KSA Cement Sector AWS
Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview
Expect a broadly flat second quarter
Rating Summary Company
Expect a broadly flat 2Q15; Jouf/City/Najran could stand out in terms of yoy earnings growth: KSA cement companies should start reporting 2Q15 earnings in the coming days. For the 13 companies under our coverage, we expect a broadly flat 2Q15 (SAR1.7bn, +3% qoq, +2% yoy) in terms of earnings performance despite higher volumes (15.7mn tons, +2% qoq, +9% yoy) primarily due to softer pricing. However, at the company level, earnings are likely to be a mixed bag with Jouf (+90% yoy), City (+25%) and Najran (+11%) likely to stand out in terms of yoy earnings growth primarily due to strong volumes. At 13.4x 2015E P/E, KSA cement sector is trading broadly in line with GCC/MEA (13.1x) but at a discount to EM peers (14.7x) coupled with an attractive sector average (ex. Jouf) dividend yield of c.5.9%. In this note, we maintain our Buy rating on Hail/Najran/Yanbu/Arabian/Tabuk/ Saudi/Yamama/Qassim and maintain Hold rating on Southern/Northern/City/Jouf/Eastern (TP revised to SAR 50). In the context of 2Q15E earnings, at the operating level, we do not expect material surprises or exaggerated stock reaction. However, if our Buy rated stocks pull back for extraneous factors, we would use the correction as buying opportunity. Volume recovery continues with c.9% yoy growth albeit with mixed trends across players: We expect 2Q15 to have been characterized by strong yoy deliveries as volume continues to recover from a lower base witnessed in 2Q14. At the sector level, for the 13 listed companies, we expect a combined volume of 15.7mn tons (+9% yoy, +2% qoq). However, volume trend seems to be mixed. While Northern (+75% yoy), Najran (+31%), Jouf (+28%) and City (+24%) could stand out, peers such as Saudi (-4% yoy), Arabian (5%) and Tabuk (-7%) could witness a yoy decline in volumes.
TP
Upside
Rating
Price
Hail
Buy
21.6
30.0
39%
Najran
Buy
26.1
33.0
26%
Yanbu
Buy
63.5
80.0
26%
Arabian
Buy
75.8
95.0
25%
Tabuk
Buy
25.0
31.0
24%
Yamama
Buy
46.0
57.0
24%
Saudi
Buy
96.5
113.0
17%
Qassim
Buy
95.3
110.0
15%
Southern
Hold
98.3
107.0
9%
Eastern
Hold
46.1
50.0
8%
Northern
Hold
22.1
23.5
6%
City
Hold
23.7
23.0
-3%
Jouf Hold 16.1 Prices as of 30 June 2015
15.0
-7%
Valuation Summary 2015E Company
P/E (x)
EV/ EBITDA
Dividend yield (%)
Hail
12.3
9.2
5.1
Tabuk
14.8
10.1
6.0
Arabian
10.9
8.1
6.6
Yamama*
10.8
8.1
6.5
Saudi
13.6
11.3
6.7
Najran
12.3
10.4
3.8
Qassim*
13.1
10.8
6.6 We expect a broadly flat earnings performance in 2Q15 with c.2% yoy average Yanbu 12.1 10.9 6.3 earnings growth: Despite strong yoy cement volumes, we expect a broadly flat quarter in Northern 16.7 11.5 8.1 terms of earnings performance primarily due to pricing pressure as we expect smaller City* 18.5 13.6 4.2 players to have continued to undercut prices in 2Q15 to increase volumes. At the sector Eastern 12.5 8.0 5.4 level, for the 13 companies, we expect a combined 2Q15 net profit of c.SAR1.7bn (c.+2% Jouf 29.7 20.1 0.0 yoy, c.+3% qoq). However, at the company level, earnings performance is likely to be a Southern 13.7 11.8 5.6 mixed bag with Jouf (+90% yoy), City (+25%) and Najran (+11%) likely to stand out Sources: Saudi Fransi Capital analysis, * Qassim, City, primarily due to strong volumes. Yamama P/Es are ex-cash
Cement index movement vs. TASI
May-15
Feb-15
Mar-15
Oct-14
Dec-14
Jul-14
Sep-14
Apr-14
May-14
Feb-14
Dec-13
Nov-13
Jul-13
Sep-13
Jun-13
Apr-13
Jan-13
170 160 150 140 130 120 110 100 90 80 70
Feb-13
Cement stocks underperformed Tadawul in 2Q15 (Cement index c.1% vs. Tadawul c.4%) albeit with differences across companies: After an underperformance in 1Q15, cement stocks again underperformed the broader Tadawul index in 2Q15. While Tadawul increased c.4% in 2Q15, cement index increased only c.1%. In our coverage universe, stock performance was mixed; while Tabuk (+9%), Saudi (+8%), City (+7%) and Jouf (+6%) were relative outperformers, Yamama (+4%) was in line and Eastern (c.-12%), Yanbu (c5%) and Hail (c.-4%) underperformed.
KSA cement sector trading broadly in line with GCC/MEA but at a discount to EM peers; sector average dividend yield (ex. Jouf) is an attractive c.5.9%: After a roughly Tadawul Cement Tadawul flat stock performance (up c.1%) in 2Q15, KSA cement sector is trading broadly in line with GCC/MEA but at a discount to EM peers (KSA Cement 2015E P/E 13.4x, GCC/MEA 13.1x Source: Bloomberg and EM peers 14.7x) with a broadly similar earnings growth profile (KSA Cement 2014-16E Sector Coverage CAGR c.7%, GCC/MEA c.8% and EM peers c.9%). Dividend yield is attractive as well with Dipanjan Ray 2015E sector average (ex. Jouf) dividend yield at c.5.9%. According to our estimates, while [email protected] Northern is set to offer the highest yield (c.8.1%) followed by Saudi (c.6.7%), +966-11-2826861 Qassim/Arabian (c.6.6%), Yamama (c.6.5%), Jouf is unlikely to pay any dividend. We use DCF to value KSA cement companies and cross check with peer multiples AbdulAziz Jawdat (P/E/EV/EBITDA). Key risks to the sector include (1) slowdown in residential/infrastructure [email protected] spending leading to lower realized prices, (2) shortage of labour, (3) adverse change in +966-11-2826856 price caps, (4) lack of fuel and increase in fuel prices. CONFIDENTIAL
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Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview
Expect a broadly flat 2Q15 Jouf, City and Najran could stand out in terms of strong yoy earnings growth Fig. 1: 2Q15E KSA cement sector earnings growth, volume growth, and stock performance 2Q15 KSA cement sector earnings growth and volume growth (% QoQ, % YoY) 10%
KSA cement sector performance vs. Tadawul in 2Q15 10%
8%
7%
6%
5%
5%
5%
9%
9%
9%
4%
3%
4%
3% 1%
8%
0%
7%
-5%
1%
-4% -5%
6% -10%
0% QoQ sector volume QoQ sector YoY sector volume YoY sector growth earnings growth growth earnings growth
Sources: Saudi Fransi Capital analysis, Yamama Cement
Tadawul
Hail
Yanbu
Najran
Southern
Northern
1%
Yamama
Qassim
Arabian*
City
Jouf
Tabuk
2%
2%
2%
Eastern
-12%
-15%
3%
3%
Saudi
4%
Tadawul Cement
5%
Sources: Bloomberg
Fig. 2: 2Q15E KSA cement sector earnings growth and volume growth (% QoQ, % YoY) by company
Earnings - % QoQ
Earnings - % YoY
Volumes - % QoQ
Sources: Company data, Saudi Fransi Capital analysis
Jouf
Najran
Hail
Tabuk
Northern
City
Eastern
Jouf
Sector Avg.
Hail
Najran
Northern
City
Tabuk
Arabian*
Qassim
Eastern*
Yanbu
Yamama
Saudi
Southern
-40%
Arabian*
-20%
2%
Qassim
3%2%
0%
Yamama
20%
Yanbu
40%
Southern
60%
Saudi
80%
2Q15 volume growth by company (% QoQ, % YoY) 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20%
9%
Sector Avg.
2Q15 earnings growth by company (% QoQ, % YoY) 100%
Volumes - % YoY
Sources: Saudi Fransi Capital analysis, Yamama Cement
Fig. 3: Quarterly earnings and volumes (YoY % trend) Quarterly earnings trend (yoy % change)
Quarterly volume trend (yoy % change) 16%
20% 15%
12% 10%
10% 5%
4%
3%
4%
9%
2%
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
-5% -6% -8%
-9%
2Q15E
4%
Sources: Company data, Saudi Fransi Capital analysis
1Q15
2Q15E
3%
2% 0% -2% -4%
-15%
9%
6% 4%
3Q13
9%
8%
0%
-10%
15%
14%
14%
2Q13
3Q13
4Q13
1Q14 -1%
2Q14 0%
3Q14
4Q14
-3%
Sources: Saudi Fransi Capital analysis, Yamama Cement
CONFIDENTIAL
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Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview Fig. 4: KSA cement sector’s quarterly volume and earnings evolution Quarterly volume evolution (in ‘000 tons)
Quarterly earnings evolution (in SARmn)
18,000
2,000
16,000
1,800
14,000
1,600 1,400
12,000
1,200
10,000
1,000
8,000
800
6,000
Sources: Saudi Fransi Capital analysis, Yamama Cement Saudi Cement
1Q15
2Q15E
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
1Q11
1Q15
2Q15E
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
0
2Q12
200
0
1Q12
400
2,000
2Q11
600
4,000
Sources: Company data, Saudi Fransi Capital analysis
2Q15E
1Q15
% QoQ
2Q14
% YoY
2,040 511
2,185 551
-7% -7%
2,123 538
-4% -5%
Gross Profit (SAR mn)
311
339
-8%
323
-4%
EBITDA (SAR mn)
335
364
-8%
347
-3%
EBITDA Margin (%)
66%
66%
EBIT (SAR mn)
282
310
-9%
296
-5%
Net Income (SAR mn)
275
303
-9%
288
-5%
2Q15E
1Q15
% QoQ
2Q14
% YoY
2,292 552
2,318 559
-1% -1%
2,148 517
7% 7%
305
291
5%
305
0%
7%
337
-1%
Volume (‘000tons) Revenue (SAR mn)
Southern Cement Volume (‘000tons) Revenue (SAR mn) Gross Profit (SAR mn)
64%
EBITDA (SAR mn)
335
313
EBITDA Margin (%)
61%
56%
EBIT (SAR mn)
293
271
8%
296
-1%
Net Income (SAR mn)
287
266
8%
294
-2%
2Q15E
1Q15
% QoQ
2Q14
% YoY
1,980 453
1,905 437
4% 4%
1,781 446
11% 2%
Gross Profit (SAR mn)
242
224
8%
238
2%
EBITDA (SAR mn)
286
266
8%
283
1%
EBITDA Margin (%)
63%
61%
EBIT (SAR mn)
232
212
9%
229
1%
Net Income (SAR mn)
227
207
9%
221
3%
2Q15E
1Q15
% QoQ
2Q14
% YoY
1,203 295
1,144 283
5% 4%
1,072 270
12% 9%
Gross Profit (SAR mn)
185
177
5%
171
8%
EBITDA (SAR mn)
196
188
5%
186
6%
EBITDA Margin (%)
67%
66%
EBIT (SAR mn)
175
167
5%
163
7%
Net Income (SAR mn)
170
163
5%
161
6%
Yanbu Cement Volume (‘000tons) Revenue (SAR mn)
Qassim Cement Volume (‘000tons) Revenue (SAR mn)
65%
63%
69%
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Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview Yamama Cement
2Q15E
1Q15
% QoQ
2Q14
% YoY
Volume (‘000tons)
1,558 351
1,494 339
4% 3%
1,501 366
4% -4%
Gross Profit (SAR mn)
196
182
8%
199
-2%
EBITDA (SAR mn)
227
215
6%
227
0%
EBITDA Margin (%)
65%
63%
EBIT (SAR mn)
181
168
8%
183
-1%
Net Income (SAR mn)
188
175
7%
207
-9%
Revenue (SAR mn)
Eastern Cement
62%
2Q15E
1Q15
% QoQ
2Q14
% YoY
Volume (‘000tons) Revenue (SAR mn)
846 250
854 255
-1% -2%
813 218
4% 15%
Gross Profit (SAR mn)
108
108
-1%
94
14%
EBITDA (SAR mn)
125
123
1%
110
13%
EBITDA Margin (%)
50%
48%
EBIT (SAR mn)
92
90
2%
81
14%
Restated Net Income (SAR mn)
88
85
3%
82
7%
Arabian Cement
51%
2Q15E
1Q15
% QoQ
2Q14
% YoY
1,480 444
1,520 453
-3% -2%
1,553 481
-5% -8%
Gross Profit (SAR mn)
211
234
-10%
228
-7%
EBITDA (SAR mn)
244
261
-6%
258
-5%
EBITDA Margin (%)
55%
58%
EBIT (SAR mn)
198
215
-8%
213
-7%
Net Income (SAR mn)
191
195
-2%
200
-4%
2Q15E
1Q15
% QoQ
2Q14
% YoY
696 149
671 145
4% 2%
562 127
24% 17%
Gross Profit (SAR mn)
86
76
13%
71
21%
EBITDA (SAR mn)
95
85
11%
77
24%
64%
59%
8%
60%
EBIT (SAR mn)
80
71
13%
64
24%
Net Income (SAR mn)
76
68
13%
61
25%
2Q15E
1Q15
% QoQ
2Q14
% YoY
375 80
392 84
-4% -5%
402 91
-7% -13%
Gross Profit (SAR mn)
36
38
-6%
49
-27%
EBITDA (SAR mn)
47
49
-4%
60
-21%
59%
58%
EBIT (SAR mn)
31
33
-7%
44
-29%
Net Income (SAR mn)
31
33
-6%
43
-29%
2Q15E
1Q15
% QoQ
2Q14
% YoY
1,001 289
805 253
24% 14%
572 222
75% 30%
Gross Profit (SAR mn)
109
101
9%
81
35%
EBITDA (SAR mn)
100
80
25%
97
4%
EBITDA Margin (%)
35%
32%
EBIT (SAR mn)
74
60
24%
60
24%
Net Income (SAR mn)
65
51
28%
62
4%
KSA Volume (‘000tons) Revenue (SAR mn)
City Cement Volume (‘000tons) Revenue (SAR mn)
EBITDA Margin (%)
Tabuk Cement Volume (‘000tons) Revenue (SAR mn)
EBITDA Margin (%)
Northern Cement KSA Volume (‘000tons) Revenue (SAR mn)
54%
66%
44%
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Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview Hail Cement
2Q15E
1Q15
% QoQ
2Q14
% YoY
495 103
406 87
22% 18%
455 101
9% 2%
Gross Profit (SAR mn)
44
49
-10%
55
-19%
EBITDA (SAR mn)
52
54
-3%
64
-18%
51%
62%
EBIT (SAR mn)
36
39
-6%
48
-24%
Net Income (SAR mn)
35
38
-8%
46
-24%
2Q15E
1Q15
% QoQ
2Q14
% YoY
1,256 301
1,245 304
1% -1%
959 218
31% 39%
Gross Profit (SAR mn)
144
160
-10%
105
37%
EBITDA (SAR mn)
136
136
0%
124
9%
EBITDA Margin (%)
45%
45%
104
105
-1%
93
11%
93
92
1%
84
11%
2Q15E
1Q15
% QoQ
2Q14
% YoY
473 95
448 87
5% 8%
368 73
28% 30%
Gross Profit (SAR mn)
42
37
15%
26
62%
EBITDA (SAR mn)
47
42
12%
39
21%
50%
48%
3%
54%
EBIT (SAR mn)
33
28
17%
20
71%
Net Income (SAR mn)
30
26
17%
16
90%
Volume (‘000tons) Revenue (SAR mn)
EBITDA Margin (%)
Najran Cement Volume (‘000tons) Revenue (SAR mn)
EBIT (SAR mn) Net Income (SAR mn)
Jouf Cement Volume (‘000tons) Revenue (SAR mn)
EBITDA Margin (%)
63%
57%
Source: Company, Saudi Fransi Capital analysis
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Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview
Peer Comparison Fig. 5: KSA cement sector peer comparison P/E
EPS CAGR
EV/EBITDA
EV/ (EBITDA-tax)
Dividend Yield
EBITDA Margin
2015E
2016E
2015E
2016E
2015E
2016E
2015E
2016E
8.3
8.3
6.6%
6.6%
51%
51%
21%
20%
11.2
10.6
6.3%
6.7%
65%
65%
25%
25%
11.8
11.1
8.1%
8.1%
39%
40%
15%
16%
7.6
8.3
7.8
6.5%
6.5%
64%
64%
18%
18%
9.2
9.0
9.4
9.2
5.1%
6.5%
60%
61%
17%
17%
3%
10.8
10.8
11.1
11.1
6.6%
6.6%
68%
68%
29%
29%
12.7
8%
11.8
10.8
12.1
11.1
5.6%
6.1%
60%
62%
31%
31%
14.8
14.0
5%
10.1
9.3
10.4
9.6
6.0%
6.0%
63%
64%
13%
13%
Najran (Buy)
12.3
11.3
25%
10.4
9.8
10.7
10.1
3.8%
4.8%
53%
54%
16%
16%
Saudi (Buy)
13.6
13.1
1%
11.3
11.0
11.6
11.3
6.7%
6.7%
65%
65%
31%
31%
Eastern (Hold)
12.5
11.4
8%
8.0
7.5
8.2
7.6
5.4%
6.5%
47%
47%
12%
13%
City (Hold)
18.5
18.3
0%
13.6
13.4
13.9
13.8
4.2%
4.2%
66%
66%
11%
11%
Jouf (Hold)
29.7
21.9
31%
20.1
16.8
20.6
17.2
0.0%
0.0%
48%
51%
5%
6%
KSA Avg.
13.4
12.7
7.0%
10.3
9.9
10.6
10.1
5.9%
6.3%
58%
58%
19%
19%
2015E
2016E
2014-16E
2015E
2016E
Arabian (Buy)
10.9
10.8
3%
8.1
8.1
Yanbu (Buy)
12.1
11.4
5%
10.9
10.4
Northern (Hold)
16.7
15.0
18%
11.5
10.9
Yamama (Buy)
10.8
9.9
7%
8.1
Hail (Buy)
12.3
11.7
12%
Qassim (Buy)
13.1
13.1
Southern (Hold)
13.7
Tabuk (Buy)
RoE
Sources: Saudi Fransi Capital analysis
Fig. 6: KSA vs. GCC/MEA and EM peer comparison P/E
EPS CAGR
EV/ (EBITDA-tax)
Dividend Yield
EBITDA Margin
2015E
2016E
2015E
2016E
2015E
2016E
2015E
7%
10.3
9.9
10.6
10.1
5.9%
6.3%
58%
58%
19%
19%
5%
9.2
8.5
10.1
9.3
4.5%
4.1%
33%
34%
12%
12%
15%
9.3
7.7
9.8
8.1
5.3%
5.7%
56%
61%
17%
17%
15%
5.3
4.1
6.3
4.9
8.2%
9.9%
32%
26%
15%
13%
9.9
-3%
6.8
6.5
7.9
7.6
8.4%
8.5%
28%
27%
21%
22%
15.6
15.0
5%
9.1
8.6
11.8
11.0
5.2%
5.6%
36%
37%
20%
19%
India
21.2
15.8
26%
11.1
8.5
14.9
11.4
1.9%
2.2%
18%
19%
12%
15%
China
12.8
11.5
8%
8.1
7.2
9.5
8.5
4.2%
4.9%
22%
22%
10%
10%
Asia ex. China
15.9
14.3
5%
10.4
9.5
12.4
11.4
4.2%
4.2%
22%
23%
13%
14%
GCC/MEA Avg.
13.1
11.9
7%
8.6
8.0
10.3
10.1
6.6%
6.8%
35%
33%
17%
18%
Em er Mkt Avg.
14.7
13.2
9%
9.1
8.4
11.1
10.3
4.9%
5.1%
27%
27%
14%
14%
2015E
2016E
KSA
13.4
12.7
Oman
11.8
11.0
Qatar
12.7
11.2
Egypt
12.4
9.9
Turkey
10.5
Other MEA
2014-16E
EV/EBITDA
2016E
RoE 2015E
2016E
Sources: Saudi Fransi Capital analysis, Bloomberg
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Recommendation Framework
Cement | Equity Research | 01 July 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.
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Research & Advisory Department
Cement | Equity Research | 01 July 2015
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)
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Cement | Equity Research | 01 July 2015
Disclaimer 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 c ompany 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 stat ements 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)
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KSA Cement Sector - 2Q15 Earnings Preview
Expect a broadly flat second quarter
Rating Summary Company
Expect a broadly flat 2Q15; Jouf/City/Najran could stand out in terms of yoy earnings growth: KSA cement companies should start reporting 2Q15 earnings in the coming days. For the 13 companies under our coverage, we expect a broadly flat 2Q15 (SAR1.7bn, +3% qoq, +2% yoy) in terms of earnings performance despite higher volumes (15.7mn tons, +2% qoq, +9% yoy) primarily due to softer pricing. However, at the company level, earnings are likely to be a mixed bag with Jouf (+90% yoy), City (+25%) and Najran (+11%) likely to stand out in terms of yoy earnings growth primarily due to strong volumes. At 13.4x 2015E P/E, KSA cement sector is trading broadly in line with GCC/MEA (13.1x) but at a discount to EM peers (14.7x) coupled with an attractive sector average (ex. Jouf) dividend yield of c.5.9%. In this note, we maintain our Buy rating on Hail/Najran/Yanbu/Arabian/Tabuk/ Saudi/Yamama/Qassim and maintain Hold rating on Southern/Northern/City/Jouf/Eastern (TP revised to SAR 50). In the context of 2Q15E earnings, at the operating level, we do not expect material surprises or exaggerated stock reaction. However, if our Buy rated stocks pull back for extraneous factors, we would use the correction as buying opportunity. Volume recovery continues with c.9% yoy growth albeit with mixed trends across players: We expect 2Q15 to have been characterized by strong yoy deliveries as volume continues to recover from a lower base witnessed in 2Q14. At the sector level, for the 13 listed companies, we expect a combined volume of 15.7mn tons (+9% yoy, +2% qoq). However, volume trend seems to be mixed. While Northern (+75% yoy), Najran (+31%), Jouf (+28%) and City (+24%) could stand out, peers such as Saudi (-4% yoy), Arabian (5%) and Tabuk (-7%) could witness a yoy decline in volumes.
TP
Upside
Rating
Price
Hail
Buy
21.6
30.0
39%
Najran
Buy
26.1
33.0
26%
Yanbu
Buy
63.5
80.0
26%
Arabian
Buy
75.8
95.0
25%
Tabuk
Buy
25.0
31.0
24%
Yamama
Buy
46.0
57.0
24%
Saudi
Buy
96.5
113.0
17%
Qassim
Buy
95.3
110.0
15%
Southern
Hold
98.3
107.0
9%
Eastern
Hold
46.1
50.0
8%
Northern
Hold
22.1
23.5
6%
City
Hold
23.7
23.0
-3%
Jouf Hold 16.1 Prices as of 30 June 2015
15.0
-7%
Valuation Summary 2015E Company
P/E (x)
EV/ EBITDA
Dividend yield (%)
Hail
12.3
9.2
5.1
Tabuk
14.8
10.1
6.0
Arabian
10.9
8.1
6.6
Yamama*
10.8
8.1
6.5
Saudi
13.6
11.3
6.7
Najran
12.3
10.4
3.8
Qassim*
13.1
10.8
6.6 We expect a broadly flat earnings performance in 2Q15 with c.2% yoy average Yanbu 12.1 10.9 6.3 earnings growth: Despite strong yoy cement volumes, we expect a broadly flat quarter in Northern 16.7 11.5 8.1 terms of earnings performance primarily due to pricing pressure as we expect smaller City* 18.5 13.6 4.2 players to have continued to undercut prices in 2Q15 to increase volumes. At the sector Eastern 12.5 8.0 5.4 level, for the 13 companies, we expect a combined 2Q15 net profit of c.SAR1.7bn (c.+2% Jouf 29.7 20.1 0.0 yoy, c.+3% qoq). However, at the company level, earnings performance is likely to be a Southern 13.7 11.8 5.6 mixed bag with Jouf (+90% yoy), City (+25%) and Najran (+11%) likely to stand out Sources: Saudi Fransi Capital analysis, * Qassim, City, primarily due to strong volumes. Yamama P/Es are ex-cash
Cement index movement vs. TASI
May-15
Feb-15
Mar-15
Oct-14
Dec-14
Jul-14
Sep-14
Apr-14
May-14
Feb-14
Dec-13
Nov-13
Jul-13
Sep-13
Jun-13
Apr-13
Jan-13
170 160 150 140 130 120 110 100 90 80 70
Feb-13
Cement stocks underperformed Tadawul in 2Q15 (Cement index c.1% vs. Tadawul c.4%) albeit with differences across companies: After an underperformance in 1Q15, cement stocks again underperformed the broader Tadawul index in 2Q15. While Tadawul increased c.4% in 2Q15, cement index increased only c.1%. In our coverage universe, stock performance was mixed; while Tabuk (+9%), Saudi (+8%), City (+7%) and Jouf (+6%) were relative outperformers, Yamama (+4%) was in line and Eastern (c.-12%), Yanbu (c5%) and Hail (c.-4%) underperformed.
KSA cement sector trading broadly in line with GCC/MEA but at a discount to EM peers; sector average dividend yield (ex. Jouf) is an attractive c.5.9%: After a roughly Tadawul Cement Tadawul flat stock performance (up c.1%) in 2Q15, KSA cement sector is trading broadly in line with GCC/MEA but at a discount to EM peers (KSA Cement 2015E P/E 13.4x, GCC/MEA 13.1x Source: Bloomberg and EM peers 14.7x) with a broadly similar earnings growth profile (KSA Cement 2014-16E Sector Coverage CAGR c.7%, GCC/MEA c.8% and EM peers c.9%). Dividend yield is attractive as well with Dipanjan Ray 2015E sector average (ex. Jouf) dividend yield at c.5.9%. According to our estimates, while [email protected] Northern is set to offer the highest yield (c.8.1%) followed by Saudi (c.6.7%), +966-11-2826861 Qassim/Arabian (c.6.6%), Yamama (c.6.5%), Jouf is unlikely to pay any dividend. We use DCF to value KSA cement companies and cross check with peer multiples AbdulAziz Jawdat (P/E/EV/EBITDA). Key risks to the sector include (1) slowdown in residential/infrastructure [email protected] spending leading to lower realized prices, (2) shortage of labour, (3) adverse change in +966-11-2826856 price caps, (4) lack of fuel and increase in fuel prices. CONFIDENTIAL
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Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview
Expect a broadly flat 2Q15 Jouf, City and Najran could stand out in terms of strong yoy earnings growth Fig. 1: 2Q15E KSA cement sector earnings growth, volume growth, and stock performance 2Q15 KSA cement sector earnings growth and volume growth (% QoQ, % YoY) 10%
KSA cement sector performance vs. Tadawul in 2Q15 10%
8%
7%
6%
5%
5%
5%
9%
9%
9%
4%
3%
4%
3% 1%
8%
0%
7%
-5%
1%
-4% -5%
6% -10%
0% QoQ sector volume QoQ sector YoY sector volume YoY sector growth earnings growth growth earnings growth
Sources: Saudi Fransi Capital analysis, Yamama Cement
Tadawul
Hail
Yanbu
Najran
Southern
Northern
1%
Yamama
Qassim
Arabian*
City
Jouf
Tabuk
2%
2%
2%
Eastern
-12%
-15%
3%
3%
Saudi
4%
Tadawul Cement
5%
Sources: Bloomberg
Fig. 2: 2Q15E KSA cement sector earnings growth and volume growth (% QoQ, % YoY) by company
Earnings - % QoQ
Earnings - % YoY
Volumes - % QoQ
Sources: Company data, Saudi Fransi Capital analysis
Jouf
Najran
Hail
Tabuk
Northern
City
Eastern
Jouf
Sector Avg.
Hail
Najran
Northern
City
Tabuk
Arabian*
Qassim
Eastern*
Yanbu
Yamama
Saudi
Southern
-40%
Arabian*
-20%
2%
Qassim
3%2%
0%
Yamama
20%
Yanbu
40%
Southern
60%
Saudi
80%
2Q15 volume growth by company (% QoQ, % YoY) 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20%
9%
Sector Avg.
2Q15 earnings growth by company (% QoQ, % YoY) 100%
Volumes - % YoY
Sources: Saudi Fransi Capital analysis, Yamama Cement
Fig. 3: Quarterly earnings and volumes (YoY % trend) Quarterly earnings trend (yoy % change)
Quarterly volume trend (yoy % change) 16%
20% 15%
12% 10%
10% 5%
4%
3%
4%
9%
2%
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
-5% -6% -8%
-9%
2Q15E
4%
Sources: Company data, Saudi Fransi Capital analysis
1Q15
2Q15E
3%
2% 0% -2% -4%
-15%
9%
6% 4%
3Q13
9%
8%
0%
-10%
15%
14%
14%
2Q13
3Q13
4Q13
1Q14 -1%
2Q14 0%
3Q14
4Q14
-3%
Sources: Saudi Fransi Capital analysis, Yamama Cement
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Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview Fig. 4: KSA cement sector’s quarterly volume and earnings evolution Quarterly volume evolution (in ‘000 tons)
Quarterly earnings evolution (in SARmn)
18,000
2,000
16,000
1,800
14,000
1,600 1,400
12,000
1,200
10,000
1,000
8,000
800
6,000
Sources: Saudi Fransi Capital analysis, Yamama Cement Saudi Cement
1Q15
2Q15E
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
1Q11
1Q15
2Q15E
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
0
2Q12
200
0
1Q12
400
2,000
2Q11
600
4,000
Sources: Company data, Saudi Fransi Capital analysis
2Q15E
1Q15
% QoQ
2Q14
% YoY
2,040 511
2,185 551
-7% -7%
2,123 538
-4% -5%
Gross Profit (SAR mn)
311
339
-8%
323
-4%
EBITDA (SAR mn)
335
364
-8%
347
-3%
EBITDA Margin (%)
66%
66%
EBIT (SAR mn)
282
310
-9%
296
-5%
Net Income (SAR mn)
275
303
-9%
288
-5%
2Q15E
1Q15
% QoQ
2Q14
% YoY
2,292 552
2,318 559
-1% -1%
2,148 517
7% 7%
305
291
5%
305
0%
7%
337
-1%
Volume (‘000tons) Revenue (SAR mn)
Southern Cement Volume (‘000tons) Revenue (SAR mn) Gross Profit (SAR mn)
64%
EBITDA (SAR mn)
335
313
EBITDA Margin (%)
61%
56%
EBIT (SAR mn)
293
271
8%
296
-1%
Net Income (SAR mn)
287
266
8%
294
-2%
2Q15E
1Q15
% QoQ
2Q14
% YoY
1,980 453
1,905 437
4% 4%
1,781 446
11% 2%
Gross Profit (SAR mn)
242
224
8%
238
2%
EBITDA (SAR mn)
286
266
8%
283
1%
EBITDA Margin (%)
63%
61%
EBIT (SAR mn)
232
212
9%
229
1%
Net Income (SAR mn)
227
207
9%
221
3%
2Q15E
1Q15
% QoQ
2Q14
% YoY
1,203 295
1,144 283
5% 4%
1,072 270
12% 9%
Gross Profit (SAR mn)
185
177
5%
171
8%
EBITDA (SAR mn)
196
188
5%
186
6%
EBITDA Margin (%)
67%
66%
EBIT (SAR mn)
175
167
5%
163
7%
Net Income (SAR mn)
170
163
5%
161
6%
Yanbu Cement Volume (‘000tons) Revenue (SAR mn)
Qassim Cement Volume (‘000tons) Revenue (SAR mn)
65%
63%
69%
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Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview Yamama Cement
2Q15E
1Q15
% QoQ
2Q14
% YoY
Volume (‘000tons)
1,558 351
1,494 339
4% 3%
1,501 366
4% -4%
Gross Profit (SAR mn)
196
182
8%
199
-2%
EBITDA (SAR mn)
227
215
6%
227
0%
EBITDA Margin (%)
65%
63%
EBIT (SAR mn)
181
168
8%
183
-1%
Net Income (SAR mn)
188
175
7%
207
-9%
Revenue (SAR mn)
Eastern Cement
62%
2Q15E
1Q15
% QoQ
2Q14
% YoY
Volume (‘000tons) Revenue (SAR mn)
846 250
854 255
-1% -2%
813 218
4% 15%
Gross Profit (SAR mn)
108
108
-1%
94
14%
EBITDA (SAR mn)
125
123
1%
110
13%
EBITDA Margin (%)
50%
48%
EBIT (SAR mn)
92
90
2%
81
14%
Restated Net Income (SAR mn)
88
85
3%
82
7%
Arabian Cement
51%
2Q15E
1Q15
% QoQ
2Q14
% YoY
1,480 444
1,520 453
-3% -2%
1,553 481
-5% -8%
Gross Profit (SAR mn)
211
234
-10%
228
-7%
EBITDA (SAR mn)
244
261
-6%
258
-5%
EBITDA Margin (%)
55%
58%
EBIT (SAR mn)
198
215
-8%
213
-7%
Net Income (SAR mn)
191
195
-2%
200
-4%
2Q15E
1Q15
% QoQ
2Q14
% YoY
696 149
671 145
4% 2%
562 127
24% 17%
Gross Profit (SAR mn)
86
76
13%
71
21%
EBITDA (SAR mn)
95
85
11%
77
24%
64%
59%
8%
60%
EBIT (SAR mn)
80
71
13%
64
24%
Net Income (SAR mn)
76
68
13%
61
25%
2Q15E
1Q15
% QoQ
2Q14
% YoY
375 80
392 84
-4% -5%
402 91
-7% -13%
Gross Profit (SAR mn)
36
38
-6%
49
-27%
EBITDA (SAR mn)
47
49
-4%
60
-21%
59%
58%
EBIT (SAR mn)
31
33
-7%
44
-29%
Net Income (SAR mn)
31
33
-6%
43
-29%
2Q15E
1Q15
% QoQ
2Q14
% YoY
1,001 289
805 253
24% 14%
572 222
75% 30%
Gross Profit (SAR mn)
109
101
9%
81
35%
EBITDA (SAR mn)
100
80
25%
97
4%
EBITDA Margin (%)
35%
32%
EBIT (SAR mn)
74
60
24%
60
24%
Net Income (SAR mn)
65
51
28%
62
4%
KSA Volume (‘000tons) Revenue (SAR mn)
City Cement Volume (‘000tons) Revenue (SAR mn)
EBITDA Margin (%)
Tabuk Cement Volume (‘000tons) Revenue (SAR mn)
EBITDA Margin (%)
Northern Cement KSA Volume (‘000tons) Revenue (SAR mn)
54%
66%
44%
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Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview Hail Cement
2Q15E
1Q15
% QoQ
2Q14
% YoY
495 103
406 87
22% 18%
455 101
9% 2%
Gross Profit (SAR mn)
44
49
-10%
55
-19%
EBITDA (SAR mn)
52
54
-3%
64
-18%
51%
62%
EBIT (SAR mn)
36
39
-6%
48
-24%
Net Income (SAR mn)
35
38
-8%
46
-24%
2Q15E
1Q15
% QoQ
2Q14
% YoY
1,256 301
1,245 304
1% -1%
959 218
31% 39%
Gross Profit (SAR mn)
144
160
-10%
105
37%
EBITDA (SAR mn)
136
136
0%
124
9%
EBITDA Margin (%)
45%
45%
104
105
-1%
93
11%
93
92
1%
84
11%
2Q15E
1Q15
% QoQ
2Q14
% YoY
473 95
448 87
5% 8%
368 73
28% 30%
Gross Profit (SAR mn)
42
37
15%
26
62%
EBITDA (SAR mn)
47
42
12%
39
21%
50%
48%
3%
54%
EBIT (SAR mn)
33
28
17%
20
71%
Net Income (SAR mn)
30
26
17%
16
90%
Volume (‘000tons) Revenue (SAR mn)
EBITDA Margin (%)
Najran Cement Volume (‘000tons) Revenue (SAR mn)
EBIT (SAR mn) Net Income (SAR mn)
Jouf Cement Volume (‘000tons) Revenue (SAR mn)
EBITDA Margin (%)
63%
57%
Source: Company, Saudi Fransi Capital analysis
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Cement | Equity Research | 01 July 2015
KSA Cement Sector - 2Q15 Earnings Preview
Peer Comparison Fig. 5: KSA cement sector peer comparison P/E
EPS CAGR
EV/EBITDA
EV/ (EBITDA-tax)
Dividend Yield
EBITDA Margin
2015E
2016E
2015E
2016E
2015E
2016E
2015E
2016E
8.3
8.3
6.6%
6.6%
51%
51%
21%
20%
11.2
10.6
6.3%
6.7%
65%
65%
25%
25%
11.8
11.1
8.1%
8.1%
39%
40%
15%
16%
7.6
8.3
7.8
6.5%
6.5%
64%
64%
18%
18%
9.2
9.0
9.4
9.2
5.1%
6.5%
60%
61%
17%
17%
3%
10.8
10.8
11.1
11.1
6.6%
6.6%
68%
68%
29%
29%
12.7
8%
11.8
10.8
12.1
11.1
5.6%
6.1%
60%
62%
31%
31%
14.8
14.0
5%
10.1
9.3
10.4
9.6
6.0%
6.0%
63%
64%
13%
13%
Najran (Buy)
12.3
11.3
25%
10.4
9.8
10.7
10.1
3.8%
4.8%
53%
54%
16%
16%
Saudi (Buy)
13.6
13.1
1%
11.3
11.0
11.6
11.3
6.7%
6.7%
65%
65%
31%
31%
Eastern (Hold)
12.5
11.4
8%
8.0
7.5
8.2
7.6
5.4%
6.5%
47%
47%
12%
13%
City (Hold)
18.5
18.3
0%
13.6
13.4
13.9
13.8
4.2%
4.2%
66%
66%
11%
11%
Jouf (Hold)
29.7
21.9
31%
20.1
16.8
20.6
17.2
0.0%
0.0%
48%
51%
5%
6%
KSA Avg.
13.4
12.7
7.0%
10.3
9.9
10.6
10.1
5.9%
6.3%
58%
58%
19%
19%
2015E
2016E
2014-16E
2015E
2016E
Arabian (Buy)
10.9
10.8
3%
8.1
8.1
Yanbu (Buy)
12.1
11.4
5%
10.9
10.4
Northern (Hold)
16.7
15.0
18%
11.5
10.9
Yamama (Buy)
10.8
9.9
7%
8.1
Hail (Buy)
12.3
11.7
12%
Qassim (Buy)
13.1
13.1
Southern (Hold)
13.7
Tabuk (Buy)
RoE
Sources: Saudi Fransi Capital analysis
Fig. 6: KSA vs. GCC/MEA and EM peer comparison P/E
EPS CAGR
EV/ (EBITDA-tax)
Dividend Yield
EBITDA Margin
2015E
2016E
2015E
2016E
2015E
2016E
2015E
7%
10.3
9.9
10.6
10.1
5.9%
6.3%
58%
58%
19%
19%
5%
9.2
8.5
10.1
9.3
4.5%
4.1%
33%
34%
12%
12%
15%
9.3
7.7
9.8
8.1
5.3%
5.7%
56%
61%
17%
17%
15%
5.3
4.1
6.3
4.9
8.2%
9.9%
32%
26%
15%
13%
9.9
-3%
6.8
6.5
7.9
7.6
8.4%
8.5%
28%
27%
21%
22%
15.6
15.0
5%
9.1
8.6
11.8
11.0
5.2%
5.6%
36%
37%
20%
19%
India
21.2
15.8
26%
11.1
8.5
14.9
11.4
1.9%
2.2%
18%
19%
12%
15%
China
12.8
11.5
8%
8.1
7.2
9.5
8.5
4.2%
4.9%
22%
22%
10%
10%
Asia ex. China
15.9
14.3
5%
10.4
9.5
12.4
11.4
4.2%
4.2%
22%
23%
13%
14%
GCC/MEA Avg.
13.1
11.9
7%
8.6
8.0
10.3
10.1
6.6%
6.8%
35%
33%
17%
18%
Em er Mkt Avg.
14.7
13.2
9%
9.1
8.4
11.1
10.3
4.9%
5.1%
27%
27%
14%
14%
2015E
2016E
KSA
13.4
12.7
Oman
11.8
11.0
Qatar
12.7
11.2
Egypt
12.4
9.9
Turkey
10.5
Other MEA
2014-16E
EV/EBITDA
2016E
RoE 2015E
2016E
Sources: Saudi Fransi Capital analysis, Bloomberg
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Recommendation Framework
Cement | Equity Research | 01 July 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.
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Research & Advisory Department
Cement | Equity Research | 01 July 2015
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)
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Cement | Equity Research | 01 July 2015
Disclaimer 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 c ompany 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 stat ements 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.
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