10-15/bag.
FCCL to experience significant brunt of the power tariff hike
With significant reliance on the national grid for its electricity needs, FCCL will be heavily impacted by the recent power tariff hike. Based on estimates, FCCL’s production cost will likely rise by PKR 25/bag. The company, however, announced its intentions to install a 10MW Waste Heat Recovery (WHR) plant to reduce its reliance on the national grid. The project is scheduled to come online during FY16. Based on 75% capacity utilization, the project will fulfill approximately 20% of FCCL’s electricity requirements. According to estimations, the WHR plant will increase the company’s earnings by ~PKR 0.35/sh during FY16.
Tightening monetary policy and currency depreciation to dent earnings
FCCL has an outstanding debt of PKR 10.5bn (including current portion). Of the total debt, approximately PKR 4.7bn are KIBOR based loans. As a result of a possible increase in discount rate ahead, FCCL’s interest costs could rise in the coming quarters. However, since the company is deleveraging its balance sheet as it has already paid off PKR 2.4bn of its long term debt during FY13, the impact of rising interest rates will be compensated. In addition to its KIBOR based loans, the company also has a USD 58.5mn LIBOR based loan, which the company took for its capacity expansion. In 1Q FY14, PKR has already depreciated by ~8%, resulting in the company suffering from exchange losses. Based on our estimations, for every 1% depreciation in PKR, the company suffers an exchange loss of PKR 58mn (EPS impact: PKR 0.03). The company in its balance sheet mentions that it has mitigated a portion of its exposure via financial derivatives. We, however, estimate that the company will likely suffer an exchange loss of PKR 400mn (EPS impact: PKR 0.20) during 1Q FY14.
Upgrade to BUY on price correction and strong yield
We have increased our Jun14 TP to PKR 14/sh (Previous: PKR 13.5/sh) after incorporating the announced WHR plant in our valuations. The stock offers an upside of 19%, trades at an FY14 PE of 6.7x, and offers a dividend yield of 13%. BUY!
PKRmn
FY12
FY13
FY14E
FY15E
EPS (PKR)
0.28
1.42
1.77
2.05
DPS (PKR)
-
1.25
1.50
1.75
P/E
42.1
8.3
6.7
5.33
P/B
0.34
0.29
0.25
0.22
Div. Yield (%)
-
11%
13%
15%
Earnings Growth (%)
4%
507%
25%
16%
ROE (%)
3%
12%
13%
13%
ROA (%)
1%
6%
7%
7%
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