DGKC: FY11 EPS expected at PKR0.83

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.
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