Saudi Cement Co: Results Summary - Q1 2018

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1. Saudi Cement Cement – Industrial SACCO AB: Saudi Arabia 03 May 2018 Target price Current price 50.5 51.5 -1.9% over current as at 01/05/2018 Research Department Yazeed Alsaqaaby Tel +966 11 211 9398, alsaqaaby@alrajhi-capital.com Existing rating Underweight Neutral Overweight Overweight Q1: Above estimates; Margins improved Vol mn RSI10 Performance Price Close MAV10 MAV50 Relative to TADAWUL FF (RHS) 75.0 106.0 65.0 91.0 55.0 76.0 45.0 61.0 70 30 -10 8 6 4 2 07/16 10/16 01/17 05/17 Source: Bloomberg Earnings Period End (SAR) Revenue (mn) Revenue Growth EBITDA EBITDA Growth EPS EPS Growth DPS Payout Ratio Dividend Yield P/E Saudi Cement Co. 12/17A 1,185 -33% 682 -41% 2.96 8% 4.0 135% 7.9% 17.0x 12/18E 1,170 -1% 712 4% 3.19 8% 3.75 118% 7.4% 15.8x Source: Company data, Al Rajhi Capital 12/19E 1,317 12% 796 12% 3.76 18% 4.0 107% 7.9% 13.4x Saudi Cement’s Q1 2018 bottom-line came in at SAR142mn (-14% y-o-y), above our (SAR117mn) as well as consensus’ (SAR125mn) estimates. The difference is attributable to better than expected gross profit margins, on account of the efficiency impact of higher sales volume (compared to previous quarters) as well as the company’s ability to maintain relatively higher realization. Nevertheless, profit was still down on an y-o-y basis as the cost per ton increased ~7% y-o-y (from SAR105/ton to SAR112/ton) and the average realized selling price declined 3% to SAR228/ton due to tough overall market circumstances. The sales volumes of Q1 remained almost flat on yearly basis at 1.45mn ton. Saudi Cement held an inventory of 4.89mn tons at the end of March, representing 97% of last 12 months sales. Going forward, we believe seasonality effect will impact Q2 earnings negatively (-3% y-o-y, -21%q-o-q). Given the intensive competition and the high inventory level, we expect that the high selling prices of Saudi cement (relative to competitors) are not sustainable. On the other hand, we believe that the cancelation of exports fees will have a positive effect on Saudi Cement’s performance as cement exports to Bahrain represented 6.2% of the company’s 2016 sales volumes. We believe that most of the strength points are already reflected in the price of the stock, and maintain our Neutral rating on the stock with a revised target price of SAR50.5per share.  Revenues and profit margins: Saudi Cement Company reported Q1 revenue of SAR331mn (-5% y-o-y, +4% q-o-q), in-line with our SAR332mn estimate. The company sold 1.45mn tons of cement during this quarter (-1.4% y-o-y). Slightly lower average selling prices (-3.2% y-o-y) along with higher cost/ton led to further contraction in profit margins as gross and operating margins came at 51.2% and 42.9%, respectively.  Outlook: Moderate drop in selling prices in the central and northern regions, and the competition in the eastern region may lead the company to offer further discounts to offload some of its inventory as well as maintain its market share. Also, we expect Saudi cement to benefit from the cancelation of previous export fees.  Dividends: Saudi Cement distributed SAR4/share of dividends in 2017. We revise our 1H2018 dividends estimate to SAR1.75 (SAR1.25 earlier). For the full year, we expect the DPS for 2018 to be SAR3.75, giving a dividend yield of 7.4%.  Valuation: Based on our weighted average of DCF and PE-based relative valuation methods, we maintain our Neutral rating on Saudi Cement Company with a revised target price of SAR 50.5/Share. Figure 1 Saudi cement: Summary of Q1 2018 results Revenue Gross Profit Gross Margin Operating profit Net Profit Q1 2017 346 191 55% 168 165 Q4 2017 319 141 44% 112 107 Q1 2018 %chg y-o-y %chg q-o-q ARC Estimate 331 -4.6% 3.8% 332 169 -11.4% 20.2% 148 51% NA NA 45% 149 -11.7% 32.1% 120 142 -13.9% 32.2% 117 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.
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