‘SBP’s principal deferral scheme to facilitate cash-strapped cement sector’

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LAHORE: The State Bank of Pakistan (SBP) has introduced a principal deferral scheme whereby principal to be repaid in FY21 can be deferred for a year; this will uplift the cement sector’s profitability and liquidity and provide relief to businesses struggling to cope with the economic impact of Covid-19. 

Shahrukh Saleem, an investment analyst at AKD Securities Limited, informed that finance costs as a proportion of Earnings Before Interest and Taxes (EBIT) for Cherat Cement Company Limited (CHCC), DG Khan Cement Company Limited (DGKC) and Maple Leaf Cement Factory Limited (MLCF) for 9MFY20 stands at 8.8pc, 5.6pc and 4.8pc, respectively.

“At a time when low margins have made lives of leveraged cement players difficult, loan restructuring and principal deferral have provided significant liquidity to local players,” Saleem added.

He stated that among the highly leveraged players, DGKC has already been granted approval for deferment till FY21.

“Even though the valuation impact of the deferment remains minimal for DGKC, a positive earnings impact of Rs0.72 per share for FY21 is expected, while earnings for FY22 and FY23 are expected to decline by Rs0.26 per share and Rs0.23 per share, respectively.”

He continued, “According to our estimates, Pioneer Cement Limited (PIOC) and CHCC are expected to pay Rs4.3 billion and Rs2.4 billion, respectively, in principle repayment for FY21. 

In case companies opt for deferment, PIOC can witness an increase in earnings of Rs1.2 per share for FY21 while a decrease in earnings for FY22 and FY23 of Rs0.28 per share and Rs0.17 per share respectively is expected,” Saleem predicted.

Similarly, CHCC’s earnings for FY21 are expected to increase by Rs0.28 per share and decrease by Rs0.93 per share and Rs0.66 per share for FY22 and FY23, respectively, he said.

According to Shehzad Saleem MLCF, on the other hand, has opted for complete restructuring of its debt with no loan repayments expected for FY21. However, the company has to repay Rs2.1 billion prior to restructuring.

In September 2019, MLCF had raised Rs6 billion by issuing 85 per cent rights shares at Rs12 per share. The company utilised the proceeds to repay Rs5.8 billion in loans during 2QFY20 and 3QFY20, reducing its total long term debt from Rs17.1 billion as of 1QFY20 to Rs11.3 billion as of 3QFY20.

However, due to strained cash flows, part of the loan repayment was financed using short term borrowing, which increased to Rs7.5 billion as of 3QFY20 from Rs5.3 billion as of 2QFY20. 

MLCF’s days working capital during 3QFY20 stood at negative 40 days compared to negative 21 days for 2QFY20, primarily due to an increase in payable days from 90 to 122 days as of 3QFY20, said Shahrukh Saleem.

He said that moving forward, working capital cycles are expected to expand until margins improve, which has been seen earlier in FY09 and FY10 when days working capital increased to negative 86 days for FY10 from negative 53 days in FY09.

The investment analyst added that DGKC and MLCF have opted for cost reduction measures along with capacity additions in the latest expansion cycle. In addition to that, DGKC and MLCF have a manageable debt to equity ratios of 72 per cent and 67 per cent respectively which makes them possible beneficiaries of the ongoing monetary easing.

He further added that with the increase in commodity prices due to the recovery in global demand, cement players will want to increase prices as freight costs are also expected to increase due to revision in toll rates. 

 

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