The Pakistan Cement Industry concluded one of its toughest years during FY20 with majority of the manufacturers expected to close in red. Prime reasons for eroding profitability include: 1) lower pricing amidst an expansion-driven price war, 2) Pak Rupee depreciation inflating energy costs, 3) high interest rates in tandem with a debt-heavy balance sheet, and 4) pandemic-led reduction in demand during the closing months of the year.

LUCK – Earnings likely to register at PKR 3.11/sh during 4QFY20
Lucky Cement (LUCK)’s earnings are estimated to register at PKR 1,005mn (EPS: PKR 3.11) during 4QFY20, down 54% YoY compared with earnings of PKR 2,196mn (EPS: PKR 6.79) during 4QFY19. On a cumulative basis, earnings are estimated to dip by 62% YoY to PKR 12.19/sh largely on account of lower realized prices and subdued demand for the commodity.

DGKC – losses expected at PKR 5.72/sh during FY20
DG Khan Cement Company (DGKC) is anticipated to post a loss of PKR 2,504mn (EPS: PKR -5.72) during FY20 compared with earnings of PKR 1,610mn (EPS: PKR 3.67) during FY19. Earnings attrition is largely on account of lower realized cement prices and a sharp rise in financial charges amid a debt-heavy balance sheet.

MLCF – losses to touch PKR 0.99/sh during 4QFY20
Maple Leaf Cement Factory (MLCF) is anticipated to post a loss of PKR 0.99/sh during 4QFY20 compared to earnings of PKR0.52/sh during 4QFY19. On a cumulative basis, losses are anticipated at PKR 3.47/sh compared with earnings of PKR 2.24/sh during FY19. Profitability erosion is largely on account of lower cement prices and higher interest rates.

FCCL – losses expected at PKR 0.09/sh during 4QFY20
Fauji Cement Company Limited (FCCL) is anticipated to post a loss of PKR 0.09/sh during 4QFY20 compared with earnings of PKR 0.28/sh during 4QFY19. Earnings attrition is largely anticipated on account of lower retention during the year. On a yearly basis, however, the company’s bottom-line is anticipated to remain in green albeit with a reduction of 95% YoY at PKR 0.11/sh during FY20. FCCL remains the only cement company within KASB’s universe to not expand its cement capacity. Consequently, its debt levels remain relatively low (~PKR 3.0bn as of Mar 30’20), providing support to its earnings.

CHCC – losses expected at PKR 2.77/sh during 4QFY20
Cherat Cement Company Limited (CHCC) is anticipated to post a loss of PKR 2.77/sh during 4QFY20 compared with a loss of PKR 2.51/sh during 4QFY19. On an annual basis, losses are estimated at PKR 8.88/sh during FY20 compared with earnings of PKR 9.07/sh during FY19. Losses are estimated to primarily emanate from lower cement prices, and higher interest rates. CHCC also funded its expansion via debt, causing its borrowings to rise to PKR 19.6bn as of Mar 30’20, resulting in a higher financial charge burden.

PIOC – losses expected at PKR 1.66/sh during 4QFY20
Pioneer Cement (PIOC) is anticipated to post a loss of PKR 1.66/sh during 4QFY20 compared with a loss of PKR 0.15/sh during 4QFY19. On a cumulative basis, losses are estimated to amount to PKR 3.96/sh during FY20 compared with earnings of PKR 3.48/sh during FY19. Profitability erosion is primarily anticipated due to lower cement prices, subduing margins during the period.

KOHC – losses expected at PKR 0.97/sh during 4QFY20
Kohat Cement (KOHC) is projected to post a loss of PKR 0.97/sh during 4QFY20 compared with earnings of PKR 1.48/sh during 4QFY19. On an annual basis, the company’s losses are anticipated at PKR 2.38/sh during FY20 compared with earnings of PKR 12.29/sh during FY19. Earnings erosion is anticipated on account of lower retention prices during the period. The company was able to fare relatively better within the industry due to its cleaner balance sheet with debt levels of PKR 6.8bn as of Mar 20’30.

Outlook
We believe the cement industry is set to enter greener pastures from FY21 onwards. The sector will likely be able to weather the pandemic due to support from the government via the construction package. Moreover, the industry will likely benefit from lower coal prices and the 625bps reduction in interest rates, bolstering its profitability potential. With large-scale projects such as the Diamer Bhasha Dam and the Naya Pakistan Housing Scheme gaining traction, we believe the industry is all set to benefit from a significant improvement in its pricing power, the key driver of the industry’s profitability, in our view.

Please find attached the detailed report.

Regards,
KASB Research