DG Cement earnings to remain flat at PKR12.66/sh in FY14

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DG Khan Cement

DG Cement board members are scheduled to meet on Sep 16’14 to announce its FY14 results. We expect the company to post NPAT of PkR5.55bn (EPS: PkR12.66) in FY14, up 1%YoY compared to PkR5.50bn (EPS: PkR12.56) in FY13. The announcement is expected to be accompanied with a dividend of PkR3/share. The factors supporting the bottomline include i) favorable changes in cement and coal prices ii) lower finance cost iii) lower selling & distribution expenses and iv) higher other income. On the flip side, rise in electricity and gas prices have let gross margins to go down by 4ppts to 33% which have partially diluted the effect to keep the bottomline growth restricted to 1%YoY. In 4QFY14 earnings are likely to stand at PkR1.60bn (EPS: PkR3.66) vs. PkR1.26bn (EPS: PkR2.88) during the same period last year, up 27%YoY, while is up 26%QoQ. On expansion side, DGKC is likely to pursue its expansion plan which we believe would be the key reason to limited payout.

DG Khan Cement EPS

We reiterate our “Buy” stance as our Jun’15 target price of scrip is PkR100 offering an upside of 20% culminating into total return of 24%.

Higher cement price to compensate topline growth
We expect the decrease in export volume (down 9%YoY) to keep the total dispatches modest. Despite so, we believe the turnover of the company is likely to increase by 6%YoY to stand at PkR26.52bn in FY14 as compared to PkR24.92bn in the previous year owing to increase in cement prices (up12%YoY) during the period.

DG Khan Cement

Cost per bag to increase 15%YoY
Despite decrease in coal prices (down 7%YoY), gas tariff hikes coupled with increase in electricity
prices (up approx 25%YoY and 41%YoY respectively) are likely to increase the cost per bag by 15%YoY
bringing the gross margins down by 4ppts to 33% in FY14 from 37% in FY13.

Lower operating expense and higher dividends keep earnings intact
Decrease in exports on account of lower exports to Afghanistan is expected to ease the distribution
expenses by 16%YoY to PkR1.47bn in FY14 from PkR1.75bn in FY13. The non operating activities are
to further supplement the growth as lower finance cost (down 30%YoY) due to deleveraging balance
sheet and higher other income (up 12%YoY) on the back of increase in dividend income would
further lent support to profitability.

Future outlook
The current floods, political rift and possible price wars have all added to the risk of the sector.
However, we downplay these risks considering this flood is lower in magnitude as compared to 2010.
Moreover, we expect speedy recovery in dispatches fueled by post flood reconstruction activities
after a temporary slip up, in contrary to the post 2010 flood dispatches which saw recovery in the
next financial year. Amid increasing energy prices DGKC has a significant cost cutting potential with
its WHR plant at Khairpur site set to become fully operationalin 1QFY15 and thus reap its full benefits
onwards.On expansion side, DGKC is likely to pursue its expansion plan which we believe would be
the key reason to limited payout.

We reiterate our ‘Buy’ stance as our Jun’15 target price of scrip is PkR100 offering an upside of 20%
culminating into total return of 24%.

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