Depressed Prices + Rising Rates = Cash Crunch - AWS
Hail Cement 3Q15 Earnings Review October 19, 2015
Net profit misses estimates while operating profit in line; Downgrade to Hold Operating profit in line with SFC while net profit misses SFC and consensus
Rating Summary Recommendation
Hold
12-Month Target price (SAR)
19.0
Upside/(Downside)
10%
Stock Details
Hail Cement reported 3Q15 net profit of SAR17m (-31% y/y, -39% q/q – not comparable due to seasonality) which missed SFC estimate by 32% and consensus by 45%. However, reported net profit included losses (amount undisclosed) in its investment book implying comparison at the operating profit level would be more meaningful to gauge true operating performance. While cement volume of 386k tons missed our estimate by 4%, gross profit of SAR38m (+16% y/y, -3% q/q) was 5% below our estimate and EBIT of SAR30m (+17% y/y, -1% q/q) was broadly in-line. This also implies that pricing pressure continued in 3Q15 (SFC est. realized price down 9% y/y) which is concurrent with the pricing weakness witnessed in the sector. To understand the impact of sector wide pricing pressure, we highlight while Hail’s 9M15 KSA cement volume is up 6% y/y, 9M15 EBIT is down 10% y/y.
Last Close Price Market Capitalization
SAR
17.2
SAR mln
1,684
Shares Outstanding
mln
98
52-Week High
SAR
27.4
52-Week Low
SAR
15.7
Price Change (YTD)
%
-25.0
6-Mth ADTV
mln
12.4
EPS 2015E
SAR
1.26
3001.SE
HCC AB
Reuters / Bloomberg Source: Tadawul
Expect further pricing weakness; Downgrade to Hold Post publication of 3Q15 preliminary results, keeping in line with recent trends and our outlook for cement sector in 2016 (continued pricing pressure from capacity increases and volume slowdown and pressure on companies to lower clinker inventory), we have cut Hail Cement’s 2016E-17E earnings by 33% and consequently cut target price to SAR19/share (from SAR30). On our revised estimate, the stock trades at 2016E P/E of 14.0x (KSA peers 12.1x, EM 12.9x, GCC/MEA 11.6x) implying a premium to the sector. Furthermore, Hail Cement suffers from locational disadvantage meaning the company may have to undercut prices more than competitors (located in strategic demand centres) to move volumes. In all, keeping in view near to mid-term challenges and valuation gap vs. peers, we believe the stock could come under further pressure as earnings weakness continues. Post publication of 3Q15 preliminary result, we downgrade Hail Cement to Hold.
Key Shareholders (%) Public
50
Other strategic shareholders
32
Al Mal Investment - Kuwait
6
Saudi Real Estate
6
Yamama Cement
6
Source: Tadawul
Price Multiples
P/E EV / EBITDA SAR mn
3Q15A
3Q15E
% dev
Cons
% dev
2Q15
% q/q
3Q14
% y/y
2015E
2016E
Volume (‘000tons)
386
402
-4%
Na
Na
488
-21%
366
5%
1,724
1,788
Revenues
Na
80
Na
Na
Na
100
Na
80
Na
351
349
Gross Profit
38
39
-5%
Na
Na
39
-3%
32
16%
172
166
EBIT
30
29
1%
Na
Na
30
-1%
25
17%
132
128
Net Income
17
26
-32%
32
-45%
28
-39%
25
-31%
124
120
Dividend Yield
2015E
2016E
13.6x
14.0x
9.1x
9.5x
6.4%
6.4%
Source: SFC
1-Year Share Performance 110 100
90 80 70 60 50
Source: Company, Saudi Fransi Capital, Bloomberg
40 S
O
N
D
J
F
Hail Cement
M
A
M
J
J
A
S
TASI Cement
Source: Bloomberg
Dipanjan Ray, CFA [email protected] +966 11 282 6861 AbdulAziz Jawdat [email protected] +966 11 282 6856
PUBLIC
Page 1
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Research and Advisory Department Rating Framework
BUY Shares of the company under coverage in this report are expected to outperform relative to the sector or the broader market.
HOLD Shares of the company under coverage in this report are expected to perform in line with the sector or the broader market.
SELL Shares of the company under coverage in this report are expected to underperform relative to the sector or the broader market.
Saudi Fransi Capital Call Center | 800 125 9999 www.sfc.sa Commercial Registration | 1010231217
Research and Advisory P.O. Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh [email protected]
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
Disclaimer This report is prepared by Saudi Fransi Capital (“SFC”), a fully-fledged investment firm providing investment banking, asset management, securities brokerage, research, and custody services. SFC, and its affiliate, might conduct business relationships with the company that is subject of this report and/ or own its security. This report is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. 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. This report is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report is not intended to take into account any investment suitability needs of the recipient. In particular, this report is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this report. SFC strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this report take into account both risk and expected return. To the maximum extent permitted by applicable law and regulation, SFC shall not be liable for any loss that may arise from the use of this report or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this report may not be realized. All opinions and estimates included in this report constitute SFC’s judgment as of the date of production of this report, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than what he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this report may be reproduced without the written permission of SFC. Neither this report nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. 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.
Saudi Fransi Capital LLC C.R. 1010231217 P.O Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
Net profit misses estimates while operating profit in line; Downgrade to Hold Operating profit in line with SFC while net profit misses SFC and consensus
Rating Summary Recommendation
Hold
12-Month Target price (SAR)
19.0
Upside/(Downside)
10%
Stock Details
Hail Cement reported 3Q15 net profit of SAR17m (-31% y/y, -39% q/q – not comparable due to seasonality) which missed SFC estimate by 32% and consensus by 45%. However, reported net profit included losses (amount undisclosed) in its investment book implying comparison at the operating profit level would be more meaningful to gauge true operating performance. While cement volume of 386k tons missed our estimate by 4%, gross profit of SAR38m (+16% y/y, -3% q/q) was 5% below our estimate and EBIT of SAR30m (+17% y/y, -1% q/q) was broadly in-line. This also implies that pricing pressure continued in 3Q15 (SFC est. realized price down 9% y/y) which is concurrent with the pricing weakness witnessed in the sector. To understand the impact of sector wide pricing pressure, we highlight while Hail’s 9M15 KSA cement volume is up 6% y/y, 9M15 EBIT is down 10% y/y.
Last Close Price Market Capitalization
SAR
17.2
SAR mln
1,684
Shares Outstanding
mln
98
52-Week High
SAR
27.4
52-Week Low
SAR
15.7
Price Change (YTD)
%
-25.0
6-Mth ADTV
mln
12.4
EPS 2015E
SAR
1.26
3001.SE
HCC AB
Reuters / Bloomberg Source: Tadawul
Expect further pricing weakness; Downgrade to Hold Post publication of 3Q15 preliminary results, keeping in line with recent trends and our outlook for cement sector in 2016 (continued pricing pressure from capacity increases and volume slowdown and pressure on companies to lower clinker inventory), we have cut Hail Cement’s 2016E-17E earnings by 33% and consequently cut target price to SAR19/share (from SAR30). On our revised estimate, the stock trades at 2016E P/E of 14.0x (KSA peers 12.1x, EM 12.9x, GCC/MEA 11.6x) implying a premium to the sector. Furthermore, Hail Cement suffers from locational disadvantage meaning the company may have to undercut prices more than competitors (located in strategic demand centres) to move volumes. In all, keeping in view near to mid-term challenges and valuation gap vs. peers, we believe the stock could come under further pressure as earnings weakness continues. Post publication of 3Q15 preliminary result, we downgrade Hail Cement to Hold.
Key Shareholders (%) Public
50
Other strategic shareholders
32
Al Mal Investment - Kuwait
6
Saudi Real Estate
6
Yamama Cement
6
Source: Tadawul
Price Multiples
P/E EV / EBITDA SAR mn
3Q15A
3Q15E
% dev
Cons
% dev
2Q15
% q/q
3Q14
% y/y
2015E
2016E
Volume (‘000tons)
386
402
-4%
Na
Na
488
-21%
366
5%
1,724
1,788
Revenues
Na
80
Na
Na
Na
100
Na
80
Na
351
349
Gross Profit
38
39
-5%
Na
Na
39
-3%
32
16%
172
166
EBIT
30
29
1%
Na
Na
30
-1%
25
17%
132
128
Net Income
17
26
-32%
32
-45%
28
-39%
25
-31%
124
120
Dividend Yield
2015E
2016E
13.6x
14.0x
9.1x
9.5x
6.4%
6.4%
Source: SFC
1-Year Share Performance 110 100
90 80 70 60 50
Source: Company, Saudi Fransi Capital, Bloomberg
40 S
O
N
D
J
F
Hail Cement
M
A
M
J
J
A
S
TASI Cement
Source: Bloomberg
Dipanjan Ray, CFA [email protected] +966 11 282 6861 AbdulAziz Jawdat [email protected] +966 11 282 6856
PUBLIC
Page 1
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Research and Advisory Department Rating Framework
BUY Shares of the company under coverage in this report are expected to outperform relative to the sector or the broader market.
HOLD Shares of the company under coverage in this report are expected to perform in line with the sector or the broader market.
SELL Shares of the company under coverage in this report are expected to underperform relative to the sector or the broader market.
Saudi Fransi Capital Call Center | 800 125 9999 www.sfc.sa Commercial Registration | 1010231217
Research and Advisory P.O. Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh [email protected]
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
Disclaimer This report is prepared by Saudi Fransi Capital (“SFC”), a fully-fledged investment firm providing investment banking, asset management, securities brokerage, research, and custody services. SFC, and its affiliate, might conduct business relationships with the company that is subject of this report and/ or own its security. This report is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. 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. This report is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This report is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report is not intended to take into account any investment suitability needs of the recipient. In particular, this report is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this report. SFC strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this report take into account both risk and expected return. To the maximum extent permitted by applicable law and regulation, SFC shall not be liable for any loss that may arise from the use of this report or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this report may not be realized. All opinions and estimates included in this report constitute SFC’s judgment as of the date of production of this report, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than what he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this report may be reproduced without the written permission of SFC. Neither this report nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. 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.
Saudi Fransi Capital LLC C.R. 1010231217 P.O Box 23454 Riyadh 11426 Saudi Arabia Head Office | Riyadh
PUBLIC
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. 11153-37
