Pioneer Cement Limited – BR Research
Pioneer Cement Limited (PSX: PIOC) was established in 1986 as a public limited company; it manufactures and sells cement. The company has three production lines with a production capacity of 10,000 tons per day on line 3. The production facility is located in Punjab province.
As of June 30, 2020, more than 51% of the shares were held by foreign companies; nearly 23 percent of the shares are held in joint stock companies, followed by 13.6 percent held by the local general public. Directors, CEO, their spouses and minor children hold less than 1% of the company’s shares. The remaining 13% of shares belong to the rest of the shareholder categories.
Historical operational performance
Over the past decade, Pioneer Cement has mostly seen revenue growth at variable rates, while profit margins have fluctuated between FY05 and FY10, before increasing and declining. peak in 2016; thereafter, it followed a downward trend.
Looking at the last few years in particular, in fiscal year 17, the turnover grew by 13.5%. Overall, cement sector shipments increased 3.7%. For the company, sales volumes increased, with local cement sales increasing 3.6% and clinker sales increasing from zero to 277,521 tonnes. Only a small amount of 498 tonnes of clinker was exported to India, while most of it went to local cement plants. Production costs, on the other hand, increased marginally to 58 percent, reducing the gross margin, also marginally, to 41.6 percent. This was reflected in the bottom line, but the net margin increased year over year due to lower tax burden.
Despite many economic and political uncertainties in FY2018, the sector saw increasing demand from the infrastructure and housing sector, with works on Gwadar Port, KKH Phase 2 and the Karachi Highway. -Lahore in progress. Pioneer Cement, however, saw its sales drop by almost 5%. Although sales volumes increased due to the existence of demand, the price factor exerted downward pressure on turnover. In addition, production costs soared to over 72% of revenue due to a combination of factors: an increase in international coal and paper prices, an increase in fuel and electricity costs, and depreciation. currency. Coupled with a decline in other income, the net margin contracted to 16.2% during the year.
In fiscal 2019, Pioneer Cement’s revenue contracted by almost 4%. For the cement industry, local sales volumes fell by almost 2%. The company’s local cement shipments fell more than 6%, while clinker shipments were recorded to zero. In addition, production continued to represent a larger share of sales, at 78 percent, reducing the gross margin to 21.9 percent. This was attributed to an increase in the price of paper which increased the cost of packaging materials, in addition to the depreciation of the currency; together, these two factors offset the benefit of lower coal prices. Distribution, administrative and financial expenses also accounted for a larger share of revenue year over year, resulting in a drop in net margin to 8% for the year. The increase in financial charges results from an increase in loans and an increase in the key rate.
In FY20, the company recorded the largest contraction in net sales, over 35%, despite a 20% increase in total shipments. This was the result of an increase in the FED rate as well as a reduction in the net price of cement to an average of Rs 5,119 per tonne, compared to Rs 6,735 per tonne in FY19. With the significant drop of revenues, the company could not cover its production costs, resulting in a gross loss of Rs 103 million. With other expenses incurred and an increase in distribution and financing costs, the net margin fell to 3.3% for the year. This is the largest net loss recorded since fiscal 2011.
Quarterly results and future outlook
Sales for the first quarter of fiscal 21 more than doubled year over year. The sector has seen improved demand as business resumed after the easing of lockdowns, which were imposed to contain the spread of Covid-19. In addition, the company also completed its new production line which increased sales volumes for the period, illustrated by a nearly doubling of total shipments year over year. An increase in the average net selling price to Rs 5,709 per tonne, from Rs 5,289 per tonne in 1QFY20, also contributed to the increase in income. But given the above 90 percent consumption of income by cost of production, combined with escalating financial expenses, the net margin was posted at a negative percent for 1QFY21; although that was better than 1QFY20’s negative net margin of nearly 10 percent.
The second quarter also saw sales more than double year over year, with a major contribution from local cement sales more than doubling. With the new production line, the company was able to take advantage of the growing demand for cement. The new plant also reduced the fixed cost per tonne; in addition, local cement prices also improved, improving net profitability for the period to 12 percent, from 3.2 percent in 2TFY21.
Revenue for the third quarter of fiscal 21 was 3.4 times higher year-over-year. the cost of production was further reduced to 75 percent for the period, compared to costs exceeding revenues during the same period last year. With other income also supporting the bottom line, the company posted a net margin of 8.3 percent, compared to a net loss of Rs 411 million in 3QFY20.
In view of the remarkable recovery in sales and a notable reduction in production costs, FY21 should post healthy profits.