Saudi Arabian Cement 1Q2015 Preview

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1 March 25, 2015 Momentum Maybe Faltering After depicting signs of improvement at the tail end of 2014, sales have started to soften in Overall, demand was weak throughout % Y/Y rise in local despatches in the year was only made possible by a relatively strong last quarter. Construction activity had started to accelerate in 4Q2014 but has been constrained recently particularly due to the fresh crackdown on illegal workers in the country. Many projects depend on low cost workers for completion. A positive in the ongoing quarter has been a gradual depletion in clinker inventory levels. We are heartened by the fact that monthly industry dispatches continue to remain above 5 million tons for the past few months. As expected, there has been no major impact of the steep decline in oil prices on the sector. We reiterate our view that the only tangible effect on the cement sector will occur if infrastructure and other construction activity decline on the back of reduction in government spending. A persistent low oil price spanning many years may eventually cause some project delays. However, short term outlook appears to be stable. Table 1: Saudi Producers Capacity and Production Yamamah 6, Saudi 11, Eastern 3, Qassim 3, Yanbu 6, Arab 3, Southern 8, Tabuk 1, Riyadh 5, Najran 4, City 1, Northern 2, Jouf 1, Al Safwa 1, Hail 1, Total 62,900 5,458 5,544 5,187 4,980 4,621 4,288 Capacity (KMT) Production (KMT) After touching a peak of 21.5 million tons in December, clinker inventory levels are down to 20.9 million by February-end as the industry reduced production and sold from available inventory. production is up +11% Y/Y in January and +8% Y/Y in February. However, we observe that the overall industry reduced production from 5.5 million in January to 5.2 million tons in February and sold from its vast reserve of inventory, a wise choice. While mega projects are going ahead at the planned pace, smaller ones may be affected by labor issues in the short term. Muhammad Faisal Potrik muhammed.faisal@riyadcapital.com Khalid Abdullah Almadhyan Khalid.a.Almadhyan@riyadcapital.com Riyad Capital is licensed by the Saudi Arabia 1 Capital Markets Authority (No )

2 Table 2: Inv entory Balance ( 000 tons) Inventory Yamamah ,793 2,884 2,818 Saudi ,240 3,332 3,431 Eastern ,000 1, Qassim Yanbu ,948 2,936 2,902 Arab Southern ,936 1,826 1,655 Tabuk Riyadh ,614 1,539 1,520 Najran ,902 2,624 2,695 City Northern ,288 1,316 1,283 Jouf Al Safwa Hail Total ,550 21,301 20,861 Saudi currently has the highest clinker inventory at 3.4 million tons followed by Yanbu at 2.9 million tons. sales are up +12% and +10% Y/Y respectively in January and February but have been witnessing a sequential decline. There have been by and large no clinker imports since June 2014 barring Arab, which is importing small quantities since November Table 3: Saudi Companies Volumes and Imports (000 tons) Yamamah Saudi Eastern Qassim Yanbu Arab Southern Tabuk Riyadh Najran City Northern Jouf Al Safwa Hail Total 5,531 5,368 5, Local Sales Imported 2

3 On volumes, Southern continues to be the biggest cement and clinker producer followed by Saudi. We expect Southern to sell 740k tons in March, Saudi 640k tons and Yanbu 605k tons. We forecast Y/Y growth in sales for 1Q2015 to range between - 4% and +8% for our coverage universe. Exhibit 1 illustrates the monthly sales volumes for each of the producers under our coverage. Exhibit 1: Jan to Mar 2015 Sales (000 tons) Yamama Saudi Qassim Southern Yanbu Jan-15 Feb-15 Mar 15 E, Riyad Capital We expect a marginal +1% Y/Y rise in revenues for our coverage universe. Although industry demand has been higher Y/Y in the preceding two months, the trend is downward. A repeat of labor shortage on account of a renewed labor crackdown cannot be ruled out. We expect Southern to lead with a +8% Y/Y increase in revenues and a corresponding +15% rise in net income. Southern has consistently outperformed its peers in the last few quarters taking advantage of its location and has started trial operations of its third line at Tihama. Saudi may be negatively affected as revenues decline -3% Y/Y and bottomline decreases -8%. Yanbu is also expected to do well with a +2% rise in sales and +6% growth in net income. Table 4: 1Q2015 Estimates (SAR mln, except per share data) 1Q2014 1Q2015E Y/Y Chg 1Q2014 1Q2015E Y/Y Chg 1Q2014 1Q2015E Y/Y Chg 1Q2014 1Q2015E Yamama % % % Yanbu % % % Qassim % % % Southern % % % Saudi % % % Group Total 2,110 2,141 1% 1,073 1,108 3% 1,046 1,075 3% Source: Riyad Capital, Reports Revenues EBIT Net Income EPS Overall, we expect the average margins for our cement coverage universe to expand Y/Y in 1Q2015. We expect gross margin to improve by 2% to 56% as EBIT and net margins rise 1% each for our covered stocks. Within our group, Qassim is forecasted to post the highest gross margin of 62%. We expect the lowest net margin from Southern and Yanbu at 48%. 3

4 Table 5: 1Q2015 Margin Estimates Gross EBIT Net 1Q2014 1Q2015E 1Q2014 1Q2015E 1Q2014 1Q2015E Yamama 49% 53% 46% 49% 48% 50% Yanbu 51% 52% 48% 50% 47% 48% Qassim 62% 62% 59% 59% 58% 57% Southern 48% 51% 46% 49% 45% 48% Saudi 61% 60% 57% 54% 53% 51% Group Average 54% 56% 51% 52% 50% 51% Source: Riyad Capital, Reports Table 6: Ratings and Valuation (SAR mln) We expect demand to improve in 2015 over last year but again highlight labor shortage as a possible concern for construction projects. On the positive side, legal influx of qualified labor has picked up pace. Presence of adequate inventory can satisfy any spikes in demand during the year. We have heard rumors in the market regarding a possible permission by the government to allow cement exports. We believe producers in the East and North may benefit the most if exports commence. For now, we maintain our target prices and recommendations for all companies under coverage. With the exception of Qassim, all the other four coverage companies remain on our Buy list. Yamama trades at the lowest 2015 forward PE at 11.9x while Qassim is the highest at 14.3x. Our universe trades at a 2015E PE of 12.7x and PBV of 3.6x. 2015E Price to Book multiple places Yamama and Yanbu at an attractive 2.3x and 3.0x respectively. TASI Current Market Target Dividend Code Price Cap Price Rating Yield E E Yamama , Buy 6.5% 13.9x 11.9x 2.4x 2.3x Saudi , Buy 7.6% 13.1x 12.0x 4.2x 4.1x Qassim , Hold 6.6% 14.6x 14.3x 4.1x 4.0x Southern , Buy 6.1% 13.2x 12.5x 4.7x 4.5x Yanbu , Buy 5.8% 13.7x 13.0x 3.1x 3.0x Group Average 13.7x 12.7x 3.7x 3.6x Source: Riyad Capital P / E P/B 4

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