Broking firms FC Capital Research yesterday downgraded public listed Tokyo Cement to “Hold” from “Strong buy” despite the increase in price of a 50kg bag of cement.
The downgrade was primarily on account of apparent shrink in market share due to intensified competition leading to a stagnant topline despite the modest 5%YoY growth registered in cement industry during 2017.
Further, with the distribution cost continuing on its increasing trend to register a 12%YoY growth for 9MFY18 adversely impacting the earnings First Capital Research has slashed TKYO revenue forecast by almost -15% for FY18E and -24% for FY19E while incorporating a more steady moderate growth in top line spreading to FY20E and FY21E. However, we expect TKYO to maintain its margins at 25% supported by enhanced capacity levels coupled with cost savings on energy, thus upholding the earnings at c.LKR 3.4Bn in FY19E. Amidst the revenue downgrade, TKYO earnings expectations have reduced by LKR 577Mn and LKR 1.0Bn for FY18E and FY19E generating a decent c.+4% earnings growth in FY19E. As a result, First Capital Research revised its fair value for TKYO.N for FY19E downwards to LKR 64.0 (previous LKR 94.0) while TKYO.X is revised to LKR 54.4 (previous LKR 80.0) providing an overall return of 12% and 14% respectively thus downgrading to HOLD on both TKYO.N/X.