By: IGI Finex Securities Limited
We initiate our coverage on DG Khan Cement company Limited (DGKC) with a target price of PKR 158/share offering an upside of 26% from last closing price of PKR 125/share. At current price level scrip is trading at a P/E of 7.99x, with earnings growth of 15% and 8% in FY15E and FY16F, respectively.
Margins to grow on decline in Energy cost: International coal prices have declined to its lowest rate since last 5 years due to supply glut situation in the region. The commodity prices are currently hovering around USD 62-63/ton; down by 15.5%FYTD. We have incorporated price of USD 65/ton in our model for FY15. As per our calculations every USD 5/ton decline in price will increase the company’s earnings by PKR 0.44/share. Moreover, due to reduction in power tariff owing to plunge in international crude oil prices have helped reduce DGKC’s generation cost by 8% (EPS impact: PKR 0.93/share).These factors helped the company’s margin to accrete by 195bps.
Sector demand on its peak: Historically, local dispatches witnessed swift expansion in second half of the fiscal year due to summer season. As per recent data published by APCMA, in 10MFY15; local dispatches grew by 8%YoY to 22.9mnT as compared to 20.5mnT same period last year, the sector is yet to incorporate its remaining tenacious quarter. We believe local dispatches are to accelerate in 2MFY15 owing to seasonal impingement and robust private sector development. However, as per estimates; decline in exports from Afghanistan will not affect the company’s earnings due to curtailed margins.