Depressed Prices + Rising Rates = Cash Crunch
Najran Cement 3Q15 Earnings Review October 19, 2015
Rating Summary
A disappointing quarter; Downgrade to Hold
Recommendation
Hold
12-Month Target price (SAR)
19.0
Upside/(Downside)
A big miss vs. SFC and consensus estimates Najran Cement reported 3Q15 net profit of SAR32m (-22% y/y, -59% q/q – not comparable due to seasonality) which missed SFC estimate by 36% and consensus by 34%. Operational performance was also much weaker than expected with gross profit of SAR91m (+14% y/y, -40% q/q) and EBIT of SAR45m (-10% y/y, -50% q/q) that missed our estimate by 25% and 26%, respectively. While cement volume of 872k tons missed our estimate by 7%, the disproportionate miss at the operational profit and net profit levels suggests pricing pressure was more severe than expected. To understand the impact of sector wide pricing pressure, we highlight while Najran’s 9M15 KSA cement volume is up 40% y/y, 9M15 net profit is up only 13% y/y.
1%
Stock Details Last Close Price Market Capitalization
SAR
18.8
SAR mln
3,196
Shares Outstanding
mln
170
52-Week High
SAR
35.2
52-Week Low
SAR
18.3
Price Change (YTD)
%
-29.0
mln
13.5
EPS 2015E SAR 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 Reuters / Bloomberg 3002.SE slowdown and pressure on companies to lower clinker inventory), we have cut Najran Cement’s Source: Tadawul 2016E-17E earnings by 31% and consequently cut target price to SAR19/share (from SAR33). On our revised estimate, the stock trades at 2016E P/E of 12.4x (KSA peers 12.3x, EM 12.9x, Key Shareholders (%) GCC/MEA 11.6x). Furthermore, Najran Cement suffers from locational disadvantage (Southern Public tip of KSA bordering Yemen) meaning the company may have to undercut prices (or continue to Khaled Mohammed Al Barrak offer transportation incentives) more than competitors (located in strategic demand centres) to Abdullah A.S Al Rajhi move volumes. In all, keeping in view near to mid-term challenges, we believe the stock could Source: Tadawul come under further pressure as earnings weakness continues. Post publication of 3Q15 preliminary result, we downgrade Najran Cement to Hold.
1.60
6-Mth ADTV
Pricing weakness to continue; Downgrade to Hold
NAJRAN AB
75 13 12
Price Multiples
SAR mn
3Q15A
3Q15E
% dev
Cons
% dev
2Q15
% q/q
3Q14
% y/y
2015E
2016E
P/E EV / EBITDA
Volume (‘000tons)
872
935
-7%
Na
Na
1,208
-28%
716
22%
4,421
4,992
Dividend Yield
2015E
2016E
11.8x
12.4x
8.7x
8.9x
5.3%
5.9%
Source: SFC Revenues
Na
228
Na
223
Na
294
Na
156
Na
1,071
1,148
Gross Profit
91
121
-25%
Na
Na
151
-40%
80
14%
550
544
EBIT
45
61
-26%
Na
Na
91
-50%
50
-10%
315
304
Net Income
32
50
-36%
49
-34%
78
-59%
41
-22%
271
259
1-Year Share Performance 110 100
90 80 70
Source: Company, Saudi Fransi Capital, Bloomberg
60 50 40 S
O
N
D
J
F
Najran 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
Rating Summary
A disappointing quarter; Downgrade to Hold
Recommendation
Hold
12-Month Target price (SAR)
19.0
Upside/(Downside)
A big miss vs. SFC and consensus estimates Najran Cement reported 3Q15 net profit of SAR32m (-22% y/y, -59% q/q – not comparable due to seasonality) which missed SFC estimate by 36% and consensus by 34%. Operational performance was also much weaker than expected with gross profit of SAR91m (+14% y/y, -40% q/q) and EBIT of SAR45m (-10% y/y, -50% q/q) that missed our estimate by 25% and 26%, respectively. While cement volume of 872k tons missed our estimate by 7%, the disproportionate miss at the operational profit and net profit levels suggests pricing pressure was more severe than expected. To understand the impact of sector wide pricing pressure, we highlight while Najran’s 9M15 KSA cement volume is up 40% y/y, 9M15 net profit is up only 13% y/y.
1%
Stock Details Last Close Price Market Capitalization
SAR
18.8
SAR mln
3,196
Shares Outstanding
mln
170
52-Week High
SAR
35.2
52-Week Low
SAR
18.3
Price Change (YTD)
%
-29.0
mln
13.5
EPS 2015E SAR 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 Reuters / Bloomberg 3002.SE slowdown and pressure on companies to lower clinker inventory), we have cut Najran Cement’s Source: Tadawul 2016E-17E earnings by 31% and consequently cut target price to SAR19/share (from SAR33). On our revised estimate, the stock trades at 2016E P/E of 12.4x (KSA peers 12.3x, EM 12.9x, Key Shareholders (%) GCC/MEA 11.6x). Furthermore, Najran Cement suffers from locational disadvantage (Southern Public tip of KSA bordering Yemen) meaning the company may have to undercut prices (or continue to Khaled Mohammed Al Barrak offer transportation incentives) more than competitors (located in strategic demand centres) to Abdullah A.S Al Rajhi move volumes. In all, keeping in view near to mid-term challenges, we believe the stock could Source: Tadawul come under further pressure as earnings weakness continues. Post publication of 3Q15 preliminary result, we downgrade Najran Cement to Hold.
1.60
6-Mth ADTV
Pricing weakness to continue; Downgrade to Hold
NAJRAN AB
75 13 12
Price Multiples
SAR mn
3Q15A
3Q15E
% dev
Cons
% dev
2Q15
% q/q
3Q14
% y/y
2015E
2016E
P/E EV / EBITDA
Volume (‘000tons)
872
935
-7%
Na
Na
1,208
-28%
716
22%
4,421
4,992
Dividend Yield
2015E
2016E
11.8x
12.4x
8.7x
8.9x
5.3%
5.9%
Source: SFC Revenues
Na
228
Na
223
Na
294
Na
156
Na
1,071
1,148
Gross Profit
91
121
-25%
Na
Na
151
-40%
80
14%
550
544
EBIT
45
61
-26%
Na
Na
91
-50%
50
-10%
315
304
Net Income
32
50
-36%
49
-34%
78
-59%
41
-22%
271
259
1-Year Share Performance 110 100
90 80 70
Source: Company, Saudi Fransi Capital, Bloomberg
60 50 40 S
O
N
D
J
F
Najran 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
