KARACHI, Sept 8: On Wednesday, Fauji Cement Company Limited announced financial figures for the year ended June 30, 2004, posting an after-tax profit at Rs314 million in place of last year's loss of Rs531 million.

Market was totally off the mark in terms of forecasting net numbers, though at the operating level, results were in line with expectations.

Analysts were looking at the after-tax profit figure ranging between Rs886 and Rs964 million. The huge difference between forecast and actual figures had nothing to do with any error of judgement, but was the result of amortization of a deferred cost arising from issue of shares at discount in 2002, due to the Securities and Exchange Commission of Pakistan removing schedule 4 of the Companies Act, in accordance with the requirements of IAS 12, allowing it to cover up its operational difficulties.

During 2004, the company reaped dividends of a one-time positive deferred tax asset adjustment of Rs710 million. Since the amortization of a deferred cost on issue of shares at discount was a non-cash accounting adjustment, all it did was to offset the similar non-cash adjustment of deferred tax asset of Rs710m recognized in HY04.

Due to historical losses, Fauji cement is not expected to pay corporate tax in the next few years. However, the company was required to book deferred tax at the rate of 35 per cent of before tax profit. Thus, FY04 deferred tax benefit is a one time gain.

In their meeting on Tuesday, the board skipped a dividend like last year, but the share in Fauji Cement closed 10 paisa up to Rs14.35 on 5.7 million shares. On the basic earnings per share (eps) of 85 paisa and diluted eps at 75 paisa, the stock is trading at expensive price-to-earnings multiple of 16.9 and 19.1 times, respectively.

After deduction of sales tax and excise duty in the sum of Rs951 million, net sales for the year ended June 30, 2004 amounted to Rs2,296 million, which was 52 per cent higher than the year ago net sales at Rs1,511 million.

Gross profit increased 321 per cent to Rs741 million, from Rs176 million, with gross margin improving to 32.3 per cent, from 11.6 per cent. The earnings growth during the year under review was due to improvement in gross margins, which climbed due to increase in net sales and reduction in production costs as a result of reduced dependence on furnace oil and conversion to coal.

Complete conversion is expected by FY 2005, but, according to some analysts, that was not likely to reduce the company's energy costs significantly as the company was already partially operating on gas, and global coal prices were significantly on the rise.

Operating profit scaled by 457 per cent to Rs680 million, from Rs122 million and the operating margin improved vastly to 29.6 per cent, from 8.1 per cent the year ago. Fauji Cement managed to cut down financial charges by 56 per cent to Rs204 million, from Rs463 million the previous year.

The company was able to successfully re-profile its expensive debts -- allowing it to pull down its interest rates liability from 16-17pc to 6pc p.a. Debt re-profiling will enable Fauji cement to save 24 paisa per share next year in reduced financial charges.

But at the same time, from 2007 onwards, the expensive payment on preferential shares would become due. The company has issued 49 million preferred shares with rising dividend, starting FY07. The increasing dividend on preferred stock means any robust dividend for ordinary shareholders does not seem imminent in the foreseeable future.

During the financial year 2004, Fauji cement dispatches increased by 30pc to 834k tons, compared to FY03 dispatches of 643k tons. Fauji cement plans to increase clinker capacity by 700tpd from 3,000tpd to 3,700tpd. The company has recently signed agreement with F.L. Smidth & Co. The project is expected to be completed by June 2005.

In a post-budget review, the analysts observed that going forward Fauji Cement could save approximately Rs198 million in respect of financial charges in FY05 through debt re-profiling.

That would include: Rs926 million of foreign debt swap with 18 per cent mark-up with local debt resulting in savings of Rs159 million and Rs499 million of domestic loans with an average mark-up of 8 per cent having been paid off, resulting in estimated savings of Rs39 million.