Arabian Cement Company - Q1 Performance Report

Transcription

1. Arabian Cement Company Construction and Materials – Industrial ARCCO AB: Saudi Arabia 08 May 2018 Target price Current price 31.00 29.50 5.05% over current as at 06/05/2018 Arabian Cement Existing rating Underweight Neutral Research Department Yazeed Alsaqaaby Tel +966 11 211 9398, alsaqaaby@alrajhi-capital.com Overweight Weak Q1 on account of price discounts Overweight Performance Price Close MAV10 MAV50 Relative to TADAWUL FF (RHS) 89.3 42.0 72.7 32.0 56.0 RSI10 106.0 52.0 70 30 -10 3 Vol mn 62.0 2 1 04/16 07/16 10/16 01/17 Source: Bloomberg Earnings Period End (SAR) Revenue (mn) Revenue Growth EBITDA EBITDA Growth EPS EPS Growth DPS Dividend Yield P/E 12/17A 906 -28% 431 -34% 2.63 -46% 4.0 11.7% 13.1x 12/18E 782 -14% 262 -39% 1.16 -56% 1.5 4.8% 26.7x Source: Company data, Al Rajhi Capital 12/19E 877 12% 370 41% 2.13 83% 2.0 6.5% 14.6x Arabian Cement’s Q1 2018 net loss of SAR 6.1mn was below our (SAR89mn) as well as consensus estimate (SAR83mn), as new entrants in the western region market led to intense competition, resulting in companies offering deep discounts. As a consequence, Arabian Cement’s average realized price was sharply lower at SAR123/ton (-32.6% y-o-y,-34.4% q-o-q), as the company offered significant discounts to maintain market share. Tracking this negative change in realized price, regional peers may also witness similar trend this quarter. Arabian Cement’s miss was also partly attributable to its Jordanian operations (Qatrana Cement), which recorded a net loss of SAR20.7mn in Q1 2018. The company held an inventory of 0.918mn tons by the end of April, representing 27% of the last 12 months sales. On the sales side, Arabian Cement sold 1.035mn tons in Q1 2018 (-7% y-o-y , +18.3% q-o-q). Going forward, we expect that the low realized selling prices could continue in the coming quarters. However, selling prices should gradually recover in the following years given the mega construction projects in the western region and the company’s comparatively low inventory level. We believe that most of the weaknesses are priced in the stock, thus we maintain our Neutral rating with a revised target price of SAR31/share . Revenue: Revenue declined 26.6% y-o-y to SAR199.7mn, lower than our estimate of SAR258mn. The company sold 1.03mn tons during this quarter, down 7% y-o-y (+ 18.3% q-o-q), compared to the sector average of -11.2% y-o-y. The decline in revenue was mainly due to extensive discounts that the company offered, which resulted in a significantly higher market share for the company this quarter. Gross and operating profit: Gross profit fell sharply to SAR12.8mn (-88% y-oy,-89% q-o-q), while operating profit stood at -SAR6.1mn, due to the double impact of lower realized price and higher costs per ton. Gross profit margin narrowed to 6.4% in Q1 2018 from 42% in Q1 2017, while operating margin stood at -3%, from 36.3% in Q1 2017. Jordanian operations: Arabian Cement’s Jordanian subsidiary, Qatrana Cement (87% ownership), recorded a net loss of SAR 20.7mn in Q1 2018 ( Arabian Cement’s share: SAR 18mn) due to the tough market situation in the country. Cement selling prices fell by more than 50% y-o-y in Jordan, triggered by the high inventory levels in the market and overcapacity. We expect the situation to continue in the coming quarters and recover gradually in the following years. On the positive side, cement demand picked up in Jordan, with sales volumes increasing by 16% y-o-y to 1.2mn tons. Which resulted in increasing Qatrana cement revenue by 5% y-o-y. Outlook: Although the company reported a net loss and a decline in revenue in Q1 2018, Arabian Cement was able to increase its cash flow to SAR63.5mn (Q1 2017: SAR34.8mn) and also improve its market share on q-o-q and y-o-y basis. Therefore, we believe that though the company’s weak performance may continue in the coming quarters in 2018, it will gradually improve over the coming years given the mega government projects in the western region and improving demand in Jordan. Downside risks are related to continue of the low average realized price in Jordan and increase in the intensity of Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
2. Arabian Cement Company Construction and Materials – Industrial ARCCO AB: Saudi Arabia 08 May 2018 competition in the western region market . Upside risks are related to potential benefits from the government mega projects located in the western region and earlier than expected recovery in the Jordanian market as a competitor company is expected to exit the market. Dividends: In 2017, the company distributed dividends of SAR4.0 per share (SAR2 as extraordinary dividends ). In 2018, given the company’s strong cash position, we anticipate dividends of SAR1.50, which implies a dividend yield of 5.1% at current price level. Valuation: We believe that most of the weaknesses are priced in the stock and maintain our Neutral rating with a revised equal weighted (DCF and relative valuation) target price of SAR 31/Share. Figure 1 Arabian Cement: Summary of Q1 2018 results (SAR mn) Q1 2017 Revenue 272 Gross Profit 114 Gross Margin 42% Operating Profit 99 Net profit 103 Q4 2017 248 127 51% 105 100 Q1 2018 % chg y-o-y %chg q-o-q ARC Estimate 200 -26.6% -19.5% 258 13 -88.8% -89.9% 110 6% NA NA 43% (6) NA NA 90 (6) NA NA 89 Source: Company data, Al Rajhi Capital Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
3. Arabian cement Company Construction and Materials – Industrial 19 April 2017 IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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5. Arabian cement Company Construction and Materials – Industrial 19 April 2017 Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. 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"Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price on a 12 month time horizon. "Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Target price": We estimate target value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations. Contact us Mazen AlSudairi Head of Research Tel : +966 1 211 9449 Email: alsudairim@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. 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