Cherat Cement (CHCC) has posted 1QFY21 NPAT of PKR309mn (EPS: PKR1.59), much better than our expected profits of PKR25mn (EPS: PKR0.13), where higher gross margins were the main deviation. The yoy jump in earnings stemmed from (i) a substantial 17ppt yoy rise in gross margins to 21%, and (ii) decline in finance cost by 12% yoy. On a sequential basis, the company has turned green from losses of PKR706mn (LPS: PKR3.63) in 4QFY20, mainly because of better retention prices, lower variable costs and higher offtake.
1QFY21 Key result highlights:
§ Net revenue increased by 16% yoy to PKR5.2bn in 1QFY21, despite lower export sales and local cement prices, which declined by 53% and 6% yoy. Key factors behind the revenue increase were higher local sales (up 26% yoy), (ii) rise in retention prices to PKR290/bag (up 7% yoy and 22% qoq) amid lower discounts and a PKR25/bag decrease in FED.
§ Consequently, GMs clocked in at 21% (up 17ppt yoy and 29ppt qoq), vs. estimated gross margins of 13%. This was primarily led by (i) higher retention prices as mentioned above, (ii) decline in international oil and coal prices along with, and (iii) lower local freight cost and relaxation of axle load. The aforementioned factors are likely to be recurring for the coming quarters, potentially complemented by rising retail prices.
§ Despite minor increase in total interest bearing debt, finance cost declined by 12% yoy to PKR522mn amid lower interest rates. The effective tax rate was 26% vs 39% in 1QFY20 on tax reversal.
CHCC has quoted massive improvement in gross margins – highest since 2QFY18. Further increase in cement prices in North region along with demand growth will boost future earnings, in our view. Our June 2021 TP for the stock is PKR150/sh.
This is the second result from among our Cement Universe that has exceeded expectations – especially gross margins that have rebounded earlier than expected – even though retail prices have not risen substantially. Based on our expectation of robust demand in the rest of the year, profitability of cement companies can improve even further. This supports our bullish outlook on the sector. We therefore reiterate our Overweight stance. (Intermarket Securities Limited)