Arabian Cement Earnings ahead of SFC/consensus by 22/32%
Arabian Cement 4Q15 Earnings Review January 20, 2016 Rating Summary
Earnings ahead of SFC/consensus by 22/32%
Recommendation
Earnings beat SFC/consensus potentially from lower usage of high cost clinker Arabian Cement reported 4Q15 net profit of SAR157m (+8% y/y, +75% q/q – not comparable due to seasonality) that has beaten SFC and consensus estimate by 22% and 32%, respectively. Operational performance was also stronger than expected with gross profit of SAR192m (+12% y/y, +77% q/q) and EBIT of SAR174m (+14% y/y, +80% q/q) that came ahead of our estimate by 27% and 28%, respectively. While both cement volume (1.41mn tons, flay y/y) and revenue came 5% ahead of our forecast implying in line pricing, we believe the majority of the earnings beat primarily originated from lower usage of high cost clinker (procured from Northern Cement) in the production mix that reduced the blended cost of production for the company.
Hold
12-Month Target price (SAR)
48.0
Upside/(Downside)
21%
Stock Details Last Close Price Market Capitalization
SAR
40.1
SAR mln
4,010
Shares Outstanding
mln
100
52-Week High
SAR
82.5
52-Week Low
SAR
38.0
%
-26.2
mln
15.1
Price Change (3M)
Cautious sector outlook; a double whammy of demand slowdown and new capacity
6-Mth ADTV
We expect sector wide growth slowdown in cement volume in 2016 (+2% yoy in 2016 vs. 2004EPS 2016E SAR 14 volume CAGR of 8%). In our view, while potential demand slowdown in 2016 is certainly an 3010.SE issue, capacity addition seems to be the bigger threat to the sector. While clinker capacity stood Reuters / Bloomberg Source: Tadawul, *as of 19 Jan 2016 at 57.8m tons in 1H15, between 2H15 and 2017 end, 11.7mn tons (20% addition to 1H15 capacity) of new clinker capacity is set to come online. Consequently, we expect clinker production to ramp up as fight for market share intensifies among the players in a weak demand Key Shareholders (%) environment. In-all, as clinker production is set to exceed demand (excluding exports which we Public haven’t modeled yet), we expect stock buildup of 4.7m tons in 2016E vs Dec 2015 clinker Abdulaziz A.S. Al Suleiman inventory of 23 mn tons. Historically, cement prices have shown a very tight inverse correlation Abdullah A.S. Al Rajhi with clinker stock and if history is any indicator, we expect cement price to fall around 7% in 2016. Public Pension Agency
Expect 32% y/y earnings decline in 2016; Maintain Hold with SAR48/share TP
4.12 ARCCO AB
81 8 6 5
Source: Tadawul
Post publication of 4Q15 preliminary results, keeping in line with recent trends and our outlook for the sector in 2016 and 2017 (volume decline, pricing pressure and negative impact from Price Multiples 2016E electricity and fuel cost increase), we have cut Arabian’s 2016E-17E earnings by 21%. On our P / E revised estimate, the stock trades at 2016E P/E of 9.7x. At current price, while we admit valuation 9.7x looks attractive and we see long term value in the stock, we expect 32% y/y earnings decline in EV / EBITDA 6.7x 2016 (company guided to impact from increase in electricity, fuel and transportation costs on Dividend Yield 8.5% earnings at SAR40m implying 10% of 2016 net profit) due to product pricing pressure as well as Source: SFC utility repricing. In that backdrop, we do not expect strong stock price performance in the near to mid-term which leads to our cautious view. While we acknowledge 2016E dividend yield is an 1-Year Share Performance 120 attractive 8.5% (DPS SAR3.40, -15% y/y), dividend yield alone is unlikely to supersede earnings 110 decline and positively impact the stock in a muted environment. We maintain Hold rating on 100 Arabian Cement with a revised target price of SAR48/share (from SAR63/share).
2017E 10.5x 7.2x 8.5%
90 80
SAR mn
4Q15A 4Q15E
% dev
Cons
% dev
3Q15
% q/q
4Q14
% y/y
2016E
2017E
70 60
KSA Vol. (‘000tons)
1,414
Revenues
415
397
5%
397
5%
328
27%
430
-4%
1,409
1,383
Gross Profit
192
151
27%
Na
Na
109
77%
171
12%
491
450
EBIT
174
136
28%
136
28%
97
80%
153
14%
429
388
Net Profit
157
128
22%
119
32%
89
75%
145
8%
412
381
1,352
5%
Na
Na
1,025
38%
1,428
-1%
5,009
5,123
50 40 J
F
M
A
M
J
Arabian Cement
J
A
S
O
N
D
J
TASI Cement
Source: Bloomberg
Dipanjan Ray, CFA [email protected] +966 11 282 6861
Source: Company, Saudi Fransi Capital, Bloomberg
AbdulAziz Jawdat [email protected] +966 11 282 6856
PUBLIC
Page 1
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Arabian Cement Summary Financials
SAR mn, ending Dec 31-st
CAGR
Income Statement
2014
2015
2016E
2017E
2018E
2013-15
Revenues
1,720
1,643
1,409
1,383
1,383
11%
(8%)
Gross profit
731
725
491
450
414
16%
(21%)
EBITDA
850
835
601
560
524
11%
(18%)
EBIT
675
660
429
388
352
15%
(23%)
Net Income**
646
603
412
381
354
10%
(20%)
Shares outstanding (mln)
100
100
100
100
100
EPS (SAR)
6.46
6.03
4.12
3.81
3.54
DPS (SAR)
5.00
4.00*
3.40
3.40
3.40
2014
2015E
2016E
2017E
2018E
Cash and Equivalents
564
393
393
412
Receivables
216
250
232
Inventories
382
455
367
85
117
Current assets
1,247
PP&E
2015-17
*SFC estimate, ** restated from one-offs
SAR mn, ending Dec 31-st
2014
2015
2016E
2017E
Sales
28%
(4%)
(14%)
(2%)
0%
394
EBITDA
26%
(2%)
(28%)
(7%)
(6%)
227
227
EBIT
36%
(2%)
(35%)
(10%)
(9%)
360
360
Net Income
30%
(7%)
(32%)
(7%)
(7%)
112
110
110
DPS
67%
(20%)
(15%)
0%
0%
1,215
1,103
1,109
1,092
2,453
2,393
2,311
2,229
2,147
360
278
283
288
293
36
28
28
28
28
4,096
3,915
3,725
3,655
3,560
Accounts payable
0
0
0
0
0
Accrued expenses
0
1
1
1
1
P/E
Current portion of LT Debt
319
184
0
0
0
Other current liabilities
312
381
291
286
286
Current liabilities
632
566
291
287
287
Balance Sheet
Other current assets
CAGR 2013-15
10%
Grow th (y/y)
2015-17
(4%) Margins
Investments Other non-current assets Total assets
(1%)
(3%)
2014
2015E
2016E
2017E
2018E
Gross Margin
42%
44%
35%
33%
30%
EBIT Margin
39%
40%
30%
28%
25%
EBITDA Margin
49%
51%
43%
41%
38%
Net Margin
38%
37%
29%
28%
26%
2014
2015E
2016E
2017E
2018E
11.0
11.3
9.7
10.5
11.3
EV/EBITDA
8.4
8.1
6.7
7.2
7.7
P/Sales
4.1
4.2
2.8
2.9
2.9
P/BV
2.2
2.3
1.3
1.3
1.3
7.0%
5.9%
8.5%
8.5%
8.5%
Valuation Multiples
0%
(29%)
Dividend Yield Long-term Debt
187
239
239
119
0
Other non-current liabilities
48
54
54
54
54
Total non-current liabilities
235
293
293
173
54
Total equity
Total liabilities & equity
3,229
4,096
3,056
3,915
3,141
3,725
3,195
3,655
3,220
3,560
(27%)
3%
(1%)
(23%)
2%
(3%)
Ratios
2014
2015E
2016E
2017E
2018E
Net Debt/Equity
(2%)
1%
(5%)
(9%)
(12%)
Net Debt/EBITDA
(0.1)
0.0
(0.3)
(0.5)
(0.8)
RoE
20%
20%
13%
12%
11%
RoA
16%
16%
11%
10%
10%
102%
75%
87%
85%
84%
Payout Ratio
77%
66%
83%
89%
96%
Working Capital/Sales
22%
27%
30%
30%
30%
Operating FCF/EBITDA SAR mn, ending Dec 31-st Cash Flow Statement CFO+WC change Capex
2014
2015E
2016E
2017E
2018E
896
760
614
568
532
(32)
(112)
(90)
(90)
(90)
Operating FCF
864
648
524
478
442
FCF after investing
894
641
524
478
442
Dividends
(313)
(725)
(340)
(340)
(340)
Debt Repayment/New debt
(309)
(84)
(184)
(119)
(119)
(2)
(2)
Others Net Cash flow
271
(170)
0
0
0
(0)
19
(17)
2018E
Sources: Company, Saudi Fransi Capital
PUBLIC
Page 2
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Research and Advisory Department Rating Framework
BUY Shares of the companies under coverage in this report are expected to outperform relative to the sector or the broader market.
HOLD Shares of the companies under coverage in this report are expected to perform in line with the sector or the broader market.
SELL Shares of the companies 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
Research and Advisory Department 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
Earnings ahead of SFC/consensus by 22/32%
Recommendation
Earnings beat SFC/consensus potentially from lower usage of high cost clinker Arabian Cement reported 4Q15 net profit of SAR157m (+8% y/y, +75% q/q – not comparable due to seasonality) that has beaten SFC and consensus estimate by 22% and 32%, respectively. Operational performance was also stronger than expected with gross profit of SAR192m (+12% y/y, +77% q/q) and EBIT of SAR174m (+14% y/y, +80% q/q) that came ahead of our estimate by 27% and 28%, respectively. While both cement volume (1.41mn tons, flay y/y) and revenue came 5% ahead of our forecast implying in line pricing, we believe the majority of the earnings beat primarily originated from lower usage of high cost clinker (procured from Northern Cement) in the production mix that reduced the blended cost of production for the company.
Hold
12-Month Target price (SAR)
48.0
Upside/(Downside)
21%
Stock Details Last Close Price Market Capitalization
SAR
40.1
SAR mln
4,010
Shares Outstanding
mln
100
52-Week High
SAR
82.5
52-Week Low
SAR
38.0
%
-26.2
mln
15.1
Price Change (3M)
Cautious sector outlook; a double whammy of demand slowdown and new capacity
6-Mth ADTV
We expect sector wide growth slowdown in cement volume in 2016 (+2% yoy in 2016 vs. 2004EPS 2016E SAR 14 volume CAGR of 8%). In our view, while potential demand slowdown in 2016 is certainly an 3010.SE issue, capacity addition seems to be the bigger threat to the sector. While clinker capacity stood Reuters / Bloomberg Source: Tadawul, *as of 19 Jan 2016 at 57.8m tons in 1H15, between 2H15 and 2017 end, 11.7mn tons (20% addition to 1H15 capacity) of new clinker capacity is set to come online. Consequently, we expect clinker production to ramp up as fight for market share intensifies among the players in a weak demand Key Shareholders (%) environment. In-all, as clinker production is set to exceed demand (excluding exports which we Public haven’t modeled yet), we expect stock buildup of 4.7m tons in 2016E vs Dec 2015 clinker Abdulaziz A.S. Al Suleiman inventory of 23 mn tons. Historically, cement prices have shown a very tight inverse correlation Abdullah A.S. Al Rajhi with clinker stock and if history is any indicator, we expect cement price to fall around 7% in 2016. Public Pension Agency
Expect 32% y/y earnings decline in 2016; Maintain Hold with SAR48/share TP
4.12 ARCCO AB
81 8 6 5
Source: Tadawul
Post publication of 4Q15 preliminary results, keeping in line with recent trends and our outlook for the sector in 2016 and 2017 (volume decline, pricing pressure and negative impact from Price Multiples 2016E electricity and fuel cost increase), we have cut Arabian’s 2016E-17E earnings by 21%. On our P / E revised estimate, the stock trades at 2016E P/E of 9.7x. At current price, while we admit valuation 9.7x looks attractive and we see long term value in the stock, we expect 32% y/y earnings decline in EV / EBITDA 6.7x 2016 (company guided to impact from increase in electricity, fuel and transportation costs on Dividend Yield 8.5% earnings at SAR40m implying 10% of 2016 net profit) due to product pricing pressure as well as Source: SFC utility repricing. In that backdrop, we do not expect strong stock price performance in the near to mid-term which leads to our cautious view. While we acknowledge 2016E dividend yield is an 1-Year Share Performance 120 attractive 8.5% (DPS SAR3.40, -15% y/y), dividend yield alone is unlikely to supersede earnings 110 decline and positively impact the stock in a muted environment. We maintain Hold rating on 100 Arabian Cement with a revised target price of SAR48/share (from SAR63/share).
2017E 10.5x 7.2x 8.5%
90 80
SAR mn
4Q15A 4Q15E
% dev
Cons
% dev
3Q15
% q/q
4Q14
% y/y
2016E
2017E
70 60
KSA Vol. (‘000tons)
1,414
Revenues
415
397
5%
397
5%
328
27%
430
-4%
1,409
1,383
Gross Profit
192
151
27%
Na
Na
109
77%
171
12%
491
450
EBIT
174
136
28%
136
28%
97
80%
153
14%
429
388
Net Profit
157
128
22%
119
32%
89
75%
145
8%
412
381
1,352
5%
Na
Na
1,025
38%
1,428
-1%
5,009
5,123
50 40 J
F
M
A
M
J
Arabian Cement
J
A
S
O
N
D
J
TASI Cement
Source: Bloomberg
Dipanjan Ray, CFA [email protected] +966 11 282 6861
Source: Company, Saudi Fransi Capital, Bloomberg
AbdulAziz Jawdat [email protected] +966 11 282 6856
PUBLIC
Page 1
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Arabian Cement Summary Financials
SAR mn, ending Dec 31-st
CAGR
Income Statement
2014
2015
2016E
2017E
2018E
2013-15
Revenues
1,720
1,643
1,409
1,383
1,383
11%
(8%)
Gross profit
731
725
491
450
414
16%
(21%)
EBITDA
850
835
601
560
524
11%
(18%)
EBIT
675
660
429
388
352
15%
(23%)
Net Income**
646
603
412
381
354
10%
(20%)
Shares outstanding (mln)
100
100
100
100
100
EPS (SAR)
6.46
6.03
4.12
3.81
3.54
DPS (SAR)
5.00
4.00*
3.40
3.40
3.40
2014
2015E
2016E
2017E
2018E
Cash and Equivalents
564
393
393
412
Receivables
216
250
232
Inventories
382
455
367
85
117
Current assets
1,247
PP&E
2015-17
*SFC estimate, ** restated from one-offs
SAR mn, ending Dec 31-st
2014
2015
2016E
2017E
Sales
28%
(4%)
(14%)
(2%)
0%
394
EBITDA
26%
(2%)
(28%)
(7%)
(6%)
227
227
EBIT
36%
(2%)
(35%)
(10%)
(9%)
360
360
Net Income
30%
(7%)
(32%)
(7%)
(7%)
112
110
110
DPS
67%
(20%)
(15%)
0%
0%
1,215
1,103
1,109
1,092
2,453
2,393
2,311
2,229
2,147
360
278
283
288
293
36
28
28
28
28
4,096
3,915
3,725
3,655
3,560
Accounts payable
0
0
0
0
0
Accrued expenses
0
1
1
1
1
P/E
Current portion of LT Debt
319
184
0
0
0
Other current liabilities
312
381
291
286
286
Current liabilities
632
566
291
287
287
Balance Sheet
Other current assets
CAGR 2013-15
10%
Grow th (y/y)
2015-17
(4%) Margins
Investments Other non-current assets Total assets
(1%)
(3%)
2014
2015E
2016E
2017E
2018E
Gross Margin
42%
44%
35%
33%
30%
EBIT Margin
39%
40%
30%
28%
25%
EBITDA Margin
49%
51%
43%
41%
38%
Net Margin
38%
37%
29%
28%
26%
2014
2015E
2016E
2017E
2018E
11.0
11.3
9.7
10.5
11.3
EV/EBITDA
8.4
8.1
6.7
7.2
7.7
P/Sales
4.1
4.2
2.8
2.9
2.9
P/BV
2.2
2.3
1.3
1.3
1.3
7.0%
5.9%
8.5%
8.5%
8.5%
Valuation Multiples
0%
(29%)
Dividend Yield Long-term Debt
187
239
239
119
0
Other non-current liabilities
48
54
54
54
54
Total non-current liabilities
235
293
293
173
54
Total equity
Total liabilities & equity
3,229
4,096
3,056
3,915
3,141
3,725
3,195
3,655
3,220
3,560
(27%)
3%
(1%)
(23%)
2%
(3%)
Ratios
2014
2015E
2016E
2017E
2018E
Net Debt/Equity
(2%)
1%
(5%)
(9%)
(12%)
Net Debt/EBITDA
(0.1)
0.0
(0.3)
(0.5)
(0.8)
RoE
20%
20%
13%
12%
11%
RoA
16%
16%
11%
10%
10%
102%
75%
87%
85%
84%
Payout Ratio
77%
66%
83%
89%
96%
Working Capital/Sales
22%
27%
30%
30%
30%
Operating FCF/EBITDA SAR mn, ending Dec 31-st Cash Flow Statement CFO+WC change Capex
2014
2015E
2016E
2017E
2018E
896
760
614
568
532
(32)
(112)
(90)
(90)
(90)
Operating FCF
864
648
524
478
442
FCF after investing
894
641
524
478
442
Dividends
(313)
(725)
(340)
(340)
(340)
Debt Repayment/New debt
(309)
(84)
(184)
(119)
(119)
(2)
(2)
Others Net Cash flow
271
(170)
0
0
0
(0)
19
(17)
2018E
Sources: Company, Saudi Fransi Capital
PUBLIC
Page 2
Saudi Fransi Capital is authorized and regulated by the Capital Market Authority (CMA)
Research and Advisory Department Rating Framework
BUY Shares of the companies under coverage in this report are expected to outperform relative to the sector or the broader market.
HOLD Shares of the companies under coverage in this report are expected to perform in line with the sector or the broader market.
SELL Shares of the companies 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
Research and Advisory Department 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
