Yamama Cement Company

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Kelley Burke
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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.

1 Update Report- Transfer of Coverage Buy Year End Target Price SAR May er 19, 27, Expected Total Return Price as on May-26, Upside to Target Price 26.8% Expected Dividend Yield 6.1% Expected Total Return 32.9% Market Data 52 Week H/L SAR 74.00/42.00 Market Capitalization Enterprise Value Shares Outstanding SAR 9,937 mln SAR 8,672 mln mln Free Float 76.4% 12-Month ADTV (000 s) TASI Weight 0.5% Reuters Code Bloomberg Symbol 1-Year Price Performance M J J A S O N D J F M A YACCO TASI TCEM Source: Bloomberg 3020.SE YACCO AB Yamama TASI TCEM May-26, ,801 7,117 Total Change 6-months (14.3%) 7.9% (4.6%) 1-Year (20.9%) 0.2% (9.9%) 2-Year 11.4% 33.9% 4.7% Shareholding Structure Sultan Mohammed Al Saud 9.1% Public Pension Authority 5.5% Public Float 85.4% Buy on Inherent Value We update our models and revise our outlook on (Yamama) for due to transfer of coverage. We believe 2015 growth to be moderate as most KSA producers are focusing to rebalance their peaked inventory levels either through production cuts or price discounts but expect to rebound. The moderate view stems from slow growth in industry dispatches at 14% Y/Y, which was a rebound from weak 2014, but at a cost of -5% Y/Y drop in realization. Notably, Yamama s realization dropped to SAR 227/ton in 1Q2015 from SAR 244/ton, average of With such slow pick-up, we revise our estimates downwards but valuations are supportive due to growth in earnings for aiding steady payouts of 81%, followed by zero debt and a relatively large investment book of SAR 1.7 billion. We roll forward our DCF assumptions and revise target price to SAR 62 from SAR 66, an upside of 27%, maintain Buy. Selling price to add pressure We cut our revenue forecasts to +5% CAGR for on pricing concerns with revenue expected to touch SAR 1,479 million by Volumes are expected to surge and improve post 2016 and reach 6.3 MT by Realization is expected to be lower for 2015 but favors growth in and to average SAR 242/ton. EBITDA margins are expected to witness pressure and average 62% but still superior to sector average of 56%. We reduce our EPS forecasts to SAR 3.20 in 2015 from earlier SAR Additionally, discussions on relocation of the plant are at a crossroad due to issues in land availability. Inventory de-stocking, a medium term concern The dominant positioning of Central province in KSA cement space is noteworthy and Yamama is one of the key beneficiaries through its operations in high demand centers largely due to its proximity. Though it has a market share of 10%, the growing capacity glut and new expansions across KSA in , Yamama could witness slight growth constraints. However, our long term view coincides with the positives of government s spending on necessary infrastructure projects. This aids visibility on cement demand over the next 3-4 years, though over the medium term inventory de-stocking is a priority. Valuations appealing and yields stable 2015E P/E of 15.3x is slightly higher to sector P/E of 14.4x, but still justified. Additionally, on a replacement cost basis EV/ton of SAR 1,280 for Yamama is cheaper to sector median of SAR 1,329. The equity story adds value with its attractive yield of 6.1% versus sector yields of 5.4%, hence yield and appreciation drives a strong call for a Buy conviction. Key Financials FY December 31 (SAR mln) 2014A 2015E 2016E 2017E Revenue 1,329 1,278 1,361 1,434 EBITDA Net Profit EPS (SAR) DPS (SAR) BVPS (SAR) ROAA 16% 16% 18% 18% ROAE 18% 17% 19% 19% P / E 14.8x 15.3x 13.5x 12.8x P / B 2.7x 2.6x 2.5x 2.4x P / S 7.5x 7.8x 7.3x 6.9x EV/ EBITDA 9.8x 11.7x 11.1x 10.1x EV/ Sales 7.5x 7.7x 6.3x 5.9x 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 Changes in Estimates We revise our estimates and the revision indicates the slight weakness in 2015 and a rebound in , wherein we revise revenue downwards by average of -8% for from earlier estimates to take in to account the fall in realization. The resultant effect of such downward revision is the subsequent impact on margins leading to a deviation in EPS estimates, a large cut of nearly -13% average from earlier estimates. Table 1: Changes in Estimates (SAR Mln) Valuation Old Estimates New Estimates New vs Old Consensus 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E Revenue 1,393 1,457 1,560 1,278 1,361 1,434-8% -7% -8% 1,440 1,481 1,503 YoY 5% 5% 7% -4% 7% 5% 8% 3% 1% Gross Profit % -10% -14% YoY 10% 5% 10% -6% 11% 5% 15% 2% 14% EBITDA % -6% -10% YoY 1% 6% 10% -8% 9% 5% 3% -1% 0% Net Income % -10% -13% YoY 16% 5% 9% -3% 14% 5% 11% 3% 3% EPS % -10% -13% Source: Bloomberg Estimates and Riyad Capital We roll forward and update our models and evaluate the various valuation methods to compare with current market valuations. We used both absolute and relative valuation approaches to value Yamama by stress testing estimates with the bull-bearbase case scenarios. Amongst the valuation approaches, we prefer DCF valuation and derive our 2015-end target price of SAR #1: DCF suggest fair value of SAR We prefer DCF valuation due to Yamama s steady generation of free cash flows. 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%. Cost of equity (CoE) of 9.6% is assumed as the discount rate for valuation and a beta of 0.9, with risk premium assumed at 6.2% Table 2: 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 1,157 1,161 1,206 1,246 1,361 1,434 1,479 1,502 1,455 1,532 1,580 1,621 Y/Y growth 1% 0.2% 0.3% 3.9% 3.3% 6.5% 5.4% 3.1% 1.5% 4.1% 5.3% 3.1% 2.6% EBITDA 209, , Y/Y growth -3.6% 2.2% 2.8% 5.2% 8.7% 5.4% 2.7% -0.1% 3.9% 3.3% 2.4% 1.7% Net Income Y/Y growth 1.1% 2.7% 4.6% 3.8% 13.8% 5.1% 4.6% 2.0% 8.3% 2.8% 4.3% 3.7% EPS (SAR) Y/Y growth 1.1% 2.7% 4.6% 3.8% 13.8% 5.1% 4.6% 2.0% 8.3% 2.8% 4.3% 3.7% Free Cash Flow To Equity (FCFE) ,129 1,158 1, ,205 1,230 1,245 1,032 PV of FCFE , ,099 1, DCF Metrics Terminal Value 9,402 10,977 11,932 PV of Terminal Value 6,509 7,600 8,261 Sum of PV Of FCFE 2,968 3,533 3,782 Value of The Firm 9,477 11,133 12,042 Add: Net Cash (Net Debt) 1,316 1,463 1,636 Implied Value of Equity 10,793 12,596 13,678 No of Shares Outstanding (Mln) Fair Value Per Share (SAR) Source: Riyad Capital May 27,

3 P/E Range(x) Cost of Equity Risks to valuation The probable downside risk would be an immediate relocation of plant from current site to new site which might incur additional costs and have an effect on near term profitability. However, the plant relocation could improve the efficiency of the plant due to new installations, which is expected to save some fuel costs compared to earlier plant which we see as an upside risk to our estimates. Sensitivity analysis on discount rate The terminal growth rate and CoE sensitivity to valuation suggest price range tends to decrease on an average of -2% with an increase of +40 bps in CoE assumptions. The valuation range increases by +1% on +10 bps increase in terminal growth rate. Table 3: Sensitivity Analysis of Cost of Equity and Terminal Growth Rate Terminal Growth Rate % 0.4% 0.5% 0.6% 0.7% 0.8% 0.9% 1.0% 1.1% 1.2% 1.3% 1.4% 1.5% 1.6% 1.7% 1.8% 8.4% % % % % % % % Source: Riyad Capital #2: Target P/E valuation at SAR We valued Yamama using target P/E based method and derived a fair value of SAR 45.17, near to market prices. The target P/E multiple of 14.1x is the 12-month average of Yamama s P/E which suggests comparability to sector average P/E of 14.5x. We prefer DCF method over target P/E method as the P/E trading range ignores the large cash flow streams and investment book quality while it considers the earnings for 2015E. Table 4: 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 2017E Net profit estimates (SAR Mln) EPS (SAR) P/E based valuation (SAR) Valuation at 3 year historical average of 12.5x Based on a sector average of 14.5x Estimated valuation at PER of 14.1x Source: Riyad Capital May 27,

4 EV/EBITDA Range (x) #3: Target EV/EBITDA valuation at SAR Our assessment using the target EV/EBITDA based method derived a fair value of SAR The target EV/EBITDA multiple of 10.0x is the weighted average of its last 5- year, 3-year and 12-month average, with the latter holding the highest weightage. On a historical basis, Yamama traded at a 5-year average of 9.4x, 3-year average of 9.6x and 12-month average of 10.5x, suggesting the weighted average to be apt for selection of target multiples. However, as a valuation method for valuing high free cash flow companies like Yamama, DCF, we maintain our preference of DCF over EV/EBITDA approach as it ignores the advantages of low leverage and limited capex. Additionally, it incorrectly values the future benefit of consistent cash flows. Table 5: 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) 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) EV/EBITDA based valuation (SAR) Valuation at last 3 year average of 9.6x Based on MENA median EV/EBITDA of 11.5x Estimated valuation at EV/EBITDA of 10.0x Source: Riyad Capital Relative valuation suggests some conviciton on P/E and Yields Yamama could be compared to Qassim Cement and Arabian Cement operationally due to its similar sized capacity. The valuations between these stocks trades at different bands, with Arabian Cement trading at TTM P/E of 11.8x, Qassim Cement at 15.4x versus Yamama P/E of 14.8x. However as a brief comparison, Yamama P/E of 14.8x trades close to sector median P/E of 14.9x on a TTM basis. We believe, dividend yields are more consistent unlike the two peers, with Yamama s 2015E forward dividend yield of 6.1% is superior and provided an average yield of 6.3% for the last three years. Table 6: 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 ,031 15, x 4.8x 7.4x 7.1x 10.8x 6.1 3% Southern Province Cement Co ,001 14, x 5.0x 7.2x 6.9x 11.6x 6.0 (9%) Yanbu Cement Co ,612 10, x 2.8x 6.8x 7.0x 10.6x 7.4 9% Yamama Cement Co ,937 8, x 2.6x 7.7x 6.0x 9.3x 6.1 2% Qassim Cement Co ,727 7, x 4.7x 8.8x 7.6x 11.4x 5.4 9% Arabian Cement Co ,990 7, x 2.4x 4.6x 4.1x 7.9x 8.1 3% Eastern Province Cement Co ,205 3, x 2.0x 4.7x 4.9x 9.8x 5.1 (12%) Najran Cement Co ,032 5, x 2.5x 5.6x 5.7x 11.4x % City Cement Co ,870 4, x 2.4x 10.2x 8.1x 13.2x % Northern Region Cement Co ,068 4, x 1.9x 4.4x 5.2x 12.9x 8.0 7% Hail Cement Co ,237 2, x 2.0x 6.2x 6.3x 10.4x 2.6 0% Tabuk Cement Co ,286 2, x 1.9x 7.4x 7.7x 12.5x 3.9 2% Al Jouf Cement Co ,370 3, x 1.6x 8.8x 9.8x 18.6x NA 30% Sector Median* 91,367 91, x 2.4x 7.2x 6.9x 11.4x 5.6 Source: Bloomberg, Market Cap and EV are total May 27,

5 5 Yr 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 Appendix Exhibit 1: Share Price and P/E trading bands at various multiple levels Actual Price 8.0x P/E 8.0x P/E 10.0x P/E 12.0x P/E 14.0x P/E 16.0x P/E Source: Bloomberg and Riyad Capital 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 10.0 EV/Sales Ratio 13.0 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 Trailing P/E to Historical 5 Year EPS growth 35% 30% KSA Cement Sector Hail Cement 25% Arabian Cement 20% Yanbu Cement 15% 10% Southern Cement Saudi Cement 5% Eastern Cement Qassim Cement Tabuk Cement Yamama Cement Najran Cement 0% 10.0x 12.0x 14.0x 16.0x 18.0x 20.0x P/E Source: Bloomberg May 27,

6 Summary Financials and Ratios Table 7: Financial Projections Summary (SAR Mln) E 2016E 2017E 2018E Profit& Loss Statement Revenue 1,442 1,576 1,542 1,329 1,278 1,361 1,434 1,479 COGS (633) (662) (661) (616) (607) (615) (650) (663) Gross Profit SG&A (59) (51) (52) (54) (71) (69) (70) (69) Operating Profit Net Financing Income(Cost) (5) (7) (4) (3) Investment Income,Others Profit before Tax Income Tax (24) (48) (26) (40) (17) (19) (20) (21) Net Profit EBITDA 939 1,053 1, EPS (SAR) DPS (SAR) Margins Gross Margins 56% 58% 57% 54% 53% 55% 55% 55% EBITDA Margins 65% 67% 66% 63% 60% 62% 62% 61% Operating Margins 52% 55% 54% 50% 47% 50% 50% 50% PBT Margins 53% 55% 58% 54% 52% 56% 55% 56% Net Margins 51% 52% 56% 51% 51% 54% 54% 55% Balance Sheet Cash and Equivalents Short Term Investments 877 1,239 1,344 1,245 1,385 1,647 1,860 2,027 Inventories Receivables Current Assets 1,380 1,675 1,839 1,881 2,059 2,312 2,623 2,917 Plant Property and Equipment 1,959 1,809 1,679 1,580 1,374 1,273 1,138 1,001 Investments-Long Term Other Non Current Assets Non current Assets 2,441 2,336 2,429 2,198 1,993 1,891 1,756 1,620 Total Assets 3,822 4,005 4,263 4,079 4,052 4,203 4,380 4,537 Short Term Debt Payables and Others Current Liabilities Long Term Debt Others Non-Current Liabilities Total Liabilities Shareholders Equity (SE) 3,375 3,599 3,893 3,731 3,773 3,905 4,074 4,230 Total Liabilities & SE 3,822 4,005 4,263 4,079 4,052 4,203 4,380 4,537 Common Size Balancesheet Current Assets 36% 42% 43% 46% 51% 55% 60% 64% Non Current Assets 64% 58% 57% 54% 49% 45% 40% 36% Current Liabilities 9% 8% 7% 7% 5% 6% 5% 5% Total Iiabilities 12% 10% 9% 9% 7% 7% 7% 7% Shareholders Equity 88% 90% 91% 91% 93% 93% 93% 93% Cashflow Net Operating Cashflow 913 1, Net Investing Cashflow (253) (432) (258) 66 (178) (303) (256) (209) Net Financing Cashflow (623) (763) (622) (781) (621) (608) (608) (658) Net Change in Cash 38 (18) (12) (35) Cash (Opening) Cash (Closing) Source: Company reports and Riyad Capital May 27,

7 Table 8: Ratio Analysis Summary E 2016E 2017E 2018E Valuation P/E 13.4x 12.2x 11.4x 14.8x 15.3x 13.5x 12.8x 12.3x P/B 2.9x 2.8x 2.6x 2.7x 2.6x 2.5x 2.4x 2.4x P/S 6.9x 6.3x 6.4x 7.5x 7.8x 7.3x 6.9x 6.7x P/CF 10.9x 8.3x 11.0x 12.8x 10.3x 11.4x 10.9x 10.9x EV/EBITDA 12.0x 10.7x 9.4x 9.8x 11.7x 11.1x 10.1x 11.0x EV/Sales 7.1x 6.4x 6.4x 7.5x 7.7x 6.3x 5.9x 6.6x Dividend Yield 8.2% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.6% Per share (SAR) EPS DPS BVPS Sales per share OCF/Share ICF/Share FCF/Share (0.16) Capex Capex/Sales 2% 2% 2% 0% 3% 3% 3% 3% Capex/Depreciation 16% 16% 15% 2% 22% 25% 25% 27% Liquidity Cash Ratio Current Ratio Quick Ratio Cash Cycle Inventory Turnover Accounts Payable Turnover Receivables Turnover Inventory Days Payable Days Receivable Days Cash Cycle Returns Ratio ROAA 19.8% 20.9% 21.0% 16.1% 16.0% 17.9% 18.1% 18.2% ROAE 22.6% 23.4% 23.2% 17.6% 17.3% 19.2% 19.4% 19.5% ROIC 21.0% 23.7% 21.1% 17.6% 15.9% 17.3% 17.5% 17.7% Pay out Ratio 109.5% 74.4% 69.8% 90.4% 93.7% 82.3% 78.3% 81.1% DUPONT Analysis Total Asset to Equity Net Income/Sales Sales/Total Assets Dupont ROE 21.9% 22.7% 22.3% 18.0% 17.2% 18.9% 19.0% 19.2% Cash Flow Ratio's Cashflow to Revenue Cashflow to EBITDA Cash return on assets 23.9% 29.8% 21.1% 19.0% 23.9% 20.8% 20.9% 20.1% Cash return on equity 27.0% 33.1% 23.1% 20.8% 25.6% 22.4% 22.4% 21.6% Source: Company reports and Riyad Capital May 27,

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 This research document is prepared for the use of clients of Riyad Capital and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Riyad Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Riyad Capital. The information herein was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Riyad Capital make no representations or warranties whatsoever as to the data and information provided and Riyad Capital do not represent that the information content of this document is complete or free from any error. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Riyad Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments. Riyad Capital shall not be liable for any loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document is subject to change without prior notice. Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No )

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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 100.14 90 80