Saudi Cement Co. - Aljazira Capital
Saudi Cement Co. April 2016
Please read Disclaimer on the back
Saudi Cement: 1Q-2016 earnings were above our expectation; lower than expected production cost and OPEX decline to strengthen the result. ‘Overweight’ recommendation reiterated. Actual 1Q-16 NA* 265 1.73
Despite 4.6%YoY sales decline; lower OPEX expenses and operational improvement led to strong performance in 1Q2016: Q1-16 net profit came above our expectation and showed a deviation of 6.8% from our estimates and 6.7% from the market consensus of SAR 248.3mn. Saudi Cement Company posted net income of SAR 265.0mn; indicating a decline of 12.6%YoY and an increase of 50.6%QoQ. We believe that the better than expected net profit is mainly associated to i) a decline in OPEX by 23.9%QoQ. ii) Lower than expected production cost, despite volumetric sales decline of 4.6%YoY on the back of slowdown construction activities in the region. Furthermore, the recognition of an impairment loss of SAR 66.15mn in 4Q2015 is the reason behind the QoQ earnings improvement. During Q1-2016, the company registered a a decline in volumetric sales, as dispatches in Q1-2016 stood at 2.08 MT vs. 2.18 MT in 1Q-2015. The company’s revenue is expected to be at around SAR 521.3mn, as the average price realization/ton is expected to be at SAR 250/ton, as compared to SAR 247.7/ton in 4Q2015 and SAR 252.1/ton in 1Q2015. We believe that concern over cement oversupply to remain in the short term, and Saudi cement company to remain stable-to-slight decline in 2016. The cement sector’s performance in 2016 is likely to witness a slight sales growth between 2% - 3%. Gross profit stood at SAR 296.0mn, well above our estimates of SAR 284.1mn due to i) higher than expected sales volume ii) operational improvement. Gross margin in 1Q2016 is expected to decline to 56.8% from 61.6% in Q1-2015 due to higher production cost/ton after the reduction in subsidy on fuel. Based on our calculation, we estimate the cost/ton to increase to SAR 108/ton in 1Q2016 vs. average cost/ton of SAR 103.4/ ton in FY2015. Operating profit for Q1-2016 stood at SAR 274mn depicting a fall of 11.6%YoY, and 48.1%QoQ; where the company has noticeably reduced its OPEX (SG & A) by 23.9%QoQ to SAR 22mn, as compared to SAR 28.9mn in the previous quarter. (The company is yet to publish detailed financials for 1Q2016). Despite 3M-2016 sales decline, higher clinker level to open a new ray of hope for the company: During January–March 2016, Saudi Cement’s sales declined by 4.6%YoY to 2.08MT, as compared to the sector growth rate of 2.9%YoY in the same period. During the same period, Saudi cement clinker inventory increased by 15.8% to 4.05MT, as compared to 3.2% increase in industry-wide clinker inventory. This indicates high clinker level with almost 45% of the company’s production capacity. We believe that the governmental decision to partially drop the ban on clinker exports could help the company offload excess inventory and relieve oversupply in the domestic market. Furthermore, a partial uplift on the export ban could substantially benefit the company in terms of higher revenues and low storage costs. Attractive investment opportunity on yields and valuations: Though SCC witnessed a comparatively slight decline in volumetric sales (during January–March 2016), we maintain a positive outlook on the company. Its strategic location in the eastern region, coupled with limited competition and stable demand, as well as strong dividend payouts ratio of 97.5% in 2015 with SAR6 DPS and D/Y of 9.2%. These makes the company an attractive investment option. At the end of FY2015, Saudi’s debt-to-equity ratio stood at 0.22x with gross debt of around SAR 720mn and a retained earnings of SAR 941mn. Based on our forecast estimates, SCC is trading at a P/E multiple of 10.3x for FY16E, with an expected dividend yield of about 8.9%, which indicates that SCC, the second largest cement company in KSA, is undervalued and offers good upside potential.
61.75 75.10
Target Price (SAR)
Deviation (%) 6.8% *Not Available,
‘Overweight ’
Current Price* (SAR)
21.6%
Upside / (Downside)
*prices as of 19th of April 2016
Key Financials SARmn (unless specified)
FY14
FY15
FY16E
Revenues Growth % Net Income Growth % EPS
2,025 -7.2% 1,074 -4.4% 7.02
1,932 -4.6% 940 -12.5% 6.14
1,896 -1.9% 920 -2.1% 6.01
Source: Company reports, Aljazira Capital
Key Ratios SARmn (unless specified)
FY14
FY15
FY16E
Gross Margin EBITDA Margin Net Margin P/E P/B ROE ROA Dividend Yield
60.7% 55.6% 53.1% 14.6x 13.5x
58.8% 50.5% 48.7% 10.56x 3.07x
56.3% 50.9% 48.5% 10.27x 2.93x
33.5% 24.0% 6.8%
29.1% 21.8% 9.2%
28.5% 21.6% 8.9%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
9.45 - 5.2% 99.0 47.0 153.0 Source: Bloomberg, Aljazira Capital
Shareholders Pattern Shareholders Pattern Public Pension Agency General Organization for Social Insurance Khaled Abdulrahman Saleh Al Rajhi Public
Holding 5.62% 8.98% 8.02% 77.38%
Source: Company reports, Aljazira Capital
Price Performance 130 120 110 100 90 80 70 60 50 40
11000 10000 9000 8000 7000 6000 5000 n14 ar -1 M 4 ay -1 Ju 4 l-1 Se 4 p1 No 4 v1 Ja 4 n1 M 5 ar M 15 ay -1 Ju 5 l-1 Se 5 p1 No 5 v1 Ja 5 n16 M ar -1 6
Forecasts 1Q-16 508.9 247.9 1.62
Ja
Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Recommendation
M
Result Flash Note 1Q-2016
Tadawul
Saudi 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
Please read Disclaimer on the back
Saudi Cement: 1Q-2016 earnings were above our expectation; lower than expected production cost and OPEX decline to strengthen the result. ‘Overweight’ recommendation reiterated. Actual 1Q-16 NA* 265 1.73
Despite 4.6%YoY sales decline; lower OPEX expenses and operational improvement led to strong performance in 1Q2016: Q1-16 net profit came above our expectation and showed a deviation of 6.8% from our estimates and 6.7% from the market consensus of SAR 248.3mn. Saudi Cement Company posted net income of SAR 265.0mn; indicating a decline of 12.6%YoY and an increase of 50.6%QoQ. We believe that the better than expected net profit is mainly associated to i) a decline in OPEX by 23.9%QoQ. ii) Lower than expected production cost, despite volumetric sales decline of 4.6%YoY on the back of slowdown construction activities in the region. Furthermore, the recognition of an impairment loss of SAR 66.15mn in 4Q2015 is the reason behind the QoQ earnings improvement. During Q1-2016, the company registered a a decline in volumetric sales, as dispatches in Q1-2016 stood at 2.08 MT vs. 2.18 MT in 1Q-2015. The company’s revenue is expected to be at around SAR 521.3mn, as the average price realization/ton is expected to be at SAR 250/ton, as compared to SAR 247.7/ton in 4Q2015 and SAR 252.1/ton in 1Q2015. We believe that concern over cement oversupply to remain in the short term, and Saudi cement company to remain stable-to-slight decline in 2016. The cement sector’s performance in 2016 is likely to witness a slight sales growth between 2% - 3%. Gross profit stood at SAR 296.0mn, well above our estimates of SAR 284.1mn due to i) higher than expected sales volume ii) operational improvement. Gross margin in 1Q2016 is expected to decline to 56.8% from 61.6% in Q1-2015 due to higher production cost/ton after the reduction in subsidy on fuel. Based on our calculation, we estimate the cost/ton to increase to SAR 108/ton in 1Q2016 vs. average cost/ton of SAR 103.4/ ton in FY2015. Operating profit for Q1-2016 stood at SAR 274mn depicting a fall of 11.6%YoY, and 48.1%QoQ; where the company has noticeably reduced its OPEX (SG & A) by 23.9%QoQ to SAR 22mn, as compared to SAR 28.9mn in the previous quarter. (The company is yet to publish detailed financials for 1Q2016). Despite 3M-2016 sales decline, higher clinker level to open a new ray of hope for the company: During January–March 2016, Saudi Cement’s sales declined by 4.6%YoY to 2.08MT, as compared to the sector growth rate of 2.9%YoY in the same period. During the same period, Saudi cement clinker inventory increased by 15.8% to 4.05MT, as compared to 3.2% increase in industry-wide clinker inventory. This indicates high clinker level with almost 45% of the company’s production capacity. We believe that the governmental decision to partially drop the ban on clinker exports could help the company offload excess inventory and relieve oversupply in the domestic market. Furthermore, a partial uplift on the export ban could substantially benefit the company in terms of higher revenues and low storage costs. Attractive investment opportunity on yields and valuations: Though SCC witnessed a comparatively slight decline in volumetric sales (during January–March 2016), we maintain a positive outlook on the company. Its strategic location in the eastern region, coupled with limited competition and stable demand, as well as strong dividend payouts ratio of 97.5% in 2015 with SAR6 DPS and D/Y of 9.2%. These makes the company an attractive investment option. At the end of FY2015, Saudi’s debt-to-equity ratio stood at 0.22x with gross debt of around SAR 720mn and a retained earnings of SAR 941mn. Based on our forecast estimates, SCC is trading at a P/E multiple of 10.3x for FY16E, with an expected dividend yield of about 8.9%, which indicates that SCC, the second largest cement company in KSA, is undervalued and offers good upside potential.
61.75 75.10
Target Price (SAR)
Deviation (%) 6.8% *Not Available,
‘Overweight ’
Current Price* (SAR)
21.6%
Upside / (Downside)
*prices as of 19th of April 2016
Key Financials SARmn (unless specified)
FY14
FY15
FY16E
Revenues Growth % Net Income Growth % EPS
2,025 -7.2% 1,074 -4.4% 7.02
1,932 -4.6% 940 -12.5% 6.14
1,896 -1.9% 920 -2.1% 6.01
Source: Company reports, Aljazira Capital
Key Ratios SARmn (unless specified)
FY14
FY15
FY16E
Gross Margin EBITDA Margin Net Margin P/E P/B ROE ROA Dividend Yield
60.7% 55.6% 53.1% 14.6x 13.5x
58.8% 50.5% 48.7% 10.56x 3.07x
56.3% 50.9% 48.5% 10.27x 2.93x
33.5% 24.0% 6.8%
29.1% 21.8% 9.2%
28.5% 21.6% 8.9%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
9.45 - 5.2% 99.0 47.0 153.0 Source: Bloomberg, Aljazira Capital
Shareholders Pattern Shareholders Pattern Public Pension Agency General Organization for Social Insurance Khaled Abdulrahman Saleh Al Rajhi Public
Holding 5.62% 8.98% 8.02% 77.38%
Source: Company reports, Aljazira Capital
Price Performance 130 120 110 100 90 80 70 60 50 40
11000 10000 9000 8000 7000 6000 5000 n14 ar -1 M 4 ay -1 Ju 4 l-1 Se 4 p1 No 4 v1 Ja 4 n1 M 5 ar M 15 ay -1 Ju 5 l-1 Se 5 p1 No 5 v1 Ja 5 n16 M ar -1 6
Forecasts 1Q-16 508.9 247.9 1.62
Ja
Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Recommendation
M
Result Flash Note 1Q-2016
Tadawul
Saudi 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
