Margin Strain
August 02, 2017 Rating 12- Month Target Price
Neutral SAR 31.00
YANBU CEMENT COMPANY 2Q2017 First Look
Margin Strain
Expected Total Return SAR 29.26 9 5.9%
Price as on Aug-01, 2017 Upside to Target Price Expected Dividend Yield
6.8%
Expected Total Return
12.8%
Market Data SAR 41.1/25.8
52 Week H/L Market Capitalization
SAR 4,608 million
Enterprise Value
SAR 4,577 million 157.5 million
Shares Outstanding
Yanbu Cement Company (Yanbu) reported 2Q2017 results with earnings missing RC and street expectations as weak demand and pricing hurt. EPS of SAR 0.51 trails our SAR 0.58 estimate and consensus of SAR 0.60. key takeaways in 2Q2017 results are: i) volume sales decline of -24% Q/Q and -18% Y/Y, larger than industry ii) drop in realization by -5% Q/Q and -25% Y/Y to SAR 177/ton, suggests stiff price competition in Western region iii) cash cost of SAR 66/ton declined by -10% Q/Q and -28% Y/Y as utilization tumbles iv) margins contract in the range of 400-500 bps is a concern but in-line with peers and lastly v) inventory/LTM sales ratio stands at 65% as of 2Q; at par with industry. Our estimates for 2017-19 are revised downwards to meet with current bearish trends. 2017E P/E of 11.8x is cheaper to TASI P/E of 14.4x but do not support a decelerating earnings trends. We revise our target price to SAR 31.00 from earlier SAR 33.00 but continue to recommend Neutral.
Free Float
69.1%
Revenue misses estimates as volume drops
12-Month ADTV(000’s)
216.1
Revenue of SAR 214 million missed our SAR 245 million estimate, declining by -38% Y/Y and -28% Q/Q, registering its sharpest decline in the recent past. We attribute the combined effect of construction slowdown and impact of Ramadan, which has led to lower volume sales of 1.21 MT. Yanbu is facing multifaceted competition from producers in the Northern, Western and Central regions who continue to focus on these markets. Realization has dropped to SAR 177/ton, which is more realistic at current levels. Yanbu has barely tested its volume-price mix in 2Q unlike its deep discount sales in 4Q2016, selling at SAR 152/ton. Despite its strategy to protect prices, market share dropped to 10.8% in 2Q2017 from 11.8% in 1Q2017.
YNCCO AB
Bloomberg Code 1-Year Price Performance 120 100
Weak Utilization
80
Yanbu had a wider miss in 2Q2017 with its gross profit of SAR 83 million trailing our estimate of SAR 104 million, declined by -51% Y/Y and -37% Q/Q. Gross margins dipped 580 bps on a Q/Q basis (500 bps in 1Q2017) to 39%, as the impact of low utilization rate-64% bites. As a result, cement production in this quarter dropped by -26% Q/Q and -17% Y/Y. On the cost front, Yanbu has seen a +9% increase in production costs as delivery costs weighed in resulting in lower operating margin, contracted by 840 bps to 33%. A combination of delivery costs and lower utilization rates has resulted in such a scenario, with EBIT/ton of SAR 59 declined by -24% Q/Q and -46% Y/Y. Yanbu reported operating profit of SAR 71 million, which declined by -55% Y/Y and -43% Q/Q. However, we expect non-operational income to have boosted earnings, with 2Q2017 earnings at SAR 80 million versus our expectations of SAR 92 million and street’s SAR 94 million. Earnings halved on a Y/Y basis and declined by -35% Q/Q, with a net margin squeeze of 450 bps to 37% from 42% in 1Q2017.
60 A
S
O N D
J
F M A M
Yanbu
J
J
TASI
Source: Bloomberg
6M
1Y
2Y
20% 10% 0% -10% -20% -30% -40% -50%
Maintain Neutral
Yanbu
Fig in SAR Mln MlnMMln Revenue Gross Profit Operating Income Net Income EPS (SAR)
Valuation looks tight and does not offer any conviction with 2018 expected to be the recovery year after successive quarters of depressed earnings since 2015. We maintain Neutral and revise our target price to SAR 31.00, as gloominess affected its cash flow stream, affecting dividend payouts. We revise our DPS to SAR 2.00, yields 6.8%. Maintain Neutral.
TASI
RC.Est Estimat 245 es 104
Actuals 214
96
71
83
92
80
0.58
0.51
Key Financial Figures FY Dec31 (SAR Mln) Revenue EBITDA* Net Profit EPS (SAR) DPS (SAR) BVPS (SAR)
2016A 1,286 774 536 3.40 3.00 22.60
Key Financial Ratios 2017E 1,057 637 392 2.49 2.00 23.09
2018E 1,087 652 401 2.55 2.00 23.63
Santhosh Balakrishnan
Alanoud K AlMoammar
[email protected] +966-11-203-6809
[email protected] +966-11-203-6833
FY Dec31 ROAA ROAE P/E P/B EV/EBITDA EV/Sales
2016A 15% 15% 8.6x 1.3x 5.9x 3.6x
2017E 10% 11% 11.8x 1.3x 7.2x 4.3x
2018E 10% 11% 11.5x 1.2x 7.0x 4.2x
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
YANBU CEMENT COMPANY 2Q2017 First Look
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi closed joint stock company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia (“KSA”). Website: www.riyadcapital.com Page 2 of 4
Neutral SAR 31.00
YANBU CEMENT COMPANY 2Q2017 First Look
Margin Strain
Expected Total Return SAR 29.26 9 5.9%
Price as on Aug-01, 2017 Upside to Target Price Expected Dividend Yield
6.8%
Expected Total Return
12.8%
Market Data SAR 41.1/25.8
52 Week H/L Market Capitalization
SAR 4,608 million
Enterprise Value
SAR 4,577 million 157.5 million
Shares Outstanding
Yanbu Cement Company (Yanbu) reported 2Q2017 results with earnings missing RC and street expectations as weak demand and pricing hurt. EPS of SAR 0.51 trails our SAR 0.58 estimate and consensus of SAR 0.60. key takeaways in 2Q2017 results are: i) volume sales decline of -24% Q/Q and -18% Y/Y, larger than industry ii) drop in realization by -5% Q/Q and -25% Y/Y to SAR 177/ton, suggests stiff price competition in Western region iii) cash cost of SAR 66/ton declined by -10% Q/Q and -28% Y/Y as utilization tumbles iv) margins contract in the range of 400-500 bps is a concern but in-line with peers and lastly v) inventory/LTM sales ratio stands at 65% as of 2Q; at par with industry. Our estimates for 2017-19 are revised downwards to meet with current bearish trends. 2017E P/E of 11.8x is cheaper to TASI P/E of 14.4x but do not support a decelerating earnings trends. We revise our target price to SAR 31.00 from earlier SAR 33.00 but continue to recommend Neutral.
Free Float
69.1%
Revenue misses estimates as volume drops
12-Month ADTV(000’s)
216.1
Revenue of SAR 214 million missed our SAR 245 million estimate, declining by -38% Y/Y and -28% Q/Q, registering its sharpest decline in the recent past. We attribute the combined effect of construction slowdown and impact of Ramadan, which has led to lower volume sales of 1.21 MT. Yanbu is facing multifaceted competition from producers in the Northern, Western and Central regions who continue to focus on these markets. Realization has dropped to SAR 177/ton, which is more realistic at current levels. Yanbu has barely tested its volume-price mix in 2Q unlike its deep discount sales in 4Q2016, selling at SAR 152/ton. Despite its strategy to protect prices, market share dropped to 10.8% in 2Q2017 from 11.8% in 1Q2017.
YNCCO AB
Bloomberg Code 1-Year Price Performance 120 100
Weak Utilization
80
Yanbu had a wider miss in 2Q2017 with its gross profit of SAR 83 million trailing our estimate of SAR 104 million, declined by -51% Y/Y and -37% Q/Q. Gross margins dipped 580 bps on a Q/Q basis (500 bps in 1Q2017) to 39%, as the impact of low utilization rate-64% bites. As a result, cement production in this quarter dropped by -26% Q/Q and -17% Y/Y. On the cost front, Yanbu has seen a +9% increase in production costs as delivery costs weighed in resulting in lower operating margin, contracted by 840 bps to 33%. A combination of delivery costs and lower utilization rates has resulted in such a scenario, with EBIT/ton of SAR 59 declined by -24% Q/Q and -46% Y/Y. Yanbu reported operating profit of SAR 71 million, which declined by -55% Y/Y and -43% Q/Q. However, we expect non-operational income to have boosted earnings, with 2Q2017 earnings at SAR 80 million versus our expectations of SAR 92 million and street’s SAR 94 million. Earnings halved on a Y/Y basis and declined by -35% Q/Q, with a net margin squeeze of 450 bps to 37% from 42% in 1Q2017.
60 A
S
O N D
J
F M A M
Yanbu
J
J
TASI
Source: Bloomberg
6M
1Y
2Y
20% 10% 0% -10% -20% -30% -40% -50%
Maintain Neutral
Yanbu
Fig in SAR Mln MlnMMln Revenue Gross Profit Operating Income Net Income EPS (SAR)
Valuation looks tight and does not offer any conviction with 2018 expected to be the recovery year after successive quarters of depressed earnings since 2015. We maintain Neutral and revise our target price to SAR 31.00, as gloominess affected its cash flow stream, affecting dividend payouts. We revise our DPS to SAR 2.00, yields 6.8%. Maintain Neutral.
TASI
RC.Est Estimat 245 es 104
Actuals 214
96
71
83
92
80
0.58
0.51
Key Financial Figures FY Dec31 (SAR Mln) Revenue EBITDA* Net Profit EPS (SAR) DPS (SAR) BVPS (SAR)
2016A 1,286 774 536 3.40 3.00 22.60
Key Financial Ratios 2017E 1,057 637 392 2.49 2.00 23.09
2018E 1,087 652 401 2.55 2.00 23.63
Santhosh Balakrishnan
Alanoud K AlMoammar
[email protected] +966-11-203-6809
[email protected] +966-11-203-6833
FY Dec31 ROAA ROAE P/E P/B EV/EBITDA EV/Sales
2016A 15% 15% 8.6x 1.3x 5.9x 3.6x
2017E 10% 11% 11.8x 1.3x 7.2x 4.3x
2018E 10% 11% 11.5x 1.2x 7.0x 4.2x
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
YANBU CEMENT COMPANY 2Q2017 First Look
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi closed joint stock company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia (“KSA”). Website: www.riyadcapital.com Page 2 of 4
