1. business and industrial

October 27, 2014
MORNING BRIEFING
Pakistan Cement Sector
DGKC: Reports steady core performance
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Furqan Ayub, CFA
& unveils investment plans
[email protected]
+ 9221 111-574-111
Ext: 3103
KSE100 Index: Closing 30,098.49 ↑ (73.36)
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D.G. Khan Cement Company Limited (DGKC) reported PAT of Rs1.16bn
(EPS: Rs2.64) in 1QFY15, up by 8%YoY.
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EPS growth is driven by 1) 20%YoY jump in other income and 2) 69% YoY
decline in financial charges. Resultantly, the company was successful in
expanding its EBT margin by 2pptsYoY to 28%.
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Gross margin on the other hand contracted by 3pptsYoY to 31% due to 1)
1%YoY dip in the company’s top-line and 2) 3%YoY increase in COGS
(partially because of booking of GIDC).
Along side the result, company also unveiled its investment plans where
1) management plans to raise its equity investment (by injecting
Rs450mn) in Adamjee Insurance and 2) set up a 30MW coal fire captive
power plant at Dera Ghazi Khan.
KATS Code: DGKC
Bloomberg Code: DGKC PA
Reuters Code: DGKH.KA
Market Price: Rs78.96
Target Price: Rs107
Market Cap: Rs35bn, US$338mn
1-yr Avg. Daily Volume:
4.1mn shares, Rs350mn, US$3.4mn
1-yr High / Low: Rs96.43 / 68.29
Estimated free float: 241mn shares (55%)
We flag a potential upside of 36% to our Target Price of Rs107 where the
exit FY15F P/E multiple remains conservative at 7.3x (vs. JS Universe P/E
of 8.5x).
1QFY15 EPS registers an uptick of 8%YoY
Net Sales
5,811
5,854
COGS
3,986
3,859
3%
Gross profit
1,826
1,995
-8%
Gross margin
31%
34%
SGA
328
428
Net other income
YoY∆%
-1%
4QFY14
QoQ∆%
-23%
KSE-100 Index
-2%
115%
105%
-16%
95%
85%
193
9%
154
37%
1,760
-3%
2,647
-35%
67
213
-69%
37
79%
EBT
1,642
1,546
6%
2,610
-37%
EAT
1,157
1,067
8%
2,022
-43%
EPS
2.64
2.44
8%
4.61
-43%
Financial charges
135%
-37%
211
5.1
DGKC
4,052
1,708
EBIT
5.2
145%
2,885
392
15.54
5.4
DGKC performance vs. KSE-100
125%
42%
FY17F
15.08
Source: JS Research
-16%
6,936
FY16F
14.58
75%
Oct-14
1QFY14
FY15E
Jun-14
Jul-14
Sep-14
1QFY15
P/E (x)
Jul-13
(Rs mn)
EPS (Rs)
Feb-14
Mar-14
Apr-14
1QFY15 financial highlights
EPS outlook
Aug-13
Sep-13
Nov-13
Dec-13
In 1QFY15 DGKC posted a PAT of Rs1.16bn (EPS: Rs2.64) vis-à-vis a PAT of
Rs1.07bn (EPS: Rs2.44) in the corresponding period last year. The steady uptick in
earnings is mainly driven by 1) 20%YoY jump in other income due to higher
dividend income from MCB and 2) 69%YoY decline in financial charges on the
back of lower debt balance of the company. Note that DGKC repaid Rs2.23bn of its
long term debt in FY14 resulting in the company’s total interest bearing debt
coming down to Rs4.7bn (as per the June 30th 2014 Balance Sheet) compared to
Rs9.8bn in FY13. This decline in financial charges boosted the EBT margin of the
company by 2pptsYoY to 28% in 1QFY15. That said, other core indicators have
worsened somewhat as vindicated by the contraction in gross margin by 3pptsYoY
to 31%.
Source: KSE, * based on adjusted prices
Source: Company announcement
JS Research is available on Bloomberg, Thomson Reuters, CapitalIQ and www.jsgcl.com
Please refer to the important disclaimer on the last page
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October 27, 2014
MORNING BRIEFING
This decrease is due to 1%YoY dip in the company’s top-line led by 2.6%YoY
decrease in volumetric sales (due to lower export sales) and 3%YoY increase in
COGS (partially because of booking of GIDC). Recall that the company recorded a
reversal in GIDC provision of ~Rs270mn in 4QFY14 but post the presidential
ordinance, which validated the imposition of GIDC, management, has decided to
smooth out the booking of GIDC over FY15.
Strong cash flows to facilitate DGKC’s investment plans
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Pakistan market statistics (Oct 24, 14)
KSE-100 Index
30,098.49
Previous KSE-100 Index
30,025.13
73.36
Change from last closing
0.24%
Change from last closing (%
6,994.84
KSE Market Cap. (Rs. bn)
KSE Market Cap. (US$ bn)
67.92
Equity Investment in AICL: The management plans to raise its equity
investment (by injecting Rs450mn) in Adamjee Insurance (AICL) Note that
DGKC presently holds 10mn worth of shares of AICL and taking the present
market rate of Rs45.75/share as a proxy for the purchase price the investment
in the insurance giant can potentially double. According to JS research
estimates, AICL offers a D/Y of 8% in 2015F.
Total Volume (Shares mn)
191.71
Investment in 30MW captive Power Plant: In view of the prevailing gas
crises, the management has decided to set up a 30MW coal fire captive power
plant. Although the company has, a gas based power plant but due to shortage
of gas in the country, power plant is not running at full capacity. Consequently,
DGKC has to partially rely on the National Grid for power. Meanwhile, coalbased power plant is expected to come online by mid 2016 while the cost of
this project is ~Rs4bn. We expect DGKC will easily finance the project through
internal cash generation (FY15E EBITDA of Rs10bn) given the strong core
operations of the company.
KSE Futures Volume (Shares mn)
Recommendation: ‘Buy’ re-iterated
We maintain our positive outlook on DGKC and flag 36% potential upside to our
target price of Rs107. Our liking for the stock stems from 1) steady earnings
outlook, 2) cushion of dividend income from group companies and 3) diminishing
financial risk due to lower debt balance. Meanwhile, note that valuations remain
attractive as DGKC trades at an undemanding FY15E P/E of 5.4x vs. market’s P/E
of 8.5x. Also note that exit FY15F P/E multiple of DGKC remains conservative at
7.3x
9.97
Traded Value (Rs. bn)
96.85
Traded Value (US$ mn)
19,977.30
KSE-30 Index
91.21
Change from last closing
Change from last closing (%)
0.46%
14.45
1,652.68
KSE Futures Value (Rs. mn)
8.01%
KSE Futures Spread
Source: KSE
KSE valuations
2013A 2014A/E 2015F
P/E (x)
10.5
9.0
8.3
P/BV (x)
2.1
1.9
1.8
Div. Yield (%)
5%
5%
6%
10%
17%
9%
Earnings growth
Source: JS Research
Also in Focus
Pakistan PM to visit China on November 7th, 2014
Water, Power and Defence Minister Khawaja Muhammad Asif said Prime Minister
(PM) Mian Muhammad Nawaz Sharif will visit China on November 7, 2014 to
discuss and sign the several agreements including those pertaining to electricity.
Moreover, the Finance Minister met Chairman of the Industrial and Commercial
Bank of China (ICBC) Jiang Jianqing in Beijing and discussed investment
opportunities for the bank in various sectors, including infrastructure development
of Gwadar.
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This report has been prepared for information purposes by the Research Department of JS Global Capital Ltd. The information and data on which this report is based are obtained from sources which
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