Result expectation: DGKC is scheduled to announce its full year FY11 result on September 7, 2011. We expect the company to post a PAT of PKR320mn, up 37% YoY (EPS: PKR0.83) with 4QFY11 PAT expected at PKR142 mn (EPS: PKR0.33) against a loss of PKR149 mn (LPS: PKR0.41) during 4QFY10. Growth in profitability will come on the account of improved EBITDA margins owing to higher retention prices offsetting cost increases.
Higher margins to drive earnings growth: We expect EBITDA margins to show an increase of 33% YoY during FY11, along with a 13% QoQ increase during 4QFY11, both emanating from higher retention prices. Average retention for FY11 is expected at PKR 4,382/ton (up 34% YoY); due to increase in domestic cement prices, which shall more than offset 22% YoY increase in COGS/ton.
Higher exports to limit decline in total dispatches to 14% during FY11: We expect DGKC’s FY11 local dispatches to fall by 26% YoY to 2.97mn tons owing to slow construction activities and oversupply of cement in the northern region. Export dispatches are expected to rise by 32% YoY to 1.32 mn tons during FY11 primarily led by higher demand of cement from Africa and Afghanistan.
Investment perspective: At the last closing price of PKR19.6/share, DGKC offers an upside of 28% to our Jun-12 price target of PKR25/share and trades at FY12 PER of 5.23x. BUY!
Higher margins to drive earnings growth
Amid 14% YoY decline in total dispatches during FY11, impetus for bottom-line growth will likely be higher EBITDA margins. We expect EBITDA margins to show an increase of 33% YoY during FY11, along with a 13% QoQ increase during 4QFY11, both emanating from higherretention prices. Average retention for FY11 is expected at PKR 4,382/ton (up 34% YoY); due to increase in domestic cement prices, which shall more than offset 22% YoY increase in COGS/ton. However, growth in EBITDA margins beyond expected levels shall be obstructed by higher distribution costs during FY11 (up 148% YoY) due to higher CNF based export contracts and rising cost of inland freight. Also, with higher share of exports in sales mix, the company is likely to book a deferred tax charge due reduction in recoverable tax losses as exports are subject to turnover tax.
Higher exports to limit decline in total dispatches to 14% during FY11
We expect DGKC’s FY11 local dispatches to fall by 26% YoY to 2.97mn tons owing to slow construction activities and oversupply of cement in the northern region. Local offtake in the north region was down 11% YoY during FY11. Moreover, northern players had stopped dumping cement in the south region during FY11 owing to contraction of the relative price premium. Due to un-alluring local market conditions, DGKC is likely to have continued to park its excess capacity in export markets during 4Q as it did during 9MFY11, despite fetching lower export retention prices. We expect DGKC’s export dispatches to rise by 32% YoY to 1.32 mn tons during FY11 primarily led by higher demand of cement from Africa and Afghanistan. We estimate local retention to have averaged PKR4,215/ton during FY11, whereas export retention, after adjusting for logistic charges is estimated at PKR3, 164/ton.
Economic & Political News
SNGPL restores gas to Industrial Zone I
The Sui Northern Gas Pipe Lines (SNGPL) has decided to restore gas to Industrial Zone I from Saturday while the industries in Zone II will be restored on Monday. SNGPL was able to provide gas to two independent power plants (IPPs) while gas would be restored initially to two fertilizer plants and then subsequently to three fertilizer plants which were on the system of SNGPL during the period of August 29 to September 2. He said that Industrial Zone I consumes 200mmcfd, which is 60% of the industrial sector load. OGDC has agreed to reduce the annual turnaround (ATA) of Qadir Pur gas field to reduce it to 8 days, instead of 20 days.
Oil prices: Plan to deregulate freight margin scrapped
The government has finally given up on the plan to deregulate the inland freight equalization margin (IFEM) on petroleum products, which, if implemented, would have led to different oil prices across the country. Economic Coordination Committee (ECC), in a meeting held on August 23, came to the conclusion that IFEM on oil prices would not be deregulated.
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.