Saudi Cement Company (SACCO)

Transcription

1 Saudi Cement Company (SACCO) Recommendation ACCUMULATE Risk Rating R-3 Share Price SR Target Price Implied Upside 11.5% Attractive Dividend Yield with Growth Potential SACCO is the market leader in the Saudi cement industry. The company has a 16% market share and is in the process of rehabilitating two kilns with a combined capacity of 3k tpd (tons per day) to increase the total capacity to 26.8k tpd by end SACCO s expansion plan in an industry producing at close to full capacity and constrained by price caps (imposed by the government) gives it an advantage over domestic peers. Furthermore, the company also offers an attractive dividend yield of 6.5%, one of the highest among regional/domestic peers. Hence, we initiate research coverage with an Accumulate rating and a target price of SR Highlights Cashing in on the Saudi infrastructure/construction boom: The Saudi construction market remains significant with ~$960bn worth of projects planned or under way. The new budget focuses on building new schools, hospitals/clinics and houses to improve socio-economic conditions in the country. This will lead to strong cement demand in the near-to-medium term. SACCO is rehabilitating its old kilns to add another 3,000 tpd of clinker capacity. In order to benefit from the anticipated demand for cement, SACCO is rehabilitating two kilns (4 & 5) to improve operational clinker capacity by another 3,000 tpd. This will increase its total clinker capacity from 23,800 tpd to 26,800 tpd. Hence, we estimate SACCO to post top-line and bottom-line growth of 9.0% and 8.2%, respectively, in Catalysts Addition of new capacity should provide positive momentum. The aforementioned kiln upgrade should help improve results in the latter part of 2014 and should act as a catalyst for the stock price. Improved cement demand over the upcoming quarters could act as nearterm catalysts. The recent crackdown on illegal/undocumented workers affected cement demand in 4Q2013. However, in our view, shortage of housing units and the need to develop the economy would force the government to ease regulatory requirements for the construction sector. Recommendation, Valuation and Risks Recommendation and valuation: We rate SACCO an Accumulate with a price target of SR Our target price implies an upside of 11.5%. SACCO offers an attractive dividend yield of 6.5%, while other valuation metrics appear to be fair vs. peers. Risk: In our view, the recent deportation of undocumented workers is the biggest near-term risk to overall cement demand. Scarcity of labor can affect construction projects, negatively impacting cement demand. Key Financial Data and Estimates e 2015e EPS (SR) EPS Growth (%) 32.5% 2.8% 8.2% 9.9% P/E (x) EV/EBITDA DPS (SR) Dividend Yield (%) 6.5% 6.5% 6.5% 6.5% Key Data Bloomberg Ticker ADR/GDR Ticker Reuters Ticker ISIN Sector SACCO AB N/A 3030.SE SA Cement 52wk High/52wk Low (SR) / m Avg. Volume (000) Mkt. Cap. ($ bn/sr bn) 4.4/16.4 Shares Outstanding (mn) Year Total Return (%) 17.3 Fiscal Year End December 31 Source: Bloomberg, Reuters, Saudi Exchange (as of February 02, 2014) Relative Price Performance vs. Tadawul Index Jan Jul Jan-14 SACCO TASI Source: Bloomberg; Note: SACCO is Saudi Cement and TASI is the benchmark Saudi Exchange Index Abdullah Amin, CFA abdullah.amin@qnbfs.com.qa Saugata Sarkar saugata.sarkar@qnbfs.com.qa ; Note: All data based on current number of shares Monday, 03 February

2 Executive Summary Diversification Drive to Boost Cement Demand Expansionary budget announced for The Kingdom of Saudi Arabia (KSA) announced its 2014 annual budget on December 23, In our view, the continued focus on diversifying the economy from hydrocarbons as well as improving Saudi s socioeconomic indicators was the key theme in the budget. According to the released estimates, revenue and expenditures will be SR855bn each, projecting a break-even. However, as in the past, we believe that revenue is underestimated, and the government will manage to record a relatively small surplus in Furthermore, strong external positions complemented by huge foreign reserves will underpin capital expenditure and development. We highlight some key segments that will lead to greater demand for cement in the medium term: Education and Training: Total expenditure for this segment is estimated to be SR210bn (25% of total), up 3% YoY. The budget envisions 465 new schools to be constructed, renovation of 1,500 schools and completions of 1,544 schools currently under construction. Health and Social Affairs: Total expenditure for this segment is estimated to be SR108bn (13% of total), up 8% YoY. The projects include primary healthcare centers, 11 new hospitals and completion of 132 hospitals already under construction. Transportation and Infrastructure: Total expenditure for this segment is estimated to be SR66.6bn (7.8% of total), up 2.5% YoY. Projects include roads, ports, railways, postal services and industrial cities. Water, Agriculture and Manufacturing: Expenditures are projected at SR61bn (7% of total), up by 5.7%. The budget includes appropriations to enhance water resources and improvement of existing water and sewage networks. Municipality Services: Total expenditure for this segment is estimated to be SR39bn (5% of total), up 9% YoY. New projects include inner and (inter)-city roads, intersections and bridges, road lights and other environment-related projects. We expect cement demand to be in excess of 65mn tons by 2016e. We believe above plans offer a compelling cement demand outlook with near-to-medium term drivers stemming from favorable macro conditions, population growth and the need for economic diversification. This has led to a construction boom, with the KSA facing a shortage of cement. According to industry data, demand came in around 53mn tons in 2012 with local sales increasing 12% YoY. According to the Northern Cement prospectus, demand can be classified into three major segments: The residential building sector contributes ~60% to cement demand: Cement consumption has been underpinned by strong population growth, which has averaged 3.1% over the last decade. Furthermore, increasing income levels have also played a part in boosting demand for housing units. Lastly, increasing propensity toward smaller-sized families and longer-term benefits from the Saudi mortgage law should also contribute toward cement demand. The commercial building sector contributes ~30% to cement demand: Similar to the residential sector, the commercial sector (commercial projects, offices, compounds, shopping centers and school and university buildings) has also experienced steady growth over the past few years. Finally, infrastructure projects contribute ~10% to cement demand: Infrastructure spending has historically represented a relatively smaller share of total construction spending. However, infrastructure has become a major source of demand for cement in the last few years. Construction of airports, roads, electricity-generation facilities, water treatment plants, sewage systems, etc., falls under this category. Importing cement to meet the growing demand: Anticipating an uptick in cement demand, the Saudi government has asked domestic cement companies to import 10mn tons of cement (one-off) as a means to meet the near-term demand-supply gap. Moreover, over the medium term, the country plans to spend SR3bn to establish three-to-four new plants with a total capacity of 12mn tons per annum (tpa) over the next three years. Improving Plant Capacity to Benefit from Anticipated Growth SACCO is rehabilitating its old kilns to add another 3,000 tpd of clinker capacity. In order to benefit from the anticipated demand for cement, SACCO is rehabilitating its kilns # 4 & 5 to improve operational clinker capacity by another 3,000 tpd. This will increase its total clinker capacity from 23,800 tpd to 26,800 tpd. Thus, we have included the 3,000-tpd expansion in our model from 4Q2014 (slight delay vs. management guidance of 3Q2014). We note the kilns were originally scheduled to come online in 4Q2013. Hence, we estimate SACCO to post top-line and bottom-line growth of 9.0% and 8.2%, respectively, in The 2014 growth will also be aided by higher inventory levels incurred in 2013 (the company had 1.9mn tons of clinker by end of November 2013 vs. a requirement of 1.2mn tons). However, post 2014, we expect limited revenue growth as there is little room to increase production, while we have not assumed any imports. Furthermore, the cap of SR240 per ton on Ordinary Portland Cement (OPC) imposed in the early part of 2013 will restrict any growth on the pricing front EBITDA is projected to increase to SR1.58bn in 2015 vs. SR1.35bn in 2013 (for more details, refer to the Key Forecasts section later in the report). Net-net, we estimate SACCO to post a strong 2014 and 2015 followed by a flattish operating income post Monday, 03 February

3 Cap on cement prices and developments on the import/export front to limit growth potential: Cement prices vary by region in the Kingdom. Prices are relatively higher in the Western and Central regions. Although SACCO falls in the Eastern region, it does supply to the Central region due to higher demand and lower supplies. On the other hand, prices are lower in the Northern region due to a more balanced demand-supply dynamics. In early 2012, prices reached SR260 per ton for OPC and SR270 for Sulfate Resistant Cement (SRC). This led to a demand-supply imbalance and a rise in prices, particularly in the Western region. In order to control rising prices, the government imposed a complete ban on cement exports from February 2012, and also imposed price ceilings of SR240 per ton on OPC and SR260 per ton on SRC. Investors should remember that an initial ban on exports was imposed in July 2008, when the government imposed a ban on all cement exports. Later on, the government allowed cement exports on a limited scale with certain conditions. However, given rising demand in early 2012, the Ministry of Commerce and Industry again prohibited cement exports to combat a supply shortage and control rising prices. However, Saudi Cement and Eastern Cement continue to export their products to Bahrain by virtue of an exemption (subject to certain restrictions). On the imports front, in early 2013, the government lifted the import ban on cement/clinker and by April 2013 ordered the import of 10mn tons of cement. Furthermore, the government announced its intention to establish up to four new cement plants with a combined capacity of 12mn tons. Finally, cement companies were also required to boost inventory levels to two months of production from one. We note SACCO is already in compliance with this clinker rule. Hence, we do not assume any more imports in our estimates. However, we do project a reduction in inventory, which will lead to a strong performance in 2014 by the company relative to other domestic peers Results and Outlook for 2014 and 2015 SACCO posted a net profit of SR1.13bn for 2013 vs. SR1.10bn in This represented a growth of 2.8% on a YoY basis. Revenue decreased to SR2.19bn vs. SR2.20bn, a decline of 0.7%. The company sold 8.76mn tons of cement at an average price of SR249.7 per ton vs. 8.73mn tons at an average price of SR252.5 per ton in the same period last year. Cost of sales decreased by 7.3% YoY to SR903.0mn vs. SR974.2mn. Cost per ton declined to SR103.1 in 2013 (adjusted for government incentive for imported clinker) vs. SR111.6 in For 2014 and 2015, we expect SACCO to post earnings of SR1.23bn and SR1.35bn, respectively. Our 2014 and 2015 estimates are covered in detail in the Key Forecasts section later in the report. Catalysts Addition of new capacity should provide positive momentum. As mentioned previously, SACCO is rehabilitating its kilns # 4 & 5 to increase its operational capacity from 23,800 tpd to 26,800 tpd. According to the management, the additional capacity will come online in 3Q2014. If this is indeed the case, then SACCO s bottom-line would increase by 9.3% YoY in 2014, a strong performance given the industry price caps and limited room for expansion. However, to be conservative, we have assumed that additional operating capacity will come online in 4Q2014 and thus expect this year s bottom-line to improve by 8.2% YoY. As previously noted, the additional capacity was initially scheduled to come online in 4Q2013 and has been delayed. Improved cement demand over the upcoming quarters could act as near-term catalysts. The recent crackdown on illegal/undocumented workers affected cement demand in 4Q2013. However, in our view, shortage of housing units and the need to develop the economy would force the government to ease regulatory requirements for the construction sector. High dividend yield to keep interest alive: SACCO is one of the highest dividend yielding stocks in the KSA cement sector. The company offers an attractive dividend yield of 6.5%. SACCO usually pays semi-annual dividends of SR3.50. Valuation We have valued SACCO using a Discounted Cash Flow (DCF) valuation methodology. The DCF is a standard discounted cash flow analysis of forecasted cash flows, which results in a present value of expected cash flows or cash flow equivalents to investors. We have used a cost of equity (Ke) assumption of 12.4%. The Ke rate results from the aggregation of an assumed risk-free rate (4.0%), an equity risk premium of 8.0% and a beta of 1.0x. We have used a beta of 1.0x (vs in actual adjusted beta per Bloomberg) to be conservative. We have also assumed cost of debt (Kd) to be 4.0%. Thus, with a 25/75 (debt/equity) target capital structure, the weighted average cost of capital (WACC) comes to 10.00%. WACC Calculation Risk-Free Rate (%) 4.0 Risk Premium (%) 8.0 Beta 1.0 Cost of Equity (%) 12.4 Cost of Debt (%) 4.0 Debt-to-Equity Ratio 25:75 WACC (%) Source: QNBFS estimates Monday, 03 February

4 Cash Flow to Firm (FCFF) In SR mn e 2015e 2016e 2017e Net Income 1,102 1,132 1,226 1,347 1,374 1,323 NCC + Net Capex Change in WC 136 (263) 248 (5) (9) 8 Interest Expense FCFF 1,394 1,026 1,589 1,496 1,508 1,463 Sensitivity Analysis 8.0% 9.0% 10.0% 11.0% 12.0% 1.0% % % % % DCF Valuation Particulars Fair Value of Equity (SR mn) Fair Value per Share (SR) Cumulative PV of FCFF 6, PV of Terminal Value 12, PV of Cash Flows 18, Add: Cash Balances (2013) Investments (2013) Less: Debt Balances (2013) (761) (4.97) Fair Value of Equity 18, Relative Valuation Valuation appears fair. We believe the firm trades at a slight premium to its regional peers. SACCO trades at P/E and EV/EBITDA multiples of 13.4x and 11.7x on our 2014 estimates. However, SACCO offers an attractive dividend yield (DY) of 6.5% for Peer Group Valuation Name Mkt. Cap ($ bn) EV/EBITDA (2014) P/E Ratio (2014) P/FCF(TTM) Saudi Cement* Yamama Cement* Qatar National Cement* Raysut Cement Oman Cement Eastern Cement Arabian Cement Qassim Cement Yanbu Cement Source: Bloomberg, *QNBFS estimates (as of February 02, 2014) Monday, 03 February

5 Risks to Our Target Price Weaker-than-expected demand due to labor issues (deportation of undocumented workers): The recent drive by the government to deport undocumented workers could lead to a slowdown in construction activity. This could negatively affect cement off-take in the near-term. News reports indicate roughly 1mn of undocumented expats have left the country in the past few months. Lower-than-estimated price realizations could crimp profitability: The government has fixed prices for OPC at SR240 per ton and SRC at SR260 per ton. Any further reduction could hurt SACCO s bottom-line. On the other hand, stronger prices versus our assumptions could lead to higher top-line, and given SACCO s high operating leverage, could provide an upside risk to our EPS estimates. Fuel allocations and costs: In view of the expected demand uptick, the government has already suggested setting up new plants/companies. However, given fuel constraints, it is not clear if existing companies will be allowed to expand (and if so, which ones). Furthermore, oil/gas is provided at highly subsidized rates, which are expected to go up in the coming years. SACCO s business is largely cyclical in nature and remains suspect to the expansion plans of the government: As noted previously, the government has ordered cement companies to import 10mn tons of clinker. These imports could impact the market and SACCO if additional supplies are not quickly absorbed. Monday, 03 February

6 The Saudi Cement Industry An Important and Developed Sector After undergoing large-scale expansions over the last few years, KSA s cement industry has emerged as a vital sector. There are 15 cement companies spread across the Central, Eastern, Northern, Southern and Western regions. These companies mainly produce OPC, SRC and Portland Pozzolana Cement (PPC). According to a January 2013 prospectus filed by Northern Cement, OPC is the dominant form of cement consumed in the Kingdom, representing 80% of the total cement consumption; SRC constitutes the remaining 20%. This ratio varies in coastal areas where usage of SRC is higher and comprises 30% of total consumption. Usage of SRC is higher in coastal areas or in places where the foundations are deep and the soil presents the risk of sulfate attack. The use of PPC is limited to the Western region as it is only produced by Arab Cement, Tabuk Cement and Yanbu Cement. In addition, the Pozzolana resources are available only in the western regions thereby limiting PPC cement mainly to the Western region. Bulk cement accounts for 60% of total consumption in KSA, while bagged cement accounts for the remaining 40%. The KSA cement industry is highly competitive given abundant limestone deposits in the country as well as access to subsidized fuel provided by Saudi Aramco. This provides KSA cement companies a cost advantage compared to other regional and international producers. Demand Outlook Remains Robust We expect cement demand to be in excess of 65mn tons by 2016e. We believe the KSA offers a compelling cement demand outlook with near-to-medium-term drivers stemming from favorable macro conditions, population growth and the need for economic diversification. This has led a construction boom, with the KSA facing a shortage of cement. According to industry data, demand came in around 55.3mn tons in 2013 with local sales increasing 3.8% YoY. As noted previously, the government has issued a directive to import 10mn tons on an urgent basis to meet growing demand. Cement demand has benefited from project mobilizations proposed under Saudi Arabia s 9 th Development Plan ( ) with $384bn of planned spending. These development plans aim to diversify the economy away from dependence on hydrocarbons, develop basic infrastructure through heavy investment, including new cities, housing, schools and universities, hospitals and transport systems. Furthermore, various industry sources, including MEED, estimate close to $1 trillion in projects planned or under way in Saudi Arabia over the coming years. Residential housing, which has historically accounted for ~60% of cement demand in Saudi Arabia, is likely to remain one of the key drivers of demand. The KSA announced plans to build 1 million housing units in its development plan, and added another 0.5mn in 2011 to make it 1.5mn for the period. Given rising population, we believe housing will remain among the top priorities on the government s development agenda in the medium-term. Keeping all this in mind, we expect demand to easily cross the 65mn tons by 2016e. Cement Demand has been Growing Steadily until 2012;2013 Impacted by Labor Issues 60 30% 40 20% 10% 20 0% % Demand (mn tons) (LHS) Growth Rate YoY (RHS) Source: Yamama Cement, Northern Cement prospectus Demand has risen from ~16.9mn tons in 1999 to ~55.3mn tons in As a result of a significant rise in building and construction activity in the KSA, cement consumption has grown from a level of 16.9mm tons in 1999 to 55.3mn tons in Consumption has witnessed a steady and continuous increase with growth picking up in the last few years. Cement demand to be driven by the Western and Central regions. The cement market can be classified into five distinct regions in the KSA the Central, Eastern, Northern, Southern and Western regions. All these regions have their own market demand dynamics. The Western region due to its religious and economic drivers is experiencing sustained growth in cement demand while the Central region is benefiting from the economic growth in Riyadh and adjoining areas. The other factors governing cement consumption are the degrees of urbanization and population density. According to prospectuses filed by Najran Cement and Northern Cement, cement consumption in the Western region is ~45% to 55% higher than the cement dispatches of the companies based in the region. The Eastern and Southern regions are net exporters of cement to other regions as cement consumption is ~20%-30% below production capacity. Going forward, we expect the Western and Central regions to be key drivers of demand and remain net importers of cement from other regions. Monday, 03 February

7 Supply Should Catch Up With Demand Longer Term We expect 2016e capacity to reach 72mn tons. The Saudi cement sector commenced production with just one producer in 1959 (Arabian Cement). Until 2007, there were only eight cement manufacturers in the Kingdom. Four more companies entered the market in Al Jouf Cement was established in As of 2013, the Saudi cement sector has grown to 15 producers. The government has plans for establishing another three-to-four new plants/producers to intersect the growing demand. Hence, new capacities are poised to take off over the medium term, which should increase overall sector capacity to hit roughly 72mn tons by 2016e. Western and Central regions should become supply centers going forward. Going forward, capital investments should continue to shift toward areas that offer better demand prospects. We note most of the cement production capacity primarily accrues from the Central and Western regions followed by the Eastern, Southern and Northern regions. Market Share in 2008 Market Share in % 17% 26% 18% 21% 10% 21% 31% 23% 28% Eastern Central Western Northern Southern Eastern Central Western Northern Southern Source: Yamama Cement, Northern Cement prospectus 2013 Industry Performance Analysis Overall cement sales are up 3.3% YoY in Total domestic cement sales stood at 55.3mn tons vs. 48.8mn tons in the same period last year. Domestic sales have grown by 3.8% YoY. However, export sales (due to higher domestic demand and overall export restrictions) have decreased to 377,000 tons vs. 640,000 tons in Exports constituted only 0.7% of total sales volume. Domestic Sales are Up 3.8% YoY Clinker Inventory has Increased to 14.7mn Tons 6,000 15,000 4,000 10,000 2,000 5,000 - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Industry data Clinker production and inventory increase: Domestic cement production increased to 55.7mn tons in 2013 vs. 53.8mn tons in 2012, up 3.5% YoY. However, clinker production increased 11.2% YoY to 54.2mn tons vs. 48.8mn tons. Clinker production, along with clinker imports, was boosted by the requirement for companies to maintain two months of clinker inventory. Clinker imports increased to 4.9mn tons vs. only 0.4mn tons. This has allowed clinker inventory to increase to 14.7mn tons vs. 6.4mn tons in Monday, 03 February

8 Company Description Saudi Cement is the biggest cement producers in the KSA. The company was established in 1955, and was among the first three cement producers in the country. SACCO primarily produces OPC and SRC. SACCO operates two cement plants in the Eastern Province of Saudi Arabia. The two plants, namely Hofuf Plant and Ain Dar Plant, are about 35 km apart and are both at an approximately equal distance of around km from King Abdul Aziz Port at Dammam. SACCO started commercial operations in 1961 with one kiln of 300 tpd of clinker capacity at the Hofuf Plant. On the other hand, the Ain Dar Plant, started as an independent company under the name of Saudi-Bahraini Cement Company (SBC) in 1981, with 4 kilns of 1,500 tpd of clinker capacity each. SBC continued its operations independently until December 31, As of January 1, 1992, SBC merged with SACCO and since then have continued under the name of Saudi Cement Company. Plant operational capacity stands at 23,800 tpd. SACCO currently has two lines producing 10,000 tpd of clinker each. SACCO also has another old line (Kiln 6) with a clinker capacity of 3,800 tpd. Together the operational capacity stands at 23,800 tpd. The company is in the process to rehabilitate 3,000 tpd of clinker capacity from kilns # 4 & 5. This will take the total operational capacity to 26,800 by end of Key Personnel Name Omar Sulaiman Al-Rajhi Dr. Walid Ahmed Al-Juffali Mohammed Ali Al-Garni Osama Sidahmed Designation Chairman Board Member and Managing Director Board Member and CEO Finance Manager Source: Company data Key Operating Metrics e 2015e Clinker Produced (mn tpa) Imported Clinker (mn tpa) Cement Rated Capacity (mn tpa) Total Cement Produced (mn tpa) Cement Utilization Rate 116.1% 116.6% 123.3% 123.3% Cement Sales (mn tpa) Sales Price Per Ton (SR) Cost Per Ton (SR) Source: Company data Monday, 03 February

9 Key Forecasts Revenue We estimate revenue to grow at a CAGR of 9.1% over e. SACCO is already operating its existing operational clinker kilns at close to full capacity. The additional 3,000 tpd of clinker capacity will increase the capacity by 12.6%. The company has already imported 1.03mn tons of clinker in 2013 to meet the two-month clinker inventory rule and produce more cement in order to intersect rising demand from the Central region. Going forward, we have not assumed clinker imports as the company has more than the required clinker inventory (2.18mn tons vs. 1.23mn tons required). Hence, we expect a reduction in inventory in 2014 and 2015, which along with some additional production will lead to topline growth of 9.0% and 9.1% in 2014 and 2015, respectively. Post 2015, we see flat performance from the firm. Stable Revenue Stream (SR mn) 3,000 Seasonality Impact Cement Sales Dips in Ramadan (000 tons) 900 2, , e 2014e 2015e - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Cost of Revenue SACCO has managed to maintain a stable cost base over the last couple of years. Over , SACCO has managed to maintain COGS as a percent of revenue between 44.2% and 44.6% and cost per ton of cement sold at SR116 per ton. However, in 2013, despite the higher cost of imports, the firm benefitted from the government incentive for clinker import, which reduced the COGS as a percentage of revenue to 41.3% in Going forward, we have assumed cost of cement per ton to be SR108 per ton vs. SR112 in 2012 and SR106 in Investors should note that clinker is produced by heating limestone (calcium carbonate) with small quantities of other materials at ~1450 C in a kiln. This makes clinker production a very energy-intensive process; hence, energy forms the biggest component of a cement producer s cost base. We believe SACCO procures oil/gas at a fixed rate much like other plants in the KSA, ensuring a stable cost base year-over-year. Capital Expenditure (Capex) Capex should increase as SACCO rehabilitates its kilns. SACCO has spent SR56.7mn to SR59.0mn in capex on plant, property and equipment (PP&E) in 2013 and 2012, respectively. We expect capex of SR91mn in 2014 followed by SR40mn per year post 2014 on maintenance capex. Debt and Financial Charges SACCO s total loans stand at SR761mn as of 2013; the company has two major loans on its books. The firm took out a SR596mn loan in February 2010 to finance the rehabilitation of two kilns (kiln # 4 & 5) and other expansion projects. The loan will be repaid in 15 unequal semi-annual installments with the last installment due on November As of 2013, total outstanding balance was SR335mn (SR235mn in long-term and SR100mn as the current portion). The company has also utilized loan facilities from some local banks on a revolving basis (Islamic Tawarruq loans). These loans are used to finance working capital with a total limit amounting to SR1,750mn. As of 2013, total outstanding under these facilties was SR425mn vs. SR400mn at the end of Although these loans are classified under current liabilities, management can roll them over if the need arises. Hence, it is possible that their maturity will extend beyond a year. Earnings Bottom-line should grow in 2014 and Given its capacity increase, we expect SACCO to increase its bottom-line by 8.2% and 9.9% in 2014 and 2015, respectively. We do not expect imported clinker to contribute significantly to earnings. On the dividends front, we expect the company to maintain its DPS of SR7.00 per share over the next two years. We are conservative in our DPS estimate despite the expected release of cash from the sale of clinker inventories built up in Monday, 03 February

10 Detailed Financial Statements Income Statement In SR mn e 2015e Net Sales 2,203 2,187 2,384 2,602 Cost of Sales (974) (903) (1,005) (1,097) Gross Profit 1,229 1,284 1,379 1,504 Selling and Distribution Expenses (33) (30) (31) (32) G&A Expenses (54) (68) (70) (72) Total Expenses (87) (98) (101) (104) Operating Income 1,142 1,186 1,278 1,401 Company's Share in Profit (Loss) of Associated Companies 2 (3) 2 2 Islamic Murabaha Income Islamic Loan Charges (15) (13) (13) (11) Others (net) Income Before Zakat 1,142 1,171 1,268 1,393 Zakat (41) (39) (42) (46) Net Income 1,102 1,132 1,226 1,347 ; Note: EPS based on current number of shares Cash Flow In SR mn e 2015e Net Cash Flow from Operating Activities 1,432 1,083 1,645 1,525 Net Cash Used in Investing Activities (59) (53) (92) (41) Net Cash Used in Financing Activities (1,378) (1,135) (1,116) (1,220) Net Change in Cash & Cash Equivalents (5) (105) Cash & Cash Equivalents at the Beginning of the Year Cash & Cash Equivalents at the End of the Year Key Stats and Ratios e 2015e Revenue Growth (YoY) 28.4% (0.7%) 9.0% 9.1% Cost of Sales Change (YoY) 27.3% (7.3%) 11.3% 9.1% Gross Margin 55.8% 58.7% 57.8% 57.8% EBIT (SR mn) 1, , , ,400.6 EBIT Margin 51.8% 54.2% 53.6% 53.8% EBITDA (SR mn) 1, , , ,584.4 EBITDA Margin 60.2% 61.9% 61.7% 60.9% EV/ EBITDA (x) Monday, 03 February

11 Balance Sheet In SR mn e 2015e Cash and Cash Equivalents Account Receivables Inventories Prepaid Expenses & Others Total Current Assets ,231 1,489 Investments Fixed Assets 3,346 3,164 3,034 2,880 Capital Work in Progress Total Non Current Assets 3,532 3,384 3,283 3,140 Total Assets 4,333 4,380 4,514 4,629 Islamic Tawarruq Loans Saudi Industrial Development Fund - Current Portion Accounts Payables Dividend and Other Payables to Shareholders Accruals and Other Credit Balances Total Current Liabilities Long-Term Loans End of Service Indemnities Total Non Current Liabilities Total Liabilities 1,175 1,162 1, Capital Paid 1,530 1,530 1,530 1,530 Statutory Reserve Voluntary Reserve Retained Earnings ,007 1,283 Total Equity 3,158 3,217 3,372 3,648 Total Liabilities and Equity 4,333 4,380 4,514 4,629 Monday, 03 February

12 Recommendations Based on the range for the upside / downside offered by the 12 - month target price of a stock versus the current market price Risk Ratings Reflecting historic and expected price volatility versus the local market average and qualitative risk analysis of fundamentals OUTPERFORM Greater than +20% R-1 Significantly lower than average ACCUMULATE Between +10% to +20% R-2 Lower than average MARKET PERFORM Between -10% to +10% R-3 Medium / In -line with the average REDUCE Between -10% to -20% R-4 Above average UNDERPERFORM Lower than -20% R-5 Significantly above average Contacts Saugata Sarkar Ahmed M. Shehada Keith Whitney Sahbi Kasraoui Head of Research Head of Trading Head of Sales Manager - HNWI Tel: (+974) Tel: (+974) Tel: (+974) Tel: (+974) saugata.sarkar@qnbfs.com.qa ahmed.shehada@qnbfs.com.qa keith.whitney@qnbfs.com.qa sahbi.alkasraoui@qnbfs.com.qa QNB Financial Services SPC Contact Center: (+974) PO Box Doha, Qatar DISCLAIMER: This publication has been prepared by QNB Financial Services SPC ( QNBFS ) a wholly-owned subsidiary of Qatar National Bank ( QNB ). QNBFS is regulated by the Qatar Financial Markets Authority and the Qatar Exchange; QNB is regulated by the Qatar Central Bank. This publication expresses the views and opinions of QNBFS at a given time only. It is not an offer, promotion or recommendation to buy or sell securities or other investments, nor is it intended to constitute legal, tax, accounting, or financial advice. We therefore strongly advise potential investors to seek independent professional advice before making any investment decision. Although the information in this report has been obtained from sources that QNBFS believes to be reliable, we have not independently verified such information and it may not be accurate or complete. While this publication has been prepared with the utmost degree of care by our analysts, QNBFS does not make any representations or warranties as to the accuracy and completeness of the information it may contain, and declines any liability in that respect. QNBFS reserves the right to amend the views and opinions expressed in this publication at any time. It may also express viewpoints or make investment decisions that differ significantly from, or even contradict, the views and opinions included in this report. COPYRIGHT: No part of this document may be reproduced without the explicit written permission of QNBFS. 12