4Q14 review: A surprisingly big miss vs. SFC estimate; Maintain Hold
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City Cement KSA Cement Sector | 4Q 2014 Preliminary Results | January 18, 2015
4Q14 review: A surprisingly big miss vs. SFC estimate; Maintain Hold
Rating Summary
4Q14 net profit misses estimates: City Cement reported a surprisingly low 4Q14 net profit
Recommendation
Hold
Target price (SAR)
23.0
Upside/ (downside)
8%
of SAR47m (0% qoq, -2% yoy) which has missed SFC estimate by c.23%. Operational performance was also weaker than expected with gross profit/EBITDA/EBIT c.19%/21%/25%
Stock Details
lower than our estimate. At this stage, while no specific details are divulged, despite cement
Closing price*
volume being c.2% higher than our estimate, it seems that the earnings miss may have come from lower margin (EBITDA margin c.53% vs. 67% SFC est.) due to startup costs associated with trial run of the 2nd clinker line (management guided to higher cost of goods sold and
SAR
21.5
SAR mn
4,068
Mn
189
52-Week High
SAR
31.8
52-Week Low
SAR
19.1
%
-14.0
Market capitalization Shares outstanding
higher G&A expenses). That said, we think c.53% EBITDA margin (c.66% in 9M14 and
Price chg. (3 months)
c.69% 2011-13 Avg.) for City Cement is rather a one-off exception and not a new normal
EPS 2015E
meaning EBITDA margin could revert to trend rate in the coming quarters.
Ticker (Reuters/ Bloomberg)
We do not expect material volume improvement for City Cement in 2015: City Cement
*Price as of January 17, 2015
SAR
1.24
3003.SE
CITYC AB
recorded 517k tons of cement sales in 4Q14 which would imply c.19% yoy/c.31% qoq (vs. c.27% qoq/c.16% yoy for the sector). Further, for full 2014, the company recorded c.2.0m
Key Shareholding (%)
tons of cement sales, which would mean c.+11% yoy (c.+3% yoy for the sector) implying
Public
68.4
City’s cement volume growth is trending well above sector average. Having said that, while
Al Abdullatif Holding Group
25.2
HH Prince Mishal Al Saud
6.4
we expect sector wide cement volume to continue recovering in 2015, City Cement is already operating at close to full utilization rate meaning possibility of material volume improvement
Source: Tadawul
Key Ratios
in 2015 is relatively minor.
2015E
2016E
Valuation leaves little room for upside; trades at 2015E ex-cash P/E of 15.9x: In the
P/E (x) – ex cash
15.9
15.7
previous 3 months, City Cement (c.-14%) underperformed Tadawul Cement index (c.-10%)
EV/EBITDA (x)
12.2
12.1
and Tadawul (c.-13%). However, even after the sharp correction, the stock trades at 2015E
Dividend yield (%)
5.8
5.8
ex cash P/E of 15.9x (KSA Cement 2015E P/E 13.6x, GCC/MEA 12.5x and EM peers 13.6x)
Source: Company, Saudi Fransi Capital
and remains one of the more expensive stocks in the KSA cement space. Post publication of 4Q14 results, we retain our Hold rating with an unchanged target price of SAR23.0/share.
Stock price movement vs. TASI
the key to City Cement’s equity story lies in fuel allocation to the new line (5,500tpd of clinker, c.110% of current capacity). While trial run started in end 4Q14 (and commercial operations probably in 2Q15), we believe fuel allocation is not confirmed for the new capacity, that is, if fuel is not allocated, the new capacity could remain unutilized and not materially contribute to cash flows and earnings growth. However, if fuel is allocated, this could help unlock significant value. According to our estimates, in a blue sky scenario, the new capacity could
210 190 170 150 130 110 90 70 Jan-13 Jan-13 Mar-13 Apr-13 May-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
Fuel allocation to new capacity (c.105% of current) could be a key catalyst: In our view,
be worth SAR11.0/share or c.50% of our target price. 4Q14A
4Q14E
Volume (000tons)
517
508
2%
Na
Na
396
31%
436
Revenues
Na
116
Na
Na
Na
91
Na
Gross Profit
56
70
-19%
Na
Na
56
EBITDA (est)**
62
78
-21%
Na
Na
64
EBITDA Margin
Na
67%
Na
Na
Na
70%
EBIT
49
65
-25%
Na
Na
51
-4%
53
Net Profit
47
62
-23%
Na
Na
47
0%
48
SAR mn
%diff
Cons*
%dev
City Cement
3Q14
%qoq
4Q13
%yoy
2015E
2016E
19%
1,942
1,960
98
Na
458
462
0%
58
-3%
268
273
-3%
67
-7%
303
306
66%
66%
-8%
250
253
-2%
234
237
68%
Tadawul
Source: Tadawul
Sector Coverage Dipanjan Ray [email protected] +966-11-2826861 AbdulAziz Jawdat [email protected] +966-11-2826856
Source: Company, Saudi Fransi Capital, * Bloomberg consensus**estimated from available disclosure
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
City Cement KSA Cement Sector | 4Q 2014 Preliminary Results | January 18, 2015
Recommendation Framework BUY: The analyst recommends a BUY when our fair value estimate is at least 10% higher than the current share price. HOLD: The analyst recommends a HOLD when our fair value estimate ranges within ±10% of the current share price. SELL: The analyst recommends a SELL when our fair value estimate is lower by more than 10% from the current share price.
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
City Cement KSA Cement Sector | 4Q 2014 Preliminary Results | January 18, 2015
Contacts RESEARCH & ADVISORY DEPARTMENT [email protected]
SAUDI FRANSI CAPITAL Call Centre 800-125-9999 Website www.sfc.sa
SAUDI FRANSI CAPITAL LLC C.R. 1010231217, PO Box 23454, Riyadh 11426, Saudi Arabia, Head Office Riyadh
Authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
City Cement KSA Cement Sector | 4Q 2014 Preliminary Results | January 18, 2015
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. Authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
City Cement KSA Cement Sector | 4Q 2014 Preliminary Results | January 18, 2015
4Q14 review: A surprisingly big miss vs. SFC estimate; Maintain Hold
Rating Summary
4Q14 net profit misses estimates: City Cement reported a surprisingly low 4Q14 net profit
Recommendation
Hold
Target price (SAR)
23.0
Upside/ (downside)
8%
of SAR47m (0% qoq, -2% yoy) which has missed SFC estimate by c.23%. Operational performance was also weaker than expected with gross profit/EBITDA/EBIT c.19%/21%/25%
Stock Details
lower than our estimate. At this stage, while no specific details are divulged, despite cement
Closing price*
volume being c.2% higher than our estimate, it seems that the earnings miss may have come from lower margin (EBITDA margin c.53% vs. 67% SFC est.) due to startup costs associated with trial run of the 2nd clinker line (management guided to higher cost of goods sold and
SAR
21.5
SAR mn
4,068
Mn
189
52-Week High
SAR
31.8
52-Week Low
SAR
19.1
%
-14.0
Market capitalization Shares outstanding
higher G&A expenses). That said, we think c.53% EBITDA margin (c.66% in 9M14 and
Price chg. (3 months)
c.69% 2011-13 Avg.) for City Cement is rather a one-off exception and not a new normal
EPS 2015E
meaning EBITDA margin could revert to trend rate in the coming quarters.
Ticker (Reuters/ Bloomberg)
We do not expect material volume improvement for City Cement in 2015: City Cement
*Price as of January 17, 2015
SAR
1.24
3003.SE
CITYC AB
recorded 517k tons of cement sales in 4Q14 which would imply c.19% yoy/c.31% qoq (vs. c.27% qoq/c.16% yoy for the sector). Further, for full 2014, the company recorded c.2.0m
Key Shareholding (%)
tons of cement sales, which would mean c.+11% yoy (c.+3% yoy for the sector) implying
Public
68.4
City’s cement volume growth is trending well above sector average. Having said that, while
Al Abdullatif Holding Group
25.2
HH Prince Mishal Al Saud
6.4
we expect sector wide cement volume to continue recovering in 2015, City Cement is already operating at close to full utilization rate meaning possibility of material volume improvement
Source: Tadawul
Key Ratios
in 2015 is relatively minor.
2015E
2016E
Valuation leaves little room for upside; trades at 2015E ex-cash P/E of 15.9x: In the
P/E (x) – ex cash
15.9
15.7
previous 3 months, City Cement (c.-14%) underperformed Tadawul Cement index (c.-10%)
EV/EBITDA (x)
12.2
12.1
and Tadawul (c.-13%). However, even after the sharp correction, the stock trades at 2015E
Dividend yield (%)
5.8
5.8
ex cash P/E of 15.9x (KSA Cement 2015E P/E 13.6x, GCC/MEA 12.5x and EM peers 13.6x)
Source: Company, Saudi Fransi Capital
and remains one of the more expensive stocks in the KSA cement space. Post publication of 4Q14 results, we retain our Hold rating with an unchanged target price of SAR23.0/share.
Stock price movement vs. TASI
the key to City Cement’s equity story lies in fuel allocation to the new line (5,500tpd of clinker, c.110% of current capacity). While trial run started in end 4Q14 (and commercial operations probably in 2Q15), we believe fuel allocation is not confirmed for the new capacity, that is, if fuel is not allocated, the new capacity could remain unutilized and not materially contribute to cash flows and earnings growth. However, if fuel is allocated, this could help unlock significant value. According to our estimates, in a blue sky scenario, the new capacity could
210 190 170 150 130 110 90 70 Jan-13 Jan-13 Mar-13 Apr-13 May-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
Fuel allocation to new capacity (c.105% of current) could be a key catalyst: In our view,
be worth SAR11.0/share or c.50% of our target price. 4Q14A
4Q14E
Volume (000tons)
517
508
2%
Na
Na
396
31%
436
Revenues
Na
116
Na
Na
Na
91
Na
Gross Profit
56
70
-19%
Na
Na
56
EBITDA (est)**
62
78
-21%
Na
Na
64
EBITDA Margin
Na
67%
Na
Na
Na
70%
EBIT
49
65
-25%
Na
Na
51
-4%
53
Net Profit
47
62
-23%
Na
Na
47
0%
48
SAR mn
%diff
Cons*
%dev
City Cement
3Q14
%qoq
4Q13
%yoy
2015E
2016E
19%
1,942
1,960
98
Na
458
462
0%
58
-3%
268
273
-3%
67
-7%
303
306
66%
66%
-8%
250
253
-2%
234
237
68%
Tadawul
Source: Tadawul
Sector Coverage Dipanjan Ray [email protected] +966-11-2826861 AbdulAziz Jawdat [email protected] +966-11-2826856
Source: Company, Saudi Fransi Capital, * Bloomberg consensus**estimated from available disclosure
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
City Cement KSA Cement Sector | 4Q 2014 Preliminary Results | January 18, 2015
Recommendation Framework BUY: The analyst recommends a BUY when our fair value estimate is at least 10% higher than the current share price. HOLD: The analyst recommends a HOLD when our fair value estimate ranges within ±10% of the current share price. SELL: The analyst recommends a SELL when our fair value estimate is lower by more than 10% from the current share price.
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
City Cement KSA Cement Sector | 4Q 2014 Preliminary Results | January 18, 2015
Contacts RESEARCH & ADVISORY DEPARTMENT [email protected]
SAUDI FRANSI CAPITAL Call Centre 800-125-9999 Website www.sfc.sa
SAUDI FRANSI CAPITAL LLC C.R. 1010231217, PO Box 23454, Riyadh 11426, Saudi Arabia, Head Office Riyadh
Authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
City Cement KSA Cement Sector | 4Q 2014 Preliminary Results | January 18, 2015
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. Authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
Refer to important terms of use, disclaimers and disclosures on back page
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA) License No. (11153-37)
