Qassim Cement Company. Results Update 4 th Quarter 2011 MARCH Research Division Company Reports

Transcription

1 Qassim Cement Company Results Update 4 th Quarter 2011 Research Division Company Reports Please read Disclaimer on the back All rights reserved, AlJAZIRA CAPITAL

2 RESEARCH DIVISION Head of Research Abdullah Alawi a.alawi@aljaziracapital.com.sa Senior Analyst Syed Taimure Akhtar s.akhtar@aljaziracapital.com.sa Analyst Saleh AlQuati s.alquati@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General Manager Brokerage Division Ala a AlYousef a.yousef@aljaziracapital.com.sa AGMHead of international and institutional brokerage Luay Jawad AlMotawa lalmutawa@aljaziracapital.com.sa Regional Manager West and South Regions Abdullah AlMisbahi a.almisbahi@aljaziracapital.com.sa Area Manager Qassim & Eastern Province Abdullah AlRahit aalrahit@aljaziracapital.com.sa Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No

3 Qassim Cement Company Result Update 4Q11 KSA Cement March Higher prices led to YoY profitability growth of 10.4% in Rating: Neutral Generates highest margins amongst peers. Capacity constraints and low clinker inventory level. Maintain Neutral recommendation. Current Price: SAR Months Price Target: SAR 83.5 Upside/ (Downside): 3.1% High prices led YoY growth Price Chart Qassim Cement Company (Qassim) posted an aftertax profit of SAR553mn (EPS: SAR6.14) in 2011 compared to PAT of SAR501mn (EPS: SAR5.56) in Qassim s bottom line rose 10.4% YoY in 2011, primarily attributed to a revenue growth of 6.9% YoY. Higher average price realizations (up 6.3% YoY) led the top line growth. Furthermore, COGS, as a percentage of sales, declined to 41.1% from 42.5% in Gross margins expanded to 58.9% in 2011 compared to 57.5% in , , , , , ,000.0 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 TASILHS Jul 10 Jan 11 Jul 11 Jan 12 Qassim RHS Financial performance 2011 All fig in SAR mn Annual Change unless otherwise stated (2011/2010) Sales Revenue 968 1, % COGS (412) (426) 3.4% Gross Profit % Gross Margin 57.5% 58.9% Operating Profit % Operating Margin 53.6% 55.2% Net Profit % Net Margin 51.7% 53.4% EPS (SAR) Source: Quarterly & annual reports Increased gross margins in addition to lower operating costs (general & administrative expenses declined 11.7%) led to higher operating and net margins. 4Q2011 financial performance overview Qassim s 4Q2011 profitability was recorded at SAR146mn (EPS: SAR1.62), an increase of 29.7% YoY. This indicates that the company s recorded profitability remained 18.1% higher than our estimations for the quarter under review, which was mainly due to higherthanexpected price realizations and sales volumes. Quarterly financial performance All fig in SAR mn YoYChange 4Q10 3Q11 4Q11 unless otherwise stated (4Q11/4Q10) Sales Revenue % COGS (106) (87) (105) 0.7% Gross Profit % Gross Margin 56.2% 59.2% 61.2% Operating Profit % Operating Margin 51.2% 55.5% 57.6% Net Profit % Net Margin 46.6% 53.9% 54.0% EPS (SAR) Source: Quarterly & annual reports Key Information Reuters Code 3040.SE Bloomberg Code QACCO AB Country: Saudi Arabia Sector: Cement Primary Listing: TASI MCap: SAR7.3 bn 52 Weeks H/L: SAR93.8/59.0 Qassim Cement Company Established in 1976, Qassim Cement Company (Qassim), one of the top five cement producers, is located in central Saudi Arabia. The company accounts for 10.2% of the domestic market share. Qassim has an annual installed production capacity of 3.5 million tonnes of clinker and 4.0 million tonnes of cement. The company manufactures ordinary portland cement, sulfate resistant cement (SRC) and limestone cement. Qassim generates most of its revenue in the domestic market. At the end of 2011, the company s total cement production capacity stood at 4.2 MT, with one of the highest utilization rates in the industry. Abdullah Alawi (Head of Research) a.alawi@aljaziracapital.com.sa

4 On a QoQ basis, the bottom line growth (up 26.9%) was largely driven by a 26.7% rise in revenue (due to 20.3% higher volumes and 5.3% increase in prices). On a YoY basis, performance during 4Q2011 was driven largely by higher prices, which increased 9.9% compared to sales volumes that rose 2.0%. Furthermore, decline in SG&A expenses (19.9% YoY) along with lower zakat expenses (10.5% YoY) contributed to the growth in bottom line. Qassim generates highest margins amongst peers Benefiting from low production cost and higher price realizations, Qassim has been generating highest margins in the sector. In 2011, it reported gross margins of 58.9% (industry average: 53.0%) and net margins of 53.4% (industry average: 47.4%). The company s cost of production at SAR100/ton is lowest in the industry compared to its peer s average level of SAR110/ton. This is largely due to the fact that Qassim operates at a significantly high utilization rate (107.2% in 2011) owing to its technologically advanced plants. Furthermore, the company has one of the highest price realizations in Saudi Arabia. At SAR244, average realization per ton of cement for Qassim was 7.0% premium to the industry average in Rising demand along with limited cement capacity in the Kingdom would lead to increased prices. We expect prices to remain strong in the coming quarters. Low inventory levels restrict the company s growth Qassim has consistently maintained low clinker inventory levels. This strategy would limit its ability to capitalize on the incremental demand expected in the cement sector. Increased infrastructure spending, business expansion and rising residential construction activities are boosting demand for cement in the KSA. Qassim s clinker inventory level stood at 199,000tons at the end of 2011, representing 2.7% of the sector s total clinker inventory. This is much lower when compared with SPCC (holding 16.1% of the sector s total clinker inventory) and Yamama (holding 17.6% of the sector s total clinker inventory). Moreover, the company is already operating at high utilizations rates; operating rates were 107.2% in Although it has proposed to add a new production line in June 2011, limited natural gas supply from Saudi Aramco continues to pose a challenge. Key financial updates Key revisions in The upward revision in sales revenue is mainly associated with the (i) positive adjustment of expected utilization rate (ii) improvement in average prices and (iii) recent agreement with Saudi cement to buy 200,000tons of clinker during. The increase in gross, operating and net profit is mainly based on the upward revision in sales revenues. All fig in SAR mn unless otherwise stated Earlier Estimates New Estimates "Upward/ (Downward) revision" Sales Revenue 1,017 1, % COGS (436) (469) 7.6% Gross Profit % Gross Margin 57.1% 57.6% Operating Profit % Operating Margin 53.3% 54.1% Net Profit % Net Margin 52.2% 52.3% EPS (SAR) Source: Aljazira Capital Investment consideration Considering the 2011 performance, and our current outlook and estimates, we arrived at an updated 12month price target of SAR83.5/share, which indicates a potential upside of 3.1% over the market price of SAR81/share (as of 25th Mar ). We believe most of the positives are already priced in the current stock price, and therefore, we maintain our Neutral recommendation of the stock.

5 All fig in SAR mn, unless otherwise stated E 2013E 2014E 2015E Income Statement Revenue 968 1,035 1,107 1,113 1,107 1,102 Growth YoY (%) 1.8% 6.9% 7.0% 0.5% 0.5% 0.5% Cost of Sales (412) (426) (469) (463) (466) (469) Gross Profit Growth YoY (%) 2.2% 9.4% 4.8% 1.8% 1.3% 1.3% Selling and Marketing Expenses (7) (10) (11) (11) (11) (11) General and administrative Expenses (31) (28) (29) (30) (30) (30) Operating Profit Growth YoY (%) 3.0% 10.2% 4.7% 1.7% 1.4% 1.4% Other Income Other Expense (8) Profit Before Tax Zakat Provision (22) (29) (30) (31) (30) (30) Minority Interest Net Profit Growth YoY (%) 16.9% 10.4% 4.9% 1.7% 1.3% 1.4% Balance Sheet Assets Propert, Plant & Equipment 1,223 1,170 1,114 1,060 1, Capital Work in Progress Deffered Expenses net Cash and Cash Equivalent ,001 Trading Investments Trade Recievables, net Prepayment and Other Recievables Inventories, net Total Assets 2,023 2,123 2,261 2,400 2,532 2,657 Liabilities & Owners Equity Trade Payables Accrued Expenses and Other Current Liabilities Dividends Zakat Provisions Employees End of Service Benefit Capital Statutory Reserves General Reserves Retained Earnings Minority Interest (1) (1) (1) (1) (1) (1) Total Equity & Liabilities 2,023 2,123 2,261 2,400 2,532 2,657 Cash flows statement Cash Flow from Operating Activities Cash Flow from Investing Activities (19) (24) (27) (28) Cash Flow from Financing Activities (674) (448) (450) (450) (450) (450) Change in cash Net Cash at hand ,001 Key fundamental ratios Liquidity ratios Current ratio (x) Quick Ratio (x) Profitability ratios Gross Margin 57.5% 58.9% 57.6% 58.4% 57.9% 57.4% Operating margin 53.6% 55.2% 54.1% 54.7% 54.2% 53.8% Net Income Margin 51.7% 53.4% 52.3% 52.9% 52.5% 52.1% EBITDA margin 63.7% 63.6% 62.0% 62.4% 61.8% 61.2% Return on average assets 23.5% 26.7% 26.4% 25.3% 23.6% 22.1% Return on average equity 27.0% 28.3% 27.8% 26.5% 24.7% 23.1% Leverage ratio Debt/Equity (x) Interest Coverage (x) Market/Valuation ratios EV/Sales (x) EV/EBITDA (x) EPS (SAR) BVPS (SAR) Market Price (SAR)* MarketCap (SAR mn) 5,603 6,548 7,290 7,290 7,290 7,290 Dividend Yield 8.4% 9.3% 6.2% 6.2% 6.2% 6.2% P/E ratio (x) P/BV ratio (x) Source: Company annual reports & Aljazira capital * We have taken respective December closing prices for 2010 & 2011, while for years & onwards we used closing price of 25th March.

6 COMPANY PROFILE RATING TERMINOLOGY 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 valueadded services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 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. 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. 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. 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. For further queries about our special services, contact us at the toll free number

7 Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/ legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by AlJazira Capital from sources believed to be reliable, but AlJazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. AlJazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in AlJazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report. This report has been produced independently and separately and no party (inhouse or outside) who might have interest whether direct or indirect have seen the contents of this report. It should be also noted that the Research Division of AlJazira Capital had no information at the time of issuing this report regarding any conflict of interest between the company/companies mentioned in this report and any members of the board / executives / employees of AlJazira Capital or any of Bank AlJazira Group companies. No part of this document may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of AlJazira Capital. Persons who receive this document should make themselves aware, of and adhere to, any such restrictions. By accepting this document, the recipient agrees to be bound by the foregoing limitations. Asset Management Brokerage Corporate Finance Custody Advisory Head Office: Madinah Road, Mosadia P.O. Box: 6277, Jeddah 21442, Saudi Arabia Tel: Fax: