Pakistan’s listed cement sector reported record earnings of Rs. 22.4 billion, up 8 percent YoY in 2QFY24. This earnings growth is primarily due to higher gross margins and other income, according to Topline Securities.
Despite a fall in cement dispatches, sector sales increased by 9 percent YoY to Rs. 179 billion in 2QFY24, led by a 16 percent YoY increase in average cement prices.
Local dispatches declined by 12 percent YoY to 10.1mn tons in 2QFY24. However, the decline in total cement dispatches was restricted to 1% YoY, due to a 166 percent growth in cement exports in 2QFY24.
Gross margins of the sector expanded by 2.1ppts to clock in at 27.5 percent in 2QFY24 versus 25.5 percent in 2QFY23 led by lower coal prices. However, QoQ gross margins witnessed a slight decline from 27.8 percent in 1QFY24 due to higher coal and electricity prices.
During 2QFY24, cement players in the southern region mostly relied on Richards Bay coal, while those in the northern region used a combination of Afghan and local coal.
Richards Bay coal prices fell 30 percent YoY while up 8 percent QoQ to Rs. 48,000 per ton in 2QFY24. Similarly average Afghan & local prices up 7 percent YoY and 11 percent QoQ to Rs. 43,400 per ton in 2QFY24.
Selling and distribution costs were up by 130 percent YoY to Rs. 7.4 billion in 2QFY24 owing to the implementation of axle load regulations and the inflationary environment.
Other income of the sector was up by 163 percent YoY to Rs. 6.6 billion in 2QFY24, amid higher dividend and interest income. Of the Rs. 6.6 billion sector’s other income in 2QFY24, 46 percent (Rs. 3 billion) was contributed by Lucky Cement (LUCK).
The cement sector reported the highest-ever EBITDA of Rs. 47.5 billion, up 10 percent YoY and 1 percent QoQ in 2QFY24. EBITDA margin of the sector remained at 27 percent in 2QFY24 vs 26 percent in 2QFY23 and 28 percent in 1QFY24.
The finance cost of the sector clocked in at Rs. 9.6 billion in 2QFY24, up 41 percent YoY due to higher interest rates and borrowings of the sector.
The sector reported an effective tax rate of 32 percent in 2QFY24 vs 27 percent in 2QFY23 and 35 percent in 1QFY24.
In 1HFY24, profitability increased by 23 percent YoY to Rs. 43.6 billion, owing to higher retention prices and Other income.
Major contributors to the profitability of the cement sector in 2QFY24 were Lucky Cement (LUCK), followed by Bestway Cement (BWCL) and Fauji Cement (FCCL).
LUCK contributes 30 percent to the total cement sector profitability. LUCK reported profits of Rs. 6.8 billion up 107 percent YoY due to a surge in sales (+19 percent YoY) and other income (+3.6x YoY) in 2QFY24.
LUCK’s other income clocked in at Rs. 3 billion, up 3.6x YoY, primarily driven by dividends received from its subsidiaries/associates of Rs. 1.7 billion, including a dividend of Rs. 1.4 billion from Lucky Motor Corporation.
Moreover, LUCK reported a higher gross margin than a peer of 36 percent in 2QFY24 vs 25 percent in 2QFY23 due to lower coal prices, in-house power generation, and higher retention prices.
BWCL’s profitability declined by 22 percent YoY in 2QFY24 despite a 20 percent YoY surge in sales. The lower profitability is attributed to a decline in gross margins from 33 percent in 2QFY23 to 30 percent in 2QFY24. BWCL contributes 17 percent to the total cement sector profitability in 2QFY24.
FCCL earnings in 2QFY24 clocked in at Rs. 2.6 billion, down 4 percent YoY due to a significant jump in distribution and finance costs. The company reported gross margins of 32.6 percent in 2QFY24 as compared to 26.9 percent in 2QFY23 mainly due to lower coal prices and less reliance on the national grid. FCCL contributes 12 percent to the total cement sector profitability in 2QFY24.
All companies in the sector reported profitability except for Dewan Cement (DCL), which reported a loss of Rs226mn in 2QFY24. Similarly, Power Cement (POWER) reported a loss before tax of Rs. 489 million, while the profit after tax clocked in at Rs. 0.3 million in 2QFY24, mainly due to a tax reversal.
Outlook
The report sees healthy gross margins led by lower coal prices and in-house power generation ability to keep the profitability of the cement sector upward, despite the anticipated low cement demand due to election, Ramadan, and Eid festivities in 3QFY24.
Pakistan’s cement Sector is trading at an average EV/ton of US$28 which is significantly lower than the replacement cost of US$ 70-80/ton.
Topline said it maintains an over-weight stance on the cement sector where LUCK and MLCF are its top picks.
