Arabian Cement Co. - Aljazira Capital
Arabian Cement Co. Result Flash Note 1Q-2016
April 2016
Please read Disclaimer on the back
Arabian Cement: 1Q-2016 earnings above estimates; Decrease in cost of sales by SR 41.7m and non-recurring of SAR 25mn resulted in a positive surprise. ‘Overweight’ recommendation reiterated. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 1Q-16 436.9 151.8 1.52
Actual 1Q-16 NA 225.6 2.26
53.0
*prices as of 19th of April 2016
Key Financials SARmn (unless specified)
In 1Q2016, Arabian Cement’s revenue is expected to decline by 0.9%YoY to SAR 448.9mn, well above AJC estimates of SAR 436.9mn. The increase in revenue was ascribed to higher than expected sales volume and realization per ton. During Q1-2016, The company’s sales volume stood at 1.48 MT vs. 1.52 MT in Q1-2015. The average realization/ton is expected to improve to SAR 265/ton from SAR 260.5/ton in 1Q2015 and SAR 254.1/ton in 4Q2015. We expect a slight Decline of 3-4% in cement sales for Arabian Cement company due to continued oversupply in the market, following lower-than-expected demand and additional cement capacity which came on stream in 2015.
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
Strong balance sheet, attractive dividend yield offer upside potential: Arabian Cement has reduced its debt over the last three years. Simultaneously, cash on the balance sheet has been consistently rising, with net cash by the end of FY2015 at SAR 490.5mn. The company’s debt-to-equity ratio reduced from 0.50x at the end of 2011 to 0.08x by the end of FY2015. Arabian Cement is well placed to fund its expansion plans, driven by strong balance sheet position. Based on our forecast estimates, Arabian Cement is trading at the lowest PE multiple of 8.9x for FY16E, with an expected dividend yield of about 8.5% (SAR 4.5 DPS). Currently, the last three-years mean PE multiple for the cement sector is about 13.6x, indicating that Arabian Cement, one of the largest cement companies in KSA, is undervalued and offers robust upside potential.
© All rights reserved
FY14
FY15
FY16E
1,719.6 26.0% 645.4 236% 6.45
1,642.6 -4.3% 601.4 -7.0% 6.02
1,595.8 -2.8% 595.1 -8.0% 5.95
Source: Company reports, Aljazira Capital
Key Ratios FY14
FY15
FY16E
42.5% 48.2% 37.5% 12.39x 2.47x 9.22x
44.1% 49.5% 36.5% 7.93x 1.33x 5.21x
42.6% 48.3% 37.3% 8.91x 1.34x 5.72x
20.0% 15.8% 6.3%
16.7% 13.9% 9.4%
15.1% 13.2% 8.5%
SARmn (unless specified)
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
5.30 1.3% 82.50 37.40 100.0 Source: Bloomberg, Aljazira Capital
Shareholders Pattern Shareholders Pattern Public Pension Agency Abdullah A. Al Rajhi Abdul-Aziz Abdullah Al Suliman Public
Holding 5.27% 6.52% 7.54% 80.67%
Source: Company reports, Aljazira Capital
Price Performance 11000
85
10000
75
9000
65
8000
55
7000
45
6000
35
5000
cFe 13 b1 Ap 4 r1 Ju 4 nAu 14 g1 O 4 ct -1 De 4 cFe 14 b1 Ap 5 r1 Ju 5 nAu 15 g1 O 5 ct De 15 cFe 15 b16
Contract awarded to expand capacity by 10,000 tpd: Arabian Cement announced plans to increase production with a new 10,000 tons per day (tpd) cement production line. The new line is expected to be commissioned by H12017. The non-availability of subsidized fuel is likely to exert pressure on operating expenses and profit margins for the new line; however, rising demand in the western region and better operational efficiencies are expected to partially offset the negative impact of the outsourced clinker.
Revenues Growth % Net Income Growth % EPS
De
Clinker exchange deal to impact the improved margin, but contribute with higher sales growth: The company signed a three-year clinker exchange deal with Northern Cement Co. to supply Arabian cement with 700 thousand tons of clinker per year. We believe that the higher uses of outsourced clinker could impact the wide margin witnessed in 1Q2016, however volumetric sales growth is expected.
65.10
22.8%
Upside / (Downside)
Despite the decline in sales volume, lower cost of sales and other non-recurring incomes pushed to better performance in 1Q2016: Net profit came above estimates and showed a deviation of 48.6% from AJC estimates and 48.7% from the market consensus of SAR 151.3mn. We believe that the better than expected net profit is mainly associated to i) decrease in cost of sales by SR 41.7m as a result of zero consumption of outsourced clinker. ii) receiving insurance claim of SR 17m for business interruption related to fire accident that occurred in 2012. iii) dividend income of SR 7.5m from available for sale investments. iv) decrease in zakat expense by SR 7.5m compared to last quarter. However despite volumetric sales decline by 2.9%YoY on the back of lower construction activities in the region.
Gross profit stood at SAR 222.3mn depicting a decline of 5.6%YoY, and well above our estimate of SAR 178.2mn due to i) higher than expected sales volume. ii) Strong decline in cost/ton due to zero consumption of outsourced clinker, which we believe is not sustainable. Gross margin in 1Q-2016 is expected to increase to 49.5% from 46.3% in Q42015. Based on our calculation, we estimate the cost/ton to decline to SAR 134/ton in 1Q2016 vs. average cost/ton of SAR 147.8/ton in FY2015. The company’s improved cost/ ton is not sustainable due to having low inventory level and the company’s need to use outsourced clinker. Operating profit for 1Q-2016 stood at SAR 205.7mn depicting a decline of 4.7%YoY, where the OPEX (SG & A) has declined to SAR 16.6mn from SAR 19.1mn in 1Q2015. (The company is yet to publish detailed financials for 1Q2016).
1
‘Overweight ’
Current Price* (SAR) Target Price (SAR)
Deviation (%) 48.6% *Not Available,
Recommendation
Tadawul
Arabian cement
Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
Acting Head of Research
RESEARCH DIVISION
BROKERAGE AND INVESTMENT CENTERS DIVISION
Talha Nazar
Sultan Al Kadi
Analyst
Jassim Al-Jubran
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
sales
brokerage
Brokerage
Alaa Al-Yousef
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
Central Region
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 11 2256364 [email protected]
+966 11 2256248 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
April 2016
Please read Disclaimer on the back
Arabian Cement: 1Q-2016 earnings above estimates; Decrease in cost of sales by SR 41.7m and non-recurring of SAR 25mn resulted in a positive surprise. ‘Overweight’ recommendation reiterated. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 1Q-16 436.9 151.8 1.52
Actual 1Q-16 NA 225.6 2.26
53.0
*prices as of 19th of April 2016
Key Financials SARmn (unless specified)
In 1Q2016, Arabian Cement’s revenue is expected to decline by 0.9%YoY to SAR 448.9mn, well above AJC estimates of SAR 436.9mn. The increase in revenue was ascribed to higher than expected sales volume and realization per ton. During Q1-2016, The company’s sales volume stood at 1.48 MT vs. 1.52 MT in Q1-2015. The average realization/ton is expected to improve to SAR 265/ton from SAR 260.5/ton in 1Q2015 and SAR 254.1/ton in 4Q2015. We expect a slight Decline of 3-4% in cement sales for Arabian Cement company due to continued oversupply in the market, following lower-than-expected demand and additional cement capacity which came on stream in 2015.
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
Strong balance sheet, attractive dividend yield offer upside potential: Arabian Cement has reduced its debt over the last three years. Simultaneously, cash on the balance sheet has been consistently rising, with net cash by the end of FY2015 at SAR 490.5mn. The company’s debt-to-equity ratio reduced from 0.50x at the end of 2011 to 0.08x by the end of FY2015. Arabian Cement is well placed to fund its expansion plans, driven by strong balance sheet position. Based on our forecast estimates, Arabian Cement is trading at the lowest PE multiple of 8.9x for FY16E, with an expected dividend yield of about 8.5% (SAR 4.5 DPS). Currently, the last three-years mean PE multiple for the cement sector is about 13.6x, indicating that Arabian Cement, one of the largest cement companies in KSA, is undervalued and offers robust upside potential.
© All rights reserved
FY14
FY15
FY16E
1,719.6 26.0% 645.4 236% 6.45
1,642.6 -4.3% 601.4 -7.0% 6.02
1,595.8 -2.8% 595.1 -8.0% 5.95
Source: Company reports, Aljazira Capital
Key Ratios FY14
FY15
FY16E
42.5% 48.2% 37.5% 12.39x 2.47x 9.22x
44.1% 49.5% 36.5% 7.93x 1.33x 5.21x
42.6% 48.3% 37.3% 8.91x 1.34x 5.72x
20.0% 15.8% 6.3%
16.7% 13.9% 9.4%
15.1% 13.2% 8.5%
SARmn (unless specified)
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
5.30 1.3% 82.50 37.40 100.0 Source: Bloomberg, Aljazira Capital
Shareholders Pattern Shareholders Pattern Public Pension Agency Abdullah A. Al Rajhi Abdul-Aziz Abdullah Al Suliman Public
Holding 5.27% 6.52% 7.54% 80.67%
Source: Company reports, Aljazira Capital
Price Performance 11000
85
10000
75
9000
65
8000
55
7000
45
6000
35
5000
cFe 13 b1 Ap 4 r1 Ju 4 nAu 14 g1 O 4 ct -1 De 4 cFe 14 b1 Ap 5 r1 Ju 5 nAu 15 g1 O 5 ct De 15 cFe 15 b16
Contract awarded to expand capacity by 10,000 tpd: Arabian Cement announced plans to increase production with a new 10,000 tons per day (tpd) cement production line. The new line is expected to be commissioned by H12017. The non-availability of subsidized fuel is likely to exert pressure on operating expenses and profit margins for the new line; however, rising demand in the western region and better operational efficiencies are expected to partially offset the negative impact of the outsourced clinker.
Revenues Growth % Net Income Growth % EPS
De
Clinker exchange deal to impact the improved margin, but contribute with higher sales growth: The company signed a three-year clinker exchange deal with Northern Cement Co. to supply Arabian cement with 700 thousand tons of clinker per year. We believe that the higher uses of outsourced clinker could impact the wide margin witnessed in 1Q2016, however volumetric sales growth is expected.
65.10
22.8%
Upside / (Downside)
Despite the decline in sales volume, lower cost of sales and other non-recurring incomes pushed to better performance in 1Q2016: Net profit came above estimates and showed a deviation of 48.6% from AJC estimates and 48.7% from the market consensus of SAR 151.3mn. We believe that the better than expected net profit is mainly associated to i) decrease in cost of sales by SR 41.7m as a result of zero consumption of outsourced clinker. ii) receiving insurance claim of SR 17m for business interruption related to fire accident that occurred in 2012. iii) dividend income of SR 7.5m from available for sale investments. iv) decrease in zakat expense by SR 7.5m compared to last quarter. However despite volumetric sales decline by 2.9%YoY on the back of lower construction activities in the region.
Gross profit stood at SAR 222.3mn depicting a decline of 5.6%YoY, and well above our estimate of SAR 178.2mn due to i) higher than expected sales volume. ii) Strong decline in cost/ton due to zero consumption of outsourced clinker, which we believe is not sustainable. Gross margin in 1Q-2016 is expected to increase to 49.5% from 46.3% in Q42015. Based on our calculation, we estimate the cost/ton to decline to SAR 134/ton in 1Q2016 vs. average cost/ton of SAR 147.8/ton in FY2015. The company’s improved cost/ ton is not sustainable due to having low inventory level and the company’s need to use outsourced clinker. Operating profit for 1Q-2016 stood at SAR 205.7mn depicting a decline of 4.7%YoY, where the OPEX (SG & A) has declined to SAR 16.6mn from SAR 19.1mn in 1Q2015. (The company is yet to publish detailed financials for 1Q2016).
1
‘Overweight ’
Current Price* (SAR) Target Price (SAR)
Deviation (%) 48.6% *Not Available,
Recommendation
Tadawul
Arabian cement
Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
Acting Head of Research
RESEARCH DIVISION
BROKERAGE AND INVESTMENT CENTERS DIVISION
Talha Nazar
Sultan Al Kadi
Analyst
Jassim Al-Jubran
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
sales
brokerage
Brokerage
Alaa Al-Yousef
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
Central Region
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 11 2256364 [email protected]
+966 11 2256248 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
