Saudi Arabian Building Materials 30 September 2015 PDF
Saudi Arabian Building Materials 3Q2015 Preview
September 30, 2015
Concerns Re-emerging The start of the oil slide and the continued volatility following the China’s slowdown concerns has led to instantaneous repercussions in Saudi equities. The TASI index fell by -18% QTD, while the TASI Building Materials and Construction index (TBMCI) declined by -27%. We view such events more closely as unrelenting oil slide is more worrying as the Kingdom could opt for capital spending cuts to manage its budget deficit more judiciously. Such a scenario should bring some negativity to the sector as it adds fuel to the ongoing concerns primarily on falling metal prices affecting the erstwhile construction sector. Signs of spending slowdown indicates lower demand, hence maintain neutral outlook for the sector over the medium term. However, the growing housing demand in the country supported by high per capita income levels drives our positive view on sustainable demand over the long term. The impending gloom following China’s slowdown has led to a correction in metals prices. Over the quarter, prices of Aluminum fell by -8% while Copper corrected by 14% (YTD fall exceeding 20%). Nonetheless, the international iron ore prices have witnessed volatile swings falling by -25% during July after China‘s manufacturing PMI hit record lows. However, the Yuan devaluation has led to prices finding some comfort at $57/dmt, declining by -4% QTD. This was explicit in local prices, with KSA’s largest steel supplier, SABIC cutting its steel rebar prices by SAR 200/ton and expected to be nearing market prices of SAR 2,200/ton, a correction of nearly -20% on a YTD basis. Such correction has led to contractors keeping a bearish view on prices and slowing its procurement cycle accordingly, leading to elasticity driven stocking. We believe contractors expect prices to fall further on expectations of weak global demand benefitting from supply and pricing imbalances thereby hurting margins for building material suppliers. Barring seasonal slowdown trends during the quarter owing to Ramadan and Hajj, demand is expected to remain weak in 3Q2015. In light of oil price volatility its apt to expect spending cuts, but the government’s response suggests only partial scale back on large projects and not termination. The recent news on Riyadh Metro is an example of how government plans to curb its spending and manage its finances. However, reviewing the project situation, we believe the government could prioritize its important projects and delay or scale back some projects while keeping its long term diversification plans intact. We believe growth in the sector remains muted as recent macro indicators are not impulsive enough to support growth, unless we see positive scenarios from fiscal spending in 2015 and plans for large capital spending in 2016. Our outlook on the sector is neutral for 3Q2015 but expect to see improvement from 2016. We maintain our target prices but upgrade National Company for Glass (Zoujaj) and United Wire Factories Co. (Aslak) to Buy while upgrading Saudi Arabian Amiantit Co. (Amiantit) to Hold as valuation across stocks offers opportunity for large upside. We maintain Buy on Saudi Ceramics Company (SCC) and Bawan Co. (Bawan) as large valuation gap exist once prices corrected sharply in the recent downturn. Table 1: Recommendation and Target Price Summary Company
TASI Code
Rating New
2040 1302 1301 2150 2160
Buy Buy Buy Buy Hold
Saudi Ceramiics Company Baw an Company United Wire Factories Company National Company for Glass Saudi Arabian Amiantit Company
New Recom m endation CMP 12-Month Upside to (SAR) Target Target price price (SAR) 58.79 105.00 79% 33.46 53.00 58% 25.80 32.00 24% 29.89 42.00 41% 10.25 12.50 22%
Old Recom m endation Rating 12-Month Old Vs (Old) Target New price TP (SAR) Buy 105.00 0% Buy 53.00 0% Sell 32.00 0% Hold 42.00 0% Sell 12.50 0%
Source: Bloomberg and Riyad Capital
Santhosh Balakrishnan
[email protected]
+966-11-203-6809
Ahmed Al Fozan
[email protected] +966-11-203-6814
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37) | 1
Saudi Arabian Building Materials 3Q2015 Preview 3Q2015 earnings decline already accounted We updated our models following 2Q2015 results and maintain the same estimates for 3Q2015 except Aslak which was surprising positively. We view 3Q2015 trends as seasonal but expect margin pressure due to volatile product prices affecting earnings stability versus historical trends. We expect 3Q2015 to register a decline of -4% Y/Y in topline and -17% Y/Y in earnings for the companies under our coverage. We expect Aslak to witness a marginal decline of -2% Y/Y in earnings owing to improvement in margins since 2Q2015 and SCC to witness -11% Y/Y decline due to competition. Zoujaj and Bawan is expected to witness a large underperformance and register Y/Y EPS decline of -11% and -54% respectively for 3Q2015. Amiantit is expected to post better earnings growth of +19% as a positive effect of restructuring its foreign subsidiaries. Table 2: 3Q15E Estimates Revenue 3Q14A 3Q15E Saudi Ceramics Company 386 395 Baw an Company 614 565 204 United Wire Factories Company 208 National Company for Glass 24 23 Saudi Arabian Amiantit Company 623 595
Y/Y 2% -8% 2% -3% -5%
EBITDA 3Q14A 3Q15E Y/Y 96 105 9% 67 40 -41% 25 21 -16% 8 7 -13% 43 60 39%
Net Incom e 3Q14A 3Q15E Y/Y 79 72 -9% 45 21 -54% 20 20 -2% 17 15 -11% 18 21 19%
EPS 3Q14A 3Q15E 2.10 1.92 0.91 0.42 0.46 0.45 0.56 0.50 0.15 0.18
Source: Company Reports and Riyad Capital
Large valuations gap to investors The sector performance versus index performance has some slight de-fragmentation as investors have followed broader TASI trends. TASI fell by -18%, while TBMCI fell by -27% underperforming larger than banks and petchems which declined by -15% and 22%. TBMCI fell irrationally when compared to other indices and offered valuation bargain across some stocks. The TBMCI sector and stocks under our coverage witnessed large volatility with Bawan witnessing the largest Q/Q fall of -30% for 3Q2015. On the valuation front, most companies offer some opportunities having corrected by -25%. Table 3: TASI Building Materials Sector Stocks Trailing Multiples
Com pany NMm e
Price (SAR)
Mcap SAR Mln
Saudi Arabian Amiantit Co 10.25 1,184 Red Sea Housing Services Co 23.43 1,406 Abdullah A.M. Al-Khodari Sons Co19.82 1,053 Saudi Steel Pipe Co 21.00 1,071 Baw an Co 33.46 1,673 National Gypsum 16.95 537 United Wire Factories Co 25.80 1,132 Arabian Pipes Co 13.95 558 Saudi Ceramic Co 58.79 2,940 Saudi Industrial Development Co 12.05 482 Middle East Specialized Cables Co9.67 580 Zamil Industrial Investment Co 39.42 2,365 Saudi Cable Co 7.54 573 National Co for Glass Manufacturing/The 29.89 897 Sector Median* 16,450
EV SAR Mln
P/E
P/B
3,073 1,711 2,154 1,402 2,369 472 974 973 3,695 312 1,125 4,768 1,737 906 25,671
12.8x 11.8x 9.6x 22.7x 12.5x 20.7x 12.5x NA 9.7x NA NA 8.8x NA 13.3x 12.5x
0.8x 1.5x 1.2x 1.3x 2.2x 1.1x 2.2x 0.9x 1.7x 1.1x 1.2x 1.3x 1.3x 1.5x 1.3x
P/S
EV/ Sales
EV/ EBITDA
Div. Yld
0.4x 1.3x 0.6x 1.2x 0.6x 6.5x 1.2x 1.3x 1.8x 1.5x 0.7x 0.4x 0.3x 9.0x 1.2x
1.3x 2.5x 1.5x 2.0x 1.2x 8.6x 1.5x 3.0x 2.9x 1.6x 1.6x 1.1x 1.0x 12.4x 1.6x
11.4x 10.3x 8.9x 19.4x 14.8x 19.6x 12.4x 473.7x 10.6x 16.5x 51.9x 10.3x NA 38.3x 14.8x
NA 4.3 0.6 4.8 0.7 3.5 6.2 NA 3.4 NA NA 5.1 NA 3.3 3.5%
YTD
52 Wk- 52 Wk- Share Hi Lo sO/S (SAR) (SAR) (Mln)
(21%) 19.05 (35%) 61.25 (35%) 77.75 (13%) 38.50 (30%) 79.00 (27%) 37.80 (25%) 50.50 (27%) 34.80 (26%) 109.69 (18%) 22.45 (56%) 26.90 (16%) 68.25 (18%) 13.30 (9%) 46.50 (27%)
10.10 20.70 18.00 19.80 29.10 15.75 24.70 13.25 56.00 10.60 8.80 36.70 6.90 24.80
115.5 60.0 53.1 51.0 50.0 31.7 43.9 40.0 50.0 40.0 60.0 60.0 76.0 30.0
Source: Bloomberg, *Market Cap and EV are total
Conclusion We view the slowdown cycle to be temporary and any prolonged recovery in oil prices should aid positive directions on capital spending. The government priorities remain in the social sector primarily in the education and health, part of which should elevate some demand in the building materials segment. For now, we are neutral over the medium term, but expect investors to identify valuation gaps especially stocks trading at large discount to market valuations.
|2
Stock Rating
Strong Buy
Buy
Hold
Sell
Not Rated
Expected Total Return ≥ 25%
Expected Total Return ≥ 15%
Expected Total Return < 15%
Overvalued
Under Review/ Restricted
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
September 30, 2015
Concerns Re-emerging The start of the oil slide and the continued volatility following the China’s slowdown concerns has led to instantaneous repercussions in Saudi equities. The TASI index fell by -18% QTD, while the TASI Building Materials and Construction index (TBMCI) declined by -27%. We view such events more closely as unrelenting oil slide is more worrying as the Kingdom could opt for capital spending cuts to manage its budget deficit more judiciously. Such a scenario should bring some negativity to the sector as it adds fuel to the ongoing concerns primarily on falling metal prices affecting the erstwhile construction sector. Signs of spending slowdown indicates lower demand, hence maintain neutral outlook for the sector over the medium term. However, the growing housing demand in the country supported by high per capita income levels drives our positive view on sustainable demand over the long term. The impending gloom following China’s slowdown has led to a correction in metals prices. Over the quarter, prices of Aluminum fell by -8% while Copper corrected by 14% (YTD fall exceeding 20%). Nonetheless, the international iron ore prices have witnessed volatile swings falling by -25% during July after China‘s manufacturing PMI hit record lows. However, the Yuan devaluation has led to prices finding some comfort at $57/dmt, declining by -4% QTD. This was explicit in local prices, with KSA’s largest steel supplier, SABIC cutting its steel rebar prices by SAR 200/ton and expected to be nearing market prices of SAR 2,200/ton, a correction of nearly -20% on a YTD basis. Such correction has led to contractors keeping a bearish view on prices and slowing its procurement cycle accordingly, leading to elasticity driven stocking. We believe contractors expect prices to fall further on expectations of weak global demand benefitting from supply and pricing imbalances thereby hurting margins for building material suppliers. Barring seasonal slowdown trends during the quarter owing to Ramadan and Hajj, demand is expected to remain weak in 3Q2015. In light of oil price volatility its apt to expect spending cuts, but the government’s response suggests only partial scale back on large projects and not termination. The recent news on Riyadh Metro is an example of how government plans to curb its spending and manage its finances. However, reviewing the project situation, we believe the government could prioritize its important projects and delay or scale back some projects while keeping its long term diversification plans intact. We believe growth in the sector remains muted as recent macro indicators are not impulsive enough to support growth, unless we see positive scenarios from fiscal spending in 2015 and plans for large capital spending in 2016. Our outlook on the sector is neutral for 3Q2015 but expect to see improvement from 2016. We maintain our target prices but upgrade National Company for Glass (Zoujaj) and United Wire Factories Co. (Aslak) to Buy while upgrading Saudi Arabian Amiantit Co. (Amiantit) to Hold as valuation across stocks offers opportunity for large upside. We maintain Buy on Saudi Ceramics Company (SCC) and Bawan Co. (Bawan) as large valuation gap exist once prices corrected sharply in the recent downturn. Table 1: Recommendation and Target Price Summary Company
TASI Code
Rating New
2040 1302 1301 2150 2160
Buy Buy Buy Buy Hold
Saudi Ceramiics Company Baw an Company United Wire Factories Company National Company for Glass Saudi Arabian Amiantit Company
New Recom m endation CMP 12-Month Upside to (SAR) Target Target price price (SAR) 58.79 105.00 79% 33.46 53.00 58% 25.80 32.00 24% 29.89 42.00 41% 10.25 12.50 22%
Old Recom m endation Rating 12-Month Old Vs (Old) Target New price TP (SAR) Buy 105.00 0% Buy 53.00 0% Sell 32.00 0% Hold 42.00 0% Sell 12.50 0%
Source: Bloomberg and Riyad Capital
Santhosh Balakrishnan
[email protected]
+966-11-203-6809
Ahmed Al Fozan
[email protected] +966-11-203-6814
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37) | 1
Saudi Arabian Building Materials 3Q2015 Preview 3Q2015 earnings decline already accounted We updated our models following 2Q2015 results and maintain the same estimates for 3Q2015 except Aslak which was surprising positively. We view 3Q2015 trends as seasonal but expect margin pressure due to volatile product prices affecting earnings stability versus historical trends. We expect 3Q2015 to register a decline of -4% Y/Y in topline and -17% Y/Y in earnings for the companies under our coverage. We expect Aslak to witness a marginal decline of -2% Y/Y in earnings owing to improvement in margins since 2Q2015 and SCC to witness -11% Y/Y decline due to competition. Zoujaj and Bawan is expected to witness a large underperformance and register Y/Y EPS decline of -11% and -54% respectively for 3Q2015. Amiantit is expected to post better earnings growth of +19% as a positive effect of restructuring its foreign subsidiaries. Table 2: 3Q15E Estimates Revenue 3Q14A 3Q15E Saudi Ceramics Company 386 395 Baw an Company 614 565 204 United Wire Factories Company 208 National Company for Glass 24 23 Saudi Arabian Amiantit Company 623 595
Y/Y 2% -8% 2% -3% -5%
EBITDA 3Q14A 3Q15E Y/Y 96 105 9% 67 40 -41% 25 21 -16% 8 7 -13% 43 60 39%
Net Incom e 3Q14A 3Q15E Y/Y 79 72 -9% 45 21 -54% 20 20 -2% 17 15 -11% 18 21 19%
EPS 3Q14A 3Q15E 2.10 1.92 0.91 0.42 0.46 0.45 0.56 0.50 0.15 0.18
Source: Company Reports and Riyad Capital
Large valuations gap to investors The sector performance versus index performance has some slight de-fragmentation as investors have followed broader TASI trends. TASI fell by -18%, while TBMCI fell by -27% underperforming larger than banks and petchems which declined by -15% and 22%. TBMCI fell irrationally when compared to other indices and offered valuation bargain across some stocks. The TBMCI sector and stocks under our coverage witnessed large volatility with Bawan witnessing the largest Q/Q fall of -30% for 3Q2015. On the valuation front, most companies offer some opportunities having corrected by -25%. Table 3: TASI Building Materials Sector Stocks Trailing Multiples
Com pany NMm e
Price (SAR)
Mcap SAR Mln
Saudi Arabian Amiantit Co 10.25 1,184 Red Sea Housing Services Co 23.43 1,406 Abdullah A.M. Al-Khodari Sons Co19.82 1,053 Saudi Steel Pipe Co 21.00 1,071 Baw an Co 33.46 1,673 National Gypsum 16.95 537 United Wire Factories Co 25.80 1,132 Arabian Pipes Co 13.95 558 Saudi Ceramic Co 58.79 2,940 Saudi Industrial Development Co 12.05 482 Middle East Specialized Cables Co9.67 580 Zamil Industrial Investment Co 39.42 2,365 Saudi Cable Co 7.54 573 National Co for Glass Manufacturing/The 29.89 897 Sector Median* 16,450
EV SAR Mln
P/E
P/B
3,073 1,711 2,154 1,402 2,369 472 974 973 3,695 312 1,125 4,768 1,737 906 25,671
12.8x 11.8x 9.6x 22.7x 12.5x 20.7x 12.5x NA 9.7x NA NA 8.8x NA 13.3x 12.5x
0.8x 1.5x 1.2x 1.3x 2.2x 1.1x 2.2x 0.9x 1.7x 1.1x 1.2x 1.3x 1.3x 1.5x 1.3x
P/S
EV/ Sales
EV/ EBITDA
Div. Yld
0.4x 1.3x 0.6x 1.2x 0.6x 6.5x 1.2x 1.3x 1.8x 1.5x 0.7x 0.4x 0.3x 9.0x 1.2x
1.3x 2.5x 1.5x 2.0x 1.2x 8.6x 1.5x 3.0x 2.9x 1.6x 1.6x 1.1x 1.0x 12.4x 1.6x
11.4x 10.3x 8.9x 19.4x 14.8x 19.6x 12.4x 473.7x 10.6x 16.5x 51.9x 10.3x NA 38.3x 14.8x
NA 4.3 0.6 4.8 0.7 3.5 6.2 NA 3.4 NA NA 5.1 NA 3.3 3.5%
YTD
52 Wk- 52 Wk- Share Hi Lo sO/S (SAR) (SAR) (Mln)
(21%) 19.05 (35%) 61.25 (35%) 77.75 (13%) 38.50 (30%) 79.00 (27%) 37.80 (25%) 50.50 (27%) 34.80 (26%) 109.69 (18%) 22.45 (56%) 26.90 (16%) 68.25 (18%) 13.30 (9%) 46.50 (27%)
10.10 20.70 18.00 19.80 29.10 15.75 24.70 13.25 56.00 10.60 8.80 36.70 6.90 24.80
115.5 60.0 53.1 51.0 50.0 31.7 43.9 40.0 50.0 40.0 60.0 60.0 76.0 30.0
Source: Bloomberg, *Market Cap and EV are total
Conclusion We view the slowdown cycle to be temporary and any prolonged recovery in oil prices should aid positive directions on capital spending. The government priorities remain in the social sector primarily in the education and health, part of which should elevate some demand in the building materials segment. For now, we are neutral over the medium term, but expect investors to identify valuation gaps especially stocks trading at large discount to market valuations.
|2
Stock Rating
Strong Buy
Buy
Hold
Sell
Not Rated
Expected Total Return ≥ 25%
Expected Total Return ≥ 15%
Expected Total Return < 15%
Overvalued
Under Review/ Restricted
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
