Lahore  - Fauji Cement (FCCL) announced 3QFY16 earnings of Rs1.6bn (EPS Rs1.1) as against Rs982mn (EPS Rs0.7) in the same quarter last year. This result was in-line with market estimates.

In 3QFY16, FCCL recorded revenues of Rs5.2bn, up considerably by 18% YoY, mainly on the back of higher local dispatches, up 10% YoY. Local sales remained robust owing to higher demand from private sector (D.H.A, Bahria, Emaar, Fazaia housing schemes etc) as evident from 39% YoY credit growth in construction sector in Feb 2016. GP margin improved substantially by 11% ppt in 3QFY16. Impressive GP margin was due to 1) firm pricing arrangement amongst cement players (higher margins on local sales), 2) lower power tariff, down by Rs3-3.5/kwh, effective from Jan 2016 and 3) lower international coal prices.

Financial charges during 3QFY16 declined considerably by 48% YoY to Rs95mn, thanks to 1) swift deleveraging, and 2) lower policy rate of 6% compared to 8-8.5% last year. In 9MFY16, FCCL’s revenues clocked in at Rs15.2bn, up by 13% YoY. This was primarily due to 15% YoY increase in local cement dispatches. However, exports volume remained dull, down 7% YoY, owing to weak demand from Afghanistan market, down 8% YoY in 9MFY16.FCCL posted profit after tax of Rs4.3bn (EPS Rs3.1) in 9MFY16, up 64% YoY.

Experts have a ‘Hold’ stance on FCCL which trades at FY16E/FY17F PE of 10.4x/9.0x. Moreover, the company offers attractive dividend yield of 9-10%.

Key risks to investment thesis include 1) adverse political developments disrupting ongoing construction projects, 2) depreciation of PKR against US$ (around 46% of FCCL’s long term loan is dollar denominated) and, 3) higher than expected energy costs.