Southern Province Cement Company

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Southern Province Cement Company Update Report- Transfer of Coverage Buy Year End Target Price SAR 115 120 110 100 June er 19, 03, 2014 2015 Expected Total Return Price as on Jun-02, 2015 100.

1 Southern Province Cement Company Update Report- Transfer of Coverage Buy Year End Target Price SAR June er 19, 03, Expected Total Return Price as on Jun-02, Upside to Target Price 15.2% Expected Dividend Yield 5.1% Expected Total Return 20.3% Market Data 52 Week H/L SAR /90.50 Market Capitalization Enterprise Value Shares Outstanding SAR 14,020 mln SAR 14,113 mln mln Free Float 46.8% 12-Month ADTV (000 s) 51.2 TASI Weight 0.7% Reuters Code Bloomberg Symbol 1-Year Price Performance 3050.SE SOCCO AB J J A S O N D J F M A M J SPCC TASI TCEM Source: Bloomberg SPCC TASI TCEM Jun-02, ,717 7,055 Total Change 6-months 1.0% 10.4% (3.6%) 1-Year (10.8%) (1.5%) (11.3%) 2-Year 10.7% 30.0% 2.5% Shareholding Structure Public Investment Fund 37.4% GOSI 15.8% Public Float 46.8% Sustainable Performance We publish our revised outlook on Southern Province Cement Company (SPCC) following transfer of coverage along with estimate revisions through this update report. SPCC is a preferred call due to (i) judicious management of its inventory backlog, currently at 16% of its capacity; the lowest among KSA producers (ii) average realization of SAR 241/ton for higher than sector s realization of SAR 234/ton (iii) EBITDA margins of 62% for is above sector average of 56%. Though estimates have been revised by a large notch due to moderate demand in 2015, it is expected to rebound in and the impending fundamentals still persist. SPCC with nearly 7.7 Million Tons (MT) of clinker capacity currently is the second largest producer in KSA with 14% market share and benefits from large economies of scale. We roll forward our DCF assumptions and revise our target price to SAR 115 from SAR 120, maintain Buy to be moderate Revenue growth of +4% CAGR is expected during touching SAR 2.2 billion by 2018 on expectations of continued demand in , though 2015 to be moderate. The revision stems from anticipated pricing pressure in de-stocking inventories. Cash costs are expected to be at manageable levels as explained by stable margins. With a slight dip in 2015, EPS is expected to touch SAR 7.97 by 2018 with a +4.5% CAGR for SPCC s incremental focus on a volume driven growth model with its newer production lines is an ideal long term strategy. It bodes well in a situation where mid-cap producers in Southern and Western regions adds glut with their newer capacities in target markets. Strategic positioning to key markets The strategic positioning to some of the of the largest demand centers, mainly its proximity to Jazan and Asir carries a lot of significance aiding continued demand. The ongoing mega projects including Najran Airport, Jazan Economic City and network of government hospitals should aid long term cement consumption, except the short term concerns on geo-political situation. Additionally, SPCC s location bordering Yemen and access to Jazan sea port benefits largely in the event government lifting the export ban. Valuation offers opportunity, though yields in mid-range Valuations are justified despite 2015E P/E of 14.3x being above sector P/E of 13.9x. SPCC lowered its payouts during 2014 but forecast similar trends in DPS for 2015E, yielding 5.1%. With sustainable ROE of 34% being the last 5 year average and D/E ratio of 0.1x, SPCC offers an excellent proportion for a yield and value conviction, maintain Buy. Key Financials FY December 31 (SAR mln) 2014A 2015E 2016E 2017E Revenue 1,878 1,940 2,020 2,113 EBITDA 1,112 1,197 1,251 1,313 Net Profit 1, ,015 1,076 EPS (SAR) DPS (SAR) BVPS (SAR) ROAA 29% 25% 25% 25% ROAE 37% 32% 30% 30% P / E 13.4x 14.3x 13.8x 13.0x P / B 4.7x 4.3x 4.1x 3.8x P / S 7.5x 7.2x 6.9x 6.6x EV/ EBITDA 12.6x 12.8x 11.7x 11.1x EV/ Sales 7.5x 7.3x 6.9x 6.6x Santhosh Balakrishnan santhosh.balakrishnan@riyadcapital.com Khalid Abdullah Almadhyan khalid.a.almadhyan@riyadcapital.com Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No )

2 Southern Province Cement Company Changes in Estimates We revise our estimates mainly taking in to account our moderate view for 2015 and also justification for the higher growth in Our earlier view was majorly driven by a rebound in volume and revenue growth for However, it did not materialize as expected, with SPCC and across the industry over the last two quarters. Accordingly, we adjust our revenue estimates for a moderate growth of +3% Y/Y for 2015 and a higher growth of +4.5% CAGR for considering pricing pressure and slight project delays in Jazan region. Table 1: Changes in Estimates (SAR Mln) Old Estimates New Estimates New vs Old Consensus 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E Revenue 2,112 2,309 2,408 1,940 2,020 2,113-8% -12% -12% 1,990 2,167 2,332 YoY 12% 9% 4% 3% 4% 5% 6% 9% 8% Gross Profit 1,158 1,276 1,342 1,086 1,133 1,188-6% -11% -11% 1,107 1,208 1,350 YoY 16% 10% 5% 9% 4% 5% 11% 9% 12% EBITDA 1,317 1,436 1,505 1,197 1,251 1,313-9% -13% -13% 1,134 1,214 1,251 YoY 18% 9% 5% 8% 4% 5% 2% 7% 3% Net Income 1,101 1,212 1, ,015 1,076-11% -16% -16% 1,008 1,095 1,131 YoY 5% 10% 5% -6% 4% 6% -4% 9% 3% EPS % -16% -16% Source: Bloomberg Estimates and Riyad Capital EPS estimates (Table-1) revised down by -11% in 2015 and invariably for , averaging -16% cut from earlier estimates. This is mainly driven by absence of any investment income, following SPCC s liquidation of its investment portfolio in It realized SAR 128 million in 2014 arising from gain on sale of Available for Sale (AFS) investments. We had factored investment income for in our earlier estimates and the discontinuity explains the deviation. Additionally, we forecast interest expense from 2015E onwards as SPCC has raised total debt of SAR 501 million during Overall these factors led to a downward revision of -14% in EPS for Relative valuation shows SPCC trades at median range to sector on most aspects Before we get in to company specific valuation, our view on relative comparison basis suggests, SPCC could be compared to Saudi Cement due to similar size and range by capacity. SPCC s TTM P/E of 12.9x is relatively cheaper to Saudi Cement s 13.9x, whilst being superior on yield perspective with 6.0% on an annualized basis. Out of the stocks in the KSA cement space, SPCC is relatively cheaper on most aspects. On a replacement cost basis and assuming investments in production lines which adds to 11 MT by , EV/ton of SAR 1,283 is cheaper to sector s SAR 1,356. Table 2: KSA Cement Sector Valuation (TTM basis) Company Name Price (SAR) Mcap SAR Mln EV SAR Mln P/E P/B P/S EV/ Sales EV/ Div. EBITDA Yld YTD 52 Wk- Hi (SAR) 52 Wk- Lo (SAR) 6M ADTV (SAR Mln) 6M Avg Vol (Mln Shares) Saudi Cement ,918 15, x 4.8x 7.3x 7.1x 10.8x 6.2 2% Southern Province Cement Co ,020 14, x 5.0x 7.2x 6.9x 11.6x 6.0 (8%) Yanbu Cement Co ,554 10, x 2.8x 6.8x 7.0x 10.6x 7.5 9% Yamama Cement Co ,779 8, x 2.6x 7.6x 6.0x 9.3x 1.6 1% Qassim Cement Co/The ,787 8, x 4.7x 8.8x 7.6x 11.4x % Arabian Cement Co/Saudi Arabia ,950 7, x 2.4x 4.5x 4.1x 7.9x 8.2 2% Eastern Province Cement Co ,165 3, x 2.0x 4.7x 4.9x 9.8x 5.2 (12%) Najran Cement Co ,884 5, x 2.4x 5.5x 5.7x 11.4x 4.2 9% City Cement Co ,760 4, x 2.3x 9.9x 8.1x 13.2x % Northern Region Cement Co ,046 4, x 1.9x 4.4x 5.2x 12.9x 8.0 6% Hail Cement Co ,222 2, x 2.0x 6.2x 6.3x 10.4x 2.6 (0%) Tabuk Cement Co ,334 2, x 2.0x 7.5x 7.7x 12.5x 3.8 5% Al Jouf Cement Co ,248 3, x 1.6x 8.3x 9.8x 18.6x N/A N/ 23% Sector Median* 90,666 90, x 2.4x 7.2x 6.9x 11.4x 5.6 Source: Bloomberg, Market Cap and EV are total Shares O/S (Mln) June 03,

3 WACC Southern Province Cement Company Valuation We roll forward and update our models to value SPCC using both absolute and relative valuation approaches by stress testing estimates with the bull-bear-base case scenarios. We prefer DCF valuation amongst the valuation approaches to derive our 2015-end target price. #1: DCF suggest fair value of SAR We used DCF valuation due to SPCC s continuity in free cash flow generation. The forecast assumed for E used a long-term terminal growth rate of 1% and riskfree rate assumption of 3.9%, which includes a premium for country risk over the 10- year US risk-free rate of 1.9%. We used a 5-year weekly adjusted beta of 0.75 and an equity risk premium of 6.2% to arrive at the Cost of Equity (CoE). We used CoE of 8.6% and Cost of Debt of 4.5% to arrive at a WACC of 8.3%. Table 3: DCF Valuation Using Bear-Base-Bull Case Assumptions (SAR Mln) Bear Case Base Case Bull Case 2016E 2017E 2018E 2019E 2016E 2017E 2018E 2019E 2016E 2017E 2018E 2019E Revenue 452, ,881 1,802 1,808 1,849 1,891 2,020 2,113 2,184 2,209 2,078 2,148 2,208 2,243 % Growth 1% 0.3% 0.3% 2.3% 2.3% 4.2% 4.6% 3.4% 1.1% 4.0% 3.4% 2.8% 1.6% EBITDA 209, , ,030 1,251 1,313 1,356 1,379 1,199 1,242 1,279 1,301 % Growth 1.2% -0.5% 1.6% 3.4% 4.5% 5.0% 3.2% 1.7% 1.5% 3.6% 2.9% 1.7% Net Income ,015 1,076 1,116 1,141 1,081 1,129 1,168 1,192 % Growth 0.3% 0.4% 2.2% 4.0% 3.7% 6.0% 3.7% 2.3% 0.5% 4.5% 3.4% 2.1% EPS (SAR) % Growth 0.3% 0.4% 2.2% 4.0% 3.7% 6.0% 3.7% 2.3% 0.5% 4.5% 3.4% 2.1% NOPLAT 108, , ,095 1,151 1,188 1,210 1,165 1,207 1,242 1,264 Net Adjustments In Working Capital, Capex And D&A (25) (83) (85) (74) (19) 16 (84) (91) (56) Free Cash Flow To Firm (FCFF) ,241 1,222 1,258 1,190 1,181 1,122 1,151 1,207 PV of FCFE ,146 1, , DCF Metrics Terminal Value 13,872 16,439 17,940 PV of Terminal Value 10,302 11,944 13,286 Sum of PV Of FCFF 2,996 4,043 3,875 Value of The Firm 13,297 15,986 17,161 Add(Less):Net Cash (Net Debt) (260) Implied Value of Equity 13,037 16,157 17,208 No of Shares Outstanding (Mln) Fair Value Per Share (SAR) Table 4: Sensitivity Analysis of WACC and Terminal Growth Rate Terminal Growth Rate ##### 0.30% 0.40% 0.50% 0.60% 0.70% 0.80% 0.90% 1.00% 1.10% 1.20% 1.30% 1.40% 1.50% 1.60% 1.70% 1.80% 7.5% % % % % % % % Risks to valuation The probable downside risk would be the ongoing geo-political situation across the border which may halt project executions and the added capacity glut from western region producers leading to pricing pressure. The upside risk would be the lifting of cement export ban and allocation of additional fuel to run its new lines. June 03,

4 EV/EBITDA Range (x) P/E Range(x) Southern Province Cement Company #2: Target P/E valuation at SAR We valued SPCC using target P/E based method and derived a fair value of SAR 97.88, which is lower than SPCC s current market prices. We derived a target P/E multiple of 14.0x by using a weighting of its long term average, which suggests a valuation nearing current market prices. We believe SPCC has enough room to command higher valuation as rebound is not accounted, hence the preference for DCF. Table 5: Price Sensitivity and Target P/E Valuation using Bear-Base-Bull Case EPS Estimates 2014A 2015E 2016E 2017E 2018E Bear Base Bull Bear Base Bull Bear Base Bull Bear Base Bull EPS (SAR) x # x # x # x # x # x # x # x # x # Valuation based on P/E 2015E 2016E 2017E 2018E Net profit estimates (SAR Mln) EPS (SAR) P/E based valuation (SAR) Valuation at 3 year historical average of 14.0x Based on a sector average of 14.1x Estimated valuation at PER of 14.0x #3: Target EV/EBITDA valuation at SAR The target EV/EBITDA based method derived a fair value of SAR and the target multiple of 13.0x is the weighted average of its last 5-year, 3-year and 12-month average, with the latter holding the highest weightage. The target multiple derived a value which is above the current market prices and points to a re-rating. Additionally, it ignores the probable cash generation from investments in new production lines, while the current EV already takes in to account the value of investments. This deemed to be inconsistent as a method in valuing SPCC at current scenario, hence prefer DCF. Table 6: Price Sensitivity and Target EV/EBITDA Valuation using Bear-Base-Bull Case EBITDA Estimates EV/EBITDA 2014A 2015E 2016E Actuals Bear Base Bull Bear Base Bull Bear Base Bull Bear Base Bull EBITDA (SAR Mln) 1, ,197 1, ,251 1, ,313 1, ,356 1, x x x x x x x x x x x E 2018E Valuation based on EV/EBITDA 2015E 2016E 2017E 2018E EBITDA Estimates (SAR Mln) 1,197 1,251 1,313 1,356 EV/EBITDA based valuation (SAR) Valuation at last 3 year average of 13.0x Based on MENA median EV/EBITDA of 12.1x Estimated valuation at EV/EBITDA of 13.0x June 03,

5 E EPS grow th Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Southern Province Cement Company Appendix Exhibit 1: Share Price and P/E trading bands at various multiple levels Actual Price 8.0x P/E 12.0x P/E 14.0x P/E 16.0x P/E 18.0x P/E 20.0x P/E Exhibit 2: 5 Year Price Multiples Trading History P/B Ratio P/S Ratio P/B 3 Yr Avg 5 Yr Avg 12M Avg P/S 3 Yr Avg 5 Yr Avg 12M Avg EV/Sales Ratio EV/EBITDA Ratio EV/Sales 3 Yr Avg 5 Yr Avg 12M Avg EV/EBITDA 3 Yr Avg 5 Yr Avg 12-M Avg Source: Bloomberg Exhibit 3: KSA Cement Sector 2016 Consensus P/E to E EPS (Consensus) growth 14% KSA Cement Sector Tabuk Cement 12% 10% 8% 6% Northern Cement Eastern Cement KSA Cement Sector Southern Cement 4% Saudi Cement Qassim Cement Yanbu Cement Arabian Cement 2% Hail Cement Yamama Cement 0% 11.0x 12.0x 13.0x 14.0x 15.0x 16.0x 17.0x 18.0x 2016E P/E Source: Bloomberg June 03,

6 Southern Province Cement Company Summary Financials and Ratios Table 7: Financial Projections Summary (SAR Mln) E 2016E 2017E 2018E Profit& Loss Statement Revenue 1,309 1,691 1,805 1,775 1,878 1,940 2,020 2,113 2,184 COGS (600) (734) (754) (762) (882) (854) (887) (924) (959) Gross Profit ,051 1, ,086 1,133 1,188 1,225 SG&A (38) (49) (40) (40) (47) (64) (64) (65) (66) Operating Profit , ,023 1,069 1,123 1,159 Net Financing Income(Cost) (19) (28) (20) (15) Investment Income/Others Profit before Tax ,026 1,032 1,074 1,004 1,041 1,103 1,144 Income Tax (23) (23) (26) (7) (27) (25) (26) (28) (29) Net Profit ,000 1,006 1, ,015 1,076 1,116 EBITDA 798 1,039 1,150 1,118 1,112 1,197 1,251 1,313 1,356 EPS (SAR) DPS (SAR) Margins Gross Margins 54.2% 56.6% 58.2% 57.1% 53.0% 56.0% 56.1% 56.2% 56.1% EBITDA Margins 61.0% 61.5% 63.7% 63.0% 59.2% 61.7% 61.9% 62.1% 62.1% Operating Margins 51.3% 53.7% 56.0% 54.8% 50.5% 52.7% 52.9% 53.1% 53.1% PBT Margins 52.4% 54.7% 56.9% 58.1% 57.2% 51.8% 51.5% 52.2% 52.4% Net Margins 50.6% 53.3% 55.4% 56.7% 55.7% 50.5% 50.2% 50.9% 51.1% Balance Sheet Cash and Equivalents Short Term Investments Inventories Receivables Current Assets ,097 1,515 1,650 1,761 Plant Property and Equipment 1,648 1,554 2,158 2,323 2,922 2,796 2,752 2,686 2,615 Investments-Long Term Others Non current Assets 1,978 2,224 2,490 2,440 2,922 2,796 2,752 2,686 2,615 Total Assets 2,832 2,992 3,164 3,342 3,890 3,893 4,268 4,337 4,376 Short Term Debt Payables and Others Current Liabilities Long Term Debt Others Non-Current Liabilities Total Liabilities Shareholders Equity (SE) 2,488 2,648 2,736 2,762 2,961 3,240 3,415 3,652 3,788 Total Liabilities & SE 2,832 2,992 3,164 3,342 3,890 3,893 4,268 4,337 4,376 Common Size Balancesheet Current Assets 30% 26% 21% 27% 25% 28% 36% 38% 40% Non Current Assets 70% 74% 79% 73% 75% 72% 64% 62% 60% Current Liabilities 9% 9% 11% 11% 8% 5% 4% 4% 4% Total Iiabilities 12% 12% 14% 17% 24% 17% 20% 16% 13% Shareholders Equity 88% 88% 86% 83% 76% 83% 80% 84% 87% Cashflow Net Operating Cashflow 710 1,129 1, ,189 1,115 1,096 1,259 1,311 Net Investing Cashflow (217) (383) (406) (370) (537) (136) (141) (148) (151) Net Financing Cashflow (620) (764) (908) (844) (468) (825) (652) (1,009) (1,079) Net Change in Cash (127) (18) (93) (340) Cash (Opening) Cash (Closing) Source: Company reports and Riyad Capital June 03,

7 Southern Province Cement Company Table 8: Ratio Analysis Summary E 2016E 2017E 2018E Valuation P/E 21.2x 15.5x 14.0x 13.9x 13.4x 14.3x 13.8x 13.0x 12.6x P/B 5.6x 5.3x 5.1x 5.1x 4.7x 4.3x 4.1x 3.8x 3.7x P/S 10.7x 8.3x 7.8x 7.9x 7.5x 7.2x 6.9x 6.6x 6.4x P/CF 19.8x 13.6x 11.7x 16.1x 11.9x 11.7x 12.8x 11.1x 10.7x EV/EBITDA 15.7x 16.9x 13.0x 11.8x 12.6x 12.8x 11.7x 11.1x 10.3x EV/Sales 10.2x 8.0x 7.5x 7.7x 7.5x 7.3x 6.9x 6.6x 6.2x Dividend Yield 4.5% 6.2% 7.0% 7.0% 5.0% 5.0% 6.0% 6.0% 7.0% Per share (SAR) EPS DPS BVPS Sales per share OCF/Share ICF/Share FCF/Share 3.69 (0.81) (0.78) (3.34) (1.36) Capex Capex/Sales 15% 22% 22% 21% 41% 7% 7% 7% 7% Capex/Depreciation 152% 281% 290% 259% 469% 78% 78% 78% 78% Liquidity Cash Ratio Current Ratio Quick Ratio Cash Cycle Inventory Turnover Accounts Payable Turnover Receivables Turnover Inventory Days Payable Days Receivable Days Cash Cycle Risk Ratio Net Interest Cover 0.0% 0.0% 0.0% 0.0% 0.0% 1.8% 2.6% 1.8% 1.3% Debt/total Capital 0.0% 0.0% 0.0% 4.5% 14.5% 10.4% 14.2% 9.8% 7.3% Debt to Total Assets ratio 0.0% 0.0% 0.0% 3.9% 12.9% 9.7% 13.2% 9.1% 6.8% Debt/Equity 0.0% 0.0% 0.0% 4.8% 16.9% 11.6% 16.5% 10.8% 7.8% Returns Ratio ROAA 26.6% 34.1% 36.6% 36.4% 35.3% 30.2% 29.7% 29.5% 29.5% ROAE 26.8% 35.1% 37.2% 36.6% 36.6% 31.6% 30.5% 30.5% 30.0% ROIC 27.0% 34.3% 36.9% 33.6% 27.4% 28.3% 26.9% 27.8% 28.4% Pay out Ratio 95.1% 97.0% 98.0% 97.4% 66.9% 71.5% 82.8% 78.1% 87.9% DUPONT Analysis Total Asset to Equity Net Income/Sales Sales/Total Assets Dupont ROE 26.6% 34.1% 36.6% 36.4% 35.3% 30.2% 29.7% 29.5% 29.5% Cash Flow Ratio's Cashflow to Revenue Cashflow to EBITDA Cash return on assets 25.1% 34.5% 38.0% 26.1% 30.3% 30.8% 25.7% 29.0% 30.0% Cash return on equity 28.5% 39.0% 43.9% 31.6% 39.8% 37.0% 32.1% 34.5% 34.6% Source: Company reports and Riyad Capital June 03,

8 Stock Rating Strong Buy Buy Hold Sell Not Rated Expected Total Return 25% Expected Total Return 15% Expected Total Return < 15% Overvalued Under Review/ Restricted Head Office Riyad Capital P.O. Box Riyadh Saudi Arabia Phone Website Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable, Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. There can be no assurance that future results or events will be consistent with any such analysis herewith. This report provide information of a general nature and do not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader s financial situation or any specific investment objectives or particular needs which the reader s may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information; opinions, forecasts and projections contained in it are protected by the copyright rules and regulations. Riyad Capital is a Saudi limited liability company, with commercial registration number ( ), licensed and organized by the Capital Market Authority under License No. ( ), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia ( KSA ). Website:

Yamama Cement Company

Yamama Cement Company Update Report- Transfer of Coverage Buy Year End Target Price SAR 62 120 110 100 90 80 70 May er 19, 27, 2014 2015 Expected Total Return Price as on May-26, 2015 49.07 Upside to Target Price 26.8% Expected