Flying Cement Company Limited

Flying Cement Company Limited (PSX: FLYNG) was set up in 1992 as a public limited company under the Companies Ordinance, 1984 (now Companies Act, 2017). The company is part of the Flying Group of Industries that was set up in 1979. It manufactures markets and sells cement at its manufacturing plant located in Khoshab, Punjab. It has an annual production capacity of 686,000 tons of clinker and 720,000 tons of cement.

Shareholding pattern

As at June 30, 2021, over 58 percent shares are held with the directors, CEO, their spouses and minor children. Within this, a major shareholder is Mr. Momin Qamar. The local general public owns close to 34 percent shares followed by 4 percent held under the category of “others”. The remaining roughly 4 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has witnessed a fluctuating topline over the years, while profit margins in the last six years have remained stable between FY16 and FY19. There was a sharp decline in FY20, after which it improved again in FY21.

Revenue growth in FY18 stood at nearly 18 percent with topline reaching Rs 2.9 billion. During the year, the company enhanced its capacity by adding another line that allowed production to double to 4,000 metric tonnages. On the other hand, cost of production reduced marginally to 91 percent of revenue, compared to nearly 92 percent in FY17. This allowed gross margin also to increase only slightly to 8.8 percent. While operating margin improved somewhat to 9.5 percent on the back of other income, net margin fell to 6.25 percent, from 6.5 percent in FY17, due to a higher finance and tax expense. The former was due to finance obtained from National Bank of Pakistan.

In FY19, revenue posted a growth of 12.4 percent, crossing Rs 3 billion. The industry, however, experienced subdued growth at nearly 2 percent due to a slowdown in the construction activity. This also adversely affected demand. Despite the over 12 percent growth in topline for the company, gross margin reduced to 5.8 percent due to production cost rising to 94 percent of revenue. This was attributed to currency devaluation and rising input prices. This also trickled to the bottomline with net margin recorded at 4.3 percent.

In FY20, topline fell drastically by 67 percent reaching Rs 1 billion. Cement dispatches were also significantly lower, shrinking by 6 times. While the impact of currency devaluation and high input prices continued, the outbreak of Covid-19 further worsened the operations. As a result, the company incurred a gross loss of Rs 462 million. With substantial financial expense, this increased to an all-time net loss of Rs 531 million.

The cement industry as well as the company’s performance improved significantly in FY21, as both revenue and volumes increased. Revenue for the company more than doubled year on year as it was recorded at Rs 3.2 billion. Dispatches increased from 86,957 metric tons in FY20 to 388,156 metric tons as demand recovered after lockdowns eased. Moreover, the government took initiatives to boost construction activities, while demand was also encouraged by CPEC related activities. As a result, gross margin improved to 9.45 percent. While net margin increased to 4.46 percent, it was more or less flat when compared to FY19 due to a substantial tax expense.

Quarterly results and future outlook

Revenue in the first quarter was notably higher year on year at Rs 1.2 billion compared to Rs 68 million in 1QFY21. Demand has been on the rise due to increase in domestic sales, mega projects and government spending on projects such as dams/reservoirs and housing schemes. This also trickled to the bottomline as net profit was recorded at Rs 205 million for the quarter versus Rs 41 million in 1QFY21.

The second quarter also saw higher revenue year on year, by over 46 percent as growth momentum continued. The company is also expanding Line 2 that will further boost production and improve financial performance. The rise in revenue also reflected in the bottomline, as net margin was recorded at 18.6 percent compared to 13.7 percent in the same period last year.

Topline in the third quarter was higher by nearly 60 percent year on year that also trickled to the bottomline. With a reduction in production cost as a share in revenue, in addition to a decrease in finance expense, net margin was significantly better at 22.3 percent compared to 4.9 percent in 3QFY22.Cumulatively as well, profitability was substantially better year on year at over 19 percent versus 7 percent in 9MFY21.Moreover, the company also completed its rights share issue of Rs 3 billion during the period. While there has been a surge in demand in the domestic market, the economy, as well as the industry face challenges of rising input prices, rising coal prices, inflationary pressures and political uncertainty.