EUR 10.00 For Business Accounts Only

D.G. Khan Cement (DGKC): 4QFY18 EPS Rs9.2, +180% YoY (+215% QoQ); DPS Rs 4.25/share (Above expectations)

• DGKC reported better than expected 4QFY18 consolidated earnings mainly due to huge tax credit (availing 65B of the Income Tax Ordinance, 2001) on account of investment in new cement line (Hub, Baluchistan) and adjustment of deferred taxes to the tune of Rs7-8/share. To note, pretax profits were  down 66% YoY.
• Another anomaly observed in 4QFY18 result was 754% YoY higher other operating expenses and 245% increase in other income. As per our channel checks, DGKC booked one-time impairment and at the same time recorded one-time income on one of its power plants, thereby netting off any material impact on the bottom-line.
• Consolidated revenues were down 2% YoY in 4QFY18, mainly due to 3% decline in sales from cement operations. Cement sales were down on the back of flat dispatches and lower net retention prices, we believe.
• Gross margins were considerably down by 13ppts to 19% in 4QFY18 owing to 1) 14ppts decline in cement operations margin and 2) higher production cost of DGKC’s dairy business (Nishat Dairy). Rising input costs like higher coal prices and increase in transportation expenses put pressure on cement margins.
• Financial charges grew by 105% YoY during the outgoing quarter on the back of increase in debt levels and higher interest rates.
• We flag 1) further decline in cement prices, 2) unanticipated increase in gas and coal prices and 3) lower than expected local cement demand as key risks for DGKC.