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.

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