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DG Khan Cement Limited Robust fundamentals at undemanding valuation
DGKC ‐ BUY Target Price: PKR 160 Current Price: PKR 133 DGKC Performance 1M 3M 12M Absolute % 8%
4%
59%
Relative to KSE % 1%
7%
44%
Bloomberg DGKC.PA
Reuters DGKH.KA
MCAP (USD mn) 573
12M ADT (USD mn) 4.8
Shares Outstanding (mn) 438
Earnings Estimates FY15E FY16E FY17E TP EPS‐New 17.16 16.21 18.79 160 EPS‐Old 14.50 15.44 16.73 144 Change 18% 5% 12% 11% Source: BMA Research DGKC vs. KSE100 Relative Chart DGKC
80%
KSE100 Index
60%
40%
20%
0%
Apr‐15
Mar‐15
Jan‐15
Feb‐15
Dec‐14
Oct‐14
Nov‐14
Sep‐14
Jul‐14
Aug‐14
Jul‐14
Jun‐14
May‐14
‐20%
Source: BMA Research
Sajjad Hussain [email protected] Wednesday May 06, 2015
We revisit our investment case for DG Khan Cement Limited (DGKC) post release of detail financial accounts wherein we have upward revised our earnings estimates by an average 10% across the forecasting horizon. The revision comes on the back of i) higher other income from subsidiaries, ii) improved margins and iii) lower taxation due to purchase of tax losses from subsidiaries. Furthermore, for the first time subsidiaries contributed a significant amount to earnings as the difference between unconsolidated and consolidated earnings clocked in at PKR461mn (PKR0.98/sh) (on a pretax basis PKR180mn) where profits from Nishat Paper Products was the prime contributor in the earnings. We remain skeptic on the outlook of export volumes since export volumes declined 40%YoY in 9MFY15, with 3QFY15 registering the sharpest fall of 66%YoY. Thus, we downgrade our assumption for exports to 10% decline per annum (earlier 5% p.a) from FY16 onwards. The downward revision in export volumes can be attributed to lower cement demand from Afghanistan due to stiff competition from Iranian cement coupled with slowdown in construction activity as a result of U.S. troop withdrawal. With positives outweighing the negatives, we upward revise our target price by 11% to PKR160/sh, offering a total returns of 24% as of last close – ‘BUY’ Expanding margins; the earnings driver: Decreasing cost of fuel & power (particularly due to lower crude and coal prices) and better retention prices, enabled the company to expand its margins in 3QFY15 to 36.3% as compared to 30.1% in the same quarter last year. We revise our assumption for coal and its international sea freight to USD62/ton and USD15/ton from previous USD68/ton and USD19/ton, down 9% and 21%, respectively. Coal based power plant to further strengthen bottom‐line: The company is in the process of establishing a 30MW coal based power plant at a cost of USD23.6mn (PKR2.4bn) which, while providing a consistent power supply throughout the year, will also assist in cost savings as the company will no longer need grid imports and FO (used in gas curtailment periods). We have assumed commissioning of the plant in end FY16 contributing, PKR860mn in cost savings from FY17 onwards given 61% lower cost per unit compared to grid imports. This might also establish a stable earnings stream from supplying surplus electricity to DISCO since after establishment of 30MW at DG Khan site, the company will have an excess capacity of ~35MW. Assuming LUCK’s margins on supply of surplus electricity to HESCO, DGKC is expected to generate PKR255mn (PKR0.58/sh). Improving cash position; declining finance cost and supporting income: The company’s improving cash position coupled with a FYTD cut of 200bps in discount rate, with a further 50bps expected in the upcoming policy, is expected to keep finance cost down. Furthermore, company’s growing earnings are expected to build up healthy cash reserves moving forward which will assist in earning return on deposits. Furthermore, ample liquidity will also enable the company to finance the expansion project in the South through a combination of debt and internal cash generation, reducing the risk of a prospective right share issue. Lower tax rate to keep earnings robust: DGKC realized an effective tax rate of 17% in 3QFY15 compared to 27.3% in 3QFY14. Lower taxation was a factor of tax losses purchased in 2QFY15 worth PKR2.05bn from its subsidiaries namely Nishat Paper products Ltd. and Nishat Dairy (Pvt) Ltd. This is expected to keep the company’s tax expense subdued, as the company will net its tax liability against these losses. +92 111 262 111 Ext: 2065 BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: [email protected] or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.11
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GIDC; what’s the story? DGKC had previously reversed its accumulated GIDC of PKR273mn back in June’14 in the backdrop of Supreme Court’s decision annulling the cess. However, post enactment of GIDC bill 2014 the company re‐booked the reversed expense and has been recording GIDC ever since with current accumulated GIDC payable standing at PKR461mn (PKR0.84/sh). The Supreme Court’s dismissal of federal govt’s review petition regarding GIDC has yet again created an opportunity for the company to reverse the expense since retrospective application of GIDC under any new bill seems unlikely. Receipt of CERs to add to the bottom‐line: As a consequence of DGKC’s environmental friendly decisions, UNFCC had approved an estimated 356,961 CERs per annum in 2013. However, the company has not been recording the certificates since the right to sell will be allocated post an audit by UNFCC. At current price of EUR7.5/CER the earnings impact of the accumulated certificates clocks in at PKR450mn (PKR1.02/sh) where, on an ongoing basis, this will contribute PKR225mn (PKR0.51/sh) to the bottom‐line of the company. Anti dumping duty; negative for sentiments, minimal impact on the earnings: DGKC exports ~200k‐250k tons (5.2%‐6.5% of total sales volume) of cement to South Africa. Given imposition of antidumping duty, the company might lose out some volume or may have to cut down on its margins. At every 10% volume lost, the company will lose a mere PKR42mn (PKR0.1/sh), thus the earnings outlook for the company remains firm even under no export scenario to South Africa. Investment perspective: The Company is trading at a core PER of 6.8x as compared to industry average multiples of 8.6x, representing a steep discount of 21%. Thus, at our revised target price of PKR160/sh the scrip offers a total return of 24% ‐ ‘BUY’. BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: [email protected] or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.22
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