IGI Securities Limited – Day Break

Karachi, March 11, 2019 (PPI-OT): Cements – DGKC: Earnings revised to reflect changes in accounting estimates; maintain ‘Hold’

We have revised our earnings estimates and target price for D.G Khan Cement Company Limited (DGKC) and reiterate our ‘Hold’ call.

To recall the company reported 2QFY19 earnings of PKR 3.02/share (1HFY19 EPS: PKR 3.98), significantly higher to our and consensus expectations, which was totally uncalled for given weak cement sector fundamentals during the period and more so because of its poor 1QFY19 earnings display of PKR 0.95/share.

As per the interim report, the management of the Company has extended the useful lives of majority of its fixed assets resulting in a lower depreciation charge of PKR 988mn during 1HFY19.

The change in depreciation estimate has resulted in revised earnings forecasts. Our revised earnings forecasts for FY19E/20F/21F/22F have inched up by +30%/19%/16%/12% respectively to (PKR 8.91/11.03/11.13/12.73) /share. However, our Dec-19 based target price drops by 6% to PKR 94/share.

We reiterate a “Hold’ call on the scrip with a decline of 6% in our Dec-19 based target price of PKR 94/share. Though reduced depreciation will lift accounting earnings upwards, it will have a negative impact on valuation. However, this will allow the scrip to trade at an improved P/E.

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