The board of directors meeting of Kohat Cement Company Limited (KOHC) is scheduled to be held on Apr 09’15 to discuss 3QFY15 results. The company is expected to post earnings of PKR738mn (EPS: PKR4.8) in 3QFY15 compared to PKR954mn (EPS: PKR6.2) in 3QFY14, representing a decline of 22.7%YoY. The decline in dispatches due to closure of plant as a result of mining issues coupled with increased electricity tariffs in Apr’14 are the prime reasons behind lackluster earnings performance. However, steady other income due to accumulating cash reserves and prudent allocation of funds in money market funds is expected to contain the decline in earnings. On a QoQ basis, earnings are expected to grow 8.1% primarily due to reduced cost pressures in the quarter in the form of fuel adjustments and reduced freight expenses. Given the fact that company’s operations have normalized again and mining of limestone has resumed, we re-iterate our ‘BUY’ stance on the scrip with a TP of PKR264/sh, offering a total return of 63%.
Loss of dispatches; restricting earnings: Despite the resumption of plant operations by mid‐Jan’15, the company is expected to post sales volumes of 414K tons in 3QFY15, down 13.9%YoY and 3.8%QoQ. Consequently, we expect Net Sales of the company to decline by 12.5%YoY and 2.8%QoQ in 3QFY15 to PKR2,896mn.
Fuel adjustments; to provide relief to margins: Given KOHC’s entire dependence on national grid for its power requirements, the hike in power tariffs (w.e.f Apr’14) significantly affected the company’s margins. However, following the decline in global crude oil prices, fuel adjustments in the electricity tariffs is expected to provide relief to the company’s bottom‐line. Furthermore, decline in sea and inland freight is also expected to contribute towards margins recovery.