Buy 12-Month Target Price SAR 65 130 120 110 100 December 14, 2015 90 80 70 60 Expected Total Return Price as on Dec-13, 2015 SAR 43.40 Upside to Target Price 49.8% Expected Dividend Yield 10,% Expected Total Return,100% Market Data 52 Week H/L SAR 42.70/72.25 Market Capitalization Shares Outstanding SAR 2,837 mln 157.5 mln Free Float 75.5% 12-Month ADTV (000 s) 156.3 TASI Weight 0.44% Reuters Code Bloomberg Symbol 1-Year Price Performance D J F M A M J J A S O N YCC TASI TCEM Source: Bloomberg 3060.SE YNCCO AB Yanbu TASI TCEM Dec-13, 2015 34.30 2,72, 4,688 Total Change 6-months (4,02%) (,20,%) (400,%) 1-Year (2909%) (,104%) (4109%) 2-Year (,203%) (9103%) (4401%) F2015E SAR mln Revenue 1,506 Gross Profit 820 Operating Income 776 Net Income 752 EPS (SAR) 4.78 Limited Growth due to Pricing Pressure We update our estimates and our outlook for (YCC) for 2015-2019 due to transfer of coverage. We cut earlier estimates slightly on the anticipation of an unhealthy competitive environment between producers as inventories and pricing pressure mounts. We believe that demand is more correlated to conservative government spending plan. As a result we expect lower realization and a decline in growth rate for YCC with realization decreasing by-7.5% Y/Y for 2015. Revenues for 2015-17E are expected to grow at a CAGR of 2.4% to touch SAR 1.58 billion in 2017, while earnings are expected to grow at 2% CAGR during the same period. With such cut in estimates valuations appear to be attractive with 2016E P/E of 5.9x which is lower than the sector s P/E of 3..1x and cheaper versus TASI P/E of 33.3x. We base our valuation on Discounted Cash Flow (DCF) and derive a target price of SAR 65, which suggests an upside of 95.8%. Maintain Buy. Advantageous location YCC is strategically located in the western region, Yanbu City. Its proximity to demand centers in Jeddah, Makkah and Madinah projects gives it an advantage over other competitors. Despite the competition from regional counterparts, Yanbu maintained market share in the sector at 11.6%. Accumulated inventory increased +9% YTD, medium term concern We also believe that once construction spending gains pace, it will lead to lower pressure on inventories. As per the latest monthly statistics, YCC inventory has reached 3.3 million tons which is 5..8% of the company s production capacity. Our estimates show that between 2015-2.37, YCC s inventory is expected to deplete at a CAGR of -6.5%. Moreover, the likelihood of lifting the ban on export is a key catalyst to tackle issues with inventory balances and gain growth on realization. Price pressure squeezing margins Pressure on YCC top line is expected to have an impact over gross margin and operating margins. We expect operating margin to stand at 93.9% in 2019 compared to 92.3% in 2014. EBITDA margins are expected at 12.3% compared to 19.8% during the same period. On the other hand, net profit margins are expected at 9.% compared to 93.9% in 2014. Attractive valuation and good yields After using two methods, the DCF and EV/EBITDA, we arrived at our target price at SAR 19.00. Our estimates indicate that a stable dividend yield of 9.2% with a payout ratio of 84 % and DPS of SAR 4.00 for 2015E, to be attractive compared to competitors. We maintain Buy. Key Financials FY December 31 (SARmln) 2014A 2015E 2016E 2017E Revenue 95,,1 9,506 9,384 9,578 EBITDA 950,, 146 887 139 Net Profit 80, 752 720 776 EPS (SAR),001 3.78 3.57 3.93 DPS (SAR) 4.00 4.00 4.00 4.00 BVPS (SAR),,02,,4047,4.91,3.81 ROAA 9801% 18.0% 17.4% 18.3% ROAE,,0,% 20.4% 19.1% 19.9% P / E 8.5x 1.1x 1.5x 8.8x P / B 901x 9.8x 9.8x 9.7x EV/ EBITDA 2.8x 7.2x 7.4x 6.9x EV/ Sales 3.5x 3.5x 3.4x 3.1x Khalid Abdullah Almadhyan Khalid.a.Almadhyan@riyadcapital.com +966-11-203-6813 Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
We transfer coverage of YCC with a Buy rating and target price of SAR 19.00 from SAR 78.00 earlier. This report highlights the performance of the cement sector as well as our outlook for and our estimate of the company's expected results for the fourth quarter of this year. Sector Outlook With nearly 16 cement companies operating in the cement space and a combined annual production capacity of 62.2 million tons, Saudi cement sector is the largest one in GCC. Saudi cement producers are geographically dispersed across different provinces and categorically take advantage of its proximity to client location for ease of delivery and compressing cash costs. With a majority of them listed in the Saudi stock market (Tadawul), the sector offers wider array of choices to investors in bottom-up selection. We take a closer look at how the cement sector has shaped over the last few years and include our outlook for 2016-17. Looking at the key trends that drive growth, we observed that the increase in cement demand is correlated to the growing infrastructure projects planned in the country. This is unpretentiously backed by the government s keen interests to develop infrastructure in the country which started over a decade ago. Saudi Arabia saw its economy expanding through its planned infrastructure spending since 2... s. However, the start of the oil slide from 3Q2014 has put some doubts on its pace as the Kingdom is expected to slow its large scale infrastructure spending plans. With oil prices retreating over the last 4-5 quarters reaching under US$40/bbl (Brent) and large upside not seen over the short term, concerns emerge on its spending plans affecting the construction sector; which otherwise had joyous ride with the construction boom. In light of such bleak expectations cement sector is poised to witness lower growth rate altering demand-supply scenario for 2016-17. Growth trajectory to be limited With such implications and keeping in view such long term consistent demand for cement in the country, producers expanded production capacities since 2007. As a result, the sector recorded growth of 11% during 2009-12. However, the Nitaqat program put a halt to such growth as scarcity in labor on construction sector has resulted in number of projects being stalled and resulted in a large drop in demand. Despite such issues, demand picked up as labor situation improved. The sector recorded volume growth rate of 6% selling 56.6 million tons from 53.5 million tons in 2013. We believe growth rates over the last two years should have been better, had the projects not been stalled. Table 1: Sector's Production And Sales Volumes (mln ton) 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Number of companies 13 13 13 13 14 15 15 15 15 Production 37.8 43.0 48.4 52.3 55.7 57.2 59.5 60.7 61.6 Growth 14% 13% 8% 6% 3% 4% 2% 1% Sales 36.7 41.3 47.0 51.8 53.5 56.6 58.5 59.7 61.0 Growth 13% 14% 10% 3% 6% 3% 2% 2% However, the government s move to a lower spending cycle has led to a fall in cement demand since start of the year with growth expected to be at +3% for 2015E to 58.5 million tons. From our forecast in Table3, we believe that sector s sales will face slight sluggishness, though +2% growth is achievable in 2016E recording 59.7 million tons. However, a rebound is achievable over 2016 and 2017 recording 59.7 and 61 million tons respectively. December 14, 2015 2
Consistent growth in production Such voluminous growth in the past has resulted in cement production reporting stellar growth during 2008-12. However recent stats proved that Saudi Arabia recorded reasonable growth during 2014. The key reason for limited upside in production is the inability to run its new capacity with subsidized fuel, while lowering demand has added to concerns affecting utilization rates and increasing cash costs. In light of such an oversupply situation, we expect modest growth rates in production with +4% Y/Y for 2015E to reach 60 million tons and a CAGR of 2% for 2015-17E which could be even higher once new capacities rolls out with Aramco allocating cheap fuel. Inventory balances mounting With large inventories of 23.5 million tons currently, Saudi cement sector is witnessing challenges with pricing pressure. The labor crisis in 2013 resulted in high inventory pressure following weaker cement demand thus creating a supply demand imbalance in the sector. As a result, clinker inventory reached 21.5 million tons, an increase of +46% compared to the inventory level in 2013 at 14.7 million tons. However in 2009-2012, cement companies continued to deplete their inventory balances at rates ranging between 7%-25%. Table 2: Sector Inventory level (mln ton) Our estimates for the sector s inventory in 2.39E show a growth of +9% Y/Y to reach 23.5 million tons. In 2016 and 2017, we expect cement companies to start depleting their inventory by -5% and -8% Y/Y to arrive to 22.4 million tons and 20.5 million tons respectively. We are optimistic on government revoking the cement export ban providing some relief while positive impact of additional construction resulting from the implementation of fees on white lands should also aid growth in sector. Yanbu positioned advantageously 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Number of companies 13 13 13 13 14 15 15 15 15 Inventory 10.9 10.0 7.5 6.4 14.7 21.6 23.5 22.5 20.5 Growth -7% -25% -15% 131% 46% 9% -5% -8% Overall YCC is positioned reasonably well while comparing the performance of cement companies. Yanbu s sales currently accounts for 11.4% of the sector enabling it to occupy the fourth place among sector companies listed on the Saudi stock market (Tadawul). However, the second highest inventory in the sector though negative over the mediumterm, revoking export ban helps to fasten the process of exports due to its proximity to MENA markets and its accessibility to ports. December 14, 2015 3
Company Outlook We revised our estimates following the weak realization which dropped -7% Y/Y. As per table 3, revised revenue is expected to decline by an average of -0.5% for 2015-17E. EPS estimates also revised down by -3% in 2015E. Table 3:Changes in Estimates (SAR Mln) Old Estimates New Estimates New vs Old Consensus 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E Revenue 1,581 1,626 1,660 1,506 1,483 1,578-5% -9% -5% 1,581 1,586 1,516 Y/Y 1.4% 2.8% 2.1% -3% -1% 6% 1.4% 0.3% -4% Gross Profit 859 884 902 820 801 860-5% -9% -5% 858 850 787 Y/Y 1% 3% 2% -4% -2% 7% 1% -1% -7% EBITDA 1,013 1,040 1,052 936 887 939-8% -15% -11% 1,040 999 802 Y/Y -1.2% 2.7% 1.2% -9% -5.2% 6% 1% -4% -20% Net Income 780 803 819 752 720 776-4% -10% -5% 787 786 702 Y/Y -2.7% 2.9% 2.0% -6% -4% 8% 5% -0.1% -10.6% EPS 4.95 5.10 5.20 4.78 4.57 4.93-3% -10% -5% 5.02 4.83 4.43 Source: Bloomberg Estimates and Riyad Capital Revenue growth to slowdown Slower growth in revenue is expected as lower realization continues to put pressure across producers and not indifferent with Yanbu. With large price discounts and onsite delivery costs, net realization could take a toll, hence adjust our earlier revenue estimates to 2.4% CAGR for 2015-17. Sales volumes are expected to touch 6.7 million tons by 2017E and grow by +2.3% over the next two years. A notable decline of -7% in realization during 9M2015 continues to be medium term concern signifying the added pressure on topline coupled with marginal growth in volumes. Exhibit 1: Company's Sales (SAR bln) with Growth (%) 1.7 1.6 1.6 1.5 1.5 1.4 2012 2013 2014 2015E 2016E 2017E 40% 30% 20% 10% 0% -10% Exhibit 2: Company's Sales Volumes (mln ton) with Average Realization (SAR) 6.8 260 6.6 250 6.4 6.2 240 6.0 230 5.8 5.6 220 5.4 210 2012 2013 2014 2015E 2016E 2017E Sales Growth Sales Volumes Average Realization Cash costs are expected to elevate In 2015-2017, we believe margin pressure is imminent as falling pricing power could add up cash costs with gross profit margin expected to average 54.3%. However, some stability is expected post 2016 as cost of sales is stable while the large pressure on realization has effected net profit margins since the start of this year. We believe net profit is expected to decline owing to the overall cost pressure, hence tweak our earlier estimates for 2015-17. Exhibit 3: Gross Profit (SAR mln) and Margins (%) Exhibit 4: Net Profit (SAR mln) and Margins (%) 54.8% 54.6% 54.4% 54.2% 54.0% 53.8% 53.6% 2013 2014 2015E 2016E 2017E 900 880 860 840 820 800 780 760 740 52.0% 51.0% 50.0% 49.0% 48.0% 47.0% 2013 2014 2015E 2016E 2017E 840 820 800 780 760 740 720 700 680 660 Gross Profit (RHS) Gross Profit Margins (LHS) Net Profit (RHS) Net Profit Margins (LHS) December 14, 2015 4
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15E Jan-15 Feb-15 Mar-15 Apr-15 May-05 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 15-Nov Dec-15E Following such revisions, margins are expected to decline by 220 bps for 2015-17 and take earnings to SAR 776 million by 2017E at a CAGR of 2%. We expect Yanbu s earnings to recover from 2017E as there will be pullback in demand and recovery in realization. Decline in earnings but good payout We estimate YCC s payout ratio for 2.39-17E at an average of 83% as it portrayed consistency in delivering dividends. DPS of SAR 4.00 is expected for 2015E and expect stability in the coming years. Yanbu has delivered superior performance in adding value to shareholders with ROE of 23.6% higher than the sector average of 19.8%. Return on assets of 18.7% is better compared to the sector average of 15.2%. With an attractive capital structure and lower debt profile, YCC is expected to continue with sustainable growth in free cash flows and help in better growth versus peers. Exhibit 5: DPS (SAR) and Payout Ratio (%) Exhibit 6: EPS (SAR) and Growth (%) 86% 5.4 14.0% 4.0 84% 5.2 3.9 82% 5 80% 3.7% 3.8 4.8 4.0 4.0 78% 3.7 4.6 76% -2.3% -4.6% 3.6 4.0 4.0 74% 4.4-5.9% 3.5 72% 4.2 2013 2014 2015E 2016E 2017E 2013 2014 2015E 2016E 2017E DPS Dividend Payout EPS Growth 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 4Q2015 Preview We believe Yanbu is expected to show some improvement unlike the last quarter as impact of Ramadan and Haj holidays has resulted in lower earnings growth in 3Q2015, a seasonality trend widely acceptable in cement sector. We expect to see an improvement in 4Q2015 with sales volumes of 1.4 million tons (+4% Q/Q). However for 4Q2015, we expect net income of SAR 155 million for 4Q2015E and revenues of SAR 319 million. Table 4: 4Q2015 Forecasts (SAR mln) 4Q2015E 4Q2014 Y/Y 3Q2015 Q/Q Sales 319 378-15.6% 311 2.7% Cost of sales (147) (168) -12.6% (149) -1.5% Gross Profit 172 210-18.1% 162 6.6% Total Operating Income 163 199-18.2% 151 7.9% Net Income 155 193-19.9% 145 7.1% EPS (SAR) 0.98 1.23-20.3% 0.92 6.5% A retake on 3Q2015 performance suggests revenues showed a decline of 29% owing to lower sales volumes of 1.19 million tons, down by -28% Q/Q. Exhibit 7: Sales Volumes Quarterly and Growth 2.3 2.0 1.8 1.5 1.3 1.0 0.8 0.5 0.3 0.0 40% 20% 0% -20% -40% Exhibit 8: Sales Volumes Monthly and Growth 800 100% 600 50% 400 0% 200-50% 0-100% Sales volumes (mln ton) Growth % Sales volumes (000 ton) Growth % December 14, 2015 5
Valuation In this report, we tested two valuation methods being DCF and EV/EBITDA multiple to arrive at YCC s fair value. We prefer DCF valuation due to its consistent cash flows. #1 DCF fair value of SAR 07.46 We used DCF model for the period 2017-2019, assuming a terminal growth rate of 3.0% and risk free rate of 3.7%. We have derived cost of equity at 8.5%, while we assume that cost of debt of 5.0% to calculate weighted average cost of capital of 8.5%. Table 5: DCF Valuation Assumptions 2017E 2018E 2019E Risk Free Rate 3.7% Beta 0.76 FCF (SAR mln) 745 784 795 Risk Premium 6.3% LT Growth Rate 1.0% Cost of Equity 8.5% Cost of Debt 5.0% Discounted Terminal Value (SAR mln) 8,454 WACC 8.50% Fair Value Per Share 64.70 Source: Riyad Capital The key risks would be a concentrated supply from producers to the western region which could alter price and supply imbalances for producers in Western region. The capacity glut in the entire KSA cement space could further lead to large price discounts among producers affecting realization. This could have a volatile impact on our forecasts if prices continues to fall, while upside risk is inherent upon governments stance of revoking the export ban. #2 EV/EBITDA fair value of SAR 56.01. We used EV/EBITDA multiple to determine the value of the company in order to arrive to our target price. We assume current sector s EV/ EBITDA multiple of 9.7x as a target multiple for YCC. Applying it to our EBITDA of SAR 887 million, we arrive at a fair value of SAR 56.01. Table 6:EV/EBITDA Valuation 2016E EBITDA (SR mln) 887 Target EV/EBITDA multiple 9.7x EV (SR bln) 8.58 Fair Value Per Share 56.01 Source: Riyad Capital Out of these two, we prefer to pick DCF and assign a target price of SAR 19.00 for Yanbu Cement. December 14, 2015 6
Relative valuation suggests Yanbu trades cheaper to peers Yanbu though trading cheaper to sector average, can also be compared to Yamama and Southern Cement due to similar size and range by capacity. On a TTM basis, Yanbu is at least 5-10% cheaper to peers with similar capacity especially its comparison with Yamama Cement. Additionally, it offers one of the largest yields in the sector at 9.2%. Table 7: Sector Key Financials ( TTM) Issued Shares Market Market Book Company EPS (SAR) P/E (x) P/B (x) (mln) Cap (mln) Cap (%) Value Yamamah Cement 202.5 6,930 11% 3.03 11.28 18.28 1.87 Umm Al-Qura Cement 55 1,507 2% -0.32 NA 9.23 2.96 Saudi Cement 153 10,022 16% 6.76 9.69 20.13 3.25 Eastern Cement 86 2,918 5% 3.76 9.03 26.42 1.28 Qassim Cement 90 6,631 11% 6.45 11.43 20.85 3.53 Yanbu Cement 157.5 6,837 11% 5.03 8.65 22.18 1.95 Arab Cement 100 4,937 8% 5.92 8.34 30.94 1.59 Southern Cement 140 9,933 16% 7.02 10.10 20.92 3.39 Tabuk Cement 90 1,494 2% 1.08 15.30 13.14 1.26 Najran Cement 170 2,644 4% 1.57 9.94 12.21 1.27 City Cement 189.2 2,861 5% 1.22 12.41 11.46 1.31 Northern Cement 180 2,684 4% 1.26 11.81 10.82 1.37 Jouf Cement 130 1,413 2% 0.71 15.37 11.64 0.93 Hail Cement 97.9 1,392 2% 1.27 11.19 10.47 1.35 Source: Tadawul Average 3.20 11.12 17.0 2.0 Recommendation We transfer coverage on with a 12-month target price of SAR 19.00 based on DCF. With an upside of 95.8% to our target price, we recommend a Buy. We believe that YCC will face hard times in short to mid-term due to the impact of lower oil prices on Saudi budget, while the long term outlook remains stable. December 14, 2015 7
Summary Financials Table 8: Yanbu Summary Financials: Income Statement (SAR Mln) 2014 2015E 2016E 2017E Cash Flows (SAR mln) 2014 2015E 2016E 2017E Sales 1,559 1,505 1,483 1,577 Net Income 802 755 730 749 Cost of Sales (706) (686) (682) (718) Gross Profit 853 820 801 860 Depreciation 210 159 157 155 Selling and Distribution (13) (14) (22) (23) Change in working Capital (81) 65 17 (11) General and Admin (28) (30) (49) (52) Operating Cash Flow 931 979 884 899 Income from main operaions 813 776 730 784 Other income 21.9 3.1 18.5 19.0 Additions to PPE (116) (113) (119) (129) Finance exp (9) (8) (4) (2) Investing Cash Flow (116) (113) (119) (134) Income befor Zakat 825 771 744 802 Zakat (22) (18) (22) (24) Dividends Paid (551) (632) (652) (652) Non control (1.7) (0.8) (1.7) (1.7) Financing Cash Flow (836) (828) (746) (686) Net Income 802 752 720 776 Shares Outstanding (mln) 157.5 157.5 157.5 157.5 Cash at the Beginning 311 290 328 347 EPS 5.09 4.78 4.57 4.93 Cash at the end 290 328 347 406 DPS 4.00 4.00 4.00 4.00 Balance Sheet (SAR mln) 2014 2015E 2016E 2017E Ratios 2014 2015E 2016E 2017E Cash in hand & banks 290 328 347 406 Profitability Account receivables 191 186 182 187 Gross Margins 54.7% 54.5% 54.0% 54.5% Inventories 551 494 484 495 Operating Margins 52.1% 51.5% 49.2% 49.7% PPE 3,187 3,141 3,103 3,077 Net Income Margins 51.4% 50.0% 48.5% 49.2% Total Assets 4,244 4,170 4,148 4,243 ROA 18.9% 18.0% 17.4% 18.3% Accounts Payable 22 21 20 21 ROE 22.5% 20.4% 19.1% 19.9% Long loan - current portion 239 107 51 26 Liquidity long loan 168 107 51 26 Current Ratio 2.4 3.3 4.0 4.8 Prov for End of Service Indemnity 66 69 72 76 Cash Ratio 0.9 1.3 1.5 2.0 Total Liabililities 682 490 382 335 Others Authorized & fully paid capital 1,575 1,575 1,575 1,575 EBITDA Per Share 6.5 5.9 5.6 6.0 Statutory Reserve 787.5 787.5 787.5 787.5 EV/Revenues 4.5x 4.5x 4.5x 4.4x Retained Earnings 1,167 1,287 1,363 1,458 EV/EBITDA 6.9x 7.3x 7.5x 7.2x TOTAL LIABILITIES & EQUITY 4,244 4,170 4,148 4,243 Dividend Payout 79% 83% 82% 81% December 14, 2015 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 For any feedback on our reports, please contact research@riyadcapital.com Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations. Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia ( KSA ). Website: www.riyadcapital.com