Yamama Cement Co. - Aljazira Capital
Yamama Cement Co. Investment Update
January 2016
Yamamah Cement: Q4-2015 net profits were in line with our expectation; the deviation in the bottom line is expected to be attributed to losses in the company’s investment portfolio. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 4Q-15 334.1 187.5 0.93
Actual 4Q-15 NA* 180.0 0.89
Deviation (%) -5.0% *Not Available,
Expected higher sales price per ton, sales growth and higher production efficiency to result in outstanding performance in 4Q15: Q4-15 net profit came in line with our expectation and showed a deviation of 5.0% from AJC estimates and 8.8% higher than the market Consensus of SAR 165.3mn. Yamamah Cement Company posted net income of SAR 180mn; indicating an increase of 18.4%YoY and 87.5%QoQ. We believe the weakness was mainly attributed to i) higher volumetric sales by 18.8%YoY due to higher construction activities during the quarter ii) selling price recovery by 3.6%QoQ iii) higher production efficiency by 1.8%QoQ. The average price per ton is expected to be around SAR230, as compared to SAR221.9 in 3Q15. Moreover, the company registered YoY volumetric sales growth of 18.8%, as sales in Q4-2015 stood at 1.55 MT vs. 1.30 MT in Q4-2014. We believe that the bottom line was compressed by a decline in the company’s investment income; however, gross and operating profits were above AJC estimates and accordingly higher than market consensus. Gross profit stood at SAR 219mn depicting an increase of 19.1%YoY, and 31.9%QoQ. Gross margin in Q4-2015 revived to 61.5% from 57.7% in 4Q2014, which was due to lower cost of sales. The cost per ton is expected to be at SAR 88.5 vs. SAR103.1 in Q4-2014. Operating Profit stood at SAR 205mn depicting an increase of 19.9%YoY and 36.7%QoQ. We foresee slight cement sales decline for Yamamah Cement company between 2 - 3% in 2016. Concern about cement oversupply to remain. The cement sector’s performance in 2016 is likely to mirror that in 2015. This is due to continued oversupply in the market, following high clinker inventory, additional cement capacity which came on stream in 2015, and lower-than-expected demand. Higher subsided fuel cost to hurt the company’s net income by 9.3% in 2016: The Saudi Arabian government recently announced an increase in the prices of all fuels, including natural gas. The price of heavy fuel oil (HFO380) would increase to USD 3.8 per barrel (4.90–8.96 hallah per liter). The price of electricity was also revised upwards. Based on our estimates, cement production cost is expected to increase by SAR 6 - 7 per ton, in addition to the increase in electricity costs. We have reworked our financial model assumptions to incorporate the impact of these changes. The increase in prices of electricity and subsided fuel is also expected to increase the production costs by about SAR60 mn according to the company. Based on the new assumptions, the increase in cost would be about SAR 58.7mn. Consequently, the net income of the company would stand revised from SAR 631.4mn to SAR 572.7mn. Combining all these factors we believe margins could be negatively impacted in near term. However, higher utilization levels and efficiency in its production line is likely to support overall margins. Promising outlook for Yamamah cement; however, dividend level is in concern due to the cost of relocating Yamamah plant: During 2015, Yamamah’s cement sales increased 6.9%YoY due to higher demand, in spite of the oversupply in the market. The company maintained its dividend payments (SAR 3 DPS) for 2015 as was in 2014 and 2013, offering an attractive dividend yield of 9.5% in 2015. However, due to the cost of relocating the company’s cement factory to Riyadh’s outskirts; the continuation of the payment level is in doubt. Based on our earnings forecast, Yamamah Cement is trading at an attractive PE multiple of 9.4x for FY16E, with an expected dividend yield of about 8.5% (SAR 2.25 DPS). The last three-years mean PE multiple for the cement sector currently stands at about 13.6x, which indicates that Yamamah Cement, one of the largest cement companies in KSA, is undervalued.
1
© All rights reserved
Please read Disclaimer on the back
‘Overweight ’
Recommendation Current Price* (SAR)
26.50
Target Price (SAR)
36.70
38.5%
Upside / (Downside)
*prices as of 19th of January 2016
Key Financials SARmn (unless specified) Revenues Growth % Net Income Growth % EPS
FY14
FY15E
FY16E
1,329 -13.8% 670.8 -22.9% 3.31
1,316 -1.0% 642.3 -4.3% 3.17
1,264 -3.9% 572.7 -10.8% 2.83
Source: Company reports, Aljazira Capital
Our estimates and valuation: Yamamah Cement Co. is expected to post SAR 572.7mn in net income (2.83 EPS) for 2016, recording a decline of 10.8% for the year influenced by higher fuel cost and expected lower sales volume, however, we remain ‘Overweight’ for the stock with target price at SAR 36.70/share; indicating a potential upside of 38.5% over current market price of SAR 26.50/share (as of 19th January 2016). The company is trading at attractive forward PE and P/B of 9.4x and 1.4x respectively based on our 2016 earnings forecast. We anticipate the company to lower its dividend payment in 2016 to stand at SAR 2.25 DPS (8.5% D/Y) owing to the effects of higher fuel cost and expected lower volumetric sales.
Key Ratios SARmn (unless specified)
FY14
FY15E
FY16E
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
53.6% 49.6% 50.5% 13.7x 2.47x 17.66
57.4% 52.8% 48.8% 9.92x 1.69x 16.75x
51.8% 45.4% 45.3% 9.37x 1.44x 20.27x
17.6% 16.1% 5.2%
17.1% 15.7% 9.54%
15.3% 13.9% 8.50%
Source: Company reports, Aljazira Capital
Shareholders Pattern Holding
Shareholders Pattern Public Pension Agency Prince Sultan Bin M. Al Saud Public
5.53% 9.12% 85.35%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap(SAR, bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
5.36 -18.3% 52.0 25.0 202.50 Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250 [email protected]
Analyst
Sultan Al Kadi
+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]
Jassim Al-Jubran +966 11 2256248 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+966 11 2256364 [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
Senior 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
January 2016
Yamamah Cement: Q4-2015 net profits were in line with our expectation; the deviation in the bottom line is expected to be attributed to losses in the company’s investment portfolio. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 4Q-15 334.1 187.5 0.93
Actual 4Q-15 NA* 180.0 0.89
Deviation (%) -5.0% *Not Available,
Expected higher sales price per ton, sales growth and higher production efficiency to result in outstanding performance in 4Q15: Q4-15 net profit came in line with our expectation and showed a deviation of 5.0% from AJC estimates and 8.8% higher than the market Consensus of SAR 165.3mn. Yamamah Cement Company posted net income of SAR 180mn; indicating an increase of 18.4%YoY and 87.5%QoQ. We believe the weakness was mainly attributed to i) higher volumetric sales by 18.8%YoY due to higher construction activities during the quarter ii) selling price recovery by 3.6%QoQ iii) higher production efficiency by 1.8%QoQ. The average price per ton is expected to be around SAR230, as compared to SAR221.9 in 3Q15. Moreover, the company registered YoY volumetric sales growth of 18.8%, as sales in Q4-2015 stood at 1.55 MT vs. 1.30 MT in Q4-2014. We believe that the bottom line was compressed by a decline in the company’s investment income; however, gross and operating profits were above AJC estimates and accordingly higher than market consensus. Gross profit stood at SAR 219mn depicting an increase of 19.1%YoY, and 31.9%QoQ. Gross margin in Q4-2015 revived to 61.5% from 57.7% in 4Q2014, which was due to lower cost of sales. The cost per ton is expected to be at SAR 88.5 vs. SAR103.1 in Q4-2014. Operating Profit stood at SAR 205mn depicting an increase of 19.9%YoY and 36.7%QoQ. We foresee slight cement sales decline for Yamamah Cement company between 2 - 3% in 2016. Concern about cement oversupply to remain. The cement sector’s performance in 2016 is likely to mirror that in 2015. This is due to continued oversupply in the market, following high clinker inventory, additional cement capacity which came on stream in 2015, and lower-than-expected demand. Higher subsided fuel cost to hurt the company’s net income by 9.3% in 2016: The Saudi Arabian government recently announced an increase in the prices of all fuels, including natural gas. The price of heavy fuel oil (HFO380) would increase to USD 3.8 per barrel (4.90–8.96 hallah per liter). The price of electricity was also revised upwards. Based on our estimates, cement production cost is expected to increase by SAR 6 - 7 per ton, in addition to the increase in electricity costs. We have reworked our financial model assumptions to incorporate the impact of these changes. The increase in prices of electricity and subsided fuel is also expected to increase the production costs by about SAR60 mn according to the company. Based on the new assumptions, the increase in cost would be about SAR 58.7mn. Consequently, the net income of the company would stand revised from SAR 631.4mn to SAR 572.7mn. Combining all these factors we believe margins could be negatively impacted in near term. However, higher utilization levels and efficiency in its production line is likely to support overall margins. Promising outlook for Yamamah cement; however, dividend level is in concern due to the cost of relocating Yamamah plant: During 2015, Yamamah’s cement sales increased 6.9%YoY due to higher demand, in spite of the oversupply in the market. The company maintained its dividend payments (SAR 3 DPS) for 2015 as was in 2014 and 2013, offering an attractive dividend yield of 9.5% in 2015. However, due to the cost of relocating the company’s cement factory to Riyadh’s outskirts; the continuation of the payment level is in doubt. Based on our earnings forecast, Yamamah Cement is trading at an attractive PE multiple of 9.4x for FY16E, with an expected dividend yield of about 8.5% (SAR 2.25 DPS). The last three-years mean PE multiple for the cement sector currently stands at about 13.6x, which indicates that Yamamah Cement, one of the largest cement companies in KSA, is undervalued.
1
© All rights reserved
Please read Disclaimer on the back
‘Overweight ’
Recommendation Current Price* (SAR)
26.50
Target Price (SAR)
36.70
38.5%
Upside / (Downside)
*prices as of 19th of January 2016
Key Financials SARmn (unless specified) Revenues Growth % Net Income Growth % EPS
FY14
FY15E
FY16E
1,329 -13.8% 670.8 -22.9% 3.31
1,316 -1.0% 642.3 -4.3% 3.17
1,264 -3.9% 572.7 -10.8% 2.83
Source: Company reports, Aljazira Capital
Our estimates and valuation: Yamamah Cement Co. is expected to post SAR 572.7mn in net income (2.83 EPS) for 2016, recording a decline of 10.8% for the year influenced by higher fuel cost and expected lower sales volume, however, we remain ‘Overweight’ for the stock with target price at SAR 36.70/share; indicating a potential upside of 38.5% over current market price of SAR 26.50/share (as of 19th January 2016). The company is trading at attractive forward PE and P/B of 9.4x and 1.4x respectively based on our 2016 earnings forecast. We anticipate the company to lower its dividend payment in 2016 to stand at SAR 2.25 DPS (8.5% D/Y) owing to the effects of higher fuel cost and expected lower volumetric sales.
Key Ratios SARmn (unless specified)
FY14
FY15E
FY16E
Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
53.6% 49.6% 50.5% 13.7x 2.47x 17.66
57.4% 52.8% 48.8% 9.92x 1.69x 16.75x
51.8% 45.4% 45.3% 9.37x 1.44x 20.27x
17.6% 16.1% 5.2%
17.1% 15.7% 9.54%
15.3% 13.9% 8.50%
Source: Company reports, Aljazira Capital
Shareholders Pattern Holding
Shareholders Pattern Public Pension Agency Prince Sultan Bin M. Al Saud Public
5.53% 9.12% 85.35%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap(SAR, bn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
5.36 -18.3% 52.0 25.0 202.50 Source: Bloomberg, Aljazira Capital
Analyst
Jassim Al-Jubran +966 11 2256248 [email protected]
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250 [email protected]
Analyst
Sultan Al Kadi
+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]
Jassim Al-Jubran +966 11 2256248 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+966 11 2256364 [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
Senior 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
