Company Initiation Report Please read Disclaimer on the back. Company Snapshot (in SAR,000) e 2014e 2015e 2016e

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1 Company Initiation Report Yanbu Cement Company (YCC) Largest Cement Producer in Wetern Region: Yanbu Cement company with a capacity of 7mtpa, as compared to 4mtpa of its closest competitor Arabian cement, is the largest producer in the region. Yanbu cement is the 4 th largest producer in the Kingdom, with a market share of 12% in local dispatches Strategic location: YCC is strategically located in the western region, where demand is rapidly growing, especially from huge construction and infrastructure projects in the cities of, Makkah, Medina, Jeddah and Yanbu. Some of the major projects in the region are Yanbu Industrial City, Rabigh power plants, King Abdullah economic city,kingdom Tower and the expansion of both Harams. Capcity addition to support growth: The company expanded its capacity by 3.0mtpa in 2012.The plant became operational in the early part of 2Q-2102, due to which overall capacity utilization for the 2012 stood at 85%, we expect from 2013 and beyond capacity utilization to stay around and above 100%. Rehabilitating old lines to improve efficiency: YCC plans to rehabilitate a couple of its old lines. This will result in enhanced milling efficiency, cement quality, and meet environmental requirements. The company is also studying plans to add another line to its existing capacity in order to meet the rising demand in the region Valuation: YCC with the a cement capacity of 7.0mtpa is the 4 th largest cement producer in the Kingdom, strategically located in the Western region, from where it has access to demand centers like Makkah, Jeddah and Yanbu. We initiate our coverage on YCC with a Neutral stance based on our 12-month target price of SAR 73.7/share. Risk to our Valuation: hh Per tonne price can come under the radar: We believe the current upsurge in cement demand, has potentially resulted in a black market for cement, where prices are being inflated in light of the short fall in supply. In this scenario, a backlash from the government to control prices, can have a negative impact on the sector and the company. Recommendation NEUTRAL 12-month price target SAR 73.7 Current price SAR 69.5 Upside / (Downside) 6% Price Chart TASI SCC Key information Reuters code: YNCCO.AB Bloomberg code: YNCCO:AB Country: Saudi Arabia Sector: Cement Primary Listing: Tadawul M-Cap: SAR 11,221 mn 52 Weeks H/L (SAR): 71.25/ Senior Analyst Talha Nazar Analyst Jassim Al-Jubran Company Snapshot Company Snapshot (in SAR,000) e 2014e 2015e 2016e Revenues (Sales) 1, , , , , , % Growth in Revenues 26% 32% 18% 4% 4% 3% Net Income % Growth in Net Income 23% 36% 22% 3% 4% 3% EPS Gross Margins 49% 53% 54% 53% 53% 53% EBIT Margins 46% 51% 52% 51% 51% 51% Net Margins 47% 48% 50% 49% 49% 49% ROE 18% 22% 24% 23% 23% 22% ROA 12% 15% 17% 18% 19% 19% PE (x) PB (x) EV/EBITDA (x) Source: Company reports, Aljazira 1

2 Valuations Discounted Cash Flow We have used the Discounted Cash Flow valuation to attain company s 12 month value. Following are the key basic steps & assumptions we have assumed to value Arabian Cement. 4-year forecasted cash flow Terminal value calculation based on Gordon Growth model hh Expected Terminal growth of 3% Using Capital Asset Pricing Model to calculate cost of equity. The calculation is based on the following variables h h Risk free rate of 2.7% based on 10 years US bond Yield of 2.0% + country risk premium of Saudi Arabia of 0.7% h h Equity Risk Premium of 10.45% h h Beta of 0.51 We are using weighted Average Cost of Capital (WACC) for discounting the future FCF of the company, where the calculation of WACC is based on the following variables h h Cost of equity based on CAPM h h Cost of Debt at 5% h h Contribution from equity and debt in Yanbu Cement s Capital structure is taken at 76% & 24%, respectively Using the above assumption, we arrived at DCF based value of SAR 70.3 /share for the company. Sensitivity Analysis of DCF WACC 6% 7% 7.65% 9% 10% 1% Growth 2% % % % EV/Tonne Based on the Saudi sector EV/tonne of USD 433mn (SAR 1586mn/tonne), value of Yanbu Cement Company stand at SAR 78.7/Share. Price Target We have assigned 60% weight to our DCF valuation, 40% to our EV/tonne valuation. Based on the above assumption our price target for the company is SAR 73.7, we initiate our coverage on Yanbu cement with a Neutral stance. Sensitivity Analysis of Price target WACC 6% 7% 7.65% 9% 10% 1% Growth 2% % % %

3 Company Overview: YCC with introduction of the 5th production line showed a jump of 34% YoY in its dispatches. The company further expanded its capacity by another 3 mtpa (10,000tpd) by commissioning the fifth line on April 2012 bringing its total capacity to 7 mtpa. YCC is considered the fourth largest player in the market and showed a marked improvement in its market share to11.7% in Q from 11.3% in 2012 and 9.5% in Chronology of YCC Capacity Expansion Years Chronology of Capacity Expansions Initiated production when commissioned two of its long dry process kilns of 1500 tpd clinker each Increased capacity by adding the third long dry process Kiln with a capacity of 1000 tpd clinker Clinker Capacity (TPD) Clinker Capacity (MTPA) Clinker capacity expanded by another 7000 tpd (4 th line) YCC has further expanded its clinkering capacity by another 0.5 Million tons (4 th line) YCC has pursued its (Line 5) expansion project with a capacity of 10,000 tons per day clinker ,000 3 Source: Yanbu cement website Yanbu Cement located near the golden triangle of Jeddah, Makkah and Madina Yanbu Cement Company is located in the eastern region, where heavy demand is excerpted from the Makkah region, Madina region and the city of Jeddah. Along with that the heavy investment in industrial cities of Yanbu and Rabigh will keep cement demand strong. Key projects like the King Abdullah economic city, expansion of Haram and Kingdom Tower are the hallmarks of region. Given its proximity of such demand centre, the company s transport cost are low Strategic Location Al Jowf Al Hudud ash Shamaliah Tabuk Hail Al Qasim Al Madinah YANBU Rabigh King Abdullah Economic city king Abdulaziz Economic Airport Kingdom Tower Makkah Al Bahah Ar Riyad Ash Sharqiyah Asir Najran USD 80 bn Expantion in yanbu USD 80 bn cost of king Abdullah economic city USD 7.2 bn Expantion of king Abdulaziz Airport USD 3.9 bn cost of kingdom tower Jizan Source:d-maps.com,Aljazira Research 3

4 Yanbu Cement Company (YCC) May 2013 Capacity Improvement to drive Dispatches growth: YCC with introduction of the 5th production line showed a jump of 34% YoY in its dispatches. The company reached 85% in 2012 of the full capacity, and we estimate Yanbu Company to achieve full capacity utilization at the end of According to the annual report, the company plans to maintain its share in Western region by adding a sixth line and rehabilitating the old lines to become more productive and economically efficient in fuel consumption. Capacity Utilization % % % % % % % % % Capacity-in KTPD (LHS) E 2014 E Dispatches- in KTPD (RHS) 2015 E 2016 E Capacity Utilization Source: Yanbu Cement Company, Yamamah Cement Company Inventory build-up to support growth for YCC: Despite of a rise in Yanbu Cement dispatches, the Company recorded the largest clinker inventory levels of 0.653mn on March-2013 showing jumps of 321% Y/Y and 8% Q/Q. We expect that the higher inventories and spare capacity levels will translate into higher growth for Yanbu cement as it will serve as a cushion against any unexpected increase in demand to strengthen its position in the sector and improve its market share in the western region. Inventory Levels 70% % % % % 20% % 300 0% % % May 2012 June 2012 Jul 2012 Aug 2012 Cement Dispatches (000 tons) Sept 2012 Oct 2012 Nov 2012 Dec 2012 Jan 2013 Feb 2013 Clinker Inventories (000 tons) Mar % % Inventories Growth Source: Yanbu Cement Company, Yamamah Cement Company Revenues to remain strong In 2012, Yanbu Cement was able to achieve 32.2% revenue growth.this revenue growth was supported by a robust increase in production after commissioning the fifth line during Q2-2012, which constituted around 32% of the overall sales. We estimate capacity utilization for Yanbu Company to reach 101% in 2013 from 85% in The company s expected revenue for the years is expected to stabilize with slight growth due to expected above 100% capacity stabilization. Hence, we expect Yanbu Company to post a CAGR of 7.16% until 2016, driven mainly by robust demand in the local market and capacity additions. YCC has been able to maintain net margin around 47-48% during 2011 and We expect YCC to post on average net margins of 48% over the period of our forecast. Net Margin % 50% % % 47% % % 0 44% Net Profit-LHS E 2014 E Revenues-LHS 2015 E 2016 E Net Margins-RHS Source: Yanbu Cement Company, Yamamah Cement Company

5 Strong cash flows ensures smooth debt repayment: At the end of 2012, the company s gross debt stood at around SAR1.05 bn, of which around 74% belongs to commercial banks to be repaid over a period of 4 to 5 years. Around SAR278 mn is contributed by SIDF, which has been calculated with a long-term repayment period of 20 years. We think the cash generated over the next four years will be adequate enough to repay the debt and easily deal with any future expansion Debt to Equity 5,000 50% 4,000 40% In mn 3,000 2,000 30% 20% 1,000 10% % Debt Equity Cash D/E* Source: Company Reports, AlJazira Research Dividend payments: Dividend per share increased from SAR 2/share in 2011 to SAR 5/share in 2012, depicting a dividend yield of 6.3% The company raised its capital by 50% by issuing bonus shares.the company s dividend payout ratio has improved to 22% in 2011 to around 28% in 2012,which we believe will improve to 30% for 2013, depicting a DPS of SAR 4.1/share. With a healthy growth expectation, along with strong cash flows, we expect the company will maintain its payout ratios. 5

6 SWOT Analysis INTERNAL Strengths YCC is expanding heavily leading to an increase in market share and production capacity. YCC has the advantage of its location in the western region, where demand is booming because of the many construction and infrastructure projects. Higher inventories and spare capacity levels will translate into higher growth for YCC as it will serve as a cushion against any unanticipated increase in demand. Weaknesses The price cap of SAR 240/tonnes, is restricting the Saudi cement companies revenue growth. Company s exposure to non-scheduled maintenance operations may lead to impact on the company s profits. POSITIVE Opportunities The increasing demand for cement in the Western region has come as an opportunity for YCC as the company bears highest production capacity in the Western region. The company plans to maintain its share in the region by adding a sixth line and rehabilitating the old lines to become more productive and economically efficient in fuel consumption. The recent decree to pump 10 million tons of cement and increase the production capacity of the market by additional 12 million tonnes, will contribute to help YCC to achieve their expansion in terms of both additional licenses and fuel. Threats Cement prices have remained more constant over the last three years on account of tight government control over prices. Going forward, cement prices are expected to have a negative impact on the companies if Aramco pulled its fuel subsidy. NEGATIVE EXTERNAL 6

7 Company Financials Income Statement (SAR, 000) E2013 E2014 E2015 E2016 Sales 1,132,267 1,496,499 1,767,500 1,846,688 1,918,445 1,973,511 % Growth In sales 26.4% 32.2% 18.1% 4.5% 3.9% 2.9% Cost of Sales (576,760) (704,453) (813,050) (862,155) (895,656) (921,365) Gross Income 555, , , ,533 1,022,789 1,052,146 Sales and Marketing Expenses (10,986) (10,125) (12,285) (12,932) (13,307) (13,680) General and Admin Expenses (20,216) (24,426) (27,020) (28,809) (28,912) (30,079) Income from Operations 524, , , , ,570 1,008,388 % Growth in operating profits 19.5% 44.5% 20.8% 3.0% 4.0% 2.8% Financing Expenses (299) (11,854) (9,665) (6,624) (3,638) (3,560) Other Income -Net 29,851 4,516 8,265 7,322 6,701 7,429 Income before Zakat and Minority Interest 553, , , , ,634 1,012,258 Zakat (19,194) (24,450) (29,782) (30,752) (32,060) (32,993) Income before Minority Interests 534, , , , , ,265 Minority Interests share of net loss of consilodated subsidiary (5,385) (5,223) (6,864) (7,659) (8,445) (8,284) Net Income for the Period 529, , , , , ,980 % Growth In net income 23.0% 36.1% 21.7% 3.2% 4.2% 2.95% EPS Balance sheet In mn SAR Cash and Cash Equivalent 558, , , , , ,185 Inventories 304, , , , , ,826 Total Current Assets 1,055,134 1,299,877 1,596,763 1,439,211 1,381,662 1,160,897 Property,Plant & Equipment 3,504,199 3,396,737 3,451,268 3,624,009 3,684,020 3,874,123 Total Non-current Assets 3,504,199 3,412,166 3,464,548 3,635,140 3,693,002 3,880,956 Total Assets 4,559,333 4,712,043 5,061,311 5,074,351 5,074,664 5,041,852 Total Current Liabilities 589, , , , , ,390 Total Non-Current Liabilities 1,095, , , , , ,560 Total Liabilities 1,684,654 1,378,758 1,378,125 1,133, , ,949 Total Shareholders Equity 2,846,159 3,301,942 3,651,843 3,909,022 4,156,521 4,377,560 Minority Interests 28, , , , , , Total Equity 2,874,679 3,333,284 3,683,186 3,940,365 4,187,864 4,408,903 Total Liabilities and Equity 4,559,333 4,712,043 5,061,311 5,074,351 5,074,664 5,041,852 Cash Flow in mn SAR Cash Flow from Operating Activities 577, , ,471 1,072,507 1,134, ,882 Cash Flow from Investing Activities (338,414) (79,566) (242,021) (369,880) (263,951) (406,427) Cash Flow from Financing Activities (801) (506,409) (515,386) (892,502) (943,219) (993,105) Changes in Cash 238, , ,064 (189,875) (72,808) (416,650) Cash Opening Balance 320, , , , , ,834 Cash Ending Balance 558, , , , , ,184 Source: Company reports, Aljazira Research 7

8 Company Ratios Ratios Liquidity Ratio Current Ratio(x) Quick Ratio (x) Efficency Ratios Receivables Days Turnover Inventory Days Turnover Payables Days Turnover Cash Cycle Asset Turnover Profitability ROE 18.4% 21.6% 23.8% 23.0% 22.5% 22.0% ROA 11.6% 15.3% 17.3% 17.8% 18.6% 19.3% ROIC 12.7% 16.4% 18.5% 19.1% 19.9% 20.6% Gross Margins 49% 53% 54% 53% 53% 53% EBITDA Margins 57% 63% 62% 61% 61% 62% EBIT Margins 46% 51% 52% 51% 51% 51% Net Margins 47% 48% 50% 49% 49% 49% Leverage Ratios Debt/Equity 44.60% 31.76% 28.75% 20.44% 13.18% 6.88% Debt/Capital 28.12% 22.47% 20.92% 15.87% 10.88% 6.01% Debt/Assets 28.12% 22.47% 20.92% 15.87% 10.88% 6.01% Times Interest Earned (TIE) 1, Valuations Dividend Yeild 3.6% 6.1% 6.2% 6.6% 7.1% 6.9% Book Valuer Per Share (BVPS) Market Capitalization(in SAR Bn) Enterprise value (in SAR Bn) PE (x) PB (x) EV/EBITDA (x) Source: Company reports, Aljazira Research 8

9 RESEARCH DIVISION AGM - Head of Research Abdullah Alawi a.alawi@aljaziracapital.com.sa Senior Analyst Talha Nazar t.nazar@aljaziracapital.com.sa Senior Analyst Syed Taimure Akhtar s.akhtar@aljaziracapital.com.sa Analyst Saleh Al-Quati s.alquati@aljaziracapital.com.sa Analyst Jassim Al-Jubran j.aljabran@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General Manager - Brokerage Division Ala a Al-Yousef a.yousef@aljaziracapital.com.sa Sales And Investment Centers Central Region Manger Sultan Ibrahim AL-Mutawa s.almutawa@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa lalmutawa@aljaziracapital.com.sa Area Manager - Qassim & Eastern Province Abdullah Al-Rahit aalrahit@aljaziracapital.com.sa Regional Manager - West and South Regions Abdullah Al-Misbahi a.almisbahi@aljaziracapital.com.sa RESEARCH DIVISION 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 value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. RATING TERMINOLOGY 1. 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. 2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. 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