Qassim Cement Co. - Aljazira Capital
Qassim Cement Co. April 2016
Qassim Cement: Q1-2016 profits below expectation; the company witnessed a weak result due to higher than expected production cost. ‘Overweight’ recommendation reiterated with lower TP. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 1Q-16 285.07 147.1 1.64
Actual 1Q-16 NA* 135.4 1.50
Deviation (%) -7.9% *Not Available,
Despite 13.5%YoY sales growth, higher cost/ton and discounted selling price to put pressure on 1Q2016 earnings: 1Q2016 net profit came below our expectation and showed a deviation of -7.9% from our estimates and -9.5% from the market Consensus of SAR 149.6mn. Qassim Cement Company posted net income of SAR 135.41mn; indicating a fall of 16.8%YoY and 3.6%QoQ. We believe the weak result was mainly associated to i) higher than expected production cost/ton due to fuel repricing. ii) Continued decline in selling price/ton due to oversupply in the market. The company’s revenue is expected to be at around SAR 280.7mn vs. our estimate of SAR 285.1mn in Q1-2016, which could be ascribed to a significant YoY decline in the sales price per ton, where the average price per ton is expected to be around SAR224, as compared to SAR 246.9 in the comparison period and SAR232.4 in FY2015. During 2M-2016, the company registered a volumetric sales growth of 13.5%, as sales in the first two months in 2016 stood at 832 thousand ton vs. 733 thousand ton in 2M-2015. Gross profit stood at SAR 145.5mn depicting a decline of 16.8%YoY, and 8.5%QoQ. Gross margin in Q1-2016 is expected to shrink to 51.8% from 62.5% in 1Q2015. Based on our calculation, we estimate the cost per ton to increase to SAR 108/ton in 1Q2016 vs. SAR 92.6/ton in Q1-2015. Operating Profit for Q1-2016 stood at SAR 138.4mn depicting a fall of 17.1%YoY, and 9.1%QoQ; where the company has noticeably reduced its OPEX (SG & A) to SAR 7.0mn, as compared to SAR 9.5mn in Q1-2015. (The company is yet to publish detailed financials for 1Q16). Higher 2M-2016 sales growth than the market average and continued clinker production at high level: During January–February 2016, Qassim Cement’s sales rose by 13.5%YoY to 0.83MT, as compared to the sector growth rate of 4.7%YoY in the same period. During the same period, industry-wide clinker inventory increased by 3.4% to 21.58MT, as compared to 9.1% increase in Qassim clinker inventory. This indicates higher clinker production than the average market rate. We believe the rise in clinker production is to maintain at least 2 months of inventory level based on production capacity. Pure defensive play due to strong balance sheet, attractive dividend yield, and reasonable valuations: Qassim Cement’s dividend payout ratio has been over 90% since 2009. The company maintained its dividend of SAR 6.25 per share, resulting in a higher payout ratio of 96%. We believe the company would maintain a dividend of SAR 5.5 per share in 2016, which would again translate into a dividend payout of over 97.8%, as low CAPEX and zero debt would ensure profit distribution among shareholders. We believe Qassim Cement is a pure defensive play, with an estimated dividend per share of SAR 5.5 for 2016, providing a dividend yield of 9.0%, among the best in the sector. Additionally, based on our forecast estimates, Qassim Cement is trading at a PE multiple of 10.89x for FY16E, which is between the low-PE level of the cement sector. Our estimates and valuation: Qassim Cement Co. is expected to post SAR 506.2mn in net income (5.62 EPS) for 2016, recording a decline of 13.6%YoY for the year influenced by higher fuel cost and low level in cement price per ton, however, we remain ‘Overweight’ for the stock with target price at SAR 69.70/share; indicating a potential upside of 13.4% over current market price of SAR 61.25/share (as of 10th April 2016). The company is trading at attractive forward PE and P/B of 10.9x and 2.8x respectively based on our 2016 earnings forecast. We anticipate the company to pay a dividend of SAR 5.5 DPS (9.0% D/Y) in 2016 owing to a strong operating cash flow and no additional capital expenditure in the medium term.
Please read Disclaimer on the back
Recommendation
‘Overweight ’
Current Price* (SAR)
61.25 69.70
Target Price (SAR)
13.4%
Upside / (Downside)
*prices as of 10th of April 2016
Key Financials SARmn (unless specified)
FY14
FY15
FY16E
Revenues Growth % Net Income Growth % EPS
986.0 -6.2% 563.1 -3.7% 6.26
1,024 3.9% 586.1 4.0% 6.52
1,063 3.8% 506.2 -13.6% 5.62
Source: Company reports, Aljazira Capital
Key Ratios FY14
FY15
FY16E
62.4% 66.9% 57.7% 14.97x 4.27x 12.36x
61.5% 66.2% 57.2% 10.76x 3.12x 9.89x
51.9% 57.3% 47.6% 10.89x 2.77x 11.32x
28.6% 25.8% 6.3%
29.0% 24.9% 8.6%
25.5% 21.2% 9.0%
SARmn (unless specified) Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (mn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
5.51 -12.2% 99.25 55.75 90.0 Source: Bloomberg, Aljazira Capital
Shareholders Pattern Shareholders Pattern Public Pension Agency General Organization for Social Insurance Public Investment Fund Public
Holding 5.67% 15.09% 23.35% 55.89%
Source: Company reports, Aljazira Capital
Price Performance 110
11000
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90
9000 8000
80
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Ja nM 14 ar M 14 ay -1 Ju 4 l-1 Se 4 pN 14 ov Ja 14 nM 15 ar M 15 ay -1 Ju 5 l-1 Se 5 pN 15 ov Ja 15 nM 16 ar -1 6
Investment Update
Tadawul
Qassim Cement
Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran
1
+966 11 2256248 [email protected]
© All rights reserved
RESEARCH DIVISION
Acting Head of Research
RESEARCH DIVISION
BROKERAGE AND INVESTMENT CENTERS DIVISION
Talha Nazar
Sultan Al Kadi
Analyst
Jassim Al-Jubran
+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]
+966 11 2256364 [email protected]
+966 11 2256248 [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
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
Qassim Cement: Q1-2016 profits below expectation; the company witnessed a weak result due to higher than expected production cost. ‘Overweight’ recommendation reiterated with lower TP. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 1Q-16 285.07 147.1 1.64
Actual 1Q-16 NA* 135.4 1.50
Deviation (%) -7.9% *Not Available,
Despite 13.5%YoY sales growth, higher cost/ton and discounted selling price to put pressure on 1Q2016 earnings: 1Q2016 net profit came below our expectation and showed a deviation of -7.9% from our estimates and -9.5% from the market Consensus of SAR 149.6mn. Qassim Cement Company posted net income of SAR 135.41mn; indicating a fall of 16.8%YoY and 3.6%QoQ. We believe the weak result was mainly associated to i) higher than expected production cost/ton due to fuel repricing. ii) Continued decline in selling price/ton due to oversupply in the market. The company’s revenue is expected to be at around SAR 280.7mn vs. our estimate of SAR 285.1mn in Q1-2016, which could be ascribed to a significant YoY decline in the sales price per ton, where the average price per ton is expected to be around SAR224, as compared to SAR 246.9 in the comparison period and SAR232.4 in FY2015. During 2M-2016, the company registered a volumetric sales growth of 13.5%, as sales in the first two months in 2016 stood at 832 thousand ton vs. 733 thousand ton in 2M-2015. Gross profit stood at SAR 145.5mn depicting a decline of 16.8%YoY, and 8.5%QoQ. Gross margin in Q1-2016 is expected to shrink to 51.8% from 62.5% in 1Q2015. Based on our calculation, we estimate the cost per ton to increase to SAR 108/ton in 1Q2016 vs. SAR 92.6/ton in Q1-2015. Operating Profit for Q1-2016 stood at SAR 138.4mn depicting a fall of 17.1%YoY, and 9.1%QoQ; where the company has noticeably reduced its OPEX (SG & A) to SAR 7.0mn, as compared to SAR 9.5mn in Q1-2015. (The company is yet to publish detailed financials for 1Q16). Higher 2M-2016 sales growth than the market average and continued clinker production at high level: During January–February 2016, Qassim Cement’s sales rose by 13.5%YoY to 0.83MT, as compared to the sector growth rate of 4.7%YoY in the same period. During the same period, industry-wide clinker inventory increased by 3.4% to 21.58MT, as compared to 9.1% increase in Qassim clinker inventory. This indicates higher clinker production than the average market rate. We believe the rise in clinker production is to maintain at least 2 months of inventory level based on production capacity. Pure defensive play due to strong balance sheet, attractive dividend yield, and reasonable valuations: Qassim Cement’s dividend payout ratio has been over 90% since 2009. The company maintained its dividend of SAR 6.25 per share, resulting in a higher payout ratio of 96%. We believe the company would maintain a dividend of SAR 5.5 per share in 2016, which would again translate into a dividend payout of over 97.8%, as low CAPEX and zero debt would ensure profit distribution among shareholders. We believe Qassim Cement is a pure defensive play, with an estimated dividend per share of SAR 5.5 for 2016, providing a dividend yield of 9.0%, among the best in the sector. Additionally, based on our forecast estimates, Qassim Cement is trading at a PE multiple of 10.89x for FY16E, which is between the low-PE level of the cement sector. Our estimates and valuation: Qassim Cement Co. is expected to post SAR 506.2mn in net income (5.62 EPS) for 2016, recording a decline of 13.6%YoY for the year influenced by higher fuel cost and low level in cement price per ton, however, we remain ‘Overweight’ for the stock with target price at SAR 69.70/share; indicating a potential upside of 13.4% over current market price of SAR 61.25/share (as of 10th April 2016). The company is trading at attractive forward PE and P/B of 10.9x and 2.8x respectively based on our 2016 earnings forecast. We anticipate the company to pay a dividend of SAR 5.5 DPS (9.0% D/Y) in 2016 owing to a strong operating cash flow and no additional capital expenditure in the medium term.
Please read Disclaimer on the back
Recommendation
‘Overweight ’
Current Price* (SAR)
61.25 69.70
Target Price (SAR)
13.4%
Upside / (Downside)
*prices as of 10th of April 2016
Key Financials SARmn (unless specified)
FY14
FY15
FY16E
Revenues Growth % Net Income Growth % EPS
986.0 -6.2% 563.1 -3.7% 6.26
1,024 3.9% 586.1 4.0% 6.52
1,063 3.8% 506.2 -13.6% 5.62
Source: Company reports, Aljazira Capital
Key Ratios FY14
FY15
FY16E
62.4% 66.9% 57.7% 14.97x 4.27x 12.36x
61.5% 66.2% 57.2% 10.76x 3.12x 9.89x
51.9% 57.3% 47.6% 10.89x 2.77x 11.32x
28.6% 25.8% 6.3%
29.0% 24.9% 8.6%
25.5% 21.2% 9.0%
SARmn (unless specified) Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (mn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
5.51 -12.2% 99.25 55.75 90.0 Source: Bloomberg, Aljazira Capital
Shareholders Pattern Shareholders Pattern Public Pension Agency General Organization for Social Insurance Public Investment Fund Public
Holding 5.67% 15.09% 23.35% 55.89%
Source: Company reports, Aljazira Capital
Price Performance 110
11000
100
10000
90
9000 8000
80
7000
70
6000
60
5000
50
Ja nM 14 ar M 14 ay -1 Ju 4 l-1 Se 4 pN 14 ov Ja 14 nM 15 ar M 15 ay -1 Ju 5 l-1 Se 5 pN 15 ov Ja 15 nM 16 ar -1 6
Investment Update
Tadawul
Qassim Cement
Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran
1
+966 11 2256248 [email protected]
© All rights reserved
RESEARCH DIVISION
Acting Head of Research
RESEARCH DIVISION
BROKERAGE AND INVESTMENT CENTERS DIVISION
Talha Nazar
Sultan Al Kadi
Analyst
Jassim Al-Jubran
+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]
+966 11 2256364 [email protected]
+966 11 2256248 [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
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
