Najran Cement Co. - Aljazira Capital
Najran Cement Co. Investment Update
January 2016
Najran Cement: Q4-2015 operating profits were below our expectation; where the company’s sales volume is lower than expected. ‘Overweight’ with a lower PT Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 4Q-15 282.8 66.4 0.39
Actual 4Q-15 NA* 53.73 0.32
Deviation (%) -19.0% *Not Available,
Lower than expected cement sales and higher production cost per ton to put more pressure on 4Q15 earnings: Q4-15 net profit below our estimates and showed a deviation of 19.0% from AJC estimates and 2.0% from market consensus of SAR54.8mn. Najran Cement Company posted net income of SAR 53.73mn; indicating a fall of 16.0%YoY and an increase of 67.5%QoQ. We believe the weakness was mainly attributed to i) 2.5% lower volumetric sales than expected. ii) The use of imported clinker, inventory adjustments. iii) Increase in selling & distribution expenses and Zakat provision. The company’s revenue is expected to be at around SAR276.1mn vs. AJC estimates of SAR282.8mn in Q4-2015, which could be ascribed to a slight decline in the sales volume by 2.5%, where the average price per ton is expected to be around SAR243.1, as compared to SAR211 in 4Q14. During Q4-2015, the company registered a volumetric sales growth of 9.5%YoY, as sales in Q4-2015 stood at 1.14 MT vs. 1.03 MT in Q4-2015. Gross profit stood at SAR 119.4mn depicting a fall of 3.8%YoY, and an increase of 31.0%QoQ. Gross margin in Q4-2015 was affected due to higher cost of sales; where the cost per ton is expect to be at SAR138 vs. average SAR124.0 in 9M2015. Operating Profit stood at SAR 67.84mn depicting a decline of 8.9%YoY and an increase of 49.8%QoQ; where the managerial expenses (SG & A) and cement transportation incentives increased to SAR51.9mn, as compared to SAR 45.9mn in Q4-2015. (The company is yet to publish detailed financials for 4Q15).
Please read Disclaimer on the back
‘Overweight ’
Recommendation Current Price* (SAR)
10.90
Target Price (SAR)
17.40
59.60%
Upside / (Downside)
*prices as of 17th of January 2016
Key Financials SARmn (unless specified)
FY14
FY15E
FY16E
Revenues Growth % Net Income Growth % EPS
828 31.1% 243 22.7% 1.43
1,087 31.3% 255.5 5.1% 1.50
1,047 -3.6% 209.2 -18.12% 1.23
Source: Company reports, Aljazira Capital
Our estimates and valuation: Najran Cement Co. is expected to post SAR209.2 mn in net income (1.23 EPS) for 2016, recording a decline of 18.1%YoY for the year influenced by higher fuel cost and higher operating expenses, however, we remain ‘Overweight’ for the stock with target price at SAR17.40/share; indicating a potential upside of 59.60% over current market price of SAR10.90 share (as of 17th January 2016). The company is trading at attractive forward PE and P/B of 8.86x and 0.87x respectively based on our 2016 earnings forecast. We anticipate the company to pay a dividend of SAR 1.05 DPS (9.6% D/Y) in 2016.
Moreover, we expect the company’s sales in 2016 to record a slight decline of 3-5%, due to continued oversupply in the market, following high clinker Key Ratios inventory, additional cement capacity which came on stream in 2015, and lower-than-expected demand. In addition, costs per ton and operating SARmn (unless specified) FY14 FY15E FY16E expenses are estimated to hurt earnings in 2016 due to higher fuel cost and Gross Margin 48.2% 49.1% 46.5% transportation incentives. EBITDA Margin 47.8% 40.2% 36.0% 29.4% 23.5% 20.0% Higher subsided fuel cost to hurt the company’s net income by 13.1% in Net Margin 20.31x 9.71x 8.86x 2016 vis-à-vis 2015: The Saudi Arabian government recently announced an P/E 2.40x 1.17x 0.87x increase in the prices of all fuels, including natural gas. The price of heavy P/B 11.8% 12.0% 9.9% ROE fuel oil (HFO380) would increase to USD 3.8 per barrel (4.90–8.96 hallah per 7.9% 7.7% 6.5% ROA liter). The price of electricity was also revised upwards. Based on our estimates, Dividend Yield 2.1% 7.2% 9.6% cement production cost is expected to increase by SAR 6–7 per ton, in addition Source: Company reports, Aljazira Capital to the increase in electricity costs. We have reworked our financial model assumptions to incorporate the impact of these changes. The increase in prices of electricity and subsided fuel is also expected to increase the production costs Shareholders Pattern by about SAR29 mn according to the company. Based on the new assumptions, Shareholders Pattern Holding the increase in cost would be about SAR 31.4mn. Consequently, the net income Khalid Mohamed Abdullah Al Barrak 13.04% of the company would stand revised from SAR 240.9mn to SAR 209.2mn. The Abdullah A. S. Al Rajhi 12.43% 74.53% company is trading at 8.9x 1-year forward PE, compared with an average PE of Public Source: Company reports, Aljazira Capital 13.6x for the cement sector during 2013-15. 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 Key Market Data in its production line is likely to support overall margins. Market Cap(bn) 1.85 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 fuel cost and 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 3Q15, Najran Cement’s debt equity ratio stood at 0.39x. Based on our forecast estimates, Najran Cement is trading at a P/ E multiple of 8.9x for FY16E.
1
© All rights reserved
YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
-20.9% 31.80 10.75 170.0 Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250 [email protected]
Analyst
Sultan Al Kadi
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
sales
brokerage
Brokerage
Alaa Al-Yousef
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
Central Region
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
Jassim Al-Jubran +966 11 2256248 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+966 11 2256364 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Senior Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
January 2016
Najran Cement: Q4-2015 operating profits were below our expectation; where the company’s sales volume is lower than expected. ‘Overweight’ with a lower PT Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 4Q-15 282.8 66.4 0.39
Actual 4Q-15 NA* 53.73 0.32
Deviation (%) -19.0% *Not Available,
Lower than expected cement sales and higher production cost per ton to put more pressure on 4Q15 earnings: Q4-15 net profit below our estimates and showed a deviation of 19.0% from AJC estimates and 2.0% from market consensus of SAR54.8mn. Najran Cement Company posted net income of SAR 53.73mn; indicating a fall of 16.0%YoY and an increase of 67.5%QoQ. We believe the weakness was mainly attributed to i) 2.5% lower volumetric sales than expected. ii) The use of imported clinker, inventory adjustments. iii) Increase in selling & distribution expenses and Zakat provision. The company’s revenue is expected to be at around SAR276.1mn vs. AJC estimates of SAR282.8mn in Q4-2015, which could be ascribed to a slight decline in the sales volume by 2.5%, where the average price per ton is expected to be around SAR243.1, as compared to SAR211 in 4Q14. During Q4-2015, the company registered a volumetric sales growth of 9.5%YoY, as sales in Q4-2015 stood at 1.14 MT vs. 1.03 MT in Q4-2015. Gross profit stood at SAR 119.4mn depicting a fall of 3.8%YoY, and an increase of 31.0%QoQ. Gross margin in Q4-2015 was affected due to higher cost of sales; where the cost per ton is expect to be at SAR138 vs. average SAR124.0 in 9M2015. Operating Profit stood at SAR 67.84mn depicting a decline of 8.9%YoY and an increase of 49.8%QoQ; where the managerial expenses (SG & A) and cement transportation incentives increased to SAR51.9mn, as compared to SAR 45.9mn in Q4-2015. (The company is yet to publish detailed financials for 4Q15).
Please read Disclaimer on the back
‘Overweight ’
Recommendation Current Price* (SAR)
10.90
Target Price (SAR)
17.40
59.60%
Upside / (Downside)
*prices as of 17th of January 2016
Key Financials SARmn (unless specified)
FY14
FY15E
FY16E
Revenues Growth % Net Income Growth % EPS
828 31.1% 243 22.7% 1.43
1,087 31.3% 255.5 5.1% 1.50
1,047 -3.6% 209.2 -18.12% 1.23
Source: Company reports, Aljazira Capital
Our estimates and valuation: Najran Cement Co. is expected to post SAR209.2 mn in net income (1.23 EPS) for 2016, recording a decline of 18.1%YoY for the year influenced by higher fuel cost and higher operating expenses, however, we remain ‘Overweight’ for the stock with target price at SAR17.40/share; indicating a potential upside of 59.60% over current market price of SAR10.90 share (as of 17th January 2016). The company is trading at attractive forward PE and P/B of 8.86x and 0.87x respectively based on our 2016 earnings forecast. We anticipate the company to pay a dividend of SAR 1.05 DPS (9.6% D/Y) in 2016.
Moreover, we expect the company’s sales in 2016 to record a slight decline of 3-5%, due to continued oversupply in the market, following high clinker Key Ratios inventory, additional cement capacity which came on stream in 2015, and lower-than-expected demand. In addition, costs per ton and operating SARmn (unless specified) FY14 FY15E FY16E expenses are estimated to hurt earnings in 2016 due to higher fuel cost and Gross Margin 48.2% 49.1% 46.5% transportation incentives. EBITDA Margin 47.8% 40.2% 36.0% 29.4% 23.5% 20.0% Higher subsided fuel cost to hurt the company’s net income by 13.1% in Net Margin 20.31x 9.71x 8.86x 2016 vis-à-vis 2015: The Saudi Arabian government recently announced an P/E 2.40x 1.17x 0.87x increase in the prices of all fuels, including natural gas. The price of heavy P/B 11.8% 12.0% 9.9% ROE fuel oil (HFO380) would increase to USD 3.8 per barrel (4.90–8.96 hallah per 7.9% 7.7% 6.5% ROA liter). The price of electricity was also revised upwards. Based on our estimates, Dividend Yield 2.1% 7.2% 9.6% cement production cost is expected to increase by SAR 6–7 per ton, in addition Source: Company reports, Aljazira Capital to the increase in electricity costs. We have reworked our financial model assumptions to incorporate the impact of these changes. The increase in prices of electricity and subsided fuel is also expected to increase the production costs Shareholders Pattern by about SAR29 mn according to the company. Based on the new assumptions, Shareholders Pattern Holding the increase in cost would be about SAR 31.4mn. Consequently, the net income Khalid Mohamed Abdullah Al Barrak 13.04% of the company would stand revised from SAR 240.9mn to SAR 209.2mn. The Abdullah A. S. Al Rajhi 12.43% 74.53% company is trading at 8.9x 1-year forward PE, compared with an average PE of Public Source: Company reports, Aljazira Capital 13.6x for the cement sector during 2013-15. 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 Key Market Data in its production line is likely to support overall margins. Market Cap(bn) 1.85 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 fuel cost and 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 3Q15, Najran Cement’s debt equity ratio stood at 0.39x. Based on our forecast estimates, Najran Cement is trading at a P/ E multiple of 8.9x for FY16E.
1
© All rights reserved
YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
-20.9% 31.80 10.75 170.0 Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250 [email protected]
Analyst
Sultan Al Kadi
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General Manager – Brokerage Services &
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
sales
brokerage
Brokerage
Alaa Al-Yousef
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256060 [email protected]
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
Central Region
Abdullah Al-Rahit
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
Jassim Al-Jubran +966 11 2256248 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+966 11 2256364 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Senior Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
