Santhosh Balakrishnan Santhosh.balakrishnan@riyadcapital.com +966-11-203-6809 Ahmed Al Fozan ahmed.al-fozan@riyadcapital.com +966-11-203-6814
April 1, 2015 Infrastructure Spending to Moderate; Neutral View The start of 2015 witnessed slight repercussions on the broader TASI index following two salary bonus. This had a direct impact on Saudi equities more positively, but wiped nearly 10% in the recent sell-off and TASI reaching 8,779 after peaking to 9,691 during 1Q2015. After a lull phase of oil price volatility over 4Q2014, these factors guided the direction of equity markets during 1Q2015 and an after-effect of the same were felt on TASI Building Material and Construction Index (TBMCI), though not hampered much with 1Q2015 returns of 6.3% versus TASI at 5.3%. KSA has been epicenter of construction boom in entire MENA region since 2005 with its construction sector carrying large significance, denoted by its 10% contribution to GDP. Hence, KSA government expects much of the economic diversification to be achieved through its spending on infrastructure projects. The same is reflected in its growth of 10% Y/Y in contract awards to SAR 221 billion in 2014. However, the prominence could gloom over the short term due to ongoing oil price volatility as oil reacts to the declining global demand. The major cause of concern is the large downward spread in oil price, an average of US$ 55/bbl (Brent) during 1Q2015 versus fiscal breakeven of US$ 81/bbl for 2015 which adds to a mounting deficit, but KSA has enough reserves to tackle such deficit. We expect KSA might take a pause in spending and evident with its decline in awards in 4Q2014 amid its shift in spending mix mainly focusing on social and much necessitated projects. Hence expect, lower spending on projects which adds less value to country s diversification and job creation. Our outlook is neutral on the sector for 2015 until we see sustainability in oil prices but recent reforms such as land tax bill and labour supply agreements are a boost over the medium to long term. The land tax bill could boost new real estate developments aimed to make housing affordable for citizen. These are likely to create demand for building materials over the medium to long term benefitting companies under our coverage. Additionally, KSA plans to enter agreements with South Asian countries for supply of cheap labour nearing 2 million foreign workers over the next 3-4 years should ease labour issues for contractors despite ongoing labour crackdown. Hence concerns are expected to be short-lived for KSA construction sector. We revise our target prices but continue to recommend a Buy on Saudi Ceramics Company (SCC) and Bawan Company (Bawan), while we recommend a Sell on United Wire Factories (Aslak) and Saudi Arabian Amiantit Co (Amiantit) and a Hold for National Company for Glass Industries (Zoujaj). We maintained our recommendation except for Zoujaj and Aslak; wherein we downgrade Zoujaj to Hold and Aslak to Sell. Table 1: Recommendation and Target Price Summary Company TASI Code Rating New New Recommendation CMP 12-Month Target price Upside to Target price Old Recommendation Rating (Old) 12-Month Target price Old Vs New TP Saudi Ceramiics Company 2040 Buy 103.30 140.00 36% Buy 151.00-7% Baw an Company 1302 Buy 49.07 71.00 45% Buy 73.00-3% United Wire Factories Company 1301 Sell 32.92 32.00-3% Hold 39.00-18% National Company for Glass 2150 Hold 39.04 42.00 8% Buy 42.00 0% Saudi Arabian Amiantit Company 2160 Sell 12.52 12.50 0% Sell 12.50 0% Source: Bloomberg and Riyad Capital 1
Investment Outlook Saudi Ceramics Company (SCC):Realization under stress We maintain our Buy recommendation as widening scope for improvement in KSA s housing market is expected, especially in Riyadh. Additionally, the government s stance on its spending program amid its reforms through land tax and labor supply continues to support our outlook for 2015, albeit on a gradual note. With SCC targeting for volume driven growth conceding its realization, we revise our revenue estimates accordingly. Despite such adjustments, we believe SCC to continue its timely expansion of its tile capacity to 68 million m 2 by 2017 though delay in Red bricks segment is expected; hence project 4% revenue CAGR through 2017. EBITDA growth of 5% CAGR is driven by higher operating leverage but leads to thin expansion of +30 bps in margins to reach 28% by 2017. Net income growth of 6% CAGR is expected and reach SAR 375 million by 2017. With such downward revision in estimates, we revise our target price to SAR 140 from earlier SAR 151. SCC trades at 2015E P/E of 11.7x versus MENA peers at 13.4x denoting an attractive valuation, recommend Buy. Table 2: Saudi Ceramics-Key Estimates Summary (Fig in SAR Mln except mentioned) Revenue 1,601 1,621 1,701 1,788 1,851 Operating 481 389 516 500 529 EBITDA 469 441 465 492 510 Investing (372) (261) (318) (353) (391) Net Profit 309 310 332 355 375 Financing (125) (100) (154) (152) (150) EPS 8.23 8.27 8.85 9.47 10.00 Ratios' DPS 3.00 2.00 3.50 4.00 4.00 ROAA 11.0% 10.6% 10.7% 10.8% 10.5% Balance Sheet ROAE 20.3% 19.2% 18.0% 16.8% 15.7% Currrent Assets 922 1,032 973 997 1,045 Margins Non Current Assets 1,883 1,986 2,208 2,421 2,653 EBITDA Margins 29.3% 27.2% 27.3% 27.5% 27.6% Total Assets 2,806 3,017 3,181 3,418 3,697 Net Margins 19.3% 19.1% 19.5% 19.9% 20.3% Current Liabilities 803 663 760 756 751 Valuation Non Current Liabilities 482 638 441 422 404 P / E 12.5x 12.5x 11.7x 10.9x 10.3x Shareholders Equity 1,521 1,716 1,980 2,241 2,542 P / B 2.5x 2.3x 2.0x 1.7x 1.5x Total Liabilities & SE 2,806 3,017 3,181 3,418 3,697 EV/EBITDA 10.0x 10.6x 10.1x 9.5x 9.2x Bawan Company (Bawan): Volume growth to slowdown Bawan s metals segment has been vulnerable to softening steel prices affecting realization, while a downturn in oil prices led to lower spending from oil producers, thus weakened demand is expected for industrial packaging, affecting woods segment. However, we expect some relief from electrical segment due to government spending plans in the electricity sector to the tune of SAR 20 billion. Hence, we lower our revenue outlook for 2015-17 and revise our projections to 6% CAGR to SAR 3.2 billion by 2017. The moderation in commodity prices has given some comfort on costs but margins remain under pressure on competition, a case witnessed in 4Q14 results. Table 3: Bawan-Key Estimates Summary (Fig in SAR Mln except mentioned) Revenue 2,448 2,791 2,861 3,071 3,211 Operating 98 188 300 265 272 EBITDA 276 269 260 274 290 Investing (94) (118) (114) (92) (100) Net Profit 168 177 180 193 209 Financing 8 (62) (155) (179) (221) EPS 3.36 3.54 3.61 3.85 4.17 Ratios' DPS 2.20 2.00 2.50 2.50 3.00 ROAA 8.9% 8.9% 8.6% 8.8% 9.2% Balance Sheet ROAE 21.8% 23.2% 21.7% 20.6% 20.7% Currrent Assets 1,262 1,404 1,308 1,381 1,447 Margins Non Current Assets 615 683 813 853 877 EBITDA Margins 11.3% 9.6% 9.1% 8.9% 9.0% Total Assets 1,877 2,087 2,121 2,234 2,324 Net Margins 6.9% 6.3% 6.3% 6.3% 6.5% Current Liabilities 981 1,130 1,096 1,147 1,167 Valuation Non Current Liabilities 128 133 121 117 114 P / E 14.6x 13.9x 13.6x 12.7x 11.8x Shareholders Equity 769 760 904 970 1,043 P / B 1.0x 0.9x 0.9x 0.8x 0.8x Total Liabilities & SE 1,877 2,087 2,121 2,234 2,324 EV/EBITDA 11.5x 11.8x 12.3x 11.6x 11.0x 2
We expect EBITDA growth of 6% CAGR through 2017 and margins to be flat at 9%. Net income of SAR 209 million is expected by 2017, growth of 8% CAGR. Such revised assumptions take target price to SAR 71, but continue to recommend Buy due to large valuation upside. 2015E P/E of 13.6x versus Aslak P/E of 16.6x and TASI P/E of 15.4x is cheaper to index and peers, hence justified; recommend Buy. United Wire Factories Company (Aslak)-Topline pressured as demand weakens Large exposure to steel and iron ore commodities, where prices have fallen significantly since 1H14 resulted in bleak expectations on volume growth and realization. Hence subdued revenue growth of 2% CAGR is expected and reach SAR 972 million by 2017. Realization continues to be under pressure as selling prices fall on weakening global demand. 2014 was a tough year for Aslak and expect 2015 to be challenging, hence cut our topline estimates. Demand is likely to flow sporadically as contractor destock inventories due to price volatility, though project flows boost demand but not realization. EBITDA and net margins are expected to decline over the next three years and average 11% and 9% by 2017. EPS set to grow at 2% CAGR through 2017 from earlier 5%. We downgrade to Sell and cut our 12-month target price to SAR 32 on its bearish outlook and expensive valuation at 2015E P/E of 16.6x versus Bawan P/E at 13.6x is unjustified. Table 4: Aslak-Key Estimates Summary (Fig in SAR Mln except mentioned) Revenue 1,001 952 935 952 972 Operatign 124 126 122 125 135 EBITDA 138 111 108 105 110 Investing (31) (50) (34) (35) (30) Net Profit 110 90 87 89 91 Financing (49) (55) (107) (107) (117) EPS 2.50 2.05 1.98 2.03 2.07 Ratios' DPS 2.22 0.50 1.00 1.50 1.75 ROAA 21.2% 16.5% 15.8% 16.9% 17.1% Balance Sheet ROAE 23.4% 17.9% 18.1% 18.3% 18.9% Currrent Assets 386 413 364 348 339 Margins Non Current Assets 131 164 160 180 197 EBITDA Margins 13.8% 11.7% 11.6% 11.0% 11.3% Total Assets 517 576 524 529 536 Net Margins 11.0% 9.5% 9.3% 9.3% 9.4% Current Liabilities 41 68 38 37 49 Valuation Non Current Liabilities 6 5 7 7 7 P / E 13.2x 16.1x 16.6x 16.2x 15.9x Shareholders Equity 470 503 479 485 480 P / B 3.1x 2.9x 3.0x 3.0x 0.0x Total Liabilities & SE 517 576 524 529 536 EV/EBITDA 9.6x 11.9x 12.2x 12.6x 12.0x National Company for Glass Industries (Zoujaj):Downgrade to Hold We downgrade our recommendation to Hold from Buy on valuation concerns but fundamentally remain strong. With KSA being a strong consumer driven story, bottling segment is expected to gather pace in demand especially for beverages containers, hence maintain revenue outlook for 2015-17 at a CAGR of 6%. Table 5: Zoujaj-Key Estimates Summary (Fig in SAR Mln except mentioned) Revenue 102 100 109 115 123 Operatign 43 51 79 76 84 EBITDA 36 32 34 37 41 Investing 5 (35) (15) (15) (15) Net Profit 45 62 63 66 70 Financing (40) 46 (48) (52) (54) EPS 1.50 2.07 2.09 2.18 2.34 Ratios' DPS 1.25 1.70 1.35 1.40 1.55 ROAA 7.0% 8.9% 8.0% 8.1% 8.3% Balance Sheet ROAE 7.6% 10.0% 9.1% 9.1% 9.3% Currrent Assets 117 173 180 192 207 Margins Non Current Assets 523 587 620 633 652 EBITDA Margins 35.1% 32.0% 31.3% 32.1% 33.3% Total Assets 640 760 801 825 860 Net Margins 44.1% 62.0% 57.6% 56.8% 57.0% Current Liabilities 38 46 36 37 39 Valuation Non Current Liabilities 11 97 76 69 65 P / E 26.1x 18.9x 18.7x 17.9x 16.7x Shareholders Equity 591 617 689 719 755 P / B 2.0x 1.9x 1.7x 1.6x 1.6x Total Liabilities & SE 640 760 801 825 860 EV/EBITDA 32.0x 35.8x 33.7x 30.9x 27.9x 3
We believe the new capacity is expected to place Zoujaj on an advantageous position and cater to the spurring demand for consumer bottling in KSA. While we expect associates in the float glass to perform better owing to surge in demand from UAE and KSA contractors as large projects are nearing completion. We raise our EPS estimates following strong 4Q14 results with Zoujaj expected to register a CAGR of 6% through 2017. Hence, maintain our target price at SAR 42 as scope for any upward revision is limited, and revise to Hold on valuation concerns. The stock has outperformed the index since our Buy rating but current valuation premiumis unjustified with a P/E of 18.7x for 2015E and believe the positives are already priced-in leaving little room for further upside. Saudi Arabian Amiantit Company (Amiantit): Revenue scale back to continue KSA governments spending on utilities projects could trigger a new wave of demand but expected to benefit Amiantit partially due to rising local competition. Further, a delay in deconsolidation initiatives from overseas subsidiaries may hamper revenue growth; hence moderate our revenue outlook for 2015-17. With strong competition, we expect Amiantit to register a muted 1% CAGR in revenue through 2017. Net margins are expected to improve as Amiantit starts focusing on high margin contracts and expect margins of 10% for 2015-17, which remains healthy. Overall EPS growth of 6% is expected after having a dismal performance in 2014, with earnings dropping by 26% Y/Y. Such lull performance resulted in lack of any dividend payments for 2014 adding to the concern, hence maintain our Sell rating and 12-month target price of SAR 12.50. Amiantit is currently trading at 2015E P/E of 16.8x, which remains expensive versus TASI P/E of 15.4x. Table 6: Amiantit-Key Estimates Summary (Fig in SAR Mln except mentioned) Revenue 3,130 2,726 2,697 2,724 2,751 Operatign 341 58 171 221 287 EBITDA 296 276 259 261 282 Investing (139) (115) (108) (82) (83) Net Profit 113 83 92 93 102 Financing (180) (13) (90) (157) (149) EPS 0.97 0.72 0.79 0.80 0.89 Ratios' DPS 1.00 NA 0.70 0.60 0.60 ROAA 2.4% 1.9% 2.1% 2.2% 2.4% Balance Sheet ROAE 6.6% 5.0% 5.4% 5.4% 5.8% Currrent Assets 3,525 3,421 3,344 3,307 3,277 Margins Non Current Assets 887 990 981 953 954 EBITDA Margins 9.5% 10.1% 9.6% 9.6% 10.2% Total Assets 4,412 4,411 4,326 4,261 4,232 Net Margins 3.6% 3.0% 3.4% 3.4% 3.7% Current Liabilities 2,496 2,735 2,438 2,316 2,220 Valuation Non Current Liabilities 212 157 196 190 224 P / E 13.8x 18.2x 16.8x 16.6x 15.0x Shareholders Equity 1,703 1,519 1,692 1,755 1,788 P / B 0.9x 0.9x 0.9x 0.9x 0.9x Total Liabilities & SE 4,412 4,411 4,326 4,261 4,232 EV/EBITDA 8.8x 10.7x 11.6x 11.3x 10.9x 1Q15 Preview We expect Zoujaj and Amiantit to witness a stable quarter with Y/Y earnings growth of 9% and 13% respectively, while Aslak is expected to witness a decline of 25% on cost and realization pressure. We expect SCC and Bawan to have a moderate performance with flat EPS growth for 1Q2015E. Table 7: 1Q15E Estimates Revenue EBITDA Net Income EPS 1Q14A 1Q15E Y/Y 1Q14A 1Q15E Y/Y 1Q14A 1Q15E Y/Y 1Q14A 1Q15E Y/Y Saudi Ceramiics Company 424 442 4% 128 121-6% 87 86-1% 2.32 2.30-1% Baw an Company 773 744-4% 72 68-6% 47 47 0% 0.94 0.94 0% United Wire Factories Company 280 243-13% 35 28-20% 30 23-25% 0.68 0.51-25% National Company for Glass 30 28-6% 10 9-12% 15 16 9% 0.50 0.54 9% Saudi Arabian Amiantit Company 698 701 0% 64 67 5% 21 24 13% 0.18 0.21 13% Source: Company Reports and Riyad Capital 4
Earnings in 4Q2014 stood at SAR 158 million compared to SAR 267 million in 4Q2013 (-30% Q/Q and -41% Y/Y) after a depressing performance from Arabian Pipes, SIDC and Saudi Cables which reported losses. We believe 1Q2015 for the sector is positive as budget announcement has brought large positive stride to the economy as well as to the construction market. However project execution may be gradual hence do not expect immediate upsurge in contracts flows. We expect combined 1Q2015 topline and earnings to decline by 2% for the companies under our coverage. Over the year, the combined earnings of TBMCI declined by 14% to reach SAR 957 million in 2014 compared to SAR 1,108 million in 2013. Conclusion In our view, the Saudi building materials stocks have not participated in the market recovery and trailed TASI recovery from its lows of 8,057. The sector trades at TTM median P/E of 15.7x, which is lower to TASI P/E of 17.8x. We believe this opportunity should be capitalized as large valuation gaps still persist. As suggested in our last Preview note, we believe the sector is prone to witness some gloom over the short term but continues to be a long term story as KSA remains the largest construction market in MENA and GCC. Our preferred list includes SCC, Bawan and Zoujaj, while we maintain our bearish view on Amiantit and Aslak. Our positive stance on the sector continues and expect 2015 to display a reasonable performance. Table 8: TASI Building Materials Sector Stocks Trailing Multiples Company NMme Price Mcap SAR Mln EV SAR Mln P/E P/B P/S EV/ Sales EV/ EBITDA Div. Yld YTD 52 Wk- Hi 52 Wk- Lo Saudi Arabian Amiantit Co 12.52 1,446 3,314 16.9x 1.0x 0.5x 1.2x 12.2x NA (4%) 20.50 11.10 115.5 Red Sea Housing Services Co 41.40 2,381 2,579 15.2x 2.5x 2.2x 2.1x 8.3x 2.5 10% 67.25 29.30 60.0 Abdullah A.M. Al-Khodari Sons 30.50 1,556 2,755 15.4x 1.8x 0.9x 1.6x 10.5x 1.7 (4%) 77.75 27.20 53.1 Saudi Steel Pipe Co 29.18 1,445 1,789 45.5x 1.8x 1.7x 1.8x 20.1x 1.8 18% 41.30 21.15 51.0 Baw an Co 49.07 2,454 3,184 13.9x 3.2x 0.9x 1.1x 11.6x 1.0 3% 85.00 40.10 50.0 National Gypsum 28.30 857 798 41.4x 1.8x 10.3x 8.2x 18.0x 2.2 16% 44.00 19.60 31.7 United Wire Factories Co 32.92 1,444 1,320 16.0x 2.9x 1.5x 1.5x 12.4x 3.0 (4%) 57.25 29.50 43.9 Arabian Pipes Co 20.10 788 984 NA 1.2x 2.0x 2.5x NA NA 2% 34.80 16.20 40.0 Saudi Ceramic Co 103.30 3,874 4,682 12.5x 2.3x 2.4x 2.9x 10.8x 1.9 (2%) 154.75 88.00 37.5 SIDC 19.25 741 587 102.9x 1.8x 2.3x 1.4x 19.5x NA 26% 24.95 12.30 40.0 Middle East Specialized Cables 15.15 930 1,535 NA 1.9x 1.1x 2.2x 41.2x NA (29%) 26.90 13.75 60.0 Zamil Industrial Investment Co 61.50 3,488 5,968 13.4x 2.0x 0.6x 1.0x 9.5x 3.4 24% 70.00 39.80 60.0 Saudi Cable Co 10.10 768 1,963 NA 1.8x 0.5x 1.1x NA NA 9% 15.15 8.15 76.0 Sector Median* 22,171 31,458 15.7x 1.8x 1.5x 1.6x 12.2x 2.1 Source: Bloomberg, Market Cap and EV are total Shares O/S 5
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 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)