Saudi Arabian Cement
Saudi Arabian Cement 4Q2015 Preview
January 06, 2016
Production growth of +6.5% Y/Y expected in 2015 Saudi cement sector is expected to register a +6.5% growth in production levels to 60.9 million tons (MT) for 2015E, similar to +6.0% production growth achieved in 2014. Growth in 2015 was aided by higher operating rates from Najran Cement and City Cement, an additional supply of 1.6 MT, the largest in the industry. Over the quarter, the sector is expected to record a growth of +31% Q/Q and +8% Y/Y to 15.8 MT. We believe a reasonable growth is achieved sequentially as Hajj holidays moved to the third quarter of the year with minimal impact of slowdown. Table 1: Sau di Cemen t Produ cers Capacity an d Produ ction Company
Production (KMT)
Capacity (KMT) Cement Sep-15
Yamamah Cement
Oct-15
Clinker Nov-15
Sep-15
Oct-15
Nov-15
6,300
443
540
465
457
495
495
11,500
525
633
618
725
499
759
Eastern Cement
3,500
221
265
280
266
326
303
Qassim Cement
4,000
328
381
377
258
326
297
Yanbu Cement
6,300
480
600
606
615
574
440
Arab Cement
3,500
340
417
478
336
270
273
Southern Cement
6,000
597
717
743
598
562
623
Tabuk Cement
1,700
83
84
131
129
115
130
Riyadh Cement
3,600
254
293
293
268
170
278
Najran Cement
3,200
302
368
382
208
224
337
City Cement
1,750
186
238
246
240
202
265
Northern Cement
2,000
171
204
219
222
262
114
Jouf Cement
2,000
119
153
186
147
131
147
120
156
142
143
148
77
Saudi Cement
Alsafwa Cement Hail Cement
1,700
134
151
136
160
171
173
Total
57,050
4,303
5,200
5,302
4,772
4,475
4,711
Source: Yamama Cement
Inventory balances still at higher levels Industry clinker inventories of 23.2 MT are expected for 2015E which continue to be a concern and almost at peak levels since 2014. The inventory balances are assumed to be close to 38% of industry’s current rated capacity. A comparison of inventories versus their respective capacity suggests Southern Cement has the lowest inventory balances of 1.1 MT, while Saudi Cement has the highest at 3.9 MT. Industry inventory balances over the last two months declined by -2% QTD as it witnessed a robust demand after hajj holidays. Table 2: In v en tory Balan ce (000 ton s) Inventory
Company
Cem ent Sep-15
Yamamah Cement
Oct-15
Clinker Nov-15
Sep-15
Oct-15
Nov-15
85
111
84
3,356
3,363
3,441
209
210
199
3,801
3,712
3,900
Eastern Cement
37
38
34
1,349
1,423
1,459
Qassim Cement
108
144
58
955
961
929
Yanbu Cement
90
102
88
3,358
3,390
3,250
Arab Cement
46
48
40
788
873
724
Southern Cement
69
77
77
1,354
1,237
1,108
Tabuk Cement
57
39
61
746
801
837
Riyadh Cement
67
60
58
1,811
1,715
1,725
Najran Cement
68
78
63
2,667
2,547
2,531
City Cement
45
47
42
780
754
782
Northern Cement
54
45
46
867
769
676
Jouf Cement
29
38
61
652
628
601
Al Safwa Cement
41
39
41
93
106
122
Hail Cement
35
34
19
815
846
892
Total
1,040
1,110
971
23,392
23,125
22,977
Saudi Cement
Source: Yamama Cement
Santhosh Balakrishnan
[email protected]
+966-11-203-6809
Khalid Abdullah Almadhyan
[email protected]
+966-11-203-6813
Riyad Capital is licensed by the Saudi Arabia |1 Capital Markets Authority (No. 07070-37)
Saudi Arabian Cement 4Q2015 Preview We expect inventories to decline by -1% Q/Q to 23.2 MT in 4Q2015E. Overall, such high balances are expected to affect Saudi cement sector in 2016 as impact of oversupply affects pricing competency. A supply-demand pattern suggests 55.6 MT of production in 11 months of 2015 meeting demand of 55.4 MT. We believe the adjusted oversupply in the industry is 12 MT currently (current inventory minus 60 days inventory or 23 MT less 11 MT).
Sales volumes to touch 15.8 MT for 4Q2015 We expect industry wide sales volumes of 15.8 MT for 4Q2015, a growth of +31% Q/Q and +8% Y/Y though yearly growth should have been lower had the holiday impact been adjusted in 4Q2014. Industry witnessed an average sales volume of 16.2 MT for first two quarters of 2015 but slowdown in project spending, holidays and labour issues with contractors had resulted in demand taking a backseat with volumes of 12.1 MT for 3Q2015. The first two months of 4Q2015 saw combined volumes of 10.5 MT, we believe December is likely to witness another 5.3 MT of sales. Table 3: Sau di Cemen t Compan ies Volu mes an d Imports (000 ton s) Company Sep-15
Local Sales
Imported
Cem ent
Clinker
Oct-15
Nov-15
Sep-15
Oct-15
Nov-15
Yamamah Cement
446
514
492
-
-
-
Saudi Cement
509
593
594
-
-
-
Eastern Cement
218
254
272
-
-
-
Qassim Cement
322
345
422
-
-
-
Yanbu Cement
481
588
620
-
-
-
Arab Cement
336
415
486
125
186
Southern Cement
611
709
743
-
-
-
Tabuk Cement
82
102
109
-
-
-
Riyadh Cement
246
290
284
-
-
-
Najran Cement
311
358
397
-
-
-
City Cement
194
236
251
-
-
-
Northern Cement
170
214
218
-
-
-
Jouf Cement
124
144
163
-
-
-
Alsafwa Cement
112
158
140
-
-
Hail Cement
131
152
151
Total
4,293
5,072
5,342
-
-
125
186
4
57 61
Source: Yamama Cement
Volume driven strategy to continue For the companies under our coverage (exhibit-1), we forecast 8.5 MT of volume sales for 4Q2015, a growth of +8% Y/Y and +26% Q/Q. We expect Southern Cement and Saudi Cement to report a much better sales volumes in December assuming healthy growth in volume sales on a QTD basis. However sales volumes are challenged by competitive pricing; with producers adopting strategy of volume driven growth.
|2
Saudi Arabian Cement 4Q2015 Preview Exhibit 1: Oct to Dec 2015 Sales (000 tons) 800 700 600 500 400 300 200 100 0 Yamama
Yanbu
Qassim
Oct-15
Nov-15
Southern
Saudi
Dec-15
Source: Yamama Cement, Riyad Capital
Earnings and topline to decline marginally We expect a -2% Y/Y revenue decline in 4Q2015 for the companies under our coverage owing to pricing pressure as declining realization trends continue. The realization for the coverage group is expected to be SAR 237/ton, declining by -4% Y/Y and -1% Q/Q on a gross basis. We continue to assess that gross realization does not take in to account the cost-of-carry overheads, mainly delivery costs. We noted that gross realization is declining since 2014 at a rate averaging -2% on a sequential basis, while net realization (adjusting price discounts) is falling at an average of -4%. Table 4: 4Q2015 Estimates (SAR mln, except per share data) Revenues Company
4Q2014
4Q2015E
EBITDA Y/Y Chg
Net Income
4Q2014 4Q2015E Y/Y Chg
4Q2014
4Q2015E
EPS Y/Y Chg
4Q2014
4Q2015E
Yamama
318
325
2%
219
221
1%
152
154
1%
0.75
0.76
Yanbu
378
319
-16%
251
194
-23%
193
155
-20%
1.23
0.98
Qassim
253
271
7%
160
158
-1%
134
141
5%
1.49
1.57
Southern
489
527
8%
293
315
7%
245
248
1%
1.75
1.77
Saudi
526
477
-9%
340
296 -
-13%
269
243
-9%
1.76
1.59
1,964
1,919
-2%
1,263
1,184
-6%
993
941
-5%
Group Total
Source: Riyad Capital, Company Reports
EBITDA for the companies under our coverage are expected to fall by -6% to SAR 1.2 billion as margins continue to be pressured on added expenditure in delivery. EBITDA per ton of sales has been witnessing a decline explaining the impact of price discounts. On the earnings front, we expect a -5% decline in earnings for 4Q2015 to SAR 941 million from SAR 993 million in 4Q2014. We also take into account the impact of investment income.
Margin drop expected; no trend reversal We expect ongoing pricing pressure on companies coupled with impact of subsidy cuts to affect margins from 1Q2016. Few companies have already reported the financial impact of cut on fuel subsidies and relative impact of tariff hike in utilities. We expect gross margins (Table-5) to be lower by 150 bps to 56% for 4Q2015E. A margin comparison suggests Qassim Cement is expected to have the highest gross margin in the industry due to its lower cash cost base, while Yanbu Cement and Saudi Cement is expected to post the lowest margin. EBITDA margins of 62% for the cement coverage group is expected with a slight fall of 200 bps due to continued lower operating leverage.
|3
Saudi Arabian Cement 4Q2015 Preview Net margins for the companies under coverage is expected to fall to 49% and expect weak impact of investment income after markets corrected sharply by -24% since 2H2015. Table 5: 4Q2015 Margin Estimates Gross
EBITDA
Net
Company
4Q2014
4Q2015E
4Q2014
4Q2015E
4Q2014
4Q2015E
Yamama
58%
56%
69%
68%
48%
47%
Yanbu
56%
54%
66%
61%
51%
49%
Qassim
62%
61%
63%
58%
53%
52%
Southern
54%
53%
60%
60%
50%
47%
Saudi
60%
58%
65%
62%
51%
51%
Group Average
58%
56%
65%
62%
51%
49%
Source: Riyad Capital, Company Reports
Valuation and recommendation We made limited revisions to our estimates for 4Q2015 and expect further adjustments after earnings releases. We maintain our target prices for now and expect a downside re-rating for most companies under our coverage. Initial estimates suggest 6-7% cut in EPS estimates for 2016 raising existing valuations by 15-20% with 2016E P/E ranging between 13x-14x from 10x-11x currently. For now, we continue to recommend a Buy for all companies. Amongst the group, Yanbu is our preferred pick as it offers cheap valuations with 2015E P/E of 8.7x and dividend yield of 9.7% while Saudi Cement is the next best pick with P/E of 9.1x and yield of 9.0%. Table 6: Ratings and Valuation (SAR mln) TASI
Current
Market
Target
Company
Code
Price
Cap
Price
Yamama
3020
29.56
5,986
Yanbu
3060
41.42
Qassim
3040
Southern Saudi Group Average
Dividend
P/E
P/B
Rating
Yield
2014
2015E
2014
2015E
56.00
Buy
8.5%
8.9x
9.8x
1.6x
1.6x
6,524
65.00
Buy
9.7%
8.1x
8.7x
1.8x
1.8x
65.98
5,938
104.00
Buy
8.3%
10.5x
10.1x
3.0x
3.0x
3050
67.19
9,407
115.00
Buy
6.7%
9.0x
9.6x
3.2x
2.9x
3030
61.15
9,356
100.00
Buy
9.0%
8.7x
9.1x
2.9x
2.8x
9.1x
9.4x
2.5x
2.4x
Source: Riyad Capital
|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
January 06, 2016
Production growth of +6.5% Y/Y expected in 2015 Saudi cement sector is expected to register a +6.5% growth in production levels to 60.9 million tons (MT) for 2015E, similar to +6.0% production growth achieved in 2014. Growth in 2015 was aided by higher operating rates from Najran Cement and City Cement, an additional supply of 1.6 MT, the largest in the industry. Over the quarter, the sector is expected to record a growth of +31% Q/Q and +8% Y/Y to 15.8 MT. We believe a reasonable growth is achieved sequentially as Hajj holidays moved to the third quarter of the year with minimal impact of slowdown. Table 1: Sau di Cemen t Produ cers Capacity an d Produ ction Company
Production (KMT)
Capacity (KMT) Cement Sep-15
Yamamah Cement
Oct-15
Clinker Nov-15
Sep-15
Oct-15
Nov-15
6,300
443
540
465
457
495
495
11,500
525
633
618
725
499
759
Eastern Cement
3,500
221
265
280
266
326
303
Qassim Cement
4,000
328
381
377
258
326
297
Yanbu Cement
6,300
480
600
606
615
574
440
Arab Cement
3,500
340
417
478
336
270
273
Southern Cement
6,000
597
717
743
598
562
623
Tabuk Cement
1,700
83
84
131
129
115
130
Riyadh Cement
3,600
254
293
293
268
170
278
Najran Cement
3,200
302
368
382
208
224
337
City Cement
1,750
186
238
246
240
202
265
Northern Cement
2,000
171
204
219
222
262
114
Jouf Cement
2,000
119
153
186
147
131
147
120
156
142
143
148
77
Saudi Cement
Alsafwa Cement Hail Cement
1,700
134
151
136
160
171
173
Total
57,050
4,303
5,200
5,302
4,772
4,475
4,711
Source: Yamama Cement
Inventory balances still at higher levels Industry clinker inventories of 23.2 MT are expected for 2015E which continue to be a concern and almost at peak levels since 2014. The inventory balances are assumed to be close to 38% of industry’s current rated capacity. A comparison of inventories versus their respective capacity suggests Southern Cement has the lowest inventory balances of 1.1 MT, while Saudi Cement has the highest at 3.9 MT. Industry inventory balances over the last two months declined by -2% QTD as it witnessed a robust demand after hajj holidays. Table 2: In v en tory Balan ce (000 ton s) Inventory
Company
Cem ent Sep-15
Yamamah Cement
Oct-15
Clinker Nov-15
Sep-15
Oct-15
Nov-15
85
111
84
3,356
3,363
3,441
209
210
199
3,801
3,712
3,900
Eastern Cement
37
38
34
1,349
1,423
1,459
Qassim Cement
108
144
58
955
961
929
Yanbu Cement
90
102
88
3,358
3,390
3,250
Arab Cement
46
48
40
788
873
724
Southern Cement
69
77
77
1,354
1,237
1,108
Tabuk Cement
57
39
61
746
801
837
Riyadh Cement
67
60
58
1,811
1,715
1,725
Najran Cement
68
78
63
2,667
2,547
2,531
City Cement
45
47
42
780
754
782
Northern Cement
54
45
46
867
769
676
Jouf Cement
29
38
61
652
628
601
Al Safwa Cement
41
39
41
93
106
122
Hail Cement
35
34
19
815
846
892
Total
1,040
1,110
971
23,392
23,125
22,977
Saudi Cement
Source: Yamama Cement
Santhosh Balakrishnan
[email protected]
+966-11-203-6809
Khalid Abdullah Almadhyan
[email protected]
+966-11-203-6813
Riyad Capital is licensed by the Saudi Arabia |1 Capital Markets Authority (No. 07070-37)
Saudi Arabian Cement 4Q2015 Preview We expect inventories to decline by -1% Q/Q to 23.2 MT in 4Q2015E. Overall, such high balances are expected to affect Saudi cement sector in 2016 as impact of oversupply affects pricing competency. A supply-demand pattern suggests 55.6 MT of production in 11 months of 2015 meeting demand of 55.4 MT. We believe the adjusted oversupply in the industry is 12 MT currently (current inventory minus 60 days inventory or 23 MT less 11 MT).
Sales volumes to touch 15.8 MT for 4Q2015 We expect industry wide sales volumes of 15.8 MT for 4Q2015, a growth of +31% Q/Q and +8% Y/Y though yearly growth should have been lower had the holiday impact been adjusted in 4Q2014. Industry witnessed an average sales volume of 16.2 MT for first two quarters of 2015 but slowdown in project spending, holidays and labour issues with contractors had resulted in demand taking a backseat with volumes of 12.1 MT for 3Q2015. The first two months of 4Q2015 saw combined volumes of 10.5 MT, we believe December is likely to witness another 5.3 MT of sales. Table 3: Sau di Cemen t Compan ies Volu mes an d Imports (000 ton s) Company Sep-15
Local Sales
Imported
Cem ent
Clinker
Oct-15
Nov-15
Sep-15
Oct-15
Nov-15
Yamamah Cement
446
514
492
-
-
-
Saudi Cement
509
593
594
-
-
-
Eastern Cement
218
254
272
-
-
-
Qassim Cement
322
345
422
-
-
-
Yanbu Cement
481
588
620
-
-
-
Arab Cement
336
415
486
125
186
Southern Cement
611
709
743
-
-
-
Tabuk Cement
82
102
109
-
-
-
Riyadh Cement
246
290
284
-
-
-
Najran Cement
311
358
397
-
-
-
City Cement
194
236
251
-
-
-
Northern Cement
170
214
218
-
-
-
Jouf Cement
124
144
163
-
-
-
Alsafwa Cement
112
158
140
-
-
Hail Cement
131
152
151
Total
4,293
5,072
5,342
-
-
125
186
4
57 61
Source: Yamama Cement
Volume driven strategy to continue For the companies under our coverage (exhibit-1), we forecast 8.5 MT of volume sales for 4Q2015, a growth of +8% Y/Y and +26% Q/Q. We expect Southern Cement and Saudi Cement to report a much better sales volumes in December assuming healthy growth in volume sales on a QTD basis. However sales volumes are challenged by competitive pricing; with producers adopting strategy of volume driven growth.
|2
Saudi Arabian Cement 4Q2015 Preview Exhibit 1: Oct to Dec 2015 Sales (000 tons) 800 700 600 500 400 300 200 100 0 Yamama
Yanbu
Qassim
Oct-15
Nov-15
Southern
Saudi
Dec-15
Source: Yamama Cement, Riyad Capital
Earnings and topline to decline marginally We expect a -2% Y/Y revenue decline in 4Q2015 for the companies under our coverage owing to pricing pressure as declining realization trends continue. The realization for the coverage group is expected to be SAR 237/ton, declining by -4% Y/Y and -1% Q/Q on a gross basis. We continue to assess that gross realization does not take in to account the cost-of-carry overheads, mainly delivery costs. We noted that gross realization is declining since 2014 at a rate averaging -2% on a sequential basis, while net realization (adjusting price discounts) is falling at an average of -4%. Table 4: 4Q2015 Estimates (SAR mln, except per share data) Revenues Company
4Q2014
4Q2015E
EBITDA Y/Y Chg
Net Income
4Q2014 4Q2015E Y/Y Chg
4Q2014
4Q2015E
EPS Y/Y Chg
4Q2014
4Q2015E
Yamama
318
325
2%
219
221
1%
152
154
1%
0.75
0.76
Yanbu
378
319
-16%
251
194
-23%
193
155
-20%
1.23
0.98
Qassim
253
271
7%
160
158
-1%
134
141
5%
1.49
1.57
Southern
489
527
8%
293
315
7%
245
248
1%
1.75
1.77
Saudi
526
477
-9%
340
296 -
-13%
269
243
-9%
1.76
1.59
1,964
1,919
-2%
1,263
1,184
-6%
993
941
-5%
Group Total
Source: Riyad Capital, Company Reports
EBITDA for the companies under our coverage are expected to fall by -6% to SAR 1.2 billion as margins continue to be pressured on added expenditure in delivery. EBITDA per ton of sales has been witnessing a decline explaining the impact of price discounts. On the earnings front, we expect a -5% decline in earnings for 4Q2015 to SAR 941 million from SAR 993 million in 4Q2014. We also take into account the impact of investment income.
Margin drop expected; no trend reversal We expect ongoing pricing pressure on companies coupled with impact of subsidy cuts to affect margins from 1Q2016. Few companies have already reported the financial impact of cut on fuel subsidies and relative impact of tariff hike in utilities. We expect gross margins (Table-5) to be lower by 150 bps to 56% for 4Q2015E. A margin comparison suggests Qassim Cement is expected to have the highest gross margin in the industry due to its lower cash cost base, while Yanbu Cement and Saudi Cement is expected to post the lowest margin. EBITDA margins of 62% for the cement coverage group is expected with a slight fall of 200 bps due to continued lower operating leverage.
|3
Saudi Arabian Cement 4Q2015 Preview Net margins for the companies under coverage is expected to fall to 49% and expect weak impact of investment income after markets corrected sharply by -24% since 2H2015. Table 5: 4Q2015 Margin Estimates Gross
EBITDA
Net
Company
4Q2014
4Q2015E
4Q2014
4Q2015E
4Q2014
4Q2015E
Yamama
58%
56%
69%
68%
48%
47%
Yanbu
56%
54%
66%
61%
51%
49%
Qassim
62%
61%
63%
58%
53%
52%
Southern
54%
53%
60%
60%
50%
47%
Saudi
60%
58%
65%
62%
51%
51%
Group Average
58%
56%
65%
62%
51%
49%
Source: Riyad Capital, Company Reports
Valuation and recommendation We made limited revisions to our estimates for 4Q2015 and expect further adjustments after earnings releases. We maintain our target prices for now and expect a downside re-rating for most companies under our coverage. Initial estimates suggest 6-7% cut in EPS estimates for 2016 raising existing valuations by 15-20% with 2016E P/E ranging between 13x-14x from 10x-11x currently. For now, we continue to recommend a Buy for all companies. Amongst the group, Yanbu is our preferred pick as it offers cheap valuations with 2015E P/E of 8.7x and dividend yield of 9.7% while Saudi Cement is the next best pick with P/E of 9.1x and yield of 9.0%. Table 6: Ratings and Valuation (SAR mln) TASI
Current
Market
Target
Company
Code
Price
Cap
Price
Yamama
3020
29.56
5,986
Yanbu
3060
41.42
Qassim
3040
Southern Saudi Group Average
Dividend
P/E
P/B
Rating
Yield
2014
2015E
2014
2015E
56.00
Buy
8.5%
8.9x
9.8x
1.6x
1.6x
6,524
65.00
Buy
9.7%
8.1x
8.7x
1.8x
1.8x
65.98
5,938
104.00
Buy
8.3%
10.5x
10.1x
3.0x
3.0x
3050
67.19
9,407
115.00
Buy
6.7%
9.0x
9.6x
3.2x
2.9x
3030
61.15
9,356
100.00
Buy
9.0%
8.7x
9.1x
2.9x
2.8x
9.1x
9.4x
2.5x
2.4x
Source: Riyad Capital
|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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