Earnings in 1Q Could Tick Down
SAUDI ARABIAN CEMENT
April 02, 2017
1Q2017 Preview
Earnings in 1Q Could Tick Down We expect the earnings cycle for the Saudi cement sector in 1Q2017 to be dismal with recent industry data intensifying such bearish stance. Factors that lead to our bearish view are i) the sharp drop in monthly sales volumes to 4.0 MT in February, lowest over the last 3-4 years ii) volatility in selling prices (adjusted) between producers ranging between SAR 152-193/ton seen during 4Q2016, trend likely to continue iii) sharp drop in utilization rates, producers cutting production between 15-20% on an average with highs of 30-35%, could put high burden on fixed costs and iv) 28.8 MT of inventory intensifying competition. With such an imbalance in supply-demand and likelihood of a rebound being ruled out over medium term, we revise our earnings estimates and target prices, maintain neutral view.
Production cuts expected, tuned to demand The recent industry statistics from Saudi cement producers opened on a negative note as data confirms the continued subdued outlook, with the first two months of 1Q2017 showing a double-digit decline in production. With such persistent gloominess, we expect cement production to reach 12.6 MT in 1Q2017, a decline of -3% Q/Q and -26% Y/Y. This is despite addition of Umm Al Qura cement and United cement’s production data since 4Q2016. According to sector monthly data, 8.8 MT of cement is produced in the first two months of this quarter and we expect another 3.8 MT of cement in March. On the other hand, the coverage group is expected to see a decline of -29% Y/Y and -13% Q/Q to 6.3 MT. We expect major production cuts, primarily from Yamama, evident from its recent announcement to cut production temporarily, while Saudi cement could also follow similar trends. We believe major producers have been operating its lines at 75-80%, while smaller producers have witnessed production rates in the range of 60-65%. In the first two months of the year, Northern Cement had seen it cutting clinker production by -51% on a Y/Y basis followed by Najran Cement with -46% and -43% by Hail Cement. Amongst our coverage group on a Y/Y basis, Yamama had witnessed a sharp drop in clinker production by -17% followed by -14% from Saudi cement. Table 1: Sau di Cemen t Produ cers Capacity an d Produ ction (Last 3 Mon th s) Production (KMT) Company
Cement Dec-16
Jan-17
Inventory Clinker
Feb-17
Dec-16
Cement
Jan-17
Clinker
Feb-17
Dec-16
Jan-17
Feb-17
Dec-16
Jan-17
Feb-17
Yamamah Cement
374
362
347
435
382
312
107
100
95
4,331
4,384
4,380
Saudi Cement
538
513
416
622
594
523
208
169
154
4,713
4,835
4,972
Eastern Cement
249
219
192
252
219
215
38
30
33
2,007
2,020
2,055
Qassim Cement
292
378
322
334
286
259
95
83
82
1,031
993
970
Yanbu Cement
756
667
467
537
390
533
66
99
92
3,036
2,851
2,980
Arab Cement
352
376
351
223
252
272
48
49
43
422
345
314
Southern Cement
442
519
448
662
538
588
123
105
108
1,797
1,806
1,922
Tabuk Cement
107
109
107
129
135
114
57
54
53
1,045
1,084
1,106
Riyadh Cement
260
307
216
215
258
244
62
65
41
1,653
1,631
1,676
Najran Cement
193
196
174
282
201
85
82
75
71
3,033
2,996
2,919
City Cement
312
337
320
324
208
230
61
43
50
1,323
1,212
1,141
Northern Cement
102
100
95
189
85
78
41
37
36
836
730
727
Jouf Cement
176
182
139
145
125
78
75
60
69
1,062
1,072
1,018
Alsafwa Cement
187
172
145
166
145
151
42
36
30
329
308
306
72
83
86
173
183
60
32
28
30
1,498
1,635
1,616 301
Hail Cement Umm Al Qura Cement
-
112
56
-
164
176
-
49
32
-
176
United Cement
-
144
158
-
76
119
-
26
52
-
429
407
4,776
4,039
4,241
4,037
1,108
1,071
28,507
28,810
Total
4,412
4,688
1,137
28,116
Source: Yamama Cement
High inventory balances implies caution Industry inventories of 28.8 MT (table-1) have increased by +34% Y/Y and +2% since the beginning of 2017 and is the highest ever. This accounts for 52% of clinker production levels over the last 12 months and 47% of industry’s current rated capacity. We believe this is expected to turn net-negative for the sector as smaller producers are finding it tough to compete in a market where pricing and demand are in the same direction, as major four producers control 50%. On the demand side, 50%, of the demand is across Central and Western regions wherein we expect to see only slight decline in demand, unlike large fall in demand from other regions.
Santhosh Balakrishnan
Alanoud K Al-Moammar
[email protected] +966-11-203-6809
[email protected] +966-11-203-6833
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
SAUDI ARABIAN CEMENT 1Q2017 Preview In our view, the cement producers eyeing for exports could see limited economic viability for cement exports as prices in the neighboring markets are seen declining. Additionally large capacity glut continue to affect these markets. Despite such uneconomical scenario upon high export fee in the range of SAR 85 to SAR 115, five of them have already obtained cement export licenses valid for a year. Additionally, cement transportation costs remains high for markets in MENA region, which implies low margins and we see less feasibility unless these producers face 30-40% demand decline in their respective local markets.
Sales volumes to decline by -25% Y/Y Dispatches for the first two months are currently at 8.8 MT and expected to add another 3.8 MT in March taking the total to 12.2 MT for 1Q2017. Industry sales volumes are expected to decline by -25% Y/Y and -3% Q/Q as continued slowdown in demand due lower pace of project spending, affecting industry sales volumes. We expect producers operating in the northern and its neighboring region to face the brunt of such huge decline in demand. Table 2: Sau di Cemen t Compan ies Sales Volu mes (000 ton s)-1Q2017E Feb-17
Mar-17E
Yamamah Cement
Dec-16 355
369
352
334
-35%
-11%
Saudi Cement
428
512
390
371
-33%
-18%
Eastern Cement
131
215
179
170
-29%
-15%
Qassim Cement
273
391
323
307
-18%
8%
Yanbu Cement
347
633
474
450
-15%
-21%
Arab Cement
220
375
358
340
-27%
12%
Southern Cement
505
537
448
426
-37%
-6%
Tabuk Cement
86
112
108
97
-21%
5%
Riyadh Cement
231
289
227
204
-26%
-10%
Najran Cement
167
200
178
160
-48%
-8%
City Cement
175
355
313
282
4%
22%
Northern Cement
Jan-17
1Q17E Y/Y 1Q17E Q/Q
94
106
102
92
-58%
-7%
144
165
130
117
-19%
-2%
Alsafwa Cement
88
178
151
136
-21%
-5%
Hail Cement
95
87
84
76
-45%
-9%
115
73
66
NM
NM
95
141
132
119
NM
NM
3,434
4,780
4,022
3,620
-25%
-3%
Jouf Cement
Umm Al Qura Cement United Cement Total Source: Yamama Cement
Sales volume are expected to touch 6.4 MT Amongst our cement coverage group, sales volumes are expected to decline to 6.4 MT, registering a decline of -28% Y/Y and -12% Q/Q, notably due to sharp decline in sales volumes from Yamama and Saudi Cement. The monthly data from February suggests, Yamama is expected to see a -35% Y/Y and -11% Q/Q drop in sales volumes to 1.07 MT in 1Q2017 as Central region is expected to see high competition. Exhibit 1: 1Q2017E Sales (000 tons) 700
600
500
400
300
200
100
0 Yamama
Yanbu Jan-17
Qassim Feb-17
Southern
Saudi
Mar-17E
Source: Yamama Cement, Riyad Capital
Page 2 of 4
SAUDI ARABIAN CEMENT 1Q2017 Preview We expect City Cement and Riyadh Cement to garner higher market share than Yamama in the Central region after its remarkable performance since 4Q2016 selling nearly 330K (Riyadh Cement) and 250K (City Cement) in the first two months of 2017 on an average in terms of monthly sales volumes. Saudi cement is set to see a drop in volumes by -33% Y/Y and -18% Q/Q to 1.32 MT, despite Eastern Cement posing tough competition in the region. Southern, though, is expected to see sharp drop in sales volume by -37% Y/Y, but see lesser decline of -6% Q/Q to 1.44 MT in 1Q2017.
Realization and volumes play the dampener trends We expect subdued revenue trends in 1Q2017 with a -38% Y/Y and -11% Q/Q decline in revenue to SAR 1.31 billion for the coverage group, as average realization for the group has declined by 16% Y/Y and -2% Q/Q. This is in addition to -28% Y/Y and -12% Q/Q fall in sales volumes. We expect gross realization of SAR 203/ton on an average, with Yamama and Yanbu facing the biggest decline in selling prices. The falling demand has led to sharp drop in utilization rates, leading to higher cost pressure attributing the decline in selling prices. We expect the coverage group to witness a -45% Y/Y and -6% Q/Q drop in operating profit to SAR 585 million in 1Q2017 from SAR 1,059 million in 1Q2016. Earnings could fall by -47% Y/Y and -6% Q/Q to SAR 541 million mainly driven by cost pressure, primarily Yamama and Yanbu which experienced pressure since 3Q2016. Table 3: 1Q2017 Estimates (SAR mln, ex cept per share data) Company Yamama Yanbu Qassim Southern Saudi Group Total
Revenues
Operating income
Net Income
EPS
1Q2016 1Q2017E Y/Y Chg 1Q2016 1Q2017E Y/Y Chg 1Q2016 1Q2017E Y/Y Chg 1Q2016 1Q2017E 376 202 -46% 171 55 -68% 150 44 -70% 0.74 0.22 400 270 -33% 189 116 -39% 184 102 -44% 1.17 0.65 275 197 -28% 138 93 -33% 135 89 -34% 1.50 0.98 549 320 -42% 287 157 -45% 283 150 -47% 2.02 1.07 507 324 -36% 274 165 -40% 265 155 -41% 1.73 1.02 2,107 1,312 -38% 1,059 585 -45% 1,017 541 -47%
Source: Riyad Capital, Company Reports
Margins to fall significantly as utilization rates drops Amongst our coverage, Yamama is expected to witness a large decline in margins with net margins of 22% (trend seen in 4Q2016) due to added impact of depreciation amid its cost pressure. However, as utilization drops by 10-15%, a 400-500 bps drop is imminent across the board due to lower economies of scale; impact could be more visible starting this quarter. Overall, we could see operating margins falling to 43% for 1Q2017 and net margins to 40%. Table 4: 1Q2017 Marg in Estimates Company Yamama Yanbu Qassim Southern Saudi Group Average
Gross income 1Q2016 50% 50% 53% 52% 58% 53%
1Q2017E 34% 47% 47% 51% 57% 47%
Operating income 1Q2016 45% 47% 50% 52% 54% 50%
1Q2017E 27% 43% 47% 49% 51% 43%
Net income 1Q2016 40% 46% 49% 52% 52% 48%
1Q2017E 22% 38% 45% 47% 48% 40%
Source: Riyad Capital, Company Reports
Sector valuations look expensive We have revised our target prices and our estimates for 2017-19, will revisit post 1Q2017 earnings cycle. Over the quarter, sector (market cap) underperformed and fell by -18% vs TASI’s -3%. 2017E P/E for the coverage group now stands at 13.1x versus TASI’s 14.5x, which is unwarranted. Table 5: Rating s and Valuation Company Yamama Yanbu Qassim Southern Saudi
TASI Code 3020 3060 3040 3050 3030
Group Average
Current Price 18.24 36.70 50.66 62.70 59.85
Market Cap 3,694 5,780 4,559 8,778 9,157
Target
Target
Price Price (old) 18.00 19.00 33.00 34.00 56.00 65.00 65.00 72.00 60.00 65.00
Dividend Rating Neutral Neutral Neutral Neutral Neutral
Yield 4.1% 6.8% 5.9% 7.2% 7.5%
P/E
P/B
2016 10.1x 10.8x 11.1x 10.0x 10.2x
2017E 14.5x 12.9x 13.5x 12.5x 12.2x
2016 1.0x 1.6x 2.5x 2.7x 2.8x
2017E 0.9x 1.5x 2.4x 2.5x 2.7x
10.4x
13.1x
2.1x
2.0x
Source: Riyad Capital
Page 3 of 4
SAUDI ARABIAN CEMENT 1Q2017 Preview
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.
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April 02, 2017
1Q2017 Preview
Earnings in 1Q Could Tick Down We expect the earnings cycle for the Saudi cement sector in 1Q2017 to be dismal with recent industry data intensifying such bearish stance. Factors that lead to our bearish view are i) the sharp drop in monthly sales volumes to 4.0 MT in February, lowest over the last 3-4 years ii) volatility in selling prices (adjusted) between producers ranging between SAR 152-193/ton seen during 4Q2016, trend likely to continue iii) sharp drop in utilization rates, producers cutting production between 15-20% on an average with highs of 30-35%, could put high burden on fixed costs and iv) 28.8 MT of inventory intensifying competition. With such an imbalance in supply-demand and likelihood of a rebound being ruled out over medium term, we revise our earnings estimates and target prices, maintain neutral view.
Production cuts expected, tuned to demand The recent industry statistics from Saudi cement producers opened on a negative note as data confirms the continued subdued outlook, with the first two months of 1Q2017 showing a double-digit decline in production. With such persistent gloominess, we expect cement production to reach 12.6 MT in 1Q2017, a decline of -3% Q/Q and -26% Y/Y. This is despite addition of Umm Al Qura cement and United cement’s production data since 4Q2016. According to sector monthly data, 8.8 MT of cement is produced in the first two months of this quarter and we expect another 3.8 MT of cement in March. On the other hand, the coverage group is expected to see a decline of -29% Y/Y and -13% Q/Q to 6.3 MT. We expect major production cuts, primarily from Yamama, evident from its recent announcement to cut production temporarily, while Saudi cement could also follow similar trends. We believe major producers have been operating its lines at 75-80%, while smaller producers have witnessed production rates in the range of 60-65%. In the first two months of the year, Northern Cement had seen it cutting clinker production by -51% on a Y/Y basis followed by Najran Cement with -46% and -43% by Hail Cement. Amongst our coverage group on a Y/Y basis, Yamama had witnessed a sharp drop in clinker production by -17% followed by -14% from Saudi cement. Table 1: Sau di Cemen t Produ cers Capacity an d Produ ction (Last 3 Mon th s) Production (KMT) Company
Cement Dec-16
Jan-17
Inventory Clinker
Feb-17
Dec-16
Cement
Jan-17
Clinker
Feb-17
Dec-16
Jan-17
Feb-17
Dec-16
Jan-17
Feb-17
Yamamah Cement
374
362
347
435
382
312
107
100
95
4,331
4,384
4,380
Saudi Cement
538
513
416
622
594
523
208
169
154
4,713
4,835
4,972
Eastern Cement
249
219
192
252
219
215
38
30
33
2,007
2,020
2,055
Qassim Cement
292
378
322
334
286
259
95
83
82
1,031
993
970
Yanbu Cement
756
667
467
537
390
533
66
99
92
3,036
2,851
2,980
Arab Cement
352
376
351
223
252
272
48
49
43
422
345
314
Southern Cement
442
519
448
662
538
588
123
105
108
1,797
1,806
1,922
Tabuk Cement
107
109
107
129
135
114
57
54
53
1,045
1,084
1,106
Riyadh Cement
260
307
216
215
258
244
62
65
41
1,653
1,631
1,676
Najran Cement
193
196
174
282
201
85
82
75
71
3,033
2,996
2,919
City Cement
312
337
320
324
208
230
61
43
50
1,323
1,212
1,141
Northern Cement
102
100
95
189
85
78
41
37
36
836
730
727
Jouf Cement
176
182
139
145
125
78
75
60
69
1,062
1,072
1,018
Alsafwa Cement
187
172
145
166
145
151
42
36
30
329
308
306
72
83
86
173
183
60
32
28
30
1,498
1,635
1,616 301
Hail Cement Umm Al Qura Cement
-
112
56
-
164
176
-
49
32
-
176
United Cement
-
144
158
-
76
119
-
26
52
-
429
407
4,776
4,039
4,241
4,037
1,108
1,071
28,507
28,810
Total
4,412
4,688
1,137
28,116
Source: Yamama Cement
High inventory balances implies caution Industry inventories of 28.8 MT (table-1) have increased by +34% Y/Y and +2% since the beginning of 2017 and is the highest ever. This accounts for 52% of clinker production levels over the last 12 months and 47% of industry’s current rated capacity. We believe this is expected to turn net-negative for the sector as smaller producers are finding it tough to compete in a market where pricing and demand are in the same direction, as major four producers control 50%. On the demand side, 50%, of the demand is across Central and Western regions wherein we expect to see only slight decline in demand, unlike large fall in demand from other regions.
Santhosh Balakrishnan
Alanoud K Al-Moammar
[email protected] +966-11-203-6809
[email protected] +966-11-203-6833
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
SAUDI ARABIAN CEMENT 1Q2017 Preview In our view, the cement producers eyeing for exports could see limited economic viability for cement exports as prices in the neighboring markets are seen declining. Additionally large capacity glut continue to affect these markets. Despite such uneconomical scenario upon high export fee in the range of SAR 85 to SAR 115, five of them have already obtained cement export licenses valid for a year. Additionally, cement transportation costs remains high for markets in MENA region, which implies low margins and we see less feasibility unless these producers face 30-40% demand decline in their respective local markets.
Sales volumes to decline by -25% Y/Y Dispatches for the first two months are currently at 8.8 MT and expected to add another 3.8 MT in March taking the total to 12.2 MT for 1Q2017. Industry sales volumes are expected to decline by -25% Y/Y and -3% Q/Q as continued slowdown in demand due lower pace of project spending, affecting industry sales volumes. We expect producers operating in the northern and its neighboring region to face the brunt of such huge decline in demand. Table 2: Sau di Cemen t Compan ies Sales Volu mes (000 ton s)-1Q2017E Feb-17
Mar-17E
Yamamah Cement
Dec-16 355
369
352
334
-35%
-11%
Saudi Cement
428
512
390
371
-33%
-18%
Eastern Cement
131
215
179
170
-29%
-15%
Qassim Cement
273
391
323
307
-18%
8%
Yanbu Cement
347
633
474
450
-15%
-21%
Arab Cement
220
375
358
340
-27%
12%
Southern Cement
505
537
448
426
-37%
-6%
Tabuk Cement
86
112
108
97
-21%
5%
Riyadh Cement
231
289
227
204
-26%
-10%
Najran Cement
167
200
178
160
-48%
-8%
City Cement
175
355
313
282
4%
22%
Northern Cement
Jan-17
1Q17E Y/Y 1Q17E Q/Q
94
106
102
92
-58%
-7%
144
165
130
117
-19%
-2%
Alsafwa Cement
88
178
151
136
-21%
-5%
Hail Cement
95
87
84
76
-45%
-9%
115
73
66
NM
NM
95
141
132
119
NM
NM
3,434
4,780
4,022
3,620
-25%
-3%
Jouf Cement
Umm Al Qura Cement United Cement Total Source: Yamama Cement
Sales volume are expected to touch 6.4 MT Amongst our cement coverage group, sales volumes are expected to decline to 6.4 MT, registering a decline of -28% Y/Y and -12% Q/Q, notably due to sharp decline in sales volumes from Yamama and Saudi Cement. The monthly data from February suggests, Yamama is expected to see a -35% Y/Y and -11% Q/Q drop in sales volumes to 1.07 MT in 1Q2017 as Central region is expected to see high competition. Exhibit 1: 1Q2017E Sales (000 tons) 700
600
500
400
300
200
100
0 Yamama
Yanbu Jan-17
Qassim Feb-17
Southern
Saudi
Mar-17E
Source: Yamama Cement, Riyad Capital
Page 2 of 4
SAUDI ARABIAN CEMENT 1Q2017 Preview We expect City Cement and Riyadh Cement to garner higher market share than Yamama in the Central region after its remarkable performance since 4Q2016 selling nearly 330K (Riyadh Cement) and 250K (City Cement) in the first two months of 2017 on an average in terms of monthly sales volumes. Saudi cement is set to see a drop in volumes by -33% Y/Y and -18% Q/Q to 1.32 MT, despite Eastern Cement posing tough competition in the region. Southern, though, is expected to see sharp drop in sales volume by -37% Y/Y, but see lesser decline of -6% Q/Q to 1.44 MT in 1Q2017.
Realization and volumes play the dampener trends We expect subdued revenue trends in 1Q2017 with a -38% Y/Y and -11% Q/Q decline in revenue to SAR 1.31 billion for the coverage group, as average realization for the group has declined by 16% Y/Y and -2% Q/Q. This is in addition to -28% Y/Y and -12% Q/Q fall in sales volumes. We expect gross realization of SAR 203/ton on an average, with Yamama and Yanbu facing the biggest decline in selling prices. The falling demand has led to sharp drop in utilization rates, leading to higher cost pressure attributing the decline in selling prices. We expect the coverage group to witness a -45% Y/Y and -6% Q/Q drop in operating profit to SAR 585 million in 1Q2017 from SAR 1,059 million in 1Q2016. Earnings could fall by -47% Y/Y and -6% Q/Q to SAR 541 million mainly driven by cost pressure, primarily Yamama and Yanbu which experienced pressure since 3Q2016. Table 3: 1Q2017 Estimates (SAR mln, ex cept per share data) Company Yamama Yanbu Qassim Southern Saudi Group Total
Revenues
Operating income
Net Income
EPS
1Q2016 1Q2017E Y/Y Chg 1Q2016 1Q2017E Y/Y Chg 1Q2016 1Q2017E Y/Y Chg 1Q2016 1Q2017E 376 202 -46% 171 55 -68% 150 44 -70% 0.74 0.22 400 270 -33% 189 116 -39% 184 102 -44% 1.17 0.65 275 197 -28% 138 93 -33% 135 89 -34% 1.50 0.98 549 320 -42% 287 157 -45% 283 150 -47% 2.02 1.07 507 324 -36% 274 165 -40% 265 155 -41% 1.73 1.02 2,107 1,312 -38% 1,059 585 -45% 1,017 541 -47%
Source: Riyad Capital, Company Reports
Margins to fall significantly as utilization rates drops Amongst our coverage, Yamama is expected to witness a large decline in margins with net margins of 22% (trend seen in 4Q2016) due to added impact of depreciation amid its cost pressure. However, as utilization drops by 10-15%, a 400-500 bps drop is imminent across the board due to lower economies of scale; impact could be more visible starting this quarter. Overall, we could see operating margins falling to 43% for 1Q2017 and net margins to 40%. Table 4: 1Q2017 Marg in Estimates Company Yamama Yanbu Qassim Southern Saudi Group Average
Gross income 1Q2016 50% 50% 53% 52% 58% 53%
1Q2017E 34% 47% 47% 51% 57% 47%
Operating income 1Q2016 45% 47% 50% 52% 54% 50%
1Q2017E 27% 43% 47% 49% 51% 43%
Net income 1Q2016 40% 46% 49% 52% 52% 48%
1Q2017E 22% 38% 45% 47% 48% 40%
Source: Riyad Capital, Company Reports
Sector valuations look expensive We have revised our target prices and our estimates for 2017-19, will revisit post 1Q2017 earnings cycle. Over the quarter, sector (market cap) underperformed and fell by -18% vs TASI’s -3%. 2017E P/E for the coverage group now stands at 13.1x versus TASI’s 14.5x, which is unwarranted. Table 5: Rating s and Valuation Company Yamama Yanbu Qassim Southern Saudi
TASI Code 3020 3060 3040 3050 3030
Group Average
Current Price 18.24 36.70 50.66 62.70 59.85
Market Cap 3,694 5,780 4,559 8,778 9,157
Target
Target
Price Price (old) 18.00 19.00 33.00 34.00 56.00 65.00 65.00 72.00 60.00 65.00
Dividend Rating Neutral Neutral Neutral Neutral Neutral
Yield 4.1% 6.8% 5.9% 7.2% 7.5%
P/E
P/B
2016 10.1x 10.8x 11.1x 10.0x 10.2x
2017E 14.5x 12.9x 13.5x 12.5x 12.2x
2016 1.0x 1.6x 2.5x 2.7x 2.8x
2017E 0.9x 1.5x 2.4x 2.5x 2.7x
10.4x
13.1x
2.1x
2.0x
Source: Riyad Capital
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SAUDI ARABIAN CEMENT 1Q2017 Preview
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]
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