Yanbu Cement Co. - Aljazira Capital
Yanbu Cement Co. Investment Update
January 2016
Yanbu Cement: fuel cost to raise the production cost by SAR45 mn in 2016; while sales volume to show stability in 2016. “Overweight” recommendation reiterated with lower TP. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 4Q-15 427.6 206.8 1.31
Actual 4Q-15 NA* 209.0 1.33
Deviation (%) 1.0% *Not Available,
Despite lower production efficiency; strong sales growth leads to superior performance in 4Q2015: Q4-15 net profit came in line with our expectation and showed a deviation of 1.0% from our estimates and 6.8% from the market Consensus of SAR195.7mn. Yanbu Cement Company posted net income of SAR 209.0mn; indicating an increase of 8.3%YoY and 44.1%QoQ. We believe the strength of top line revenues was mainly associated to higher volumetric sales growth. During Q4-2015, the company registered a sales growth of 21.3%YoY, as sales in Q4-2015 stood at 1.89 MT vs 1.56 MT in Q4-2014. The top line revenues is expected to be at around SAR434.8mn vs SAR378.2mn in Q4-2014, where the average price per ton is expected to be around SAR229, as compared to SAR241.5 in the comparison period and SAR229.3 in Q3-2015. Gross profit stood at SAR 224.0mn depicting an increase of 6.7%YoY, and 38.3%QoQ. Gross margin in Q4-2015 has been impacted due to expected lower production efficiency that has reflected on higher cost per tonne and we expect it to be around SAR111 vs SAR110 in Q4-2014 and SAR107 in the same comparison period. Operating Profit for Q42015 stood at SAR 212.0mn depicting an increase of 6.5%YoY, and 40.4%QoQ; where the managerial expenses (SG & A) increase to SAR12.0mn in 4Q15 from SAR11 mn in last quarter. (The company is yet to publish detailed financials for 2Q15). Yanbu cement 2015 sales growth outperformed the market average growth, while stability is expected through 2016: During 12M-2015, Yanbu Cement’s sales rose by 11.4%YoY to 7.01MT from 6.23MT in 2014. During the same period, industrywide clinker inventory increased by 5.7% to 22.78MT from 21.55MT in December-2014, as compared to 8.2% increase in Yanbu clinker inventory. We believe the rise in clinker inventory is the main reason behind discount in the sector selling price. In 2015, Yanbu Cement experienced pricing pressure, with cement price realization declining to SAR 230.2 compared with SAR 247.7 in 2014. As we expect the inventory level to further rise as demand is not expected to match supply. We foresee stable-to-slight cement sales decline for Yanbu Cement in 2016. Higher subsided fuel cost to raise the production cost by SAR45 mn 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 from USD 2.1 per barrel to USD 3.8 per barrel (4.90–8.96 hallah per liter). The price of electricity was also revised upwards. Yanbu Cement mostly uses heavy fuel oil (HFO); with the increase in cost of HFO, the production cost of cement is likely to increase. The increase in prices of electricity and subsided fuel is also expected to increase the production costs by about SAR45 mn according to the company. Based on our calculation, 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. Based on the new assumptions, the increase in cost would be about SAR 44.5mn. Consequently, the net income of the company would stand revised from SAR 794.7mn to SAR 750.3mn (-6.5%YoY). The company is trading at 8.2x 1-year forward PE, compared with an average PE of 13.6x for the cement sector during 2013-15.
1
Waste heat recovery system to result in substantial savings from 2017: In March 2015, Yanbu Cement announced an agreement to construct a 34MW thermal power station that utilizes wasted thermal energy produced by the manufacturing process at a cost of SAR 232mn. The waste heat recovery (WHR) system would become operational by January 2017 and lead to substantial savings in fuel cost; moreover, this system would lower the dependence on power generated from diesel power stations. Yanbu Cement’s management estimates that the WHR system will raise the efficiency of cement grinding by one million tonne of cement a year. The company would be able to realize the financial benefit from the implementation of WHR system from 1Q2017. © All rights reserved
Please read Disclaimer on the back
Recommendation
‘Overweight ’
Current Price* (SAR)
39.0 56.30
Target Price (SAR)
44.3%
Upside / (Downside)
*prices as of 11h of January 2016
Key Financials FY14
FY15E
FY16E
1,559.4 -3.8% 801.9 -2.4% 5.09
1,605.1 2.9% 806.3 0.5% 5.12
1,627.6 1.4% 750.3 -6.9% 4.76
SARmn (unless specified) Revenues Growth % Net Income Growth % EPS
Source: Company reports, Aljazira Capital
Our estimates and valuation: Yanbu Cement Co. is expected to post SAR750.28 mn in net income (4.76 EPS) for 2016, recording a decline of 6.9%YoY for the year influenced by higher fuel cost and low level in cement price per ton, however, we remain ‘Overweight’ for the stock with target price at SAR56.30/share; indicating a potential upside of 44.3% over current market price of SAR39.0 share (as of 11th January 2015). The company is trading at attractive forward PE and P/B of 8.2x and 1.6x respectively based on our 2016 earnings forecast. We anticipate the company to pay a dividend of SAR 4 DPS (10.2% D/Y) in 2016 owing to a strong operating cash flow and no additional capital expenditure in the medium term.
Key Ratios SARmn (unless specified)
FY14
FY15E
FY16E
Gross Margin EBITDA Margin Net Margin P/E P/B ROE ROA Dividend Yield
54.7% 65.6% 51.4% 12.7x 2.86x
53.99% 63.93% 49.99% 8.56x 1.80x
49.86% 60.01% 46.10% 8.19x 1.56x
22.5% 18.9% 6.2%
21.0% 18.4% 8.0%
19.1% 17.3% 10.2%
Source: Company reports, Aljazira Capital
Shareholders Pattern Shareholders Pattern General Organization for Social Insurance AlRajhi Ekhwan Group Awqaf Suliman AlRajhi Abdullah A. AlRajhi Public Investment Fund Public
Holding 12.37% 5.17% 7.35% 6.01% 10.0% 59.1%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (mn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
6,142.5 -16.57 % 72.25 39.90 157.50 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
Yanbu Cement: fuel cost to raise the production cost by SAR45 mn in 2016; while sales volume to show stability in 2016. “Overweight” recommendation reiterated with lower TP. Amount in SAR mn; unless specified Sales revenues Net profit EPS (SAR)
Forecasts 4Q-15 427.6 206.8 1.31
Actual 4Q-15 NA* 209.0 1.33
Deviation (%) 1.0% *Not Available,
Despite lower production efficiency; strong sales growth leads to superior performance in 4Q2015: Q4-15 net profit came in line with our expectation and showed a deviation of 1.0% from our estimates and 6.8% from the market Consensus of SAR195.7mn. Yanbu Cement Company posted net income of SAR 209.0mn; indicating an increase of 8.3%YoY and 44.1%QoQ. We believe the strength of top line revenues was mainly associated to higher volumetric sales growth. During Q4-2015, the company registered a sales growth of 21.3%YoY, as sales in Q4-2015 stood at 1.89 MT vs 1.56 MT in Q4-2014. The top line revenues is expected to be at around SAR434.8mn vs SAR378.2mn in Q4-2014, where the average price per ton is expected to be around SAR229, as compared to SAR241.5 in the comparison period and SAR229.3 in Q3-2015. Gross profit stood at SAR 224.0mn depicting an increase of 6.7%YoY, and 38.3%QoQ. Gross margin in Q4-2015 has been impacted due to expected lower production efficiency that has reflected on higher cost per tonne and we expect it to be around SAR111 vs SAR110 in Q4-2014 and SAR107 in the same comparison period. Operating Profit for Q42015 stood at SAR 212.0mn depicting an increase of 6.5%YoY, and 40.4%QoQ; where the managerial expenses (SG & A) increase to SAR12.0mn in 4Q15 from SAR11 mn in last quarter. (The company is yet to publish detailed financials for 2Q15). Yanbu cement 2015 sales growth outperformed the market average growth, while stability is expected through 2016: During 12M-2015, Yanbu Cement’s sales rose by 11.4%YoY to 7.01MT from 6.23MT in 2014. During the same period, industrywide clinker inventory increased by 5.7% to 22.78MT from 21.55MT in December-2014, as compared to 8.2% increase in Yanbu clinker inventory. We believe the rise in clinker inventory is the main reason behind discount in the sector selling price. In 2015, Yanbu Cement experienced pricing pressure, with cement price realization declining to SAR 230.2 compared with SAR 247.7 in 2014. As we expect the inventory level to further rise as demand is not expected to match supply. We foresee stable-to-slight cement sales decline for Yanbu Cement in 2016. Higher subsided fuel cost to raise the production cost by SAR45 mn 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 from USD 2.1 per barrel to USD 3.8 per barrel (4.90–8.96 hallah per liter). The price of electricity was also revised upwards. Yanbu Cement mostly uses heavy fuel oil (HFO); with the increase in cost of HFO, the production cost of cement is likely to increase. The increase in prices of electricity and subsided fuel is also expected to increase the production costs by about SAR45 mn according to the company. Based on our calculation, 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. Based on the new assumptions, the increase in cost would be about SAR 44.5mn. Consequently, the net income of the company would stand revised from SAR 794.7mn to SAR 750.3mn (-6.5%YoY). The company is trading at 8.2x 1-year forward PE, compared with an average PE of 13.6x for the cement sector during 2013-15.
1
Waste heat recovery system to result in substantial savings from 2017: In March 2015, Yanbu Cement announced an agreement to construct a 34MW thermal power station that utilizes wasted thermal energy produced by the manufacturing process at a cost of SAR 232mn. The waste heat recovery (WHR) system would become operational by January 2017 and lead to substantial savings in fuel cost; moreover, this system would lower the dependence on power generated from diesel power stations. Yanbu Cement’s management estimates that the WHR system will raise the efficiency of cement grinding by one million tonne of cement a year. The company would be able to realize the financial benefit from the implementation of WHR system from 1Q2017. © All rights reserved
Please read Disclaimer on the back
Recommendation
‘Overweight ’
Current Price* (SAR)
39.0 56.30
Target Price (SAR)
44.3%
Upside / (Downside)
*prices as of 11h of January 2016
Key Financials FY14
FY15E
FY16E
1,559.4 -3.8% 801.9 -2.4% 5.09
1,605.1 2.9% 806.3 0.5% 5.12
1,627.6 1.4% 750.3 -6.9% 4.76
SARmn (unless specified) Revenues Growth % Net Income Growth % EPS
Source: Company reports, Aljazira Capital
Our estimates and valuation: Yanbu Cement Co. is expected to post SAR750.28 mn in net income (4.76 EPS) for 2016, recording a decline of 6.9%YoY for the year influenced by higher fuel cost and low level in cement price per ton, however, we remain ‘Overweight’ for the stock with target price at SAR56.30/share; indicating a potential upside of 44.3% over current market price of SAR39.0 share (as of 11th January 2015). The company is trading at attractive forward PE and P/B of 8.2x and 1.6x respectively based on our 2016 earnings forecast. We anticipate the company to pay a dividend of SAR 4 DPS (10.2% D/Y) in 2016 owing to a strong operating cash flow and no additional capital expenditure in the medium term.
Key Ratios SARmn (unless specified)
FY14
FY15E
FY16E
Gross Margin EBITDA Margin Net Margin P/E P/B ROE ROA Dividend Yield
54.7% 65.6% 51.4% 12.7x 2.86x
53.99% 63.93% 49.99% 8.56x 1.80x
49.86% 60.01% 46.10% 8.19x 1.56x
22.5% 18.9% 6.2%
21.0% 18.4% 8.0%
19.1% 17.3% 10.2%
Source: Company reports, Aljazira Capital
Shareholders Pattern Shareholders Pattern General Organization for Social Insurance AlRajhi Ekhwan Group Awqaf Suliman AlRajhi Abdullah A. AlRajhi Public Investment Fund Public
Holding 12.37% 5.17% 7.35% 6.01% 10.0% 59.1%
Source: Company reports, Aljazira Capital
Key Market Data Market Cap (mn) YTD % 52 Week (High ) 52 Week (Low) Shares Outstanding (mn)
6,142.5 -16.57 % 72.25 39.90 157.50 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
