Saudi Arabian Cement 01 October 2015 PDF
Saudi Arabian Cement 3Q2015 Preview
October 01, 2015
Demand Situation Worrying KSA cement sector is facing headwinds as cement demand is expected to slow signalled by record rise of +13% QTD and +10% Y/Y increase in inventories to 22.5 MT. Though ongoing seasonality trends in third quarter is a good reasoning for slowdown but impact of rising inventories suggests no signs of renewed demand. Hence, expect continued pricing pressure over the medium term hurting stellar margins which industry enjoyed over the years. In our view, a bearish scenario could emerge if government’s stance on spending tightens. This calls for further scaling back of projects thus pointing to the worries of the overall demand situation. We account such bearishness for 2H2015 and expect dispatches in 3Q2015 to grow by +5% Y/Y to reach 11.8 million tons (MT), while production to grow by +8% Y/Y to 40.8 MT. We believe producers are unable to sell-off excess inventories despite large price discounts to contractors, a failing sign of demand and price equation. Barring few large producers, most were unable to emerge out of the situation following the labour crisis since 2013 as large inventories and margin drop explains the issues in the sector. KSA’s possible shift towards constrained spending scenario following a decline in oil prices has dimmed prospects and a delayed recovery could be further gruesome. The government has hinted spending cuts through its delay or scale back in some of the key projects which includes the USD 22 billion Riyadh Metro. In such a scenario, the cement sector is expected to grow at low single digits unlike double digit growth rates expected earlier. The key priority would be to uphold and resolve excess inventory issues though lifting of its export ban, which we see as a near term trigger for an upside in the KSA cement sector. Despite concerns, KSA is determined to keep up its diversification efforts, hence it is likely to continue its capital spending over long term. We believe once KSA overcomes its near term hurdles on low oil price amid ongoing border security issues, it is prone to continue its spending. We await 2016 to see any shift which could elevate growth rate in cement demand.
Production growth of +9% Y/Y reasonable The improvement in production levels are as expected despite the partial impact of Ramadan and Haj which had spread over last two quarters. However, better utilization rates since last year has led to higher operating leverage and helped curtail its cash costs. We expect production growth of +9.2% Y/Y to 12.4 MT in 3Q2015 but lower by 25% Q/Q due to seasonal trends. Cement production is expected to witness a -8% M/M drop in September owing to Haj holidays though volumes in July surged by +60% M/M on lower base, while impact of Ramadan in June led to a -38% M/M decline. Table 1: Sau di Cemen t Produ cers Capacity an d Produ ction Company
Production (KMT)
Capacity (KMT) Cement Jun-15
Yamamah Cement
Jul-15
Clinker Aug-15
Jun-15
Jul-15
Aug-15
6,300
453
329
488
553
521
479
11,500
626
437
586
490
594
695
Eastern Cement
3,500
228
176
224
308
307
251
Qassim Cement
4,000
390
230
358
307
325
324
Yanbu Cement
6,300
542
312
545
620
659
420
Arab Cement
3,500
413
259
418
337
333
326
Southern Cement
6,000
656
454
667
627
718
567
Tabuk Cement
1,700
100
56
85
122
57
125
Riyadh Cement
3,600
285
-
280
285
-
290
Najran Cement
3,200
344
232
348
335
340
340
City Cement
1,750
211
126
224
274
292
283
Northern Cement
2,000
188
122
200
276
270
245
Jouf Cement
2,000
141
79
131
140
137
136
156
103
110
106
101
86
Saudi Cement
Alsafwa Cement Hail Cement
1,700
143
93
162
160
185
162
Total
57,050
4,876
3,008
4,826
4,940
4,839
4,729
Source: Yamama Cement
Santhosh Balakrishnan
Khalid Abdullah Almadhyan
+966-11-203-6809
+966-11-203-5013
[email protected]
[email protected]
Riyad Capital is licensed by the Saudi Arabia |1 Capital Markets Authority (No. 07070-37)
Saudi Arabian Cement 3Q2015 Preview Industry Inventories at peak Industry inventories of 22.5 MT have breached record levels, growing by +11% Y/Y and equating to 40% of industry’s current rated capacity. However companies under our coverage had inventory growth below industry rate with the exception of Yanbu and Southern which had witnessed an increase in inventory levels. Qassim and Yanbu have increased their inventory balances over the last two months by nearly +20%, while other’s inventory levels have grown by +11% from 2Q2015. However, inventories across the industry have increased by +13% since 2Q2015. We noted producers operating outside of Western and Central regions are witnessing supply glut with inventory balances equalling 90% of production over the last 8 months. This means producers sold only excess inventories since 2014 as production in 2015 was added to inventories, which points to a large concern on supply glut. Table 2: In v en tory Balan ce (000 ton s) Inventory
Company
Cem ent Jun-15
Yamamah Cement
Jul-15
Clinker Aug-15
Jun-15
Jul-15
Aug-15
88
108
88
3,010
3,261
3,299
232
228
223
3,225
3,413
3,564
Eastern Cement
28
37
42
1,114
1,255
1,293
Qassim Cement
106
109
102
816
949
973
Yanbu Cement
108
93
91
2,849
3,237
3,174
Saudi Cement
Arab Cement
54
61
42
344
547
630
Southern Cement
83
103
83
1,101
1,323
1,318
Tabuk Cement
56
57
56
589
607
674
Riyadh Cement
74
74
68
1,602
1,602
1,775
Najran Cement
58
75
77
2,596
2,724
2,738
City Cement
49
50
53
479
649
718
Northern Cement
55
55
53
926
985
906
Jouf Cement
35
30
34
569
629
639
Al Safwa Cement
24
35
33
29
39
42
Hail Cement
32
29
32
665
765
778
Total
1,082
1,144
1,077
19,914
21,985
22,521
Source: Yamama Cement
Sales volumes to touch 11.8 MT Industry sales volumes are expected to touch 11.8 MT in 3Q2015, a growth of +5% Y/Y with volumes at 7.8 MT in the first two months of 3Q2015. We believe with Ramadan being spread over June and July while Haj holidays falling in the last week of September, volumes are projected at 4.1 MT for September on lower economic activity. Table 3: Sau di Cemen t Compan ies Volu mes an d Imports (000 ton s) Local Sales
Company
Imported
Cem ent Jun-15
Clinker
Jul-15
Aug-15
Jun-15
Jul-15
Aug-15
Yamamah Cement
457
309
508
-
-
-
Saudi Cement
567
408
558
-
-
-
Eastern Cement
227
160
209
-
-
-
Qassim Cement
344
227
365
-
-
-
Yanbu Cement
527
327
547
-
-
-
Arab Cement
412
252
437
127
102
131
Southern Cement
644
434
687
-
-
-
Tabuk Cement
100
55
86
-
-
-
Riyadh Cement
251
-
278
-
-
-
Najran Cement
346
215
346
-
-
-
City Cement
194
125
221
-
-
-
Northern Cement
180
122
202
-
-
-
Jouf Cement
132
84
127
-
-
-
Alsafwa Cement
154
92
112
-
-
Hail Cement
142
96
159
-
-
-
Total
4,677
2,906
4,842
127
102
141
10
Source: Yamama Cement
|2
Saudi Arabian Cement 3Q2015 Preview Volume growth of +7% Y/Y in volumes sales Overall we forecast 6.6 MT of volume sales for 3Q2015, a growth of +7% Y/Y for the companies under our coverage. We expect Yanbu and Qassim to register much better than expected sales volumes during September as they prudently managed to lower their inventory levels through competitive pricing. Exhibit 1: Jul to Sep 2015 Sales (000 tons) 800 700 600 500 400 300 200 100 0 Yamama
Yanbu Jul-15
Qassim Aug-15
Southern
Saudi
Sep-15
Source: Yamama Cement, Riyad Capital
Revenues to witness a marginal decline but earnings to fall We expect a -1% Y/Y revenue decline in 3Q2015 as a result of drop in realization for companies under coverage and volumes declining by -1% during the same period. Overall most producers are expected to witness a decline in revenues owing to pricing pressure. We expect realization for the coverage group to be SAR 235/ton, declining by -7% Y/Y and -2% Q/Q for 3Q2015 on a gross basis. However adjusting price discounts, we expect larger decline in realization as price discounts increases cash costs affecting margins. Qassim Cement is expected to report higher cash costs as a result of costs associated with transportation to client sites. Table 4: 3Q2015 Estimates (SAR mln, except per share data) Revenues Company
EBITDA 3Q2014 3Q2015E Y/Y Chg
3Q2014
EPS
3Q2015E
Yamama
277
272
-2%
187
177
-5%
137
144
5%
0.68
0.71
Yanbu
296
304
3%
225
210
-7%
163
173
7%
1.03
1.10
Qassim
190
200
5%
131
138
6%
109
124
14%
1.21
1.38
Southern
378
400
6%
216
220
2%
285
208
-27%
2.04
1.49
Saudi
426
375
-12%
288
240
-17%
232
187
-19%
1.51
1.22
1,566
1,551
-1%
1,047
985
-6%
926
836
-10%
Group Total
Y/Y Chg
Net Income
3Q2014
3Q2015E Y/Y Chg 3Q2014 3Q2015E
Source: Riyad Capital, Company Reports
EBITDA for the companies under our coverage are expected to fall by -6% to SAR 985 million as margins continues to be pressured by higher price discounts. Cement producers continue to offer 10-15% discount which is reflected in falling EBITDA margins but revenues fall would be lower. On the earnings front, we expect a -10% decline in earnings for 3Q2015 to SAR 836 million on added pressure from Saudi Cement which is experiencing large inventory pressure affecting margins. A decline of -27% Y/Y for Southern Cement is due to large one-off income during 3Q2014, while normalized earnings is expected to be SAR 208 million.
|3
Saudi Arabian Cement 3Q2015 Preview Margins to subside on pricing concerns We expect the companies under coverage to witness margin pressure on costs related to building new capacities leading to lower operating leverage over the medium term. As a result, we expect gross margins to be lower by 200 bps to 55% for 3Q2015E. Qassim is expected to offer the highest margin in the industry due to its lower cash cost base, while Saudi Cement is expected to post the lowest margin due to large pricing pressure in depleting excess inventories. Consequently EBITDA margins are expected to be lower due to the relative seasonal impact of holidays. Industry EBITDA margins are expected to fall to 64% for 3Q2015E. We also expect the effect of lower yields from investment book as TASI fell by 18% on a QTD basis. As a result net margins for the companies under coverage is expected to fall to 55% though impact of one-off income is not estimated. Table 5: 3Q2015 Margin Estimates Gross
EBITDA
Net
Company
3Q2014
3Q2015E
3Q2014
3Q2015E
3Q2014
3Q2015E
Yamama
54%
54%
67%
65%
49%
53%
Yanbu
61%
55%
76%
69%
55%
57%
Qassim
62%
62%
69%
69%
57%
62%
Southern
50%
49%
57%
55%
75%
52%
Saudi
62%
61%
68%
64%
54%
50%
Group Average
58%
56%
67%
64%
58%
55%
Source: Riyad Capital, Company Reports
Valuation and Recommendation We have made revisions to our estimates for few companies in light of lower pricing environment. However, we maintain our target prices as our valuations focus on intrinsic valuation and any near term market volatility does not impact the long term value of the business. Despite continued market re-rating, we believe valuation levels in the cement sector in the range of 11-12x P/E for 2015E are more attractive than earlier 13-14x P/E levels. We continue to recommend a Buy for all companies except Qassim Cement which has a Hold rating. Amongst the group, Yanbu offers cheap valuation with 2015E P/E of 10.9x and yields of 7.1%, while Qassim is the highest at 13.6x but offers good consistency in yields with 6.0%. Table 6: Ratings and Valuation (SAR mln) TASI
Current
Market
Target
Company
Code
Price
Cap
Price
Yamama
3020
38.50
7,796
Yanbu
3060
53.67
Qassim
3040
Southern Saudi
Dividend
P/E
P/B
Rating
Yield
2014
2015E
2014
2015E
62.00
Buy
6.6%
11.6x
12.0x
2.1x
2.1x
8,453
78.00
Buy
7.1%
10.5x
10.9x
2.4x
2.3x
81.50
7,335
101.00
Hold
6.0%
13.0x
13.6x
3.7x
3.7x
3050
77.50
10,850
115.00
Buy
5.1%
10.4x
11.1x
3.7x
3.3x
3030
71.76
10,979
123.00
Buy
6.2%
10.2x
10.2x
3.4x
3.3x
11.1x
11.6x
3.1x
2.9x
Group Average Source: Riyad Capital
Conclusion We believe with lower projects spending, cement demand is unlikely to grow at double digits for 2016 especially with IMF’s oil price expectations below USD 65/bbl for 2016. However, with labor situation improvement and social projects unlikely to face any scrap or delay and the next few quarters producers are likely to focus on inventory destocking, which we believe is deemed to be ideal. We believe the scope for conviction in the cement sector are the relatively higher free cash flows amid decent dividend yields above 6%. The sector trades at 30% discount to TASI and offer lower valuations with P/E of 11.6x aiding a long term buy conviction.
|4
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
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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
October 01, 2015
Demand Situation Worrying KSA cement sector is facing headwinds as cement demand is expected to slow signalled by record rise of +13% QTD and +10% Y/Y increase in inventories to 22.5 MT. Though ongoing seasonality trends in third quarter is a good reasoning for slowdown but impact of rising inventories suggests no signs of renewed demand. Hence, expect continued pricing pressure over the medium term hurting stellar margins which industry enjoyed over the years. In our view, a bearish scenario could emerge if government’s stance on spending tightens. This calls for further scaling back of projects thus pointing to the worries of the overall demand situation. We account such bearishness for 2H2015 and expect dispatches in 3Q2015 to grow by +5% Y/Y to reach 11.8 million tons (MT), while production to grow by +8% Y/Y to 40.8 MT. We believe producers are unable to sell-off excess inventories despite large price discounts to contractors, a failing sign of demand and price equation. Barring few large producers, most were unable to emerge out of the situation following the labour crisis since 2013 as large inventories and margin drop explains the issues in the sector. KSA’s possible shift towards constrained spending scenario following a decline in oil prices has dimmed prospects and a delayed recovery could be further gruesome. The government has hinted spending cuts through its delay or scale back in some of the key projects which includes the USD 22 billion Riyadh Metro. In such a scenario, the cement sector is expected to grow at low single digits unlike double digit growth rates expected earlier. The key priority would be to uphold and resolve excess inventory issues though lifting of its export ban, which we see as a near term trigger for an upside in the KSA cement sector. Despite concerns, KSA is determined to keep up its diversification efforts, hence it is likely to continue its capital spending over long term. We believe once KSA overcomes its near term hurdles on low oil price amid ongoing border security issues, it is prone to continue its spending. We await 2016 to see any shift which could elevate growth rate in cement demand.
Production growth of +9% Y/Y reasonable The improvement in production levels are as expected despite the partial impact of Ramadan and Haj which had spread over last two quarters. However, better utilization rates since last year has led to higher operating leverage and helped curtail its cash costs. We expect production growth of +9.2% Y/Y to 12.4 MT in 3Q2015 but lower by 25% Q/Q due to seasonal trends. Cement production is expected to witness a -8% M/M drop in September owing to Haj holidays though volumes in July surged by +60% M/M on lower base, while impact of Ramadan in June led to a -38% M/M decline. Table 1: Sau di Cemen t Produ cers Capacity an d Produ ction Company
Production (KMT)
Capacity (KMT) Cement Jun-15
Yamamah Cement
Jul-15
Clinker Aug-15
Jun-15
Jul-15
Aug-15
6,300
453
329
488
553
521
479
11,500
626
437
586
490
594
695
Eastern Cement
3,500
228
176
224
308
307
251
Qassim Cement
4,000
390
230
358
307
325
324
Yanbu Cement
6,300
542
312
545
620
659
420
Arab Cement
3,500
413
259
418
337
333
326
Southern Cement
6,000
656
454
667
627
718
567
Tabuk Cement
1,700
100
56
85
122
57
125
Riyadh Cement
3,600
285
-
280
285
-
290
Najran Cement
3,200
344
232
348
335
340
340
City Cement
1,750
211
126
224
274
292
283
Northern Cement
2,000
188
122
200
276
270
245
Jouf Cement
2,000
141
79
131
140
137
136
156
103
110
106
101
86
Saudi Cement
Alsafwa Cement Hail Cement
1,700
143
93
162
160
185
162
Total
57,050
4,876
3,008
4,826
4,940
4,839
4,729
Source: Yamama Cement
Santhosh Balakrishnan
Khalid Abdullah Almadhyan
+966-11-203-6809
+966-11-203-5013
[email protected]
[email protected]
Riyad Capital is licensed by the Saudi Arabia |1 Capital Markets Authority (No. 07070-37)
Saudi Arabian Cement 3Q2015 Preview Industry Inventories at peak Industry inventories of 22.5 MT have breached record levels, growing by +11% Y/Y and equating to 40% of industry’s current rated capacity. However companies under our coverage had inventory growth below industry rate with the exception of Yanbu and Southern which had witnessed an increase in inventory levels. Qassim and Yanbu have increased their inventory balances over the last two months by nearly +20%, while other’s inventory levels have grown by +11% from 2Q2015. However, inventories across the industry have increased by +13% since 2Q2015. We noted producers operating outside of Western and Central regions are witnessing supply glut with inventory balances equalling 90% of production over the last 8 months. This means producers sold only excess inventories since 2014 as production in 2015 was added to inventories, which points to a large concern on supply glut. Table 2: In v en tory Balan ce (000 ton s) Inventory
Company
Cem ent Jun-15
Yamamah Cement
Jul-15
Clinker Aug-15
Jun-15
Jul-15
Aug-15
88
108
88
3,010
3,261
3,299
232
228
223
3,225
3,413
3,564
Eastern Cement
28
37
42
1,114
1,255
1,293
Qassim Cement
106
109
102
816
949
973
Yanbu Cement
108
93
91
2,849
3,237
3,174
Saudi Cement
Arab Cement
54
61
42
344
547
630
Southern Cement
83
103
83
1,101
1,323
1,318
Tabuk Cement
56
57
56
589
607
674
Riyadh Cement
74
74
68
1,602
1,602
1,775
Najran Cement
58
75
77
2,596
2,724
2,738
City Cement
49
50
53
479
649
718
Northern Cement
55
55
53
926
985
906
Jouf Cement
35
30
34
569
629
639
Al Safwa Cement
24
35
33
29
39
42
Hail Cement
32
29
32
665
765
778
Total
1,082
1,144
1,077
19,914
21,985
22,521
Source: Yamama Cement
Sales volumes to touch 11.8 MT Industry sales volumes are expected to touch 11.8 MT in 3Q2015, a growth of +5% Y/Y with volumes at 7.8 MT in the first two months of 3Q2015. We believe with Ramadan being spread over June and July while Haj holidays falling in the last week of September, volumes are projected at 4.1 MT for September on lower economic activity. Table 3: Sau di Cemen t Compan ies Volu mes an d Imports (000 ton s) Local Sales
Company
Imported
Cem ent Jun-15
Clinker
Jul-15
Aug-15
Jun-15
Jul-15
Aug-15
Yamamah Cement
457
309
508
-
-
-
Saudi Cement
567
408
558
-
-
-
Eastern Cement
227
160
209
-
-
-
Qassim Cement
344
227
365
-
-
-
Yanbu Cement
527
327
547
-
-
-
Arab Cement
412
252
437
127
102
131
Southern Cement
644
434
687
-
-
-
Tabuk Cement
100
55
86
-
-
-
Riyadh Cement
251
-
278
-
-
-
Najran Cement
346
215
346
-
-
-
City Cement
194
125
221
-
-
-
Northern Cement
180
122
202
-
-
-
Jouf Cement
132
84
127
-
-
-
Alsafwa Cement
154
92
112
-
-
Hail Cement
142
96
159
-
-
-
Total
4,677
2,906
4,842
127
102
141
10
Source: Yamama Cement
|2
Saudi Arabian Cement 3Q2015 Preview Volume growth of +7% Y/Y in volumes sales Overall we forecast 6.6 MT of volume sales for 3Q2015, a growth of +7% Y/Y for the companies under our coverage. We expect Yanbu and Qassim to register much better than expected sales volumes during September as they prudently managed to lower their inventory levels through competitive pricing. Exhibit 1: Jul to Sep 2015 Sales (000 tons) 800 700 600 500 400 300 200 100 0 Yamama
Yanbu Jul-15
Qassim Aug-15
Southern
Saudi
Sep-15
Source: Yamama Cement, Riyad Capital
Revenues to witness a marginal decline but earnings to fall We expect a -1% Y/Y revenue decline in 3Q2015 as a result of drop in realization for companies under coverage and volumes declining by -1% during the same period. Overall most producers are expected to witness a decline in revenues owing to pricing pressure. We expect realization for the coverage group to be SAR 235/ton, declining by -7% Y/Y and -2% Q/Q for 3Q2015 on a gross basis. However adjusting price discounts, we expect larger decline in realization as price discounts increases cash costs affecting margins. Qassim Cement is expected to report higher cash costs as a result of costs associated with transportation to client sites. Table 4: 3Q2015 Estimates (SAR mln, except per share data) Revenues Company
EBITDA 3Q2014 3Q2015E Y/Y Chg
3Q2014
EPS
3Q2015E
Yamama
277
272
-2%
187
177
-5%
137
144
5%
0.68
0.71
Yanbu
296
304
3%
225
210
-7%
163
173
7%
1.03
1.10
Qassim
190
200
5%
131
138
6%
109
124
14%
1.21
1.38
Southern
378
400
6%
216
220
2%
285
208
-27%
2.04
1.49
Saudi
426
375
-12%
288
240
-17%
232
187
-19%
1.51
1.22
1,566
1,551
-1%
1,047
985
-6%
926
836
-10%
Group Total
Y/Y Chg
Net Income
3Q2014
3Q2015E Y/Y Chg 3Q2014 3Q2015E
Source: Riyad Capital, Company Reports
EBITDA for the companies under our coverage are expected to fall by -6% to SAR 985 million as margins continues to be pressured by higher price discounts. Cement producers continue to offer 10-15% discount which is reflected in falling EBITDA margins but revenues fall would be lower. On the earnings front, we expect a -10% decline in earnings for 3Q2015 to SAR 836 million on added pressure from Saudi Cement which is experiencing large inventory pressure affecting margins. A decline of -27% Y/Y for Southern Cement is due to large one-off income during 3Q2014, while normalized earnings is expected to be SAR 208 million.
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Saudi Arabian Cement 3Q2015 Preview Margins to subside on pricing concerns We expect the companies under coverage to witness margin pressure on costs related to building new capacities leading to lower operating leverage over the medium term. As a result, we expect gross margins to be lower by 200 bps to 55% for 3Q2015E. Qassim is expected to offer the highest margin in the industry due to its lower cash cost base, while Saudi Cement is expected to post the lowest margin due to large pricing pressure in depleting excess inventories. Consequently EBITDA margins are expected to be lower due to the relative seasonal impact of holidays. Industry EBITDA margins are expected to fall to 64% for 3Q2015E. We also expect the effect of lower yields from investment book as TASI fell by 18% on a QTD basis. As a result net margins for the companies under coverage is expected to fall to 55% though impact of one-off income is not estimated. Table 5: 3Q2015 Margin Estimates Gross
EBITDA
Net
Company
3Q2014
3Q2015E
3Q2014
3Q2015E
3Q2014
3Q2015E
Yamama
54%
54%
67%
65%
49%
53%
Yanbu
61%
55%
76%
69%
55%
57%
Qassim
62%
62%
69%
69%
57%
62%
Southern
50%
49%
57%
55%
75%
52%
Saudi
62%
61%
68%
64%
54%
50%
Group Average
58%
56%
67%
64%
58%
55%
Source: Riyad Capital, Company Reports
Valuation and Recommendation We have made revisions to our estimates for few companies in light of lower pricing environment. However, we maintain our target prices as our valuations focus on intrinsic valuation and any near term market volatility does not impact the long term value of the business. Despite continued market re-rating, we believe valuation levels in the cement sector in the range of 11-12x P/E for 2015E are more attractive than earlier 13-14x P/E levels. We continue to recommend a Buy for all companies except Qassim Cement which has a Hold rating. Amongst the group, Yanbu offers cheap valuation with 2015E P/E of 10.9x and yields of 7.1%, while Qassim is the highest at 13.6x but offers good consistency in yields with 6.0%. Table 6: Ratings and Valuation (SAR mln) TASI
Current
Market
Target
Company
Code
Price
Cap
Price
Yamama
3020
38.50
7,796
Yanbu
3060
53.67
Qassim
3040
Southern Saudi
Dividend
P/E
P/B
Rating
Yield
2014
2015E
2014
2015E
62.00
Buy
6.6%
11.6x
12.0x
2.1x
2.1x
8,453
78.00
Buy
7.1%
10.5x
10.9x
2.4x
2.3x
81.50
7,335
101.00
Hold
6.0%
13.0x
13.6x
3.7x
3.7x
3050
77.50
10,850
115.00
Buy
5.1%
10.4x
11.1x
3.7x
3.3x
3030
71.76
10,979
123.00
Buy
6.2%
10.2x
10.2x
3.4x
3.3x
11.1x
11.6x
3.1x
2.9x
Group Average Source: Riyad Capital
Conclusion We believe with lower projects spending, cement demand is unlikely to grow at double digits for 2016 especially with IMF’s oil price expectations below USD 65/bbl for 2016. However, with labor situation improvement and social projects unlikely to face any scrap or delay and the next few quarters producers are likely to focus on inventory destocking, which we believe is deemed to be ideal. We believe the scope for conviction in the cement sector are the relatively higher free cash flows amid decent dividend yields above 6%. The sector trades at 30% discount to TASI and offer lower valuations with P/E of 11.6x aiding a long term buy conviction.
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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
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