Company Recommendation Overweight Fair Value (SAR) 03.27 Price as of April 19, 2016 16.13 Expected Return 60.2% Company Data 3030.SE Tadawul Symbol 102.50 52 Week High (SAR) 47.00 52 Week Low (SAR) -4.4% YTD Change 136 3-Month Average Volume (Thousand Shares) 9,428 Market Cap. (SAR Million) 2,514 Market Cap. (USD Million) 153 Outstanding Shares (Million Shares) 153 Major Shareholders ( > 5% ) General Organization for Social Insurance 8.98% Khalid Abdulrahman Saleh Al Rajhi 8.0 Public Pension Agency 5.62% 110 100 90 80 70 60 50 52-week Stock Price Movement Tadawul Index Quarterly Net Income (SAR mn) Source: Tadawul Q1 2016 Company (SCC) announced its Q1 2016 interim results revealing a bottom line of SAR 265 million compared to SAR 303 million in Q1 2015 slumping 12.5% YoY and surging 50% QoQ outstripping our estimate of SAR 255 million. The company attributed the YoY decrease in net income to lower sales and rising energy prices while the QoQ increase was driven by mounting sales and shrinking selling and administration expenses as well as impairment charges for kilns 5 and 4 in Q4 2015. Gross profit plunged 12.7% YoY in Q1 2016 posting SAR 296 million compared to SAR 339 million in Q1 2015. Operating income hit SAR 274 million in Q1 2016 tumbling 11.6% YoY. The company's cement production contracted by 2.0% in Q1 2016 recording 2.10 million tons (mt) versus 2.15 mt in Q1 2015. On the other side, total dispatches posted 2.09 mt shrinking 4.6% compared to 2.19 mt in Q1 2015. Regarding the local cement market, cement production in Q1 2016 hit 17.04 million tons versus 16.53 mt in Q1 2015 surging 3.0%. Furthermore, total dispatches escalated 2.9% to 17.04 mt from 16.56 mt in Q1 2015. Clinker stock plateaued at 21.15 mt in March 2015 leaping 3.2% YoY. Net earnings in Q1 2016 surpassed our estimate of SAR 255 million. The company s bottom line decrease was driven by shrinking demand. We forecast the slowdown in cement sales to continue in 2016 triggered by reduction of government spending. However, lifting the ban on cement exports is expected to strengthen the company s sales as it is located closer to the eastern borders of Saudi Arabia thus trimming accumulated clinker inventory in the upcoming years. Our valuation is maintained at SAR 72.30 assigning an Overweight recommendation. 400 300 200 100 0 FY - Ending December 3762A 3761E 3760F 3762F EV/EBITDA 7.70 8.43 8.21 8.01 EV/Sales 4.72 5.04 4.91 4.79 Turki Fadaak Research & Advisory Manager TFadaak@albilad-capital.com Saeed I. Alghamdi Financial Analyst sialghamdi@albilad-capital.com Source: Company Filings, Albilad Capital Research Estimates P/E 10.03 10.16 9.89 9.59 Dividend Yield 9.7% 9.7% 9.7% 10.5% P/BV 2.90 2.89 2.86 2.87 P/Revenue 4.88 5.25 5.12 4.98 Revenue Growth (4.6%) (7.1%) 2.5% 2.9% Source: Company Filings, Albilad Capital Research Estimates 1
20 April, 2016 Sector Overview Three companies are expected to increase their capacities through their new production lines in 2016 with total capacity of 16,000 tons per day. The cement sector s sales continued to improve in Q1 2016 compared to Q1 2015. However, Continuous clinker buildup implies a high level of demand saturation as the sector awaits cement exports ban lift in which may reduce the clinker buildups. Dependency on local demand, rising production costs, and government expenditure cuts, these factors may limit the local demand on cement starting from 2016 onwards. Cement Dispatches Breakdown - Q1 2016 Southern 1 Saudi 12% Yanbu 11% Yamamah 10% Arabian 9% Qassim 7% Najran 6% Riyadh 6% City 5% Eastern 5% Northern 4% Safwa Jouf Hail Tabuk 2% Local Dispatches and Export of Cement Local Dispatches (Million Tons) Export (Million Tons) Cement Company s Expansions 1.7 2.3 3.5 2.8 1.2 1.5 1.5 0.6 0.4 0.6 0.7 Company Project Daily Capacity (Tons) Commencing Date Remarks 24.4 24.7 26.8 29.9 36.7 41.3 47.0 52.7 55.2 56.6 60.7 SPCC New Line 20777 Q2 2016 Tabuk Cement New Line 20777 N/A UACC New Plant 10777 Q2 2016 Arab Cement New Line 670777 H2 2017 Bisha Plant (Experimental production delayed) Experimental production commenced, commercial production delayed) Experimental production commenced without production and delayed commercial production) 80% 60% 40% 20% Growth Comparison Clinker Inventory Growth Cement Dispatches Growth Cement Production Growth YSCC New Line 670777 TBA 0% QACCO New Line 20277 TBA -20% EPCCO New Line 670777 TBA -40% -60% TBA: To be announced Clinker Inventory to Cement Dispatches (Thousand Tons) Cliker Inventory Cement Dispatches Clinker Inventory to Cement Dispatches 25,000 22,500 20,000 17,500 15,000 12,500 10,000 7,500 5,000 2,500 0 800% 700% 600% 500% 400% 300% 200% 100% 2
Cement and Clinker Summary by the End of Q1 2016 Company (thousand ton) Q1 2015 Q1 2016 Growth Q1 2015 Q1 2016 Sector Production Cement 610217 600777 Clinker 620000 620022 % 7.3 Sector Dispatches Cement 610217 600777 Clinker 367 Sector Inventory Cement 211 200 % 6.2 Clinker 370270 360627 Cement Production / Company Yamama Cement 60277 60172 % 2.6 30672 30677 % 3.6- % 62.7 % 63.2 Eastern Cement 222 223 % 3.0- % 7.2 Qassim Cement 60603 60317 % 0.2 % 0.6 % 0.7 Yanbu Cement 60237 60221 % 7.7- % 66.1 % 67.2 Arabian Cement 60236 60717 % 7.7- % 2.1 Southern Cement 30260 30270 % 7.7- % 67.7 % 62.2 Tabuk Cement 271 201 % 3.6 % 3.3 Riyadh Cement 222 60723 % 37.2 % 1.6 Najran Cement 60322 60772 % 62.2- % 0.2 % 1.6 City Cement 112 276 % 22.2 % 7.7 Northern Cement 200 072 % 36.2 % 7.6 Jouf Cement 720 727 Safwa Cement 222 222 % 7.2 Hail Cement 772 722 % 66.2 % 3.0 Cement Dispatches / Company Yamama Cement 60727 60122 % 67.2 30621 30722 % 7.1- % 62.3 % 63.3 Eastern Cement 227 222 % 6.2- % 7.2 Qassim Cement 60677 60313 % 67.2 % 1.2 % 0.7 Yanbu Cement 60272 60227 - % 66.2 % 67.2 Arabian Cement 60237 60702 - Southern Cement 30262 30327 % 6.1- % 67.7 % 62.7 Tabuk Cement 223 777 % 3.6 % 3.7 Riyadh Cement 276 60772 % 37.7 % 2.6 Najran Cement 60372 60732 % 60.7- % 0.2 % 1.7 City Cement 106 262 % 21.6 % 7.6 Northern Cement 221 061 % 37.6 % 2.1 % 7.3 Aljouf Cement 772 270 % 62.6 % 3.0 Safwa Cement 273 222 Hail Cement 771 772 % 67.0 % 3.7 % 3.1 3
Income Statement (SAR mn) 2014A 2015A 2016E 2017F 2018F Sales 2,024.6 1,932.4 1,794.6 1,840.0 1,893.4 COGS 590.3 577.1 622.8 638.6 657.1 SG&A 105.6 172.4 98.7 101.2 104.1 EBITDA 1,328.7 1,182.9 1,073.1 1,100.2 1,132.2 EBITDA Margin 65.6% 61.2% 59.8% 59.8% 59.8% Depreciation and amortization 205.2 219.3 116.8 119.7 123.2 EBIT 1,123.4 963.6 956.3 980.5 1,009.0 Net interest income (15.2) (12.1) (12.1) (12.1) (12.1) Others 2.8 12.8 7.6 9.4 9.9 Pre-Tax and Zakat Income 1,111.0 964.4 951.9 977.9 1,006.9 Tax and Zakat 36.9 24.2 24.2 24.2 24.2 Net Income 1,074.1 940.2 927.6 953.6 982.7 ROS 53.1% 48.7% 51.7% 51.8% 51.9% Balance Sheet (SAR mn) 2014A 2015A 2016E 2017F 2018F Cash and marketable securities 298.3 383.0 327.8 339.5 307.0 Accounts Receivables 216.7 226.9 210.7 216.1 222.3 Inventory 668.5 754.9 701.1 718.8 739.7 Others 63.4 51.4 51.4 51.4 51.4 Total ST Assets 1,246.9 1,416.2 1,291.0 1,325.8 1,320.4 Net Fixed Assets 3,109.4 2,876.4 2,878.0 2,879.6 2,881.2 Projects Under Implementation 64.1 138.1 138.1 138.1 138.1 Others 86.9 82.8 82.8 82.8 82.8 Total LT Assets 3,260.4 3,097.4 3,098.9 3,100.5 3,102.2 Total Assets 4,507.3 4,513.6 4,390.0 4,426.3 4,422.6 Short term debt and CPLTD 135.0 150.0 30.0 30.0 30.0 Accounts Payable 51.9 90.8 84.3 86.5 89.0 Accrued Expenses 110.6 120.4 113.6 112.2 117.7 Others 809.1 805.2 805.2 805.2 805.2 Total ST Liabilities 1,106.6 1,166.5 1,033.2 1,033.9 1,042.0 Total Long Term Debt 150.0 0.0 0.0 0.0 0.0 Other Non-Current Liabilities 91.4 91.3 91.3 91.3 91.3 Equity 3,159.3 3,255.8 3,265.5 3,301.1 3,289.3 Total Liabilities and Equity 4,507.3 4,513.6 4,390.0 4,426.3 4,422.6 Presentation of financial statements may differ from the company s presentation. However, there is no impact on the final results. 4
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