March 25, 2015 Momentum Maybe Faltering After depicting signs of improvement at the tail end of 2014, sales have started to soften in 2015. Overall, demand was weak throughout 2014. +2% Y/Y rise in local despatches in the year was only made possible by a relatively strong last quarter. Construction activity had started to accelerate in 4Q2014 but has been constrained recently particularly due to the fresh crackdown on illegal workers in the country. Many projects depend on low cost workers for completion. A positive in the ongoing quarter has been a gradual depletion in clinker inventory levels. We are heartened by the fact that monthly industry dispatches continue to remain above 5 million tons for the past few months. As expected, there has been no major impact of the steep decline in oil prices on the sector. We reiterate our view that the only tangible effect on the cement sector will occur if infrastructure and other construction activity decline on the back of reduction in government spending. A persistent low oil price spanning many years may eventually cause some project delays. However, short term outlook appears to be stable. Table 1: Saudi Producers Capacity and Production Yamamah 6,300 473 507 480 573 550 369 Saudi 11,000 766 733 652 697 770 709 Eastern 3,500 280 269 287 326 297 142 Qassim 3,700 370 389 371 309 284 281 Yanbu 6,200 623 642 615 569 547 502 Arab 3,700 531 516 483 319 289 319 Southern 8,900 767 769 719 670 574 515 Tabuk 1,500 144 121 100 118 107 43 Riyadh 5,200 292 304 251 282 203 211 Najran 4,800 381 410 392 229 105 436 City 1,700 185 219 216 147 161 139 Northern 2,000 182 190 178 261 265 199 Jouf 1,700 122 160 138 147 143 130 Al Safwa 1,000 203 191 174 165 154 141 Hail 1,700 139 122 131 168 173 152 Total 62,900 5,458 5,544 5,187 4,980 4,621 4,288 Capacity (KMT) Production (KMT) After touching a peak of 21.5 million tons in December, clinker inventory levels are down to 20.9 million by February-end as the industry reduced production and sold from available inventory. production is up +11% Y/Y in January and +8% Y/Y in February. However, we observe that the overall industry reduced production from 5.5 million in January to 5.2 million tons in February and sold from its vast reserve of inventory, a wise choice. While mega projects are going ahead at the planned pace, smaller ones may be affected by labor issues in the short term. Muhammad Faisal Potrik muhammed.faisal@riyadcapital.com +966-11-203-6807 Khalid Abdullah Almadhyan Khalid.a.Almadhyan@riyadcapital.com +966-11-203-5013 Riyad Capital is licensed by the Saudi Arabia 1 Capital Markets Authority (No. 07070-37)
Table 2: Inv entory Balance ( 000 tons) Inventory Yamamah 82 88 94 2,793 2,884 2,818 Saudi 190 189 145 3,240 3,332 3,431 Eastern 29 28 40 1,000 1,039 913 Qassim 75 99 102 922 880 850 Yanbu 89 96 102 2,948 2,936 2,902 Arab 41 46 42 436 466 418 Southern 71 88 76 1,936 1,826 1,655 Tabuk 41 33 8 532 542 505 Riyadh 22 59 47 1,614 1,539 1,520 Najran 58 70 64 2,902 2,624 2,695 City 41 40 44 564 514 444 Northern 56 53 38 1,288 1,316 1,283 Jouf 31 52 52 664 646 648 Al Safwa 20 20 36 90 78 68 Hail 31 30 32 621 680 712 Total 877 991 922 21,550 21,301 20,861 Saudi currently has the highest clinker inventory at 3.4 million tons followed by Yanbu at 2.9 million tons. sales are up +12% and +10% Y/Y respectively in January and February but have been witnessing a sequential decline. There have been by and large no clinker imports since June 2014 barring Arab, which is importing small quantities since November 2014. Table 3: Saudi Companies Volumes and Imports (000 tons) Yamamah 482 501 474 - - - Saudi 749 692 649 - - - Eastern 273 259 265 - - - Qassim 389 365 368 - - - Yanbu 623 636 609 - - - Arab 538 512 487 78 61 62 Southern 769 750 731 - - - Tabuk 133 130 125 - - - Riyadh 310 258 256 - - - Najran 401 399 398 - - - City 199 220 212 - - - Northern 181 193 193 - - - Jouf 135 138 138 - - - Al Safwa 208 191 158 - - - Hail 141 124 129 - - - Total 5,531 5,368 5,192 78 61 62 Local Sales Imported 2
On volumes, Southern continues to be the biggest cement and clinker producer followed by Saudi. We expect Southern to sell 740k tons in March, Saudi 640k tons and Yanbu 605k tons. We forecast Y/Y growth in sales for 1Q2015 to range between - 4% and +8% for our coverage universe. Exhibit 1 illustrates the monthly sales volumes for each of the producers under our coverage. Exhibit 1: Jan to Mar 2015 Sales (000 tons) 800 700 600 500 400 300 200 100 0 Yamama Saudi Qassim Southern Yanbu Jan-15 Feb-15 Mar 15 E, Riyad Capital We expect a marginal +1% Y/Y rise in revenues for our coverage universe. Although industry demand has been higher Y/Y in the preceding two months, the trend is downward. A repeat of labor shortage on account of a renewed labor crackdown cannot be ruled out. We expect Southern to lead with a +8% Y/Y increase in revenues and a corresponding +15% rise in net income. Southern has consistently outperformed its peers in the last few quarters taking advantage of its location and has started trial operations of its third line at Tihama. Saudi may be negatively affected as revenues decline -3% Y/Y and bottomline decreases -8%. Yanbu is also expected to do well with a +2% rise in sales and +6% growth in net income. Table 4: 1Q2015 Estimates (SAR mln, except per share data) 1Q2014 1Q2015E Y/Y Chg 1Q2014 1Q2015E Y/Y Chg 1Q2014 1Q2015E Y/Y Chg 1Q2014 1Q2015E Yamama 367 356-3% 169 176 4% 175 178 2% 0.86 0.88 Yanbu 440 450 2% 213 224 5% 205 218 6% 1.30 1.38 Qassim 273 281 3% 162 167 3% 159 160 1% 1.77 1.78 Southern 495 535 8% 225 260 16% 221 255 15% 1.58 1.82 Saudi 535 519-3% 304 281-8% 286 264-8% 1.87 1.73 Group Total 2,110 2,141 1% 1,073 1,108 3% 1,046 1,075 3% Source: Riyad Capital, Reports Revenues EBIT Net Income EPS Overall, we expect the average margins for our cement coverage universe to expand Y/Y in 1Q2015. We expect gross margin to improve by 2% to 56% as EBIT and net margins rise 1% each for our covered stocks. Within our group, Qassim is forecasted to post the highest gross margin of 62%. We expect the lowest net margin from Southern and Yanbu at 48%. 3
Table 5: 1Q2015 Margin Estimates Gross EBIT Net 1Q2014 1Q2015E 1Q2014 1Q2015E 1Q2014 1Q2015E Yamama 49% 53% 46% 49% 48% 50% Yanbu 51% 52% 48% 50% 47% 48% Qassim 62% 62% 59% 59% 58% 57% Southern 48% 51% 46% 49% 45% 48% Saudi 61% 60% 57% 54% 53% 51% Group Average 54% 56% 51% 52% 50% 51% Source: Riyad Capital, Reports Table 6: Ratings and Valuation (SAR mln) We expect demand to improve in 2015 over last year but again highlight labor shortage as a possible concern for construction projects. On the positive side, legal influx of qualified labor has picked up pace. Presence of adequate inventory can satisfy any spikes in demand during the year. We have heard rumors in the market regarding a possible permission by the government to allow cement exports. We believe producers in the East and North may benefit the most if exports commence. For now, we maintain our target prices and recommendations for all companies under coverage. With the exception of Qassim, all the other four coverage companies remain on our Buy list. Yamama trades at the lowest 2015 forward PE at 11.9x while Qassim is the highest at 14.3x. Our universe trades at a 2015E PE of 12.7x and PBV of 3.6x. 2015E Price to Book multiple places Yamama and Yanbu at an attractive 2.3x and 3.0x respectively. TASI Current Market Target Dividend Code Price Cap Price Rating Yield 2014 2015E 2014 2015E Yamama 3020 45.90 9,295 66.00 Buy 6.5% 13.9x 11.9x 2.4x 2.3x Saudi 3030 91.75 14,038 136.00 Buy 7.6% 13.1x 12.0x 4.2x 4.1x Qassim 3040 91.50 8,235 104.00 Hold 6.6% 14.6x 14.3x 4.1x 4.0x Southern 3050 98.50 13,790 120.00 Buy 6.1% 13.2x 12.5x 4.7x 4.5x Yanbu 3060 69.50 10,946 83.00 Buy 5.8% 13.7x 13.0x 3.1x 3.0x Group Average 13.7x 12.7x 3.7x 3.6x Source: Riyad Capital P / E P/B 4
Stock Rating Strong Buy Buy Hold Sell Not Rated 25% 15% < 15% Overvalued Under Review/ Restricted Head Office Riyad Capital P.O. Box 21116 Riyadh 11475 Saudi Arabia Phone 800 124 0010 Website www.riyadcapital.com Email research@riyadcapital.com 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 Markets Authority (No. 07070-37)