DG Khan Cement risk to margins over-played – KASB Research
By: KASB Securities Ltd.
(9221) 111 222 000
Overhyped risk to margins; DGKC vals more attractive now
A 17% MoM correction in DGKC’s stock price of late, is unwarranted in our view and has in our view, made DG Khan Cement (DGKC) even more attractive at 4.9x our FY14E P/E (cheapest in Pak Universe). We believe the market has over-played risk to cement margins from recent events including (1) conflicts in ACPMA, (2) rise in power cost and (3) expansion plans unveiled within the industry. In our view, conflicts within APCMA are likely to be resolved soon, while there is no threat to pricing structure; breakup of APCMA would not favor anyone in the industry. Power cost hike can be passed on (at least for large players incl. DGKC) with expected near term improvement in sales (in peak period, if not immediate). A simultaneous expansion plan if taken by leading players (incl. 2.6mpta addition by DGKC) will enhance DGKC capacity based market share after 3-years (from 9% currently to 13%) in our view.
Reiterate Buy; Strong sector fundamentals intact
Our Buy rating on DGKC remains intact premised on 1) firm cement prices, 2) soft coal prices, 3) potential improvement in demand under the new govt, 4) growth from investments and 5) compelling valuations. Our PO of PRs111, now offers 50% upside from current levels. We have made minor changes in estimates (<1%) to incorporate the recent developments including power & gas tariff hike, marked-to-market cement prices with only PRs10/bag hike expected in 2HFY14, lower corp. tax rate, and lowered sales vol. forecast for FY14.
FY13 Earnings marginally lower, but DPS was higher
DG Khan Cement (DGKC) posted 34% EPS growth for FY13 to PRs12.56; marginally below expectations due to lower sales vol, while DPS of PRs3.00 is above expected. 22% increase in gross margins, 23% jump in dividend income and 40% decline in financial charges were key drivers for bottom-line growth. Margin expansion was led by 9% hike in realized prices, against 25% decline in coal prices.