Saudi Arabian Cement 31 March 2016 PDF
Saudi Arabian Cement 1Q2016 Preview
March 31, 2016
Earnings Slowdown Priced-in The Cement sector in Saudi Arabia is facing slight headwinds due to continued impact of competitive pricing, excess inventory and partial removal of energy subsidies affecting earnings in 2016. These concerns have led to a correction in TASI Cement Index (TCEM), but recovered gradually, ending the quarter with a modest decline of -5% versus TASI’s -10%. We believe most negatives are priced-in. Sector valuations have narrowed to 2016E P/E of 12.2x (consensus) versus 14.6x, a year ago and currently trading cheaper to MENA cement peers at 13.7x. Some of the key developments posing concerns are the declining trends in project awards, peaked supply in residential market and slow deals in real estate sector. Firstly, MEED’s data on project awards recorded a decline of -25% Q/Q in 4Q2015 and reached SAR 45 billion, though 2015 witnessed a marginal growth of +1% Y/Y to SAR 223 billion. Secondly, an oversupplied scenario for residential projects in Riyadh and Jeddah with combined supply of 107K units for 2016-17. This leaves less scope for further large-scale developments except government backed projects. Lastly, real estate transactions declined by -18% in 1Q2016 to SAR 78 billion, marking consecutive quarterly decline. Despite these concerns, some expected positives are in place such as i) tax on white land-enhancing real estate developments ii) increasing the LTV ratio to 85%-making housing affordable to citizens iii) restructuring the real estate development fund-enhancing credit availability and iv) lifting the cement export ban. These positives are expected to drive cement consumption and pave the way forward.
Maintaining a reasonable growth rate; efficient usage of production lines Despite the large excess inventory, we expect production levels to be healthy, after producers maintained utilization rates in excess of 90%. As a result, production is expected to reach 17.2 MT in 1Q2016, a growth of +6% Q/Q and +4% Y/Y. According to sector monthly data, 11.2 MT of cement is produced in the first two months of this quarter and we expect another 6.0 MT of cement in March. The healthy growth rate on a QTD basis denotes expectations of sustainable demand on the part of producers. Table 1: Sau di Cemen t Produ cers Capacity , Produ ction an d In v en tory Company
Production (KMT)
Capacity (KMT) Cem ent Dec-15
Jan-16
6,300
549
555
11,500
642
Eastern Cement
3,500
Qassim Cement
Inventory Clinker
Clinker
Dec-15
Jan-16
Feb-16
Dec-15
Jan-16
Feb-16
Dec-15
Jan-16
Feb-16
497
456
425
410
88
92
74
3,397
3,316
3,272
737
650
686
664
635
150
191
182
3,983
3,974
4,005
289
290
267
323
282
280
32
32
31
1,440
1,516
1,543
4,000
405
439
408
334
332
284
43
58
59
917
906
883
Yanbu Cement
6,300
672
624
603
551
450
521
100
94
95
3,191
3,106
3,108
Arab Cement
3,500
532
480
471
417
302
303
59
45
42
666
530
415
Southern Cement
6,000
768
774
716
692
492
621
66
82
72
1,071
747
622
Tabuk Cement
1,700
121
121
129
136
59
84
65
45
47
883
854
842
Riyadh Cement
3,600
320
345
344
317
296
282
39
24
33
1,748
1,726
1,692
Najran Cement
3,200
374
343
350
314
312
220
57
48
78
2,486
2,436
2,308
City Cement
1,750
275
273
300
301
238
300
35
18
31
820
796
807
Northern Cement
2,000
238
240
230
179
186
144
44
43
41
630
589
513
Jouf Cement
2,000
172
155
165
105
123
143
51
45
49
546
524
510
173
197
201
166
165
154
35
26
41
184
181
173
Yamamah Cement Saudi Cement
Alsafwa Cement
Feb-16
Cem ent
Hail Cement
1,700
188
172
138
89
183
172
24
34
31
819
842
887
Total
57,050
5,718
5,745
5,469
5,066
4,509
4,553
888
877
906
22,781
22,043
21,580
Source: Yamama Cement
Inventory pressure for producers, a mixed trend Industry inventories of 21.6 MT (table-1) have declined by -5% since the beginning of 2016 but still remains high. We note that producers are making efforts to deplete their inventory levels and in some cases, it turned below the mandatory inventory levels.
Santhosh Balakrishnan
[email protected]
+966-11-203-6809
Khalid Abdullah Almadhyan
[email protected]
+966-11-203-6813
1 Riyad Capital is licensed by the Saudi |Arabia Capital Markets Authority (No. 07070-37)
Saudi Arabian Cement 1Q2016 Preview Producers such as Arabian and Northern’s inventory levels recorded high depletion and reached even below the mandatory 60-day inventory, while Southern and Qassim’s were at par. However, few companies under our coverage depleted their inventories at a lower rate and on a combined basis, depleted by -5% YTD (matching industry levels). Notably, Saudi Cement is well above the industry average, which is a large negative but large-scale producers do witness these challenges. Overall, cement companies are stressing hard to reduce their inventory and manage it amicably.
Sales volumes to touch 17.1 MT 1Q2016 Industry sales volumes are expected to reach 17.1 MT in 1Q2016, with a growth of +6% Q/Q and +5% Y/Y. Volumes are currently at 11.1 MT and expected to add another 6.0 MT in March. A closer look at demand patterns suggests that volumes are higher in the first quarter and then gradually decline; hence 1Q2016 provides directions for the rest of the year. Table 2: Sau di Cemen t Compan ies Volu mes an d Imports (000 ton s) Local Sales
Company
Imported
Cem ent Dec-15
Clinker
Jan-16
Feb-16
Dec-15
Jan-16
Feb-16
Yamamah Cement
545
551
515
-
-
-
Saudi Cement
649
655
621
-
-
-
Eastern Cement
279
275
254
-
-
-
Qassim Cement
420
425
407
-
-
-
Yanbu Cement
660
630
602
-
-
-
Arab Cement
513
492
474
-
-
-
Southern Cement
779
760
726
-
-
-
Tabuk Cement
117
130
127
-
-
-
Riyadh Cement
328
350
323
-
-
-
Najran Cement
380
354
320
-
-
-
City Cement
282
290
287
-
-
-
Northern Cement
240
241
232
-
-
-
Jouf Cement
182
161
161
-
-
-
Alsafwa Cement
179
206
186
-
-
Hail Cement
183
161
141
-
-
5,736
5,681
5,376
-
-
Total
37 37
Source: Yamama Cement
A growth of +2% Y/Y in volumes sales Overall, we forecast 9.1 MT of volume sales in 1Q2016 for the companies under our coverage, a growth of +2% Y/Y. We expect Yamama and Qassim to register much better than expected sales during March as they take advantage of operating in the central region. Additionally, it serves key infrastructure projects especially the Riyadh metro. Exhibit 1: Jan to Mar 2016 Sales (000 tons) 900 800 700 600 500 400
300 200 100 0
Yamama
Yanbu Jan-16
Qassim Feb-16
Southern
Saudi
Mar-16
Source: Yamama Cement, Riyad Capital
|2
Saudi Arabian Cement 1Q2016 Preview
Revenues to fall slightly despite pick up in volumes Revenue for the stocks under our coverage is expected to decline by -4% Y/Y to SAR 2.1 billion for 1Q2016 from SAR 2.2 billion in 1Q2015 following a decline in cement prices. Realization is set to drop by -4% to SAR 223/ton for 1Q2016, while adjusting price discounts, the net realization would be at least 5-10% lower than gross realization. Yamama Cement is likely to report much lower net realization as they compete in Central region where most producers are aiming to deplete their excess capacity with lower pricing. Table 3: 1Q2016 Estimates (SAR mln, except EPS) Revenues Company
1Q2015
1Q2016E
EBITDA Y/Y Chg
1Q2015 1Q2016E
Net Income Y/Y Chg
1Q2015
1Q2016E
EPS Y/Y Chg
1Q2015
1Q2016E
Yamama
339
372
10%
215
212
-1%
175
164
-6%
0.86
0.81
Yanbu
437
432
-1%
266
208
-22%
207
191
-8%
1.32
1.20
Qassim
282
280
-1%
188
167
-11%
163
146
-10%
1.81
1.62
Southern
559
511
-9%
313
276
-12%
266
235
-12%
1.90
1.68
Saudi
551
496
-10%
364
302
-17%
303
243
-20%
1.98
1.59
2,168
2,091
-4%
1,346
1,165
-13%
1,114
979
-12%
Group Total
Source: Riyad Capital, Company Reports
Profitability affected on two counts; lower realizaion and higher energy costs EBITDA for the companies under our coverage is expected to fall by -13% Y/Y to SAR 1.2 billion as higher price discounts and delivery costs hinder margins. Additionally the impact of partial removal on energy subsidies will start affecting margins starting this quarter. On the earnings front, we expect a -12% Y/Y decline in earnings for 1Q2016 to SAR 979 million due to detrimental effect of price and cost inflation. The impact of portfolio losses is awaited as TASI corrected by -10% during the quarter. Notably, Saudi Cement Co’s (TASI: 3030) earnings are set to decline by -20% as cost pressure continues to haunt.
Margin scenario is at new levels; impact awaited We expect the companies under coverage to witness margin deterioration by 5% on a gross margin level especially the old-age producers. We highlighted possible impact of energy subsidy in our detailed note published recently. Amongst our coverage, Qassim is expected to offer the highest margin due to its access to central province amid a lower cash cost base. We believe overall industry EBITDA margins are expected to fall to 56% for 1Q2016. The negative impact of investment portfolios is to be ascertained after markets crashed in January. Overall, we expect net margins for the companies to fall to 47%. Table 4: 1Q2016 Margin Estimates Gross
Company
EBITDA
Net
1Q2015
1Q2016E
1Q2015
1Q2016E
1Q2015
1Q2016E
Yamama
54%
54%
63%
57%
52%
44%
Yanbu
51%
48%
61%
48%
47%
44%
Qassim
62%
55%
67%
60%
58%
52%
Southern
52%
48%
56%
54%
48%
46%
Saudi
62%
50%
66%
61%
55%
49%
Group Average
56%
51%
63%
56%
52%
47%
Source: Riyad Capital, Company Reports
|3
Saudi Arabian Cement 1Q2016 Preview
Valuation and Recommendation: Maintain Buy for all We had revised our estimates following company’s announcement on the financial impact of energy subsidy removal and 4Q2015 earnings. We believe the exact impact would be more visible in 1Q2016 earnings giving directions or more guidance for the rest of 2016. For now, we maintain our target prices and continue to maintain the same ratings. Table 5: Ratings and Valuation (SAR mln) TASI
Current
Market
Target
Company
Code
Price
Cap
Price
Rating
Yield
2015
2016E
2015
2016E
Yamama
3020
27.83
5,636
35.00
Buy
10.8%
8.8x
10.0x
1.5x
1.5x
Yanbu
3060
48.99
7,716
58.00
Buy
9.2%
9.6x
10.6x
2.2x
2.1x
Qassim
3040
61.50
5,535
78.00
Buy
9.3%
9.4x
10.7x
2.7x
2.8x
Southern
3050
72.67
10,174
75.00
Buy
7.6%
10.4x
11.5x
3.3x
3.2x
Saudi
3030
60.47
9,252
71.00
Buy
9.9%
9.8x
10.2x
2.9x
2.8x
9.6x
10.6x
2.5x
2.5x
Group Average
Dividend
P/E
P/B
Source: Riyad Capital
Over the quarter, sector’s median P/E were priced attractively and trades at 15% discount to TASI with a 2016E P/E of 12.2x versus TASI’s 14.3x. TCEM has relatively outperformed TASI by +5%. Notably, Yanbu Cement was the best outperformer in the sector with a +20% return followed by Southern Cement with a +10% increase in stock prices. Amongst the group, Yamama offers attractive valuation profile with 2016E P/E of 10.0x and yields of 10.8%, while Southern trades at expensive levels with a P/E of 11.5x and lower yields of 7.6%.
Conclusion We believe cement demand is expected to grow at low single digits for the rest of 2016. We expect a short-term slowdown due to prioritization of few infrastructure projects causing demand fluctuation, but minimal. However, government’s pace in developing residential and infrastructure projects are likely to continue and provide enough cushion for sustainable demand, though at lower growth rates. We believe among TASI sectors, TCEM is relatively placed better in terms of consistency in earnings over the long term and dividend payouts, barring few short-term hindrances.
|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.
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March 31, 2016
Earnings Slowdown Priced-in The Cement sector in Saudi Arabia is facing slight headwinds due to continued impact of competitive pricing, excess inventory and partial removal of energy subsidies affecting earnings in 2016. These concerns have led to a correction in TASI Cement Index (TCEM), but recovered gradually, ending the quarter with a modest decline of -5% versus TASI’s -10%. We believe most negatives are priced-in. Sector valuations have narrowed to 2016E P/E of 12.2x (consensus) versus 14.6x, a year ago and currently trading cheaper to MENA cement peers at 13.7x. Some of the key developments posing concerns are the declining trends in project awards, peaked supply in residential market and slow deals in real estate sector. Firstly, MEED’s data on project awards recorded a decline of -25% Q/Q in 4Q2015 and reached SAR 45 billion, though 2015 witnessed a marginal growth of +1% Y/Y to SAR 223 billion. Secondly, an oversupplied scenario for residential projects in Riyadh and Jeddah with combined supply of 107K units for 2016-17. This leaves less scope for further large-scale developments except government backed projects. Lastly, real estate transactions declined by -18% in 1Q2016 to SAR 78 billion, marking consecutive quarterly decline. Despite these concerns, some expected positives are in place such as i) tax on white land-enhancing real estate developments ii) increasing the LTV ratio to 85%-making housing affordable to citizens iii) restructuring the real estate development fund-enhancing credit availability and iv) lifting the cement export ban. These positives are expected to drive cement consumption and pave the way forward.
Maintaining a reasonable growth rate; efficient usage of production lines Despite the large excess inventory, we expect production levels to be healthy, after producers maintained utilization rates in excess of 90%. As a result, production is expected to reach 17.2 MT in 1Q2016, a growth of +6% Q/Q and +4% Y/Y. According to sector monthly data, 11.2 MT of cement is produced in the first two months of this quarter and we expect another 6.0 MT of cement in March. The healthy growth rate on a QTD basis denotes expectations of sustainable demand on the part of producers. Table 1: Sau di Cemen t Produ cers Capacity , Produ ction an d In v en tory Company
Production (KMT)
Capacity (KMT) Cem ent Dec-15
Jan-16
6,300
549
555
11,500
642
Eastern Cement
3,500
Qassim Cement
Inventory Clinker
Clinker
Dec-15
Jan-16
Feb-16
Dec-15
Jan-16
Feb-16
Dec-15
Jan-16
Feb-16
497
456
425
410
88
92
74
3,397
3,316
3,272
737
650
686
664
635
150
191
182
3,983
3,974
4,005
289
290
267
323
282
280
32
32
31
1,440
1,516
1,543
4,000
405
439
408
334
332
284
43
58
59
917
906
883
Yanbu Cement
6,300
672
624
603
551
450
521
100
94
95
3,191
3,106
3,108
Arab Cement
3,500
532
480
471
417
302
303
59
45
42
666
530
415
Southern Cement
6,000
768
774
716
692
492
621
66
82
72
1,071
747
622
Tabuk Cement
1,700
121
121
129
136
59
84
65
45
47
883
854
842
Riyadh Cement
3,600
320
345
344
317
296
282
39
24
33
1,748
1,726
1,692
Najran Cement
3,200
374
343
350
314
312
220
57
48
78
2,486
2,436
2,308
City Cement
1,750
275
273
300
301
238
300
35
18
31
820
796
807
Northern Cement
2,000
238
240
230
179
186
144
44
43
41
630
589
513
Jouf Cement
2,000
172
155
165
105
123
143
51
45
49
546
524
510
173
197
201
166
165
154
35
26
41
184
181
173
Yamamah Cement Saudi Cement
Alsafwa Cement
Feb-16
Cem ent
Hail Cement
1,700
188
172
138
89
183
172
24
34
31
819
842
887
Total
57,050
5,718
5,745
5,469
5,066
4,509
4,553
888
877
906
22,781
22,043
21,580
Source: Yamama Cement
Inventory pressure for producers, a mixed trend Industry inventories of 21.6 MT (table-1) have declined by -5% since the beginning of 2016 but still remains high. We note that producers are making efforts to deplete their inventory levels and in some cases, it turned below the mandatory inventory levels.
Santhosh Balakrishnan
[email protected]
+966-11-203-6809
Khalid Abdullah Almadhyan
[email protected]
+966-11-203-6813
1 Riyad Capital is licensed by the Saudi |Arabia Capital Markets Authority (No. 07070-37)
Saudi Arabian Cement 1Q2016 Preview Producers such as Arabian and Northern’s inventory levels recorded high depletion and reached even below the mandatory 60-day inventory, while Southern and Qassim’s were at par. However, few companies under our coverage depleted their inventories at a lower rate and on a combined basis, depleted by -5% YTD (matching industry levels). Notably, Saudi Cement is well above the industry average, which is a large negative but large-scale producers do witness these challenges. Overall, cement companies are stressing hard to reduce their inventory and manage it amicably.
Sales volumes to touch 17.1 MT 1Q2016 Industry sales volumes are expected to reach 17.1 MT in 1Q2016, with a growth of +6% Q/Q and +5% Y/Y. Volumes are currently at 11.1 MT and expected to add another 6.0 MT in March. A closer look at demand patterns suggests that volumes are higher in the first quarter and then gradually decline; hence 1Q2016 provides directions for the rest of the year. Table 2: Sau di Cemen t Compan ies Volu mes an d Imports (000 ton s) Local Sales
Company
Imported
Cem ent Dec-15
Clinker
Jan-16
Feb-16
Dec-15
Jan-16
Feb-16
Yamamah Cement
545
551
515
-
-
-
Saudi Cement
649
655
621
-
-
-
Eastern Cement
279
275
254
-
-
-
Qassim Cement
420
425
407
-
-
-
Yanbu Cement
660
630
602
-
-
-
Arab Cement
513
492
474
-
-
-
Southern Cement
779
760
726
-
-
-
Tabuk Cement
117
130
127
-
-
-
Riyadh Cement
328
350
323
-
-
-
Najran Cement
380
354
320
-
-
-
City Cement
282
290
287
-
-
-
Northern Cement
240
241
232
-
-
-
Jouf Cement
182
161
161
-
-
-
Alsafwa Cement
179
206
186
-
-
Hail Cement
183
161
141
-
-
5,736
5,681
5,376
-
-
Total
37 37
Source: Yamama Cement
A growth of +2% Y/Y in volumes sales Overall, we forecast 9.1 MT of volume sales in 1Q2016 for the companies under our coverage, a growth of +2% Y/Y. We expect Yamama and Qassim to register much better than expected sales during March as they take advantage of operating in the central region. Additionally, it serves key infrastructure projects especially the Riyadh metro. Exhibit 1: Jan to Mar 2016 Sales (000 tons) 900 800 700 600 500 400
300 200 100 0
Yamama
Yanbu Jan-16
Qassim Feb-16
Southern
Saudi
Mar-16
Source: Yamama Cement, Riyad Capital
|2
Saudi Arabian Cement 1Q2016 Preview
Revenues to fall slightly despite pick up in volumes Revenue for the stocks under our coverage is expected to decline by -4% Y/Y to SAR 2.1 billion for 1Q2016 from SAR 2.2 billion in 1Q2015 following a decline in cement prices. Realization is set to drop by -4% to SAR 223/ton for 1Q2016, while adjusting price discounts, the net realization would be at least 5-10% lower than gross realization. Yamama Cement is likely to report much lower net realization as they compete in Central region where most producers are aiming to deplete their excess capacity with lower pricing. Table 3: 1Q2016 Estimates (SAR mln, except EPS) Revenues Company
1Q2015
1Q2016E
EBITDA Y/Y Chg
1Q2015 1Q2016E
Net Income Y/Y Chg
1Q2015
1Q2016E
EPS Y/Y Chg
1Q2015
1Q2016E
Yamama
339
372
10%
215
212
-1%
175
164
-6%
0.86
0.81
Yanbu
437
432
-1%
266
208
-22%
207
191
-8%
1.32
1.20
Qassim
282
280
-1%
188
167
-11%
163
146
-10%
1.81
1.62
Southern
559
511
-9%
313
276
-12%
266
235
-12%
1.90
1.68
Saudi
551
496
-10%
364
302
-17%
303
243
-20%
1.98
1.59
2,168
2,091
-4%
1,346
1,165
-13%
1,114
979
-12%
Group Total
Source: Riyad Capital, Company Reports
Profitability affected on two counts; lower realizaion and higher energy costs EBITDA for the companies under our coverage is expected to fall by -13% Y/Y to SAR 1.2 billion as higher price discounts and delivery costs hinder margins. Additionally the impact of partial removal on energy subsidies will start affecting margins starting this quarter. On the earnings front, we expect a -12% Y/Y decline in earnings for 1Q2016 to SAR 979 million due to detrimental effect of price and cost inflation. The impact of portfolio losses is awaited as TASI corrected by -10% during the quarter. Notably, Saudi Cement Co’s (TASI: 3030) earnings are set to decline by -20% as cost pressure continues to haunt.
Margin scenario is at new levels; impact awaited We expect the companies under coverage to witness margin deterioration by 5% on a gross margin level especially the old-age producers. We highlighted possible impact of energy subsidy in our detailed note published recently. Amongst our coverage, Qassim is expected to offer the highest margin due to its access to central province amid a lower cash cost base. We believe overall industry EBITDA margins are expected to fall to 56% for 1Q2016. The negative impact of investment portfolios is to be ascertained after markets crashed in January. Overall, we expect net margins for the companies to fall to 47%. Table 4: 1Q2016 Margin Estimates Gross
Company
EBITDA
Net
1Q2015
1Q2016E
1Q2015
1Q2016E
1Q2015
1Q2016E
Yamama
54%
54%
63%
57%
52%
44%
Yanbu
51%
48%
61%
48%
47%
44%
Qassim
62%
55%
67%
60%
58%
52%
Southern
52%
48%
56%
54%
48%
46%
Saudi
62%
50%
66%
61%
55%
49%
Group Average
56%
51%
63%
56%
52%
47%
Source: Riyad Capital, Company Reports
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Saudi Arabian Cement 1Q2016 Preview
Valuation and Recommendation: Maintain Buy for all We had revised our estimates following company’s announcement on the financial impact of energy subsidy removal and 4Q2015 earnings. We believe the exact impact would be more visible in 1Q2016 earnings giving directions or more guidance for the rest of 2016. For now, we maintain our target prices and continue to maintain the same ratings. Table 5: Ratings and Valuation (SAR mln) TASI
Current
Market
Target
Company
Code
Price
Cap
Price
Rating
Yield
2015
2016E
2015
2016E
Yamama
3020
27.83
5,636
35.00
Buy
10.8%
8.8x
10.0x
1.5x
1.5x
Yanbu
3060
48.99
7,716
58.00
Buy
9.2%
9.6x
10.6x
2.2x
2.1x
Qassim
3040
61.50
5,535
78.00
Buy
9.3%
9.4x
10.7x
2.7x
2.8x
Southern
3050
72.67
10,174
75.00
Buy
7.6%
10.4x
11.5x
3.3x
3.2x
Saudi
3030
60.47
9,252
71.00
Buy
9.9%
9.8x
10.2x
2.9x
2.8x
9.6x
10.6x
2.5x
2.5x
Group Average
Dividend
P/E
P/B
Source: Riyad Capital
Over the quarter, sector’s median P/E were priced attractively and trades at 15% discount to TASI with a 2016E P/E of 12.2x versus TASI’s 14.3x. TCEM has relatively outperformed TASI by +5%. Notably, Yanbu Cement was the best outperformer in the sector with a +20% return followed by Southern Cement with a +10% increase in stock prices. Amongst the group, Yamama offers attractive valuation profile with 2016E P/E of 10.0x and yields of 10.8%, while Southern trades at expensive levels with a P/E of 11.5x and lower yields of 7.6%.
Conclusion We believe cement demand is expected to grow at low single digits for the rest of 2016. We expect a short-term slowdown due to prioritization of few infrastructure projects causing demand fluctuation, but minimal. However, government’s pace in developing residential and infrastructure projects are likely to continue and provide enough cushion for sustainable demand, though at lower growth rates. We believe among TASI sectors, TCEM is relatively placed better in terms of consistency in earnings over the long term and dividend payouts, barring few short-term hindrances.
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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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