Portfolio Investment (USD mn): 12sep14

Sept 12’14
KSE100 30,044.89
+186.52pts Vol: 168m

Portfolio Investment (USD mn):

Net +8.34
Buy +13.27
Sell -4.93

Net -1.14
Buy +24.83
Sell -25.97

Net -3.36
Buy +5.35
Sell -8.71

Net +4.70
Buy +9.88
Sell -5.18

Net +0.04
Buy +0.68
Sell -0.64

Net -7.36
Buy +56.69
Sell -64.05

Net -1.23
Buy +1.45
Sell -2.68


Samba: the momentum continues

These are good times for Samba Bank. It closed first half with a 235 percent year-on-year bottom line growth. The banking minnow has cemented the first quarter gains with a strong financial performance in the second.

It seems that the fundamentals that triggered the first quarter growth helped Samba put on a good show in the Apr-Jun quarter as well. Recall that the healthy 1Q CY14 performance was characterised by heavy investment in attractive government securities, sizable bad debt reversals, and higher non-mark-up income. The investment frenzy was such that the bank’s portfolio swelled up by nearly Rs10 billion in that period. No wonder then its Investment-to-Deposit Ratio (IDR) stood at 89.11 percent, well above the Advances-to-Deposit Ratio (ADR) of 73.47 percent, as of March end.

As the first half closed, it seems that returns from high-yielding sovereign investments and incremental mark-up income from fresh advances have delivered a stunning 36 percent year-on-year top line growth. The 43 percent growth in cost of funds is proportionally higher than that, a cause of worry. Yet a 26 percent expansion in net mark-up income is to be savoured.

The story gets better as the bank showed strong growth in reversals of earlier provisioning and also made some recoveries against bad debts. That augurs well for Samba’s asset quality, even as the bank gradually expands its loan book.

However, non-mark-up income-–which comprises of fee, commission and brokerage income, as well as foreign exchange income-–could have done better. The humble 6 percent year-on-year growth under this head is primarily due to comparatively lower income from dealing in foreign currencies. But that was positively compensated by a controlled 4 percent growth in non-mark-up/non-interest expenses: thanks to contained administrative expenses.

With a PAT of Rs125 million, Samba is now headed to the closing half of the year in strong shape. However, the management must keep its focus on mitigating the inherent challenges small banks usually face, so as to put the bank on a continued solid footing.

Samba’s deposit growth-–which was about 8 percent at March 31, 2014, compared to December 31, 2013-–is decent when compared with its peers. However, during the same period, the bank’s borrowing from other financial institutions had increased nearly four times. Besides feeding in higher cost of funds, short-term borrowing from other financial institutions can also create maturity mismatch if the investment appetite continues to be funded primarily from market borrowings. This is not a sustainable way to profitability.

To tackle that, Samba needs to attract low-cost deposits-–arguably a difficult feat for small-sized banks. At the same time, it should continually expand its lending portfolio for sustainable future income.

Samba Bank Limited (Unconsolidated P&L)
Rs(mn) 1HCY14 1HCY13 Chg
Markup/return/interest earned 2,059 1,518 36%
Markup/return/interest expensed 1,246 872 43%
Net markup income 812 647 26%
Provisioning / (Reversal) (56) (43) 32%
Net markup income after provisions 869 690 26.0%
Non mark-up / Non-interest income 98 93 6%
Operating revenues 967 782 24%
Non mark-up / interest expenses 775 747 4%
Profit before taxation 192 36 435%
Taxation 67 (1) 4804%
Profit after taxation 125 37 235%
EPS – Rs 0.14 0.05

PKGS: improving margins

After a few tough years, Packages Ltd (KSE: PKGS) is back to profitability, putting in another round of better performance at the end of 1H CY14.

But, it didn’t start auspiciously. The company’s top line declined to Rs7.9 billion at the six-month mark. Both domestic sales and export sales during 1H CY14 were, to some extent, stunted, actually slithering on quarter-on-quarter basis.

However, gross margins improved owing to improved efficiency in terms of raw material consumption. The firm’s cost of sales declined by 4 percent year on year-–that really helped the ensuing profit margins.

But, the real kick came from a significant rise in investment income. According to industry analysts, a hefty share of investment income is backed by the firm’s investment in Tetra Pak shares.

Due to significant appreciation of rupee against the dollar in the first quarter and exchange rate stability since, the improved non-core income provided favourable support. Although the rupee appreciation improved PKGS margins, the growth potential of its core operations remain dreary due to lack of pricing power owing to strong competition in the market.

However, the company management is optimistic of a brighter future. Going forward, the firm will have to manage their working capital more efficiently in order to avoid the burden of high financial charges in the future.
Packages Ltd – key financials
Rs (mn) 1HCY14 1HCY13 Chg
Net Sales 7,892 8,084 -2%
Cost of sales 6,644 6,933 -4%
Gross profit 1,248 1,151 8%
Distribution & marketing expenses 248 309 -20%
Administrative expenses 353 312 13%
Investment income 1,953 1,232 59%
Profit for the period 1,925 904 113%
EPS – Rs 22.82 7.77 –
Gross margin 15.8% 14.2% –
Operating margin 8.2% 6.5% –
Net margin 24.4% 13.1% –

Fauji Cement Company Limited

We are previewing financial results for the quarter ending June 2014 for Fauji Cement Company Ltd (FCCL – 4QFY14).

We expect FCCL to post 68%YoY and 19%QoQ higher 4QFY14 EPS of Rs0.66 which is expected to deliver FY14E basic EPS of Rs2.16 (+37%YoY). We also expect FCCL to announce a final cash dividend of Rs0.75/share.

Strong bottom-line growth is margin driven, due to the combo of high cement prices (+6%YoY) and uptick in volumes. Moreover, lower financial costs (-62%YoY) in the period under review is also likely to boost earnings.

FCCL is trading at FY15F P/E of 8.3x (vs. JS Cement Universe FY15F P/E of 8.0x). The premium is justified given that FCCL offers relatively healthy dividend yield (FY15 D/Y 8%) compared to its peers (JS Cement Universe D/Y of 3%).

We re-iterate our ‘Buy’ rating on the stock with a TP of Rs21.5.

Basic EPS likely to grow by 68%YoY in 4QFY14

The Board of Directors of Fauji Cement Company Limited (FCCL) is scheduled to meet today to announce FY14E results. In 4QFY14, we expect the company to post PAT of Rs884mn (Basic EPS: Rs0.66) which translates into a growth of 68%YoY and 19%QoQ. The strong earnings growth is largely margin driven on the back of higher cement prices and uptick in sales volumes. Consequently, gross margin is likely to expand to 33.6% from 30% in the same period last year. Another key driver of profitability during the period under review is lower financial costs       (-62%YoY). The company has used its strong cash flows to deleverage its balance sheet where currently the interest bearing debt/assets ratio of FCCL stands at 29% as against 35% in FY13. Incorporating our 4Q earnings expectations, FCCL’s full year FY14 earnings arrive at Rs2,879 (Basic EPS: Rs2.16), up 37%YoY.

However, after adjusting for preferential shares dividend payments, EPS amounts to  Rs1.99. We also do not rule out a  possibility of the company announcing a finalcash dividend of Rs0.75/share taking the full year cash dividend to Rs1.5/share.

Recommendation: Re-iterate ‘Buy’

Despite the prevailing uncertainty on the pricing arrangement of the cement sector, FCCL’s stock has outperformed the market by 6.8% in FY15 (year to date). The strong price performance is partially attributed to FCCL being among the main beneficiary of the Rawalpindi-Islamabad Metro Bus project. However, due to the current political uncertainty in Islamabad the project has come to a halt for now. That said, on a relative basis, FCCL is still trading at FY15F P/E of 8.3x (vs. JS Cement Universe FY15F P/E of 8.0x). The premium is justified given that FCCL offers relatively healthy dividend yield (FY15E D/Y 8%) compared to peers (JS Cement Universe D/Y of 3%). We re-iterate our ‘Buy’ rating on the stock with a TP of Rs21.5 where the stock offers a potential total return of 16%.

The board of directors of Pakistan State Oil (PSO) is meeting on August 26, 2014 to announce FY14 results.

Profitability to show robust growth

PSO is expected to post massive growth in earnings as profit after taxation to surge at Rs 22.86 billion (EPS: Rs 84.16) from Rs 12.63 billion (EPS: Rs 46.51) in FY13. Healthy performance likely to driven by increase in penal interest income of Rs 13.30 billion, inventory gain of Rs 373 million, surge in volumetric sales by 1% and lower financing cost.

Decline in earnings growth is expected QoQ

In 4QFY14, we expect company to post net earnings of Rs 3.46 billion (EPS: Rs 12.75) against Rs 3.60 billion (EPS: Rs 13.25) in 3QFY14. Lower earning is expected due to inventory losses of Rs 943 million (after tax Rs 3.70/share), hike in financing cost of 58% QoQ and no exchange gains.

DPS of Rs 5/share; bonus 10% expected

We expect the result to be accompanied by a final dividend of Rs 5/share cumulating the FY14 dividends to Rs 9/share. Furthermore, possibility of 10% stock dividend can not be rule out.

Top line to likely to up by 4%

Top line likely to surge by 4% to Rs 1,143 billion compared to Rs 1,100 billion in FY13 mainly due to higher product prices. However, volumetric sales likely to surge by 1% to 12.72 million tons mainly due to increase in MS sales by 11% in FY14. Cost of product sales is expected to hike by 4% at Rs 1,106 billion against Rs 1,064 billion in FY13. Gross profit likely to increase by 4% to Rs 37.79 billion against Rs 36.50 billion in FY13.

Kohat Cement Company Limited

In 1984, the State Cement Corporation of Pakistan established a thousand Tons Per Day (TPD) Romanian cement line in Kohat town, about sixty kilometers from Peshawar. The facility was privatised and subsequently incorporated during the 1992 privatisation wave, and was taken over by a new management with Tariq Sheikh as CEO. The incorporated entity was registered as Kohat Cement Company Limited and is in the business of manufacturing and sale of cement.

In 1995, the company underwent an extensive Balancing, Modernisation and Restructuring (BMR) programme, funded by the proceeds of public offering and issuance of commercial debt. Subsequently, the Company expanded its production capacity to eighteen hundred tons per day as a result of technical collaboration with KHD Humboldt Wedag, a renowned German engineering company.

Ever since, the Company has undergone several expansion phases, including establishment of a white cement facility with a capacity of 450 tons per day. The high point in KCCL’s history came with the commencement of 6,700TPD grey cement line. Its current annual production capacity stands at 2.8 million tons for grey cement and 148,500 tons for white cement. The Company is listed on the Karachi, Lahore and Islamabad stock exchanges known by the ticker symbol KOHC. The Company is majority owned by the Tariq and Nadeem Sheikh Family, which has business interests in lesser known enterprises in the construction, textile, automobile and hospitality industry.

INDUSTRY REVIEW FY13 proved to be an excellent year for the cement sector, with total industry cement dispatches growing by nearly three percent. This was despite the two percent decline in cement export, which dropped due to lower demand for bagged cement. However, domestic sales proved to be the saving grace for the sector, which saw growth by more than 1.11 million tons, making up for the lost export volumes.

For several years, exports have stood at around a quarter of total cement dispatches for the industry. During the year, Kohat cement’s cumulative share in the export market was 3.7 percent, a gain of 50 basis points since last year. Kohat’s share in the export market has flip-flopped over the years, from a low of 2.1 percent in FY09 to peaking at 4.2 percent in FY11, registering a cumulative growth of six and a half percent over the past six years.

In the domestic market, Kohat’s share remained intact at six percent on a year-on-year basis. However, this was less than half of the domestic market share of industry leaders Lucky Cement, with share of 15 percent. Overall, Kohat’s market share was 5.5 percent of total industry off-take.

While Kohat is known to be a significant player in the cement industry, its plant operated much below its full capacity, with capacity utilisation for clinker and cement (grey) averaging at sixty-five percent. Capacity utilization for white cement was much worse, with 13.4 and 14.4 percent utilization for clinker and cement, respectively.

According to the Company report, the underutilization is a direct result of overcapacity in the cement industry; Kohat’s old grey cement line remained non-operative with new grey cement line operating at 83.4 percent.

PERFORMANCE BRIEF FY13 As for the rest of the industry, FY13 was a good year for the Company as local industry sales rose by 4.6 percent on the back of growing domestic demand. According to the industry experts, the catalysts for this demand was higher government spending on infrastructure during an election year, coupled with increased private spending on new construction driven by growth in remittances from expatriate Pakistanis. For Kohat cement, growth in local sales was in line with the industry, growing by seven percent.

Over the years, the saturation of the export market has stifled growth for the sector. Surplus production capacity in the Middle East as well as decline in exports has encouraged players to look inwards. During the past two years, Kohat has been successful in doing just that: the Company has reduced its reliance on exports from the peak of 36 percent export share in FY08 to just 17 percent in FY13, while at the same time maintaining its overall sale volumes and market share in the total industry off take by increasing focus on the local market.

Growth rate in local sales has outperformed the industry for last many years. On a cumulative basis, Kohat’s local sales have increased by 30.61 percent year on year since FY08, at a time when the industry local sales have seen a cumulative year-on-year growth of only 1.76 percent. Surely, the lost share in the export market has been more than made up for by increasing reliance on domestic market.

FINANCIAL PERFORMANCE FY13 Increase in cement prices in both domestic and international markets allowed turnover to grow by 21.26 percent compared to last year. Coal prices also remain under control. As a result, cost of sales declined as percentage over net turnover from 69.4 percent to 61.4 percent last year.

Distribution and administrative cost grew with inflation but remained stable as a percentage of sales. Other operating expenses grew disproportionately on account of exchange rate fluctuation related loss, growing by nearly 100bps as a percentage of sales. Decline in discount rate by the central bank also helped trim finance costs for the Company during the year, which declined by 61 percent on a year-on-year basis. Other income remained stable but insignificant.

PROFITABILITY Stable product prices allowed gross margin to grow by a healthy eight percentage points during the year. Gross margin stood at nearly 38.6 percent, up from just 30.6 percent last year. Nominal growth in distribution expenses allowed the Company to sustain the growth in gross margin. Operating margin hence also grew by nearly eight percentage points, clocking in at 37.3 percent.

Lower finance cost allowed Company to bag a fat bottom line, although offset partly by increased taxation. Profit after tax grew by 58.5 percent, from Rs 1.6bn last year to 2.6bn in FY13. Earnings per share stood Rs 20.45, with net margin improving from 17.8 to 23.3 percent.

OUTLOOK Going forward, cement sector in general as well as Kohat is expected to see growth in FY14 on the back of higher budget allocations towards PSDP by the new Federal Government. However, inflationary macroeconomic outlook for FY14 and devaluation of Pak rupee may prove to be the sector’s undoing. On the other hand, currency depreciation could increase the cost of inputs, eroding the ground gained by gross margins. Kohat also plans to continue reducing its debt over the next year; however, a successive increase in discount rate may make the process difficult.

Political and security uncertainty in the region makes export to Afghanistan and India an unstable demand factor. The cement sector in general not only needs to look inward but also expand its export market from traditional Middle Eastern to potential markets in emerging African economies. Going forward, Kohat cement has plans to incorporate cost reduction processes in production, including setting up of a Waste Heat Recovery Plant to mitigate the increase in energy costs.
Kohat Cement Company Limited
Rs (mn) FY13 FY12 FY11 FY10 FY09 FY08
Financial Performance
Sales – net 11,297 9,316 6,085 3,692 3,396 1,372
Cost of goods sold -6,936 -6,464 -5,158 -3,335 -2,591 -1,284
Gross profit 4,361 2,852 927 357 805 87
Selling & distribution expenses -58 -46 -41 -56 -111 -25
Administrative and general expense -86 -67 -49 -36 -30 -41
Operating profit 4,216 2,739 837 265 663 22
Other operating expenses -234 -108 -16 -5 -3 -21
Other income 36 31 20 23 34 36
Finance cost -249 -626 -715 -665 -673 -49
Voluntary Seperation scheme 0 0 0 0 0 -267
Profit before taxation 3,770 2,036 126 -382 21 -280
Taxation -1,137 -375 -62 54 6 57
Profit after taxation 2,633 1,661 64 -328 27 -222
Earnings per share (Rs) 20.45 12.9 0.49 -2.55 0.21 -1.73
Source: Company Accounts
Year ending June UoM FY13 FY12 FY11 FY10 FY09 FY08
Gross margin % 38.60% 30.60% 15.20% 9.70% 23.70% 6.40%
Operating margin % 37.30% 29.40% 13.80% 7.20% 19.50% 1.60%
Net margin % 23.30% 17.80% 1.00% -8.90% 0.40% -16.20%
Return on equity % 53.70% 56.70% 3.10% -15.50% 0.70% -9.60%
Return on capital employed % 47.30% 42.20% 12.30% 6.20% 12.30% -3.10%
Liquidity & Solvency
Current ratio 1.8 0.8 0.7 0.43 0.56 0.66
Debt-to-equity 0.88888889 43:57:00 70:30:00 72:28:00 69:31:00 67:33:00
Interest cover ratio 16.14 4.25 1.18 0.42 1.26 -4.71
EPS (basic) Rs 20.45 12.9 0.49 -2.55 0.21 -1.73
Breakup value per share Rs 46.92 29.17 ============================================================================================
Kohat Cement Company Limited
Rs (mn) FY13 FY12 FY11 FY10 FY09 FY08
Financial Position
Share capital and reserves 6,041 3,756 2,103 1,961 2,272 2,329
Non-current liabilities 2,459 2,557 4,211 3,470 3,407 3,278
Current liabilities 2,294 2,899 2,811 3,242 2,946 2,016
Total liabilities 4,754 5,456 7,022 6,712 6,353 5,295
Total equity and liabilities 10,795 9,213 9,124 8,673 8,625 7,624
Non-current assets 6,668 6,894 7,171 7,266 6,979 6,291
Current assets 4,126 2,318 1,954 1,407 1,646 1,333
Total assets 10,795 9,213 9,124 8,673 8,625 7,624
Source: Company Accounts
16.33 15.23 17.64 19.9
Source: Company Accounts

Nishat Mills Limited

The flagship company of the Nishat Group, NML is the largest vertically integrated textile manufacturer in the country, with a major portion of the company’s earnings coming from exports.

Financial highlights

During 1Q FY14, Nishat’s profit after tax increased significantly by 47.89 percent as compared to corresponding quarter of the last year-mainly on account of increase in sales by 4.81 percent. Performance of the firm’s weaving division was especially remarkable during the current quarter, with sales of Grey cloth seeing a major boosted in European market.

However, profitability for both the processed textiles and garments division of the company remained depressed during the first quarter of the year, primarily because of low sales in the US and EU regions.

Improved productions efficiencies and better cost management, however, saved the day, keeping the increase in cost of goods sold to a minimal 1.5 percent. As a result, NML’s gross profit margin increased from 15.7 percent in the corresponding quarter to 18.4 percent in the current quarter.

Other major profitability measures that contributed to the firm’s improved bottom line were increased dividend income of Rs488.8 million and a one-time gain of Rs95 million mainly on sale of partial investment in Lalpir Power Limited.

Decrease in finance cost by 10 percent in the current quarter as compared to corresponding quarter in the last year through better working capital management and reduction in borrowing rates was also key contributor to the profitability during a quarter that saw largely depressed sales.

Operational highlights

The cotton prices remained mostly steady during the first month of the current quarter of financial year. However, some panic was created in the market early on this season regarding the health of the incoming crop, allowing prices to swing up sharply at the start of August.

Preempting an even worse situation in the coming months and to fulfil its immediate spinning production requirements, Nishat started buying raw cotton as soon as new crop arrived in the market. While the company’s hasty purchase decisions had small bearings on the first quarter results, phutti prices have subsequently seen a substantial decrease.

Going forward, NML might find their expensive cotton procurement to have a tad gloomy effect on their margins. However, the company is poised to reap some great rewards of a well-timed and concentrated expansion effort, which will not only bring about a great increase in production capacity of their spinning, processing and garments division, but will also bring down their cost of operations in the long run.

All the machinery that the company had purchased for the aforementioned expansion moreover has already arrived in Pakistan and sources report that most of the newly installed capacity should come online by the end of the next quarter.

Once the entire planned expansion is completed, the production capacity of the home textile division will increase by approximately 25 percent. Additionally, five hundred thousand meters of added production capacity will also be available to the Processing unit at the start of next calendar year.


In a major positive development for the country’s economy in general and textile industry in particular, the European parliament approved Pakistan’s request this month for more favourable trade regime under euro-zone’s GSP plus system.

The new regime would be applicable from 1st Jan 2014 and will largely benefit Pakistan’s value-added exports to EU as it will effectively remove the 11 percent tariff our textiles are slapped with upon entry into the market. According to industry reports, this would translate into $550-700mn incremental exports to EU during the upcoming year.

One player that is all set to make good use of this development is Nishat Mills Limited-being well poised as a result of their higher concentration in the value-added segment. Furthermore, while a majority of the mills are currently not in the position to fully benefit from this upside due to their power related shortcomings, NML’s plans for installing a 9MW coal fired plant, a 2MW gas fired generator and a plan to replace their existing gas turbines will ensure the firm supply of cheaper power-thereby helping them reap the greatest benefit out of the GSP status.

Honda Atlas Car

Honda Atlas Car’s performance for half year ending September could serve as a classic example of how badly things can go wrong for businesses and manufacturers in an environment of rapid currency depreciation.

The company announced net earnings of Rs314 million from a loss of Rs71 million in the same period of last year. However, underneath this reasonably six month recovery is hidden a dismal second quarter performance, stemming from meteoric rise in other expenses, owing to exchange loss due to eight percent rupee depreciation.

An impressive recovery in volumes failed to translate into dividends for HCAR’s investors, despite continued excitement among customers for Honda’s new models launched last year. Total HCAR sales grew by nearly 50 percent year on year, as the number of new Honda Civics on the streets more-than-doubled, clocking in at 5,884 units.

There was still some pleasant news for the bosses in Tokyo as the company successfully wrestled market share from Toyota and Suzuki in the luxury car segment. The second quarter market share for HCAR stood at 42.5 percent, up ten percentage points over the same period of last year. Honda’s sales are now trailing closely that of category leader Toyota, whose sales went as high as seventy percent of the total segment back in FY12.

Whether the mixed performance report card gives Honda reason enough for jubilation remains debatable. The third quarter period is historically marked by poorest sales for auto assemblers, as preference for cars with new-year registration picks up vogue among customers. This has been neatly depicted by the Pakistan Automobile Manufacturers’ Association (PAMA)’s sale numbers for October, which recorded more than 12 percent decline in Honda sales on a month-on-month basis.

The excitement for latest Civic brewing since last year is also expected to die down in the coming months, as luxury segment customers have begun to delay purchases in the anticipation of new Corolla model slated to be launched in second half of CY14.

Whether Honda’s newly gained market share rests on thin ice depends as much on company’s strategy as it does on customer loyalty. The company’s plans to launch CRZ hybrid later this month shows its resolve to attract customers through quality innovation and product differentiation in a segment devoid of volumes. Here’s to hoping that the USD-PKR exchange rate won’t get any more worse, allowing HCAR to salvage its bottom line in the second half of FY14.