Flying Cement Company Limited (PSX: FLYNG) is part of the Flying Group of Industries that came about in 1979. The company was set up in 1992 as a public limited company in 1992 under the Companies Ordinance, 1984 (now, Companies Act, 2017).
The company manufactures, markets, and sells cement at its manufacturing plant located at Khoshab in Punjab province, with an annual capacity of 686,000 tons of clinker and 720,000 tons of cement.
With 66.3 percent shares held under this category, the directors, CEO, their spouses, and minor children are collectively the key shareholders of the company as at June 30, 2020. Within this, Mr. Momin Qamar, one of the board directors, holds 16.5 percent of the shares. A little over 32 percent shares are with the local general public, while the remaining about 1 percent of the shares are with the rest of the shareholder categories.
Historical operational performance
While the topline for Flying Cement has been fluctuating over the years, profit margins improved after FY13 before dropping significantly again more recently in FY20.
Sales revenue fell marginally by less than a percent in FY17 despite cement production and dispatches being higher by 2.45 percent and 2.5 percent, respectively. The cement industry had also grown at single digit of nearly 4 percent. The lower growth was due to depressed exports. Cost of production, for the company on the other hand was lower, to almost 92 percent of revenue, marginally down from last year’s 93 percent. This was due to lower coal and energy prices. Lower costs allowed gross margin to increase to over 8 percent despite the reduced topline. With other factors remaining more or less similar, the effect was also reflected in the net margin that rose to 6.5 percent for the year.
Growth in cement industry was better than before, at 13.84 percent due to higher demand in FY18. Considering this, the company added another line to its capacity that would double the production from 2,000 metric tonnage to 4,000 metric tonnage. The better performance of the industry was also seen in Flying Cement’s financials, as its topline registered almost 18 percent increase. Volumetrically too, its cement production and dispatches saw a roughly 33 percent incline. Cost of production went down slightly to 91 percent that kept gross margin relatively flat. Other income however helped to improve operating margin, but net margin was squeezed by a higher finance and tax expense; finance expense was higher due to finance obtained form National Bank of Pakistan for the expansion.
Cement industry’s growth was relatively subdued at 1.98 percent in FY19 compared to that seen last year, while the company’s topline grew at 12.4 percent. Cement production and dispatches, however, saw a decline of roughly 2 percent. The industry trend for lower cement dispatches despite a higher revenue was because there was slower construction activity in the economy, hence demand. Most of the growth in the industry was brought about by export dispatches. Cost of production, however, for the company increased to 94 percent of revenue, after decreasing for eight consecutive years. This was a result of increase in input prices that was further worsened by currency depreciation against USD. Thus, gross margin reduced to almost 6 percent; this also trickled down to the bottomline, and net margin was also lower at a little over 4 percent.
The overall cement industry’s growth remained subdued at 2 percent in FY20, in the backdrop of currency exchange rate, stricter policies that resulted in low demand and high input prices, that was further worsened towards the end due to the outbreak of the Covid-19 pandemic. The effect was also seen on the company’s performance as its topline contracted by three times, while cement dispatches shrunk nearly 6 times. As a result, the company could not bear the cost of production, incurring a gross loss of Rs 462 million that increased to a bottomline of Rs 531 million.
Quarterly results and future outlook
Despite the resumption of activities after the strict lock down that was imposed upon the outbreak of the Covid-19 pandemic, in addition to incentives and measures by the government to support the construction industry to revive the economy, the company’s topline continued to reduce in the first quarter of FY21- Rs 68 million as compared to Rs 422 million seen in 1QFY20. With this drastic reduction, Flying Cement was unable to sustain its cost of production that exceeded revenue, thus incurring a gross loss of Rs 34 million that increased to Rs 41 million as net loss, as compared to a net profit of Rs 22 million in 1QFY21.
The company foresees growing demand in the domestic market that would help to improve the performance of the company while also acknowledging the government’s efforts to revive the economy in the aftermath of the Covid-19 and support the construction industry. It also expects positive outcomes for the cement industry due to the package that was announced for the construction industry.