Yanbu Cement Q1: Misses estimates on lower prices

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1. Yanbu Cement Cement – Industrial YNCCO AB: Saudi Arabia 10 May 2018 Target price Current price 29.00 27.26 6 % Over current as at 9/5/2018 Research Department Yazeed Alsaqaaby Tel +966 11 211 9398, Alsaqaaby@alrajhi-capital.com Existing rating Underweight Neutral Overweight Overweight Q1: Misses estimates on lower prices Performance Price Close MAV10 MAV50 Relative to TADAWUL FF (RHS) 93.1 28.0 79.1 23.0 65.0 RSI10 107.2 33.0 Vol mn 38.0 70 30 -10 6 4 2 03/17 06/17 09/17 12/17 Source: Bloomberg Earnings 2017 2018 2019 Revenue (mn) 917 900 966 Revenue Growth EBITDA (mn) -29% 542 -2% 510 7% 545 EBITDA Growth EPS -32% 2.0 -6% 1.8 7% 2.1 EPS Growth PE DPS -40% 17 2 -9% 13 1.9 14% 14 2.2 Period End (SAR) Yanbu Cement Yanbu cement’s Q4 net profit came at SAR39.6mn (-68% y-o-y and -59% q-oq), missing our (SAR96mn) as well as consensus estimates (SAR90mn) by a wide margin. The company’s top-line of SAR216mn ( -30% y-o-y, -3% q-o-q) was driven by lower than expected sales price of SAR 145/ton (down 25% y-oy, -18% q-o-q) while the volume stood at 1.49 mn tons (-6.5% y-o-y, 18% q-o-q). The cost per ton jumped to SAR117 ( 7%y-o-y, 38% q-o-q) which is due to the reversal of economies of scale as the volume dropped as said by management. Going forward, we expect the selling price to remain at current levels in Q2 and volume to drop due to the seasonality effect. The company started exporting in April as part of its one year agreement to export 1mn ton of clinker and 500 thousand ton of cement, the agreement is expected to increase revenue by SAR100 mn in 2018. We believe the PIF’s initiatives in the region (NEOM, Red sea, Jeddah downtown, Rou’a Al Haram and Rou’a Al Madinah) will remain the upside driver for the region in medium to long term. Downside risks are related to increase in price war which will lead to lower than expected sales volume and selling prices. Post estimates revision, we revise our TP to SAR29/share and maintain our Neutral rating. Inventory: The company holds 3.9mn tons of inventories, representing 76% of last 12-month sales volume. We believe the level of inventory will decrease going forward as the company decreased its production to 1.1 mn ton (-78% y-o-y) and because of the export agreement which will reduce clinker by 1mn ton as well as the company strategy to lower prices to increase volume to keep market share. Source: Company data, Al Rajhi Capital Profit margins: The company’s gross and operating margins dropped to 19% and 14% respectively, from 52% and 45% in the previous quarter due to 38% increase in cost per ton as the company saw lower economies of scale. Conclusion and Valuation: The western region has the highest number of producers/ production capacities, which should sustain the challenging conditions and the volatility in prices. We value the company based on an equal weighted average of DCF (10.3% WACC) and relative valuation (P/E of 13x). We keep our neutral rating on the stock with a change to the target price to SAR29 per share which is 6% above current. Figure 1 Yanbu Cement: Summary of Q1 2018 results (SARmn) Q1 2017 Q4 2017 Q1 2018 % chg y-o-y % chg q-oq ARC Estimate Revenue 307 222 216 -30% -3% Gross Profit 132 115 41 -69% -64% 252 106 Gross Margin 43% 52% 19% NA NA 42% Operating Profit 123 100 30 -75% -70% 97 Net Profit 125 97 40 -68% -59% 96 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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