Pioneer Cement Limited

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 that have a production capacity of 10,000 tons per day on Line 3. The production facility is located in the province of Punjab.

Shareholding pattern

As of June 30, 2020, over 51 percent of shares are held by foreign companies; nearly 23 percent of shares are held in joint-stock companies, followed by 13.6 percent held by the local general public. The directors, CEO, their spouses, and minor children own less than 1 percent share in the company. The remaining roughly 13 percent shares are with the rest of the shareholder categories.

Historical operational performance

In the last more than a decade, Pioneer Cement has mostly seen a growing topline at varying rates, while profit margins have fluctuated between FY05 to FY10, before rising and reaching a peak in FY16; subsequently, it has followed a declining trend.

Looking at the last few years particularly, in FY17, topline registered a 13.5 percent growth. The overall cement sector’s dispatches grew by 3.7 percent. For the company, sales volumes rose, with local cement sales growing by 3.6 percent, and clinker sales growing from nothing to 277,521 tons. Only a small amount of 498 tons of clinker was exported to India, while the major chunk was directed at local cement manufacturers. Production cost, on the other hand, grew marginally to 58 percent, reducing gross margin, also marginally, to 41.6 percent. This trickled down to the bottomline, but net margin increased year on year due to a lower tax expense.

Despite a lot of economic and political uncertainty in FY18, the sector saw a growing demand coming from the infrastructure and housing sector, with work on Gwadar Port, KKH Phase 2, and the Karachi-Lahore Motorway underway. Pioneer Cement, however, saw a decline in sales revenue by almost 5 percent. Although sales volumes had risen due to the existence of demand, the price factor put downward pressure on revenue. Moreover, production cost jumped to over 72 percent of revenue due to a combination of factors: an increase in international coal prices and paper prices, an increase in fuel and power cost, and currency depreciation. Coupled with a drop in other income, the net margin shrunk to 16.2 percent during the year.

In FY19, topline contracted by almost 4 percent for Pioneer Cement. For the cement industry, local sales volumes registered a decline of almost 2 percent. The company’s local dispatches of cement fell by over 6 percent, while clinker dispatches were recorded at zero. Moreover, production continued to make a larger share in revenue, at 78 percent, reducing the gross margin to 21.9 percent. This was attributed to a rise in paper prices that increased the cost of packing materials, in addition to currency depreciation; together these two factors offset the benefit of a fall in coal prices. Distribution, administrative, and finance expenses also made a larger share of revenue year on year, which resulted in net margin falling to 8 percent for the year. The rise in finance expenses was a result of increased borrowing and a rise in the policy rate.

In FY20, the company saw the highest contraction in net revenue, by over 35 percent, despite total dispatches growing by 20 percent. This was a result of an increase in the FED rate along with a reduction in net cement price to an average of Rs 5,119 per ton, compared to Rs 6,735 per ton in FY19. With the significant drop in revenue, the company could not cover its production cost, resulting in a gross loss of Rs 103 million. With further expenses incurred, and a rise in distribution and finance expenses, net margin fell to a negative 3.3 percent for the year. This was the biggest net loss posted since FY11.

Quarterly results and future outlook

Revenue in the first quarter of FY21 more than doubled year on year. The sector saw improvement in demand as business activities resumed after the lockdowns eased, which were imposed to contain the spread of Covid-19. In addition, the company also finished its new production line that added to the period’s sales volumes, depicted by an almost doubling of total dispatches year on year. An increase in the average net sale price to Rs 5,709 per ton from Rs 5,289 per ton in 1QFY20, also contributed to the higher revenue. But given the above 90 percent consumption of revenue by production cost, combined with an escalation in finance expense, the net margin was posted at a negative 1 percent for 1QFY21; albeit this was better than the negative net margin of 1QFY20 of almost 10 percent.

The second quarter also saw revenue more than double year on year, with a major contribution made by local cement sales that more than doubled. Given the new production line, the company was able to tap into the growing cement demand. The new plant also reduced the per ton fixed cost; moreover, local cement prices also improved thereby improving net profitability for the period at 12 percent, compared to 3.2 percent in 2QFY21.

Revenue in the third quarter of FY21 was 3.4 times higher year on year. production cost further reduced to 75 percent for the period, compared to costs exceeding revenue in the same period last year. With other income also providing support to the bottomline, the company posted a net margin of 8.3 percent, compared to a net loss of Rs 411 million in 3QFY20.

Given the remarkable recovery seen in revenue and a notable reduction in production cost, FY21 is likely to post healthy profits.