Saudi Cement Sector - Aljazira · PDF fileSaudi Cement Sector-Executive Summary ... Cement companies in Saudi Arabia benefit from subsidized heavy fuel, which is allocated by the Ministry

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Septemper 2013

Saudi Cement Sector-Executive Summary

The Saudi Cement sector has seen its fortune rise on the back on the back of improved demand, backed by heavy infrastructure development in the Kingdom of Saudi Arabia. The TASI Cement index has moved up by 20% YTD, primarily due the favorable demand fundamental. However, the sector was impacted by a number of factors, that we believe have resulted in subduing the

sectors profitability:

• Depleting Inventory Levels

• The decree the government to maintain at least 2 months of inventory level based on production capacity;

• Government initiative to import un-subsidized cement in-order to meet demand;

• Limited fuel allocation the Ministry;

• Capped ex-factory prices at SAR 240.

On the back of the sector performance in 1H-2013, and changes on the fundamental front we have revised our estimations and 12-months price target.

Company Name Old 12-month price target in SAR

New 12-month price target in SAR

Old Recommendation

Share Price performance from our last recommendation

New Recommendation

Arabian Cement 69.5 73.5 Neutral 6.7% Neutral

Najran Cement 31.0 28.9 Overweight -2.9% Neutral

Qassim Cement 88.0 91.5 Overweight -0.9% Neutral

Saudi Cement 103.2 113.0 Neutral 8.2% Neutral

Southern Cement 118.1 114.2 Overweight 5.0% Neutral

Yamamah Cement 61.7 65.0 Overweight 8.0% Overweight

Yanbu Cement 73.7 76.6 Neutral 7.9% Neutral

Source: Aljazira Reseacrh

Key financial updates

AlJazira Capital Cement Universe

Share Capital

Market Cap (SAR Mn)

Profitability (SAR Mn) EPS (SAR) PE (x) PB (x) Dividend Yield

(SAR Mn) (SAR Mn) 2012a 2013e 2012a 2013e 2012a 2013e 2012a 2013e 2012a 2013e

Arabian Cement 3,048 5,720 384 544 4.8 6.8 10.4 10.6 1.4 1.8 4.6% 6.0%

Najran Cement 1,878 4,505 202 285 1.4 1.8 16.1 15.8 1.8 2.3 5.5% 4.0%

Qassim Cement 1,994 7,583 561 593 6.2 6.6 12.9 12.9 3.5 3.5 5.9% 5.9%

Saudi Cement 2,732 16,715 1,102 1,152 7.2 7.5 10.0 13.5 1.9 2.6 6.0% 7.0%

Southern Cement 2,743 15,435 1,003 1,026 7.2 7.3 14.0 15.1 5.3 5.8 7.0% 6.5%

Yamamah Cement 3,543 10,986 818 901 4.0 4.4 9.8 12.4 2.3 3.0 5.5% 8.4%

Yanbu Cement 3,296 11,852 721 948 4.6 6.0 11.9 12.6 2.6 3.2 6.1% 5.8%

Source: Aljazira Reseacrh


Saudi Cement Sector

Sector report - Updated Outlook For 3Q2013

Analyst

Jassim Al-Jubran +966 2 6618602

Senior Analyst

Talha Nazar +966 2 6618603



Septemper 2013

Saudi cement sector - Strong demand outlook; supply concerns persist

Saudi Arabia’s cement industry continues to witness robust demand due to a rise in construction activity, led by government-

backed infrastructure projects. Moreover, the sector is benefiting from low production costs on account of subsidized fuel

from Ministry of Petroleum. We believe companies that are in close proximity to high demand areas (particularly in the western

region) and the ones that are expanding their capacities are better placed to capitalize on the rising demand. However, limited

fuel allocation from Ministry of Petroleum to the cement sector poses a major threat to the planned capacity expansion.

Furthermore, the government’s cap on price realizations and ruling on maintaining minimum two months inventory level is

likely to hurt the profitability of cement manufacturers.

Favorable macroeconomic factors continue to drive demand

The cement industry in the Kingdom has witnessed a steady growth in consumption over the last few years. Cement

consumption1 has increased from 25.9MT in 2002 to 53.0MT in 2012 – a CAGR of 11.6% during 2007–12 as against the 3.4%

registered during 2002–07. The robust growth has been propelled by a rise in construction activity in the Kingdom.

The residential building sector, which accounts for around 60% of cement consumption, is expected to expand at a CAGR

of 8–10%2 in the long term, supported by a rising population, changing family structure, which more emphasis on nucleus

families, implementation of the mortgage law3 ,new structure decided by the ministry of housing to provide developed land

along with a loan to build housing units. Further, increase in infrastructure spending by government and strong project

pipeline in KSA is also supporting the cement demand. According to MEED Saudi Arabia Projects Market 2013 report, of the

USD 110bn worth of contracts awarded in 2012 among GCC countries, contracts worth USD 50bn were awarded in Saudi

Arabia. Furthermore, contracts worth around USD 30bn were awarded during the first six months of 2013.

1. Production and consumption data is the aggregate of Yamama Cem, Saudi Cem, Eastern Cem, Qassim Cem, Yanbu Cem, Arabian Cem, Southern Cem, Tabuk Cem, Riyadh Cem, Najran Cem, City Cem, Northern Cem, and AlJouf Cem2. NRCC prospectus dated May 20123. The implementation of the mortgage law is expected to trigger demand for housing units and, consequently, drive cement demand.

Figure 1: Total cement and clinker sales

Source: Yamama Cements, AlJazira Capital

2007 2008 2009 2010 2011 2012

26 25 26 26 27 31

33 38

44 49

53

20

30

40

50

60

MT

2002 2003 2004 20062005

CAGR: 3.4% CAGR: 11.6%

We believe the demand is expected to remain healthy in the long term, supported by ongoing construction activities due to

an increase in government spending on infrastructure, business expansion, and the construction of residential units.

Saudi Cement Sector

Sector report - Updated Outlook For 3Q2013



Septemper 2013

Supply concerns persist despite expansion plans

Saudi Arabia’s cement production capacity increased at a CAGR of 11.2% to 56.2MT in 2012 from 33.0MT in 2007. Consequently,

production rose 11.6% during the same period, driven by the entry of new players and expansion by existing companies.

The central and western regions account for the majority of cement capacity in the KSA –28.6% and 24.5%, respectively.

However, in recent years, demand in the central region has gradually stabilized, while that in the western region has increased

due to development projects such as the construction of king Abdul-Aziz airport in Jeddah and other infrastructure projects.

Capacity to increase 12.1% over 2012–15

The rising demand for cement in the Kingdom has encouraged companies to expand operations in order to meet demand and

stay competitive. The KSA cement sector is expected to add about 23.0MT capacity by 2015 to meet the strong rise in domestic

demand. However, the majority of the capacity addition is likely to enter the market in 2015.

Fuel allocation – a major bottleneck in expansion

Cement companies in Saudi Arabia benefit from subsidized heavy fuel, which is allocated by the Ministry of Petroleum. Over

the last few months, several cement producers like Najran Cement and Tabuk cement reported a delay in implementation of

their expansion plans due to their inability to enter into a fuel supply agreement with the ministry. Limited fuel allocation to

cement producers remains a major concern for the implementation of the planned capacity expansion. During 2011, Yanbu

Cement Company (a major player in the western region) was involved in a dispute ; the company was unable to enter into a

fuel supply agreement , which resulted in a delay in the opening of Yanbu’s new kiln. Moreover, ministry had turned down

fuel supply for new production lines of Southern Province Cement and Qassim Cement. In 2012, the government asked

Saudi Aramco to provide fuel for six months to cement companies that underwent capacity expansions. However, this was a

temporary solution, and cement companies in the Kingdom continue to face a fuel supply bottleneck. The risk of a shortage

of cement supply could be mitigated by assurance from Aramco on the continuous availability of fuel.

33.0

43.8 46.0 47.550.7

56.2 57.863.1

79.2

20.0

32.0

44.0

56.0

68.0

80.0

2013

E

2014

E

2015

E

2007

2008

2009

2010

2011

2012

Figure 2: Installed capacity (MT) Figure 3: Region-wise production capacity4

Eastern Region, 22%

Central Region, 29% Western

Region, 24%

Northern Region, 7% Southern

Region, 19%

4. As of May 2012Northern Cem, and AlJouf Cem

Source: Yamama Cements, AlJazira Capital Source: Yamama Cements, AlJazira Capital

Cement Sector



Septemper 2013

Imports to support declining inventory level Clinker inventory levels for cement producers in Saudi Arabia have been depleting over the last few years due to robust demand for cement. Overall inventory levels of clinker declined from 25% of clinker production (10.9MT) in 2009 to 13.4% (6.4MT) in 2012. During 2012, Yamama and Saudi Cement registered the highest decline in clinker inventory. The decline in Saudi Cement’s inventory was due to the sale of 2mn tons of clinker to Qassim Cement. Furthermore, the falling inventory levels add to the existing supply concerns.

The government, however, has taken initiatives to offset the concerns over depleting clinker inventory levels.

10.910.0

7.5

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12.0%

15.0%

18.0%

21.0%

24.0%

27.0%

30.0%

4

6

8

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12

2009 2010 2011 2012 YTD

MT

Clinker Stock As a % of production (RHS)

Figure 4: Declining clinker inventory Figure 5: Company-wise inventory level

0.0

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Clinker inventory - Aug 2013 Clinker Imports - Aug 2013


Government initiatives to bridge demand–supply gapThe Saudi government has taken a series of measures to mitigate the supply concerns in the Kingdom’s cement sector.

• Maintaining minimum inventory levels: In May 2013, KSA’s Minister of Commerce and Industry made it mandatory for cement producers to build a ‘strategic’ reserve of two months of inventory at each plant, given the rising deficit in cement production. In case of a shortfall, the companies have to cover the same by importing. The ministry stated that it would monitor the companies and penalize the ones that do not adhere to the decree. In August 2013, eight cement producers reported a clinker import of approximately 1.4mn tons, of which Saudi Cement’s imports were around 23.3% of 2013 target (The government has set a target of 6mn ton of import for 2013,Import distribution formula will be based on fuel allocation).

• Cement imports to alleviate near-term shortage: In April 2013, the government instructed cement factories to import 10MT of additional cement to meet local demand. In June 2013, the Saudi Port Authority reported that about 350,000 tons of cement had been imported from the UAE and Egypt.

• Additional capacity: The government has set aside SAR 3bn, to support construction of four cement factories with a total capacity of 12MT.

Cement Sector



Septemper 2013

Cement prices – remain regulated by the governmentThe rise in cement demand and the limited supply led to price5 increases in 2011 and 2012 (up 2.6% YoY and 4.2% YoY, respectively). During 2012, the price increase was limited, as the government took various measures to keep prices under control; these include extending export ban and intervening in the dispute between Saudi Aramco and cement producers. Furthermore, in March 2012, the government imposed a price ceiling for cement at SAR 240/tonne (down from SAR 250/ton earlier) to control unprecedented hikes in cement prices. Despite the price regulations, the Saudi market has suffered from an ‘informal’ cement market throughout 2012. According to news sources, traders were stockpiling cement to create artificial shortages, and cement was being sold at inflated prices.

Among listed players, Yanbu Cement and Qassim Cement command the highest prices in the region at around SAR 252/ton. During 1H2013 average cement prices in the Kingdom stood at SAR 236/ton.

Figure 6: Cement price realizations

234

229

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245

236

225

230

235

240

245

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2009 2010 2011 2012 1H 2013

SAR/t

on

190

225

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Figure 7: Company-wise price realization


Margins likely to be adversely affected by price cap and clinker importCement companies in the Kingdom benefit from higher profitability compared with their regional and global peers; this is primarily on account of a favorable cost structure due to access to cheaper raw materials and fuel. Energy and raw material costs account for nearly 32% and 29%, respectively, of total production expenditure. Consequently, margins for cement producers in the Kingdom are much higher than those of their regional peers. Average gross and net margins (TTM) for cement companies6

in Saudi Arabia stood at 51.9% and 45.9%, respectively, vis-à-vis regional average of 33.8% and 28.3%, respectively.

Figure 9: Trend in gross and net margins

53.7%

51.4%

53.1%53.7%

48.3%

46.0% 46.5% 46.7%

42%

45%

48%

51%

54%

57%

2009 2010 2011 2012

Gross Margin Net margin

Figure 8: Saudi – better positioned

Kuwait

Oman

Qatar

Saudi

UAE

0%

10%

20%

30%

40%

50%

60%

0% 15% 30% 45% 60%

Gros

s Marg

in (TT

M)

Net Margin (TTM)

Source: Bloomberg, AlJazira Capital Source: Tadawul, Bloomberg, AlJazira Capital

During 2012, gross and net margins for cement producers stood at 53.7% and 46.7%, respectively. At 58.6%, Qassim Cement maintains the highest gross margin level among its domestic peers, followed by Southern Province Cement (58.2%) and Yamama Cement (58.0%). Qassim Cement’s higher price realizations and better efficiency help the company in maintaining higher gross margins vis-à-vis its peers.

Government cap – SAR240/ton

5. Price data pertains to average of Yamama Cem, Saudi Cem, Eastern Cem, Qassim Cem, Yanbu Cem, Southern Cem, Tabuk Cem, Najran Cem, and AlJouf Cem

6..Data pertains to average of Yamama Cem, Saudi Cem, Eastern Cem, Qassim Cem, Yanbu Cem, Arabian Cem, Southern Cem, Tabuk Cem, Najran Cem, and AlJouf Cem

Cement Sector



Septemper 2013

Saudi , 14.6%

Eastern, 5.9%

Yamama, 10.3%

Qassim, 7.7% Yanbu, 14.4% Arabian,

8.0% Tabuk, 2.5%

Northern, 3.6% Al Jouf, 2.7%

Southern, 12.3%

Najran, 5.5% Others, 12.6%

Regulatory limit of 85%

Competitive landscapeIn terms of capacity until Aug-2013, the top three cement players in KSA control over 40% of the market – Saudi Cement Company (16.1%), Southern Province Cement Company (13.3%), and Yamama Cement Company (12.0%). Yanbu cement with the eadditional capacity of about 3.0MT in 2012, the company is expected to rise to around 12.5% from 11.8% during 2013. Furthermore, the market share of private players is expected to rise its share market from 12.6% to 18.4% primarily due to the expected capacity addition of approximately 3.5MT in 2015 by Riyad Cement.

Source: NRCC prospectus, Tadawul, AlJazira Capital

Saudi , 13.2% Eastern, 4.2%

Yamama, 11.7%

Qassim, 5.4%

Yanbu, 10.2%

Arabian, 8.8%

Tabuk, 3.4% Northern, 2.5%

Al Jouf, 1.9% Southern,

10.6% Najran,

7.0%

Others, 18.4%

New Players*, 2.6%

“New Players” refers to expected expansion by existing companies.

Source: NRCC prospectus, AlJazira Capital

Figure 12: Market share by capacity – 2015E Figure 11: Market share by capacity – 2012

We believe margins may come under pressure due to price realizations being regulated by the government and the continuation of the export ban. Furthermore, production costs are expected to increase as companies import clinker to adhere to the government’s decree of maintaining two months of inventory level. In addition the cost of imported clinker for cement companies have adversely effected the profitabilty, as Najran cement which is located in the Southern region has been effected by approximately SAR 80/ton in 2Q-2013.

Source: Yamama Cements, Tadawul, AlJazira Capital

Figure 10: Gross and net margins across Saudi cement companies (2012)

58.6% 58.2% 58.0% 56.9% 55.8% 55.6%52.9% 50.9%

42.0%39.2%

51.9% 50.1%47.3%

53.5%48.1%

28.3%

55.4%

47.0%

33.0%27.5%

25%

32%

39%

46%

53%

60%

67%

Yamama Saudi Eastern Qassim Yanbu Arabian Southern Tabuk Najran Aljouf

Gross Margin Net Margin

Cement Sector

Strategic Reports |Cement Sector



Septemper 2013

Price upgraded, ‘Neutral’ recommendation maintained/Net income expectation revised

• Valuation update: We revise our 12-month price target for Arabian

Cement by 1.4% to SAR 73.53/share. On the back of revised beta from

Bloomberg , however we cut our net income estimates for 2013 by 8.2%

on the back of i)lower price realization and ii)less than expected growth

in dispatches . The stock is currently trading at a PE and PB of 13.18x and

1.93x respectively. For 2013 and 2014, at current market price (24th Sept

2013) we expect the company to trade at an expected PE of 10.6x and 9.3x

respectively. We maintain our “Neutral” stance.

• Lower dispatches and price realization hurting prospects:

Arabian 1H-2013 showed a fall of 6.3% in the local market as dispatches

stood at 2.20mn as compared to 2.35 tons in 1H-2012. For full year we

cut our dispatches forecast on the local front by 5.4%. According to our

estimates price realization per tonne for the company has showed a fall

of 8.6%. For full year 2013 we expect the company’s per ton realization to

register fall of 8%.

• We downgrade our 2013 expectation: Arabian cement in 2Q-2013

posted net income of SAR124.7mn.Major deviation from our expectation

was due to lower dispatches at lower price realization. We cut our 2013 net

income estimate by 8.1% to SAR 543.65mn.

New Recommendation ‘Neutral’’

Old recommendation ‘Neutral’

New 12-month price target; SAR73.53

Old12-month price target; SAR 69.5

Current Price: SAR71.50

Upside / (downside): 2.8%

Reuters code: 3010.SEBloomberg code: ARCCO:ABCountry: Saudi ArabiaSector: CementPrimary Listing: TadawulM-Cap: SAR 5,920mn52 Weeks H/L (SAR): 76.43 / 43.70

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Price Chart

SARmn (unless specified) 2012 2013e 2014e 2015e 2016eSales (Mn SAR) 1,371 1,486 1,599 1,615 1,324 % Growth In sales 27% 8% 8% 1% -18%Net Income (Mn SAR) 384 544 617 637 467 % Growth In Net Income -6% 42% 14% 3% -27%EBITDA Margins 41% 50% 51% 51% 49%EBIT Margins 29% 39% 40% 40% 35%Net Margins 28% 37% 39% 39% 35%ROE 13% 17% 17% 16% 11%ROA 9% 12% 12% 13% 9%PE (x) 10.4 10.6 9.3 9.0 12.3 PB (x) 1.4 1.8 1.6 1.4 1.4 EV/EBITDA (x) 8.1 8.1 6.9 6.7 8.0 Dividend Yild 4.6% 6.0% 4.2% 4.2% 4.2%

Source: Company’s report & Aljazira Capital research,


Arabian Cement Company

Investment Update |Saudi Arabia | Cement



Septemper 2013

Price downgraded, Relegated to ‘Neutral’ recommendation /Net income expectation revised

• Valuation update: We revise our 12-month price target for Najran cement

company by 6.7% to SAR 28.9/share. On the back of i) A revised Beta of 1.37

from Bloomberg. ii) We reduce our Expectation of capacity utilization for

2013 by 9.4% after a fuel supply issue iii) Operational efficiency in reducing

the cost per tonne from 134 to SAR 130 iii) lower price realization. The

stock is currently trading at a PE and PB of 17.88x and 2.34x respectively.

For 2013 and 2014, at current market price (24th Sept 2013) we expect the

company to trade at an expected PE of 15.80x and 11.38x respectively. We

revise our 12months price target for NCC to SAR 28.9/share. Therefore, we

relegated our recommendation to “Neutral” stance.

• Fuel shortages lead to a reduction in Dispatches growth: Najran

Cement commenced experimental operation of its new 2.1mtpa capacity

plant at the beginning of 3Q-2013 taking NCC’s capacity to 5mtpa. However,

the company has not been able to utilize its full capacity due to lack of

fuel allocation from the Ministry of Petroleum. NCC in a recent circular on

Tadawul highlighted the issue and came up with a temporary solution.

A decision so far has not been reached on the fuel allocation issue. We

believe that given the shortfall in cement demand it is inevitable that the

plant will receive fuel allocation. However due to the previous short fall we

have revised our estimates for 2013.

• We downgrade our 2013 expectation: NCC in 2Q-2013 posted net

income of SAR 63.5 mn (EPS; SAR0.37), which remained in line with our

estimations, with a slight deviation of 7.4%. Major deviation from our

expectation was due to lower clinker stocks resulting in lower sales. We cut

our 2013 net income estimate by 12.9% to SAR 285.1mn.

New Recommendation ’Neutral’’

Old recommendation ‘Overweight’



Current Price: SAR 26.5


Reuters code: 3002.SEBloomberg code: NAJRAN:ABCountry: Saudi ArabiaSector: CementPrimary Listing: TadawulM-Cap: SAR 4,301mn52 Weeks H/L (SAR): 29.90 / 16.90

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NCCO

Price Chart

SARmn (unless specified) 2011 2012 2013e 2014e 2015e 2016eSales 697 613 755 1,019 1,159 1,238 % Growth In sales 9.3% -12.1% 23.0% 35.1% 13.7% 6.8%Net Income 235 202 285 396 464 497 % Growth In net income -2.3% -13.8% 41.0% 38.8% 17.2% 7.0%EPS 2.16 1.44 1.81 2.53 2.93 3.11 Gross Margins 42% 45% 45% 45% 46% 45%EBIT Margins 38% 40% 41% 42% 43% 43%Net Margins 34% 33% 38% 39% 40% 40%ROE 19% 11% 15% 18% 19% 18%ROA 12% 7% 9% 12% 13% 14%PE (x) - 16.06 15.80 11.38 9.71 9.07 PB (x) - 1.8 2.3 2.1 1.9 1.6 EV/EBITDA (x) - 11.5 11.3 8.2 6.7 5.9 Dividend Yield - 5.5% 4.0% 4.0% 4.0% 4.0%



Najran Cement Company




Septemper 2013

Price upgraded, Relegated to ‘Neutral’ recommendation /Net income expectation revised.

• Valuation update: We revise our 12-month price target for Qassim

cement company by 3.8% to SAR91.5/share. On the back of i) A revised

Beta of 0.58 from Bloomberg. ii) Operational efficiency in reducing the cost

per tonne from 102.4 to SAR 100 iii) Expected higher cement production

iii) lower price realization. The stock is currently trading at a PE and PB of

12.97x and 3.82x respectively. For 2013 and 2014, at current market price

(24th Sept 2013) we expect the company to trade at an expected PE of

12.90x and 12.18x respectively. We revise our 12 months price target for

QCC to SAR 91.5/share. However we maintain our “Neutral” stance.

• Proximity to high-growth regions: Qassim is located in the central

region of Saudi Arabia and benefits from the strong demand from central

and western parts of the Kingdom. We expect the company’s sales increased

at a CAGR of 3.2% during 2012–2016 from 4.1 MT to 4.8 MT. Qassim is

expected to continue on a steady growth path as demand is projected

to increase due to the government’s active participation in a new Metro

project, construction and real estate projects, especially in the central and

western parts that are characterized by high population, and infrastructure

development.

• We upgrade our 2013 expectation: QCC in 2Q-2013 posted net income

of SAR 166.1 mn (EPS; SAR1.85), depicting lower than our expectation by

3.0% Y/Y. Major deviation from our expectation was due to the rise of some

expenses elements especially Zakat expense. However, we raise our 2013

net income estimate by 2.8% to SAR 593.2mn due to operation efficiency

driven by lower cost.



New 12-month price target; SAR 91.5




Reuters code: 3040.SEBloomberg code: QACCO:ABCountry: Saudi ArabiaSector: CementPrimary Listing: TadawulM-Cap: SAR 7,627mn52 Weeks H/L (SAR): 88.5 / 75.0

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Price Chart

SARmn (unless specified) 2011 2012 2013e 2014e 2015e 2016eSales (SAR mn) 1,034.8 1,047.9 1,079.2 1,149.7 1,174.9 1,186.4 Growth in sales % 6.9% 1.3% 3.0% 6.5% 2.2% 1.0%Net Income (SAR mn) 552.7 561.0 593.2 628.2 643.1 636.5 Growth in net income % 10.4% 1.5% 5.7% 5.9% 2.4% -1.0%EPS 6.14 6.23 6.59 6.98 7.15 7.07 Gross Margins 59% 59% 60% 60% 60% 59%EBIT Margins 55% 55% 57% 57% 57% 56%Net Margins 53% 54% 55% 55% 55% 54%ROE 28% 27% 27% 26% 25% 23%ROA 26% 25% 25% 25% 23% 22%PE (x) 11.85 12.91 12.90 12.18 11.90 12.02 PB (x) 3.35 3.51 3.46 3.20 2.96 2.76 EV/EBITDA (x) 11.08 10.91 10.37 9.86 9.65 11.02 Dividend Yield 5.9% 5.9% 5.9% 5.9% 5.9% 5.9%



Qassim Cement Co.




Septemper 2013


• Valuation update: We revise our 12-month price target for Saudi Cement

by 9.5% to SAR 113.02/share. On the back of revised beta from Bloomberg ,

however we cut our net income estimates for 2013 by 3.16% on the back of i)

lower price realization and ii)a cut of 4.1% in our expectation for volumetric

dispatches. The stock is currently trading at a PE and PB of 13.99x and 5.8x

respectively. For 2013 and 2014, at current market price (24th Sept 2013)

we expect the company to trade at an expected PE of 13.46x and 10.86x

respectively. We maintain our “Neutral” stance.

• Lower dispatches and price realization hurting prospects: Saudi

Cement in 1H-2013 showed a jump of 5.1% in its net income on the back of

improved volumetric sales, however the jump in dispatches was lower than

our expectation. We have adjusted our dispatches assumption downward

by 4.1%.

• We downgrade our 2013 expectation: Saudi cement in 2Q-2013

posted net income of SAR344.9mn.Major deviation from our expectation

was due to lower dispatches at lower price realization. We cut our 2013 net

income estimate by -3.1% to SAR 1151.6mn







Reuters code: 3030.SEBloomberg code: SACCO:ABCountry: Saudi ArabiaSector: CementPrimary Listing: TadawulM-Cap: SAR 16,294mn52 Weeks H/L (SAR): 110.25 / 87.0

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SARmn (unless specified) 2011 2012 2013e 2014e 2015e 2016eRevenues (Sales) 1,716 2,203 2,285 2,480 2,521 2,592 % Growth in Revenues 12% 28% 4% 9% 2% 3%Net Income 831 1,102 1,152 1,259 1,273 1,316 % Growth in Gross Profit 24% 29% 6% 9% 1% 3%EPS 5.43 7.20 7.53 8.23 8.32 8.60 Return On Equity (ROE) 22% 19% 20% 25% 35% 37%Retun On Asstes (ROA) 14% 12% 14% 18% 25% 27%EBIT Margins 51% 52% 52% 53% 52% 53%Net Margins 49% 43% 43% 48% 50% 50%PE (x) 8.70 9.98 13.46 10.86 13.78 14.58 PB (x) 1.90 1.89 2.63 2.75 4.81 5.45 Dividend Yield 7% 6% 7% 11% 7% 6%



Saudi Cement Company




Septemper 2013

Price downgraded, Relegated to ‘Neutral’ recommendation/Net income expectation revised

• Valuation update: We revise our 12-month price target for Southern

cement company by 3.3% to SAR 114.2/share. On the back of i) A revised

Beta of 0.59 from Bloomberg. ii) Lower price realization iii) Expected sales

reduction by 12.5% for 2013. The stock is currently trading at a PE and PB

of 15.16x and 5.63x respectively. For 2013 and 2014, at current market

price (24th Sept 2013) we expect the company to trade at an expected PE

of 15.08x and 13.74x respectively. We revise our 12 months price target

for SPCC to SAR 114.2/share. However we maintain our “Neutral” stance.

• The second largest market share: SPCC is one of the leading cement

companies in Saudi Arabia with a market share of 13.7% (August-2013).

SPCC is expected to further strengthen its position in the Saudi Arabian

market after doubling clinker capacity at its Tihama factory to 10,000 tons

per day by mid-2012. SPCC has increased its grinding capacity by 50% in

Jazan plant after adding a third cement mill on 1Q-2013.

• Risk Factors:

1. The shortage of fuel supply for Tihama and Jizan plants may affect the production

capacity.

2. The new expansions in the region might reduce the company’s share.

3. Increase clinker inventory after import decision might have an impact on cost

per tonne in case of lower demand.

• We downgrade our 2013 expectation: SPCC in 2Q-2013 posted

net income of SAR 297.0 mn (EPS; SAR2.12), depicting higher than our

expectation by 9.9%Y/Y. Major deviations from our expectation was due

to an increase in local dispatches. However, we cut our 2013 net income

estimate by 12.4% to SAR 1.02bn due to lower capacity utilization of the

new expansions.




Old12-month price target; SAR118.1



Reuters code: 3050.SEBloomberg code: SOCCO:ABCountry: Saudi ArabiaSector: CementPrimary Listing: TadawulM-Cap: SAR 14,9801mn52 Weeks H/L (SAR): 115 / 91.0

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SARmn (unless specified) 2011 2012 2013e 2014e 2015e 2016eSales 1,691.1 1,805.3 1,851.3 2,029.3 2,095.2 2,163.3 Growth in sales (%) 29% 6.8% 2.5% 9.6% 3.3% 3.3%Net Income 895.7 1,003.3 1,025.8 1,125.7 1,146.5 1,182.3 Growth in net income (%) 36% 12.0% 2.2% 9.7% 1.8% 3.1%EPS 6.40 7.17 7.33 8.04 8.19 8.45Gross Margins 57% 58% 59% 59% 58% 58%EBIT Margins 54% 56% 56% 56% 56% 56%Net Margins 53% 56% 55% 55% 55% 55%ROE 34% 38% 38% 41% 42% 43%ROA 30% 33% 34% 37% 37% 38%PE (x) 13.44 13.95 15.08 13.74 13.49 13.08 PB (x) 4.55 5.25 5.75 5.70 5.65 5.59 EV/EBITDA (x) 13.54 12.36 12.09 11.18 10.95 10.64 Dividend Yield 7.3% 7.0% 6.5% 7.1% 7.2% 7.5%



Southern Province Cement Co.




Septemper 2013

Price upgraded, ‘Overweight’ recommendation maintained/Net income expectation revised

• Valuation update: We revise our 12-month price target for Yamamah

Saudi Cement by 5.4% to SAR 65.01/share. On the back of revised

beta from Bloomberg and higher net income expectation due to i)

Extraordinary other income for 2Q-2013 ii)higher price realization. The

stock is currently trading at a PE and PB of 12.61x and 3.1x respectively.

For 2013 and 2014, at current market price (24th Sept 2013) we expect

the company to trade at an expected PE of 12.40x and 12.00x

respectively. We maintain our “Overweight” stance.

• Higher Other income and strong price realization adding

to the bottom line: Yamamah Saudi Cement in 1H-2013 showed a

jump of 11.8%YoY in its net income on the back of improved volumetric

sales as it showed an increase of 5.8% YoY. We maintain our full year

dispatches assumption for the company. The company in 2Q-2013

posted non-operational income of SAR19.7mn depicting a jump of

120%YoY, which our higher than our expectation.

• We upgrade our 2013 expectation: Yamamah cement in 2Q-

2013 posted net income of SAR267.6mn.Major deviation from our

expectation was due to higher other income. We revise our 2013 net

income estimate by 5.1% to SAR 900.5mn.

New Recommendation ’Overweight’






Reuters code: 3020.SEBloomberg code: YACCO:ABCountry: Saudi ArabiaSector: CementPrimary Listing: TadawulM-Cap: SAR 11,086mn52 Weeks H/L (SAR): 57.0 / 43.0

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SARmn (unless specified) 2012 2013e 2014e 2015e 2016e Revenue 1,575.8 1,601.4 1,621.2 1,624.5 1,643.2 Growth YoY (%) 9.3% 1.6% 1.2% 0.2% 1.2% Net Profit 817.6 900.5 911.6 920.1 956.1 Growth YoY (%) 11% 10% 1% 1% 4% EPS (SAR) 4.8 4.4 4.5 4.5 4.7 Operating margin 54.8% 56.0% 56.2% 56.6% 58.2% EBITDA margin 54.9% 56.2% 56.3% 56.7% 57.2% ROA 21.3% 23.0% 22.5% 21.8% 21.8% ROE 23.7% 25.0% 24.2% 23.4% 23.4% EV/EBITDA (x) 12.70 12.21 12.03 11.92 11.69 P/E ratio (x) 9.80 12.14 12.00 11.89 11.44 P/BV ratio (x) 2.28 2.97 2.84 2.73 2.62 Dividend Yield 5.5% 8.4% 6.7% 6.8% 6.9%



Yamamah Saudi Cement Co.




Septemper 2013


• Valuation update: We revise our 12-month price target for Yanbu

cement company by 3.9% to SAR 76.6/share. On the back of i) A revised

Beta of 0.89 from Bloomberg. ii) Operational efficiency in reducing the cost

per tonne to SAR 100. The stock is currently trading at a PE and PB of 13.48x

and 3.60x respectively. For 2013 and 2014, at current market price (24th

Sept 2013) we expect the company to trade at an expected PE of 12.55x

and 12.01x respectively. We revise our 12months price target for YNCC to

SAR 76.6/share. However we maintain our “Neutral” stance.

• Strong Inventory build-up and capacity utilization to support

growth for YNCC: Despite of a rise in Yanbu Cement dispatches, the

Company recorded the second largest clinker inventory levels of 0.991mn

on August-2013 showing jumps of 65% Y/Y and 45% Q/Q. We expect

that the higher inventories and spare capacity levels will translate into

higher growth for Yanbu cement as it will serve as a cushion against any

unexpected increase in demand to strengthen its position in the sector and

improve its market share in the western region.

• We upgrade our 2013 expectation: YCC in 2Q-2013 posted net income

of SAR 274.4 mn (EPS; SAR1.73), which is higher than our expectation by

7.6% Y/Y. Major deviation from our expectation was due strong demand

in the western region, along with company’s cost efficiency. Therefore, we

raise our 2013 net income estimate by 8.1% to SAR 947.8mn.







Reuters code: 3060.SEBloomberg code: YNCCO:ABCountry: Saudi ArabiaSector: CementPrimary Listing: TadawulM-Cap: SAR 11,615mn52 Weeks H/L (SAR): 80.75 / 46.0

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Price Chart

SARmn (unless specified) 2011 2012 2013e 2014e 2015e 2016eSales 1,132.3 1,496.5 1,706.3 1,793.9 1,855.9 1,900.7 Growth in Sales (%) 26.4% 32.2% 14.0% 5.1% 3.5% 2.4%Net Income 529.3 720.5 947.9 990.2 1,021.9 1,039.9 Growth in net income (%) 22.9% 36.1% 31.6% 4.5% 3.2% 1.8%EPS 5.04 6.86 6.02 6.29 6.49 6.60 Gross Margins 49% 53% 60% 59% 59% 59%EBIT Margins 46% 51% 58% 57% 57% 57%Net Margins 47% 48% 56% 55% 55% 55%ROE 18% 22% 25% 24% 24% 23%ROA 12% 15% 18% 19% 20% 20%PE (x) 13.69 11.88 12.55 12.01 11.64 11.43 PB (x) 2.52 2.57 3.17 2.93 2.75 2.61 EV/EBITDA (x) 12.12 9.11 9.96 9.33 8.81 8.57 Dividend Yield 3.6% 6.1% 5.8% 6.3% 6.8% 6.1%



Yanbu Cement Company


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Disclaimer

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. 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.

2. 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.

3. 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.

4. 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.

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AGM - Head of ResearchAbdullah Alawi+966 12 [email protected]

Senior Analyst Syed Taimure Akhtar +966 12 6618271 [email protected]

Senior Analyst

Talha Nazar +966 12 [email protected]

Analyst

Saleh Al-Quati+966 12 [email protected]

Analyst

Jassim Al-Jubran +966 12 [email protected]

General Manager - Brokerage DivisionAla’a Al-Yousef+966 11 [email protected]

AGM-Head of international

and institutional brokerageLuay Jawad Al-Motawa +966 11 [email protected]

Regional Manager - West and South Regions

Abdullah Al-Misbahi+966 12 [email protected]

Sales And Investment Centers Central Region

Manger

Sultan Ibrahim AL-Mutawa +966 11 [email protected]

Area Manager - Qassim & Eastern Province

Abdullah Al-Rahit+966 16 [email protected]

Asset Management Brokerage Corporate Finance Custody Advisory

Head Office: Madinah Road, Mosadia، P.O. Box: 6277, Jeddah 21442, Saudi Arabia، Tel: 02 6692669 - Fax: 02 669 7761

Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37

Documents

Saudi Cement Sector - Aljazira · PDF fileSaudi Cement Sector-Executive Summary ... Cement companies in Saudi Arabia benefit from subsidized heavy fuel, which is allocated by the Ministry