Cherat Cement (CHCC) has posted 2QFY21 NPAT of PKR820mn (EPS: PKR4.22), much better than market expected profits of PKR525mn (EPS: PKR2.70), where higher gross margins were the main deviation. The yoy jump in earnings stemmed from (i) substantial 17ppt yoy rise in gross margins to 26%, and (ii) decline in finance cost by 45% yoy. The company has also announced an interim dividend of PKR1.0/sh in 2QFY21, whereas we were not assuming any payout.
2QFY21 Key result highlights:
Net revenue increased by 27% yoy to PKR6.4bn in 2QFY21. Key factors behind the revenue increase were (i) higher local sales (up 17% yoy), (ii) rise in retention prices to PKR307/bag (up 19% yoy and 8% qoq), and (iii) higher retail cement prices amid lower or no discounts being offered by the company.
Consequently, GMs clocked in at 26% (up 17ppt yoy and 5ppt qoq), vs. our estimated gross margins of 20%, mainly because of lower-than-anticipated COGS. Elevated GP margins were primarily led by higher retention prices as mentioned above and decline in international oil and coal prices. The aforementioned factors are likely to be recurring in the coming quarters, complemented by higher retail prices.
Finance cost for the quarter declined by 45% yoy to PKR363mn amid lower interest rates and possible decline in short-term borrowing, in our view. The effective tax rate was 25% vs 33% of tax reversal in 2QFY20.
CHCC has quoted massive improvement in gross margins – highest since 4QFY16. Further increase in cement prices in the North region, along with demand growth will boost future earnings, in our view. Our June 2021 TP for the stock is PKR180/sh.
This is the second result from among our Cement Universe that has exceeded expectations – especially, gross margins have rebounded more emphatically than expected. Based on our expectation of robust demand in the remainder of FY21, profitability of cement companies can improve even further. This supports our bullish outlook on the sector. We therefore reiterate our Overweight stance.
Source: Company Announcement, IMS Research