IMS Cement Universe is expected to return to profits in 1QFY21, with combined net profits estimated at PKR2.28bn compared to losses of PKR2.26bn in the previous quarter.
This includes the highly leveraged producers which will also post profits for the first time in four quarters. Robust local demand and better retention prices have reversed losses. This will be complemented by significant energy cost savings and steep decline in interest rates.
Looking ahead, demand is likely to remain healthy driven by growth in private housing and government incentives for new low-cost houses. We prefer DGKC, MLCF and LUCK in the space owing to better ability and prospects for earnings growth.
Profitability led by cost savings and better retention price
We expect the IMS Cement Universe to book combined net profits of PKR2.28bn in 1QFY21 (drastic improvement on a sequential basis). All producers in our coverage are expected to post profits in 1Q, (although thin), including CHCC, MLCF and DGKC – which are highly leveraged and bear more fixed costs. This will come on the heels of better retention prices and reduced energy costs. LUCK, on the other hand, will nearly double profits sequentially (albeit from a low base) for similar reasons. KOHC and FCCL, which have relatively low debt-to-asset ratios and have less fixed costs vs. peers will remain moderately profitable. We prefer DGKC, MLCF and LUCK in the space owing to better prospects for earnings growth, in our view.
GMs will improve drastically
We expect the revival of gross margins in 1Q, with average increase of 9ppt yoy (ex-LUCK) to an average level of 12%. This emanates from (i) lower variable costs, especially due to low international oil and coal prices, (ii) higher retention prices (lower FED), and (iii) growth in cement dispatches. Average retail prices during the quarter stood at PKR520/bag (down 6% yoy) in North and PKR630/bag (down 3% yoy). Despite the decline in retail prices, gross margins will improve, led by reduced FED, lower discounts and input costs. On a sequential basis, gross margins are expected to recover from an average of -3% in 4QFY20 (ex-LUCK) following a surge in demand at the lifting of Covid-19 lockdown. We expect gross margins to improve further in the coming quarters – potentially towards average level of 20% by June 2021 – on the back of rising demand and improving pricing consensus.
Private demand and exports led to surge in dispatches
During 1QFY21, local cement sales rose 18% yoy to 10.8mn tons, up from 9.1mn tons in 1QFY20. Export sales also increased to 2.8mn tons, up 38% yoy. Overall industry utilization averaged 79% (vs. 76% in the same period last year). As mentioned in our earlier note, strong private demand from housing projects amid low interest rates was the main driver during 1Q. This means that demand can sustain in the coming quarters as government infrastructure spending will rise, in our view. Total dispatches in the North and South grew by 17% and 38% yoy to 10.0mn and 3.6mn tons, respectively. Cement demand in South has improved considerably, compared to previous quarters, mainly because of higher exports and reduced selling from North producers into the South market. However, the difference between South and North cement prices is still about PKR110/bag, so the presence of North will not completely end.
(Intermarket Securities Limited).