Profit Margins Shrink
October 23, 2016 Rating 12- Month Target Price
Buy SAR 39.00
YANBU CEMENT COMPANY (YCC) 3Q2016 First Look
Profit Margins Shrink
Expected Total Return SAR 26.63 9 46.5%
Price as on Oct-20, 2016 Upside to Target Price Expected Dividend Yield
11.3%
Expected Total Return
57.7%
Market Data SAR 52.25/25.80
52 Week H/L Market Capitalization
SAR 4,205 mln
Enterprise Value
SAR 3,815 mln 157.5 mln
Shares Outstanding Free Float
58.6%
12-Month ADTV (000’s)
234.1 YACCO AB
Bloomberg Code 1-Year Price Performance
Yanbu Cement Company (YCC) announced 3Q2016 results, widely missing expectations. EPS of SAR 0.59 was below our SAR 0.79 estimate and streets SAR 0.74. Earnings dropped significantly due to effect of hike in fuel costs amid a weak demand. On the other hand, realization declined to SAR 208/ton in 3Q, a drop of -24% Y/Y and 12% Q/Q aided by weaker sales volumes. As realization plummets, YCC registered weak operating margins due to cost pressure, with a drop of nearly of 9% in margins to 42% this quarter from 49% in 3Q2015 and lower from 46% in 2Q2016. Notably, YCC’s market share also declined from 11.1% in 3Q2015 to 10.6% in 3Q2016. With a negative surprise this quarter, we believe a rebound is unlikely in 4Q as industry’s weak outlook points to a gloomy 2017. We revise our 2016-18 estimates and cut our target price to SAR 39.00. Valuations are still attractive with 2017E P/E of 7.9x cheaper to TASI’s 11.9x, maintain Buy.
Revenue declined by 24% Y/Y Revenue of SAR 236 million in 3Q2016 was below expectations of SAR 277 million, declined by -24% Y/Y and -32% Q/Q as realization suffered during the quarter. Realization declined by -24% Y/Y and -12% Q/Q to SAR 208/ton, the second lowest since 4Q2015, but grew from SAR 204/ton in 4Q2015. It declined significantly from SAR 237/ton in 2Q2016.
105
Inventory at new record levels
95
YCC’s clinker inventory reached 3.7 MT as of 9M2016 representing 83% of volume sales during this period, increasing by +18% from start of the year. However this stood at 58% of LTM sales on combined basis (cement + clinker), higher than industry average. Sales volumes decreased by -16% Y/Y and -23% Q/Q to reach 1.14 MT in 3Q2016 as ailing demand continues in this quarter. Overall, YTD YCC’s sales volumes dropped by 12% to 4.44 MT in 9M2016 from 5.10 MT in 9M2015, the highest among large cap producers.
85 75 65 55 45 O
N
D
J
F
M
A
YNCCO
M
J
J
TASI
A
S
TCEM
Source: Bloomberg
6M
1Y
Operating margins are underperforming Gross profit of SAR 107 million was below our estimate of SAR 136 million, declined by -37% Q/Q and by -34% Y/Y. COGS as a percentage of sales increased to 55% in 3Q2016 from earlier 51% in 3Q2015 as subsidy cuts have led to sharp increase in direct costs. Gross margins declined by 700 bps to 46%. Operating income followed suit as utilization dropped, declining by -35% Y/Y and -38% Q/Q to reach SAR 98 million. Net income of SAR 93 million was below our estimate of SAR 124 million, down by -41% Q/Q and -35% Y/Y. Net margin contracted to 40% in 3Q from 46% in 2Q2016.
2Y
0% -10% -20%
-30% -40% -50%
Cutting DPS to SAR 3.00, yields 11%
-60% -70%
YNCCO
Fig in SAR mln MlnMMln Revenue
TASI
TCEM
RC. Est Estimates 277
Actuals 236
Gross Profit
136
107
EBIT
128
98
Net Income
124
93
EPS (SAR)
0.79
0.59
Industry demand is weak and likely to continue this way until 2018, hence YCC is susceptible to pressure. Stock prices have retreated by -39% versus TASI’s 18% YTD, as investor’s pessimism continues to weigh the stock. With earnings under pressure, we cut DPS to SAR 3.00 for 2017, however yields of 11% are attractive, while offering a valuation upside of +47%. Recommend a Buy. Key Financial Figures FY Dec31 (SAR mln) Revenue EBITDA Net Profit EPS (SAR) DPS (SAR) BVPS (SAR)
Key Financial Ratios
2015A
2016E
2017E
1,613
1,294
1,214
1,035
765
672
806
568
532
5.12
3.61
3.38
5.00
3.50
3.00
23.7
23.8
24.1
FY Dec31 ROAA ROAE P/E P/B EV/EBITDA EV/Sales
2015A
2016E
2017E
19%
13%
12%
22%
15%
14%
5.2x
7.4x
7.9x
1.1x
1.1x
1.1x
3.9x
5.0x
5.5x
2.5x
3.0x
3.1x
Khalid Al Madhyan [email protected] +966-11-203-6813
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
YANBU CEMENT COMPANY 3Q2016 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 limited liability 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
Buy SAR 39.00
YANBU CEMENT COMPANY (YCC) 3Q2016 First Look
Profit Margins Shrink
Expected Total Return SAR 26.63 9 46.5%
Price as on Oct-20, 2016 Upside to Target Price Expected Dividend Yield
11.3%
Expected Total Return
57.7%
Market Data SAR 52.25/25.80
52 Week H/L Market Capitalization
SAR 4,205 mln
Enterprise Value
SAR 3,815 mln 157.5 mln
Shares Outstanding Free Float
58.6%
12-Month ADTV (000’s)
234.1 YACCO AB
Bloomberg Code 1-Year Price Performance
Yanbu Cement Company (YCC) announced 3Q2016 results, widely missing expectations. EPS of SAR 0.59 was below our SAR 0.79 estimate and streets SAR 0.74. Earnings dropped significantly due to effect of hike in fuel costs amid a weak demand. On the other hand, realization declined to SAR 208/ton in 3Q, a drop of -24% Y/Y and 12% Q/Q aided by weaker sales volumes. As realization plummets, YCC registered weak operating margins due to cost pressure, with a drop of nearly of 9% in margins to 42% this quarter from 49% in 3Q2015 and lower from 46% in 2Q2016. Notably, YCC’s market share also declined from 11.1% in 3Q2015 to 10.6% in 3Q2016. With a negative surprise this quarter, we believe a rebound is unlikely in 4Q as industry’s weak outlook points to a gloomy 2017. We revise our 2016-18 estimates and cut our target price to SAR 39.00. Valuations are still attractive with 2017E P/E of 7.9x cheaper to TASI’s 11.9x, maintain Buy.
Revenue declined by 24% Y/Y Revenue of SAR 236 million in 3Q2016 was below expectations of SAR 277 million, declined by -24% Y/Y and -32% Q/Q as realization suffered during the quarter. Realization declined by -24% Y/Y and -12% Q/Q to SAR 208/ton, the second lowest since 4Q2015, but grew from SAR 204/ton in 4Q2015. It declined significantly from SAR 237/ton in 2Q2016.
105
Inventory at new record levels
95
YCC’s clinker inventory reached 3.7 MT as of 9M2016 representing 83% of volume sales during this period, increasing by +18% from start of the year. However this stood at 58% of LTM sales on combined basis (cement + clinker), higher than industry average. Sales volumes decreased by -16% Y/Y and -23% Q/Q to reach 1.14 MT in 3Q2016 as ailing demand continues in this quarter. Overall, YTD YCC’s sales volumes dropped by 12% to 4.44 MT in 9M2016 from 5.10 MT in 9M2015, the highest among large cap producers.
85 75 65 55 45 O
N
D
J
F
M
A
YNCCO
M
J
J
TASI
A
S
TCEM
Source: Bloomberg
6M
1Y
Operating margins are underperforming Gross profit of SAR 107 million was below our estimate of SAR 136 million, declined by -37% Q/Q and by -34% Y/Y. COGS as a percentage of sales increased to 55% in 3Q2016 from earlier 51% in 3Q2015 as subsidy cuts have led to sharp increase in direct costs. Gross margins declined by 700 bps to 46%. Operating income followed suit as utilization dropped, declining by -35% Y/Y and -38% Q/Q to reach SAR 98 million. Net income of SAR 93 million was below our estimate of SAR 124 million, down by -41% Q/Q and -35% Y/Y. Net margin contracted to 40% in 3Q from 46% in 2Q2016.
2Y
0% -10% -20%
-30% -40% -50%
Cutting DPS to SAR 3.00, yields 11%
-60% -70%
YNCCO
Fig in SAR mln MlnMMln Revenue
TASI
TCEM
RC. Est Estimates 277
Actuals 236
Gross Profit
136
107
EBIT
128
98
Net Income
124
93
EPS (SAR)
0.79
0.59
Industry demand is weak and likely to continue this way until 2018, hence YCC is susceptible to pressure. Stock prices have retreated by -39% versus TASI’s 18% YTD, as investor’s pessimism continues to weigh the stock. With earnings under pressure, we cut DPS to SAR 3.00 for 2017, however yields of 11% are attractive, while offering a valuation upside of +47%. Recommend a Buy. Key Financial Figures FY Dec31 (SAR mln) Revenue EBITDA Net Profit EPS (SAR) DPS (SAR) BVPS (SAR)
Key Financial Ratios
2015A
2016E
2017E
1,613
1,294
1,214
1,035
765
672
806
568
532
5.12
3.61
3.38
5.00
3.50
3.00
23.7
23.8
24.1
FY Dec31 ROAA ROAE P/E P/B EV/EBITDA EV/Sales
2015A
2016E
2017E
19%
13%
12%
22%
15%
14%
5.2x
7.4x
7.9x
1.1x
1.1x
1.1x
3.9x
5.0x
5.5x
2.5x
3.0x
3.1x
Khalid Al Madhyan [email protected] +966-11-203-6813
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
YANBU CEMENT COMPANY 3Q2016 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 limited liability 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
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