Elevated cost structure outweigh substantial increase in clinker export sales; pushes EBIT down by 32%YoY… However positive tax impact and accounting anomaly present a positive case
· D. G. Khan Cement Company Limited (DGKC) announced its financial results for 2QFY19 with unconsolidated earnings clocking in at PKR 1.32bn (EPS: PKR 3.02), up by a substantial +48%YoY, as compared to PKR 896mn (EPS: PKR 2.05) reported in the same period last year. However, the results are impressive on a sequential basis, reflecting a two fold increase.
· The inclined percentage of +48%YoY is subject to anomaly with respect to its base figure. To recall, DGKC in 1QFY18 had recorded early recognition of tax incentives due on its Hub Plant, which it subsequently reversed in 2QFY18 probably on recommendations of its external auditors. This eventually led to declined PAT in 2QFY18, thus propelling an apparent YoY increase.
· Net Sales of the Company have increased by +41%YoY, likely due to substantial export clinker exports from South plant.
· Gross profits of the Company have been washed away by 17%YoY, largely due to rise in input prices and more so due to inclusion of substantial depreciation expense pertaining to recently inaugurated Hub Plant of the Company.
· EBIT of the Company has collapsed by a significant 32%YoY, driven by +64%YoY increase in Selling, Distribution and Admin costs of the Company, which in turn was subject to incremental freight costs incidental to export sales.
· Finance cost of the Company leaped up by 7 folds, largely on account of unwinding of finance cost to income statement post inauguration of DGKC Hub Plant.
· The downside impact was arrested by a positive tax reversal, likely on account of unused tax credits available on investments made in DGKC Hub Plant