Najran Cement Co. July 2015
Pressure on margins: Considering the company’s efforts to diversify revenue from different regions, we believe Najran Cement may end up losing margins due to higher transportation cost in the near to medium term. Higher financing cost due to additional borrowings of SAR 400.0mn in June 2015 could further impact profitability. However, positive cash flows at the operating level would act as a cushion. As of March 2015, Najran Cement’s debt equity ratio stood at 0.4x, which would increase after taking into account the additional borrowing of SAR 400.0mn in June 2015. Based on our forecast estimates, Najran Cement is trading at a P/ E multiple of 14.4x for FY15E and 13.8x for FY16E.
1
FY15E
FY16E
828 31.1% 243 22.7% 1.43
1,116 34.8% 302 24.4% 1.78
1,141 2.2% 317 4.9% 1.87
Source: Company reports, Aljazira Capital
Key Ratios SARmn (unless specified) Gross Margin EBITDA Margin Net Margin P/E P/B ROE ROA Dividend Yield
FY14
FY15E
FY16E
48.2% 47.8% 29.4% 20.31x 2.40x
52.0% 42.3% 27.1% 14.44x 2.07x
52.1% 42.5% 27.8% 13.77x 2.02x
11.8%
14.4%
14.6%
7.9%
9.1%
9.7%
2.1%
4.1%
4.1%
Source: Company reports, Aljazira Capital
Shareholders Pattern Holding
Shareholders Pattern Khalid Mohamed Abdullah Al Barrak Abdullah A. S. Al Rajhi Mohammed bin Manaa bin Sultan Public
13.04% 12.35% 5.03% 69.58%
Source: Company reports, Aljazira Capital
Key Sector Data SARmn (unless specified) Market Cap(bn) YTD% 52 week (High) 52 week (Low) Share Outstanding (mn)
4.37 -2.8% 38.10 24.45 170.0 Source: Bloomberg, Aljazira Capital
Price Performance 12000
40 38 36 34 32 30 28 26 24 22 20
11000 10000 9000 8000 7000 6000
2/ 13 28 /1 4 4/ 30 /1 4 6/ 30 /1 4 8/ 31 10 /14 /3 1 12 /14 /3 1/ 2/ 14 28 /1 5 4/ 30 /1 5 6/ 30 /1 5
High volume growth will offset some pressure on margins: In Saudi Arabia, the southern region is primarily dominated by Southern Province Cement Co. (SPCC) and Najran Cement. According to Holtec, market attractiveness would be highly concentrated in the south-west region. Given the gradual diversification of revenue by Najran Cement to other high demand regions like western KSA (due to proximity), we believe the company would be able to continue volume growth and increase its market share (1H2015 sales grew 48.2% YoY; and market share improved to 7.3% in June-2015 from 6.2% in June-2014). However, regional competition from big players such as SPCC could impact its price/ton and additional logistics for catering to non-core regions (like western region) could increase the cost. Najran also carries one of the highest clinker inventories among the cement companies (2Q2015 at 2.6 mt). Combining all these factors we believe margins could be negatively impacted in near term. However, higher utilization levels due to implementation of waste heat recovery (WHR) system in its production line is likely to support overall margins.
FY14
Revenues Growth % Net Income Growth % EPS
13
Operating Profit for Q2-2015 stood at SAR 91.4mn depicting a decline of 2.3% YoY, and 13.1% QoQ. Operating profit has been noticeably impacted due to increase in managerial and operating expenses. OPEX expenses is expected to be at around SAR59.8mn vs SAR11mn in Q2-2014 and SAR54.8mn in Q1-2015, which could be ascribed to the significant increase in the cement transportation incentives, where the company has the advantage for catering to non-core regions (like western region). (The company is yet to publish detailed financials for 2Q15).
SARmn (unless specified)
1/
Gross profit stood at SAR 151.1mn depicting an increase of 26.3%YoY, and a fall of 5.6%QoQ. Gross profit in Q2-2015 showed YoY improvement due to higher sales. The company’s sales revenues in Q2-2015 registered strong volumetric growth, as sales in Q2-2015 stood at 1.21 MT vs 0.96 MT in Q22014 depicting an increase of 25.9%YoY. However, the QoQ sales decline were ascribed to slow demand during the month of Ramadan
Key Financials
1/
Cement transportation incentives and slowdown of cement consumption in Ramadan putting pressure on the operating profits: Q2-15 net profit came below our expectation and showed a deviation of 14.2% from our estimates and 15.0% from the Bloomberg market Consensus of SAR91.5mn. Najran Cement Company posted net income of SAR 77.8mn; indicating a fall of 7.8%YoY and 15.4%QoQ. We believe the weakness was mainly attributed to an increase in i) operating expenses (cement transportation incentives), ii) managerial expenses (SG & A) iii) finance and Zakat expenses, these were enough to lower the benefits of YoY sales growth.
*prices as of 10th of July 2015
/3
*Not Available
Upside / (Downside)
/3
-14.2%
14.1%
12
NA* 77.8 0.46
10
301.8 90.7 0.53
29.30
New Target Price (SAR)
/1 3
Deviation (%)
25.70
/1 3
Actual 2Q-15
33.3
Current Price* (SAR)
30
Sales revenues Net profit EPS (SAR)
Forecasts 2Q-15
Previous Target Price (SAR)
31
Amount in SAR mn; unless specified
‘Overweight ’
Recommendation
6/
Najran Cement: We remain ‘Overweight’ with a lower PT; Q2-2015 operating profits were below our expectation; as the company is witnessing higher than expected increase in OPEX.
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8/
Investment Update
TADAWUL
Najran Source: Company Financials
Analyst
Jassim Al-Jubran +966 11 2256248
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RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250
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Sultan Al Kadi
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AGM- Head of Western and Southern Region Investment Centers & ADC
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brokerage
Brokerage
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Abdullah Q. Al-Misbani
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AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
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[email protected] +966 1 225 6352
[email protected] Jassim Al-Jubran +966 11 2256248
[email protected] BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+966 11 2256364
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