Cement Sector Report December 2014 - Aljazira Capital · 3 © All rights reserved Cement Sector...

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Cement Sector Report

Sector Update | KSA | Cement

December 2014

Please read Disclaimer on the back

Analyst

Jassim Al-Jubran [email protected]+966 11 2256248

Senior Analyst

Talha Nazar [email protected]+966 11 2256115

Key valuation methodology (After adjustments)12-month price targets of all cement companies under our coverage are adjusted with our amended valuation methodology. It is worthy to note that the 12-month price targets of few stocks were adjusted recently in investment/event updates of the respective companies. The key amendments in our valuation methodology are given below;

• Downward revision in the company’s risk free rate to 2.84% (due to decrease in US 10-year bond yield to 2.14%); where, the impact of such revision on valuation is minimal due to CAPM equation.

• We used 5-years monthly beta to reduce the impact of volatility on our valuation.• We used 10-year explicit cash flows for DCF based valuation to reduce the impact of terminal value on overall

valuation.• According to a press release, the complex’s fixed cost is around SAR16.0mn per month (of which SAR5.0mn is

depreciation).

Company12-month TP

(SAR)Investment

recommendationProfitability (SAR in

mn)EPS (SAR mn) PE (x)* PBV (x)* Dividend

yield*

2014E 2015E (%) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E

Saudi 119.3 Overweight 1,100.1 1174.8 6.8% 7.19 7.68 14.2 13.3 4.81 4.66 6.9% 6.9%

Yamamah 63.2 Overweight 679.4 707.8 4.2% 3.36 3.50 15.2 14.6 2.61 2.54 5.2% 5.2%

Qassim 113.6 Overweight 575.2 592.6 3.0% 6.39 6.58 14.6 14.2 4.14 4.03 6.4% 6.4%

Southern 129.1 Overweight 1,056.9 1022.1 -3.3% 7.55 7.30 13.6 14.1 5.16 5.12 6.8% 6.8%

Yanbu 79.4 Overweight 790.9 847.9 7.2% 5.02 5.38 12.8 11.9 3.01 2.83 6.2% 6.2%

Najran 33.3 Overweight 267.4 303.7 13.6% 1.57 1.79 18.7 16.5 2.67 2.53 2.0% 3.6%

Arabian 92.8 Overweight 666.3 674.6 1.2% 6.66 6.75 12.2 12.0 2.35 2.09 4.3% 4.3%

Hail 34.3 Overweight 148.4 156.4 5.4% 1.52 1.69 14.1 12.6 2.08 2.05 5.2% 7.0%

Eastern 66.5 Overweight 355.3 311.3 -12.4% 4.13 3.62 13.6 15.5 2.07 2.06 6.2% 6.2%

Northern 26.8 Overweight 236.4 243.3 2.9% 1.31 1.35 16.5 16.0 1.86 1.97 9.3% 6.9%

City 27.0 Overweight 234.6 292.6 24.7% 1.24 1.55 18.6 14.9 2.2 2.1 5.4% 5.4%

Source: AlJazira Capital* we used closing price of 21st Dec 2014.

Updated key financials & investment recommendations

Saudi Cement Outlook in 2015: The sales of Saudi Cement sector in 2015 is expected to witness visible rise on the back of improved demand, backed by heavy infrastructure development in Saudi Arabia and lower impact of labor shortage in the market. We expect the cement consumption during Q4-2014 to stand at 14.1MT depicting an increase of 12.5%YoY. For 2015 sales are expected to register an increase by 7.1%YoY due to higher construction activity on the back of increase in infrastructure spending by the government and a strong project pipeline in Saudi Arabia. The long-term outlook for cement companies remains bullish despite short-term problems such as labor shortage and uncertainty over the availability of subsidized fuel for capacity expansion.Key highlighted points:

• In light of large infrastructure projects in the coming years, the government has taken up the labor issue seriously and working towards resolving the issue of labor shortage. Therefore, we expect to see demand improvement by the end 2014.

• We believe with the current inventory level (21 MT – Nov 2014), the sector is well set to cater the demand boom that the Kingdom is expected to see in 2015. Moreover, the recent dispatches (Jan-Nov 2014) has indicated a growth of 1.1%YoY and expected to record 56.12 MT in full year 2014 (55.26 MT in 2013).

• Saudi Cement Company announced the completion of rehabilitate of Kilns 4 and 5 in Al-Hofuf plant with a total designed capacity of 3000 tons of clinker/day, the company is reconsidering the feasibility of operating these two kilns, depending on market conditions.

• Arabian Cement Company planes to extend its capacity by adding a new production line in Rabigh, with a daily production capacity of 10,000 tons of cement, which is expected to begin operations by the end of H2-2017.

• Southern Province Cement Company (SPCC) plans to add a second production line in Bisha factory and it’s expected to commence commercial production in Oct-2015. The 3rd production line in addition to SPCC’s capacity in Tihama and Bisha project is likely to raise production capacity to 33,000 tpd of clinker.

• Qassim Cement showed an improvement in operational efficiency due to decline in the average cost of production from SAR 97.5pt in 2013 to SAR 94.8pt in 2014.

• Najran Cement continued to make significant improvement in sales and capacity utilization, recording higher than expectation growth at 24.9%YoY (11M-2014).




December 2014


Saudi cement sector – Short-term challenges but bullish outlookSaudi Arabia’s cement sector slowed in 2014 due to labor shortage as the government intensified the deportation of 2mn illegal expatriate laborers. However, to overcome labor shortage the government intends to allow legal foreign workers. We believe that the long-term outlook for the cement sector remains bullish. The cement players across KSA have access to cheaper raw materials, resulting in global competitive advantage. Moreover, with the introduction of the mortgage law, the housing sector is expected to expand, which would increase the demand for cement. Furthermore, increased tourism activities across Makkah and Medinah are expected to result in the construction of hotels and other hospitality’s segments

Cement sales showing signs of recovery

Saudi Arabia’s cement industry witnessed steady growth in consumption over the last five years. Cement consumption in terms of volume1 increased from 38.4MT in 2009 to 55.7MT in 2013, recording a CAGR of 9.7% from 2008–13 and the sales value increased at a CAGR of 10.3% to SAR 12.2bn in 20132 . The robust growth was propelled by a rise in construction activity in the Kingdom. However, cumulative sales for the first nine months of 2014 declined 3.6% YoY due to low demand. This trend changed in August and September when sales grew 48% and 13%, respectively, driven by increased government investment and demand pickup.

The residential segment, which accounts for ~ 54%3 of cement consumption, is expected to benefit from government initiatives that will help meet the housing shortage; 1 mn housing units by 2020 and 3 mn by 2040.3 Furthermore, increase in infrastructure spending by the government (80% growth in 2014) and a strong project pipeline in KSA supports the demand for cement. Moreover, of the USD 156.3bn projects (across all sectors) awarded in 2013, projects in Saudi Arabia alone constituted for USD 66bn.4

Figure 1: Total cement and clinker sales volume and sales value

Source: Yamama Cement, Aljazira Capital

1 Production and consumption data is the aggregate of Yamama Cement, Saudi Cement, Eastern Cement, Qassim Cement, Yanbu Cement, Arabian Cement, Southern Cement, Tabuk Cement, Riyadh Cement, Najran Cement, City Cement, Northern Cement, AlJouf Cement, and Hail Cem

2 Sales value data is for Yamama Cement, Saudi Cement, Eastern Cement, Qassim Cement, Yanbu Cement, Arabian Cement, Southern Cement, Tabuk Cement, Um Al-Qura Cement, Najran Cement, City Cement, AlJouf Cement, and Hail Cem

3 Um_Al-Qura Cement Co prospectus (2014)

4 MEED’s GCC Construction Projects Market 2015 report




December 2014


Increased government projects to boost cement demandDemand for cement in Saudi Arabia is strongly correlated with activity in the real estate industry (residential building construction accounts for 54% of total cement demand), with demand pickup picking up after delay of a year or two since the project announcements. Through the Ninth Development Plan (2010-2014), the government increased expenditure on construction activity to USD 385bn. However, owing to deceleration in economic growth in 2012 and 2013, construction activity in the region was weak, with total projects awarded decreasing to USD 17bn in 2012 and USD 40bn in 2013 from ~ USD 70bn in 2011. The effect trickled down to the cement sector as well, with the sales volume falling 3.6% YoY in the first nine months of 2014. However, we expect recovery of the Building & Construction sector, lead by the expansion in projects by the Ministry of Housing and the allocation of housing units.

Saudi Arabia’s projects (either ongoing or planned), which amount to USD 1.1tn, consist of those in the residential sector (30%), followed by the healthcare (20%) and education sector (10%). The Saudi budget for 2014 has also scheduled expenses worth SAR 855bn, rising 4.3% YoY from SAR 820bn in 2013. The transport sector, particularly aviation and rail, constitute a large proportion of the high-value construction contracts awarded over the last three years. The Kingdom is anticipated to award further contracts in the construction sector, with construction projects worth USD 195.4bn scheduled over the next three years. 2015 budget is also expected to be expansionary.

A few of the major ongoing government development projects are:

Project Cost (USD bn) Completion date

0.5mn new houses 67 NA

King Abdullah Financial Center 7.8 NA

Communications and Information Technology Complex 1.3 2015

Economic cities:

King Abdullah Economic City 86 2029

Jazan Economic City 27 2037

Abdulaziz Bin Musa'ed Economic City 8 2022

Economic Knowledge City 8 2020

King Abdulaziz New International Airport 8.2 2035

Riyadh metro Project 22.5 2018

Source: Zawya, www.saudi.gov.sa, Aljazira Research

1 Um AL-Qura prospectus (2014)

With infrastructure investments growing at a rapid pace, cement manufacturers are expanding capacity in line with rising demand. Consequently, total cement capacity in the Kingdom rose to 47mn tons in 2013 from 31mn tons in 2008. Moreover, cement demand is forecast to increase at a CAGR of 4% during the next five years.5

Saudi Arabia’s Nitaqat program, aimed at increasing the number of Saudi nationals employed in a company, can affect the construction industry and cement production. Around 5.3mn foreign workers resigned from their services until September 2013 after the government announced the labor laws. According to Jeddah Chamber of Commerce and Industry, in December 2013, Saudi projects worth over USD 26bn were stalled owing to labor shortage. Furthermore, 0.01mn of the 0.25mn contracts were cancelled in 2013 due to the companies’ inability to fulfill contractual obligations. The construction sector relies on foreign labor for low-skilled jobs, which they have been unable to backfill from domestic workforce supply. Resultantly, construction activity declined, which, in turn, lowered cement sales. However, cement companies with strong margins are better positioned in this situation and improved results are expected over the next few quarters.




December 2014


Figure 2: Spending sector-wise (Apr 2014)

Figure 4: Inventory Levels (cement + clinker)

Figure 3: Contracts awarded (USD bn)

Figure 5: Number of days of inventory

Source: MEED Projects

Source: Yamama Cements, Aljazira Capital

Source: Big 5 Saudi

Source: Yamama Cements, Aljazira Capital

Rapid growth in construction activityAccording to MEED, the value of projects planned or currently underway in KSA was USD 1.1tn at the end of April 2014. These projects primarily include the construction of real estate properties as well as development of hospitality and leisure properties. The developers aim to benefit from a favorable demographic profile (47% of Saudis are below the age of 25; 45% are 25-54 years) and high per capita income (~USD25,000 at end-2013). About 29% of current construction in KSA is focused on commercial properties and infrastructure upgrade (e.g., development of transport system in Makkah and King Abdulaziz International Airport). Moreover, the cement sector is likely to benefit from the shortage of housing units, as nearly 0.5mn new housing units are in the pipeline. Some of the major projects under construction include Riyadh Metro line, Abraj Kudai in Makkah, Phase 6 of Rabigh Power Plant Extension, and rehabilitation centers for prisoners.

To achieve higher non-oil economic growth, the Kingdom is witnessing a surge in the number of construction contracts being awarded. Construction projects worth USD 75.6bn (SAR 272.2bn) are expected to be awarded in 2014, representing an annual growth of 80%. Moreover, projects worth USD 195bn are expected to be awarded between 2015 and 2017. We expect construction activities to grow at a higher pace until 2020 due to several projects in the pipeline.

Surge in inventories Total inventories (cement + clinker) at the end of October almost doubled to an all-time high of 22.2mn tons as against 12.1mn tons a year ago. Moreover, 1.9mn tons of clinker were imported from January to October 2014 (imports were only carried out in the first three quarters), following King Abdullah’s 2013 mandate to companies to import 10mn tons of cement cumulatively to plug the supply gap in the region. In 2013, cement supply was not sufficient to cater the cement demand in the Kingdom. To avoid the projects to get delayed, King Abdullah mandated companies to import cement. Massive imports have impacted the margins of the companies as imported cement is costlier than domestically produced cement. However, the project execution and cement demand dropped in 2014. Therefore, lower demand in 2014, coupled with high imports, has led to an increase in inventory levels for the year. The average number of days of stock rose to 188 days as at the end of October 2014 from 133 days last year.6 Najran Cement Co had 412 days of inventory in its stock as of October 2014, followed by Riyadh Cement Co. with 227 days’ stock. However, imports have been on a decline since 2Q2014 as the firms have largely fulfilled the import mandate of importing 10mn tons of cement cumulatively. We believe that, going forward, inventory levels would decrease with decline in imports and higher demand.

6 Inventory data is the average of Yamama Cem, Saudi Cem, Eastern Cem, Qassim Cem, Yanbu Cem, Arabian Cem, Southern Cem, Tabuk Cem, Riyadh Cem, Najran Cem, Northern Cem, AlJouf Cem, and Hail Cem

17.0

42.0

75.6

2012 2013 2014(e)

USD

bn

-

5,000

10,000

15,000

20,000

25,000

2007 2008 2009 2010 2011 2012 2013 YTD

Cement (THD of tons) Clinker (THD of tons)

- 50.0

100.0 150.0 200.0 250.0 300.0 350.0 400.0 450.0

Naj

ran

Riya

dh

Aljo

uf

Nor

ther

n

Yanb

u

Saud

i

Yam

ama

Tabu

k

Hai

l

East

ern

Sout

hern

Qas

sim

Arab

ian




December 2014


Cement prices – Regulated by governmentIncreased cement demand and hoarding practices led to a higher-than-anticipated rise in cement prices across Saudi Arabia in 2012. As a result, the government imposed a price ceiling of SAR 240 per ton (down from SAR 250 per ton earlier) in March 2012. Moreover, cement exports are banned, except to selected countries such as Bahrain. However, traders continued their practice of artificially creating shortages, leading to higher prices throughout 2013. Acute labor shortage in 2014 disrupted cement production, thereby resulting in lower sales. However, cement manufacturing companies took advantage of this shortage, leading to inflated prices.

Among listed players, Yanbu Cement and Qassim Cement sell cement for SAR 250 per ton. At the end of 9M 2014, the average cement prices in the Kingdom stood at SAR 246 per ton.

Cement cost – range-bound and beneficialCement companies across KSA benefit from subsidized fuel provided by Aramco and easy availability of raw materials such as limestone, providing global competitive edge. The average production cost (primarily raw materials) was SAR 118 per ton, with an average of SAR 116 per ton over the last five years. At the end of 9M 2014, the production cost averaged SAR116 per ton, indicating that the cost remained stable and range-bound. Although cement production was affected in 2014 due to labor shortage, we expect the labor problem to be solved over the next few quarters. Moreover, we expect that Aramco will continue to provide the subsidized fuel for the current production lines, thereby keeping the production cost lower and beneficial to the sector. On the Other hand, Saudi Aramco had turned down fuel supply for new production lines in the last two years, and we believe that the risk of future shortage of fuel supply could force the companies to use an alternative fuel to run the new coming production lines, which is subject to increase the production cost.

Figure 6: Cement price realizations

Figure 8: COGS as % of revenues

Figure 7: Company-wise price realization

Figure 9: Company-wise production cost


Source: Company Annual Report, Aljazira Capital


Source: Company Annual Report, Aljazira Capital

234 233 237

246

251

246

220

225

230

235

240

245

250

255

2009 2010 2011 2012 2013 TTM

SAR/

ton

0 40 80

120 160 200 240 280 320 360

Yam

ama

Saud

i

East

ern

Qas

sim

Yanb

u

Arab

ian

Sout

hern

Tabu

k

Naj

ran

Hai

l

Aljo

uf

SAR/

ton

Government cap – SAR240/ton

0.0%

20.0%

40.0%

60.0%

80.0%

2013 5 yrs. Avg

Yamama Saudi Eastern Qassim Yanbu

Arabian Southern Tabuk Najran Aljouf

0 20 40 60 80

100 120 140 160 180

Yam

ama

Saud

i

East

ern

Qas

sim

Yanb

u

Arab

ian

Sout

hern

Tabu

k

Naj

ran

Hai

l

Aljo

uf

SAR/

ton




December 2014


Margins declining due to low demandSaudi Arabia has the highest margins than any global counterpart, primarily due to access to cheap raw material and fuel (the

companies receive heavy oil at a subsidized rate from Saudi Aramco and natural gas is sourced from Aramco at USD 0.75/mmbtu

compared with an average international spot market price of about USD 4.0/mmbtu). Furthermore, limestone, one of the major

raw materials, is provided at highly subsidized rates to companies in the Kingdom.

The average gross and net margins (TTM) for cement companies in the Kingdom stood at 52.3% and 46.4%7 , respectively, vis-à-vis

the GCC average of 36.5% and 28.6%8, respectively. Kuwait has the lowest margins among GCC countries, as it is a net importer

of cement (due to lack of raw materials). Demand in The UAE and Oman has increased, leading to better price realizations and

margins. Qatar, with gross and net margins of 28.6% and 35.0%, respectively, has the highest per capita consumption in the GCC

region.

Of the companies in Saudi Arabia, Qassim Cement maintains the highest gross margin level at 62.1% (TTM) among domestic peers,

followed by Saudi Cement (61.4%) and City Cement (59.2%). Qassim Cement’s high price realizations and better efficiency due to

its low cost of production (high utilization due to technologically advanced plants) help the company maintain high gross margins

vis-à-vis peers. Moreover, Southern Province Cement Co is the best placed among its peers, by giving the highest returns (ROE) of

40.3% along with net margins of 58.5% for the last 12 months. The companies in the in the top right quadrant are better in terms of

profitability and returns, whereas companies in left bottom quadrant are the companies performing the worst amongst its peers.

7 Margins data is the average of Yamama Cem, Saudi Cem, Eastern Cem, Qassim Cem, Yanbu Cem, Arabian Cem, Southern Cem, Tabuk Cem, Riyadh Cem, City cement, Najran Cem, Northern Cem, AlJouf Cem, and Hail Cem

8 Margins data is average of listed cement companies of the repective countries

Figure 10: Saudi – Better positioned Figure 11: Trend in gross and net margins

Source: Bloomberg, Aljazira Capital Source: Tadawul, Bloomberg, Aljazira Capital

Kuwait Oman

Qatar

Saudi

UAE

-10%

0%

10%

20%

30%

40%

50%

60%

0% 20% 40% 60%

Net

Mar

gin

(TTM

)

Gross Margin (TTM)

42%

45%

48%

51%

54%

57%

2009 2010 2011 2012 2013 TTM

Gross Margin Net margin




December 2014


We expect local companies to post higher profits due to higher sales owing to the high demand forecast. However, if Aramco adopts a differential pricing approach (pricing capacity additions higher), profit margins would decline.

The key risks to margins in the cement sector are:

• Fuel pricing and supply concerns: Saudi Aramco has not clarified the status of fuel supply agreements for the upcoming capacity additions in the Kingdom. Thus, limited fuel allocation to the cement sector could pose a major threat to the planned capacity expansion, pushing prices higher as companies’ source fuel at higher costs. This would impact margins of cement companies.

• Labor shortage: The Government of Saudi Arabia plans to continue the Nitaqat program to reduce the unemployment rate among Saudi nationals. Thus, the cement and construction sectors would continue to face labor shortage. However, high margins would provide headroom to companies to remain resilient and recover once the temporary shortage is plugged.

• Declining global oil prices: Saudi Arabia depends heavily on the revenues generated from the petroleum sector. However, the global oil prices are on the decline, touching five-year lows. This would adversely impact the Saudis Arabia revenues, thereby could impacting government spending on infrastructure. Lower government spending on infrastructure (biggest driver of cement) would impact demand, thereby affecting prices. Consequently, margins are likely to decline.

2009 2010 2011 2012 2013

Net Margin (1) 48.5% 46.5% 46.8% 47.1% 45.8%

Assets turnover (2) 0.31 0.32 0.33 0.35 0.35

Leverage (3) 1.32 1.30 1.30 1.26 1.27

ROE (1 x 2 x 3) 19.6% 19.5% 20.3% 20.9% 20.2%

Source: Bloomberg

Dupont Analysis:

Figure 12: Gross and net margins across Saudi cement companies (TTM)

Source: Yamama Cements, Tadawul, Aljazira Capital

Qassim

Saudi City Yanbu

Southern

Yamama

Najran

Tabuk

Hail

Arabian

Eastern

Aljouf

10%

17%

24%

31%

38%

45%

52%

59%

66%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Net

Mar

gin

(TTM

)

ROE


December 2014


• Investment consideration – By employing DCF valuation methodology, we arrived at a 12-month price target of SAR66.5/share for Eastern Cement. This indicates the stock, at a current market price of SAR57.23/share (as of 18th Dec. 2014), is offering a potential upside of 16.2% and trading at prospective 2014 PE and PBV of 13.9x (17.7X after excluding the gain from asset sales) and 2.1x respectively. We, therefore initiate our coverage on Eastern Cement with ‘Overweight’ recommendation.

Fuel allocation of the proposed new production line is the most prominent growth• Multiple (uncertain) expansions projects allowing growth prospects: The Company has

been operating at more than 100% of its capacity since 2010 and witnessed a slowdown in 2013 to about 94% in 2013, primarily due to labor shortage in the market. However, we believe that the government infrastructure spending in the region and a strong industrial and housing projects pipeline would support the company’s sales to show signs of recovery over next few years. Eastern cement has announced ambitious expansion plans that includes the fourth production line with capacity of 3.2 mtpa (10,000tpd), which would let the company capitalize on the anticipated growing demand for cement in the region and offers a strong potential for the stock price. However, the new expansion has not been included in our valuation of the company due to rejection of fuel allocation by the ministry, along with the company’s uncertainty in implementing the new project.

• Ideal location and utilizing the spare capacity leads to strong growth in sales: Eastern Cement Company with a capacity of 3.3mtpa is the second largest player in the Eastern province. Strategically located in the industrial area with easy access to demand centers like Dammam, Khobar, AlJubail and Riyadh along with easy access to Bahrain that allow the company to be one out of the two cement producer who exports cement to the Kingdom of Bahrain with almost 5% of its production. Eastern cement continues to witness a rise in construction and real estate activities, which accounts for nearly 20% of the total cement consumption in the Kingdom.

• Modest Financial growth - Based on our expectations, the company’s revenue will increase at a CAGR of 2.4%, during 2013-17; where the growth in revenues is mainly based on increase in sales due to expected improvement in capacity utilization and upcoming new kiln capacity in Q1-2015 (150 tph). Moreover, EACCO has been able to show net margin of 37.3% during 2013 whereas we expect the company to post net margins of 44% in 2014 due to realization of gains on available for sale investment, and then an average of 37.5% over the period of our forecast. We expect improvement in the production efficiency will lead the company’s net profitability to increase at 2013-17 CAGR of 2.2%.

• Despite some challenges, Solid financial profile to support expansion plan: the company is expected to end 2014 with cash and cash equivalents totaling SAR336.7mn, along with the absence of any debt that could provide the company with much flexibility to support most of their future expansion. Although we expect EBITDA margins to fall toward 45.1% in 2014 (47.1% in 2013), the margins could show an improvement to 47% in 2015 and over the forecast period. However, it is likely the company will face some challenges regarding the value and returns of their subsidiaries and associate companies. The company reported a decline by SAR8mn in its profit share of its associates in Yemen due to current political scenario. Although the company has sold a substantial portion of its investment in SIIG (Saudi Industrial Investment Group), however EACCO still holds a portion of its investment in the company. SIIG due to the recent fall in the market has also taken a hit, which has consequently impacted the company’s investment value.

• Dividend payments: Dividend per share declined from SAR 4/share in 2012 to SAR 3.5/share in 2013, depicting a dividend yield of 6.1% that is above the average D/Y of cement sector (5.5%). However, The Company’s dividend payout ratio has improved from 88% in 2012 to around 97% in 2013, which we believe will remain attractive for the investor. With a healthy growth expectation, along with strong cash flows, we expect the company will maintain its payout ratios.

Recommendation ‘Overweight’

12-month price target; SAR 66.5

Current Price: SAR 57.23

Upside / (downside): 16.2%

Reuters code: 3080.SEBloomberg code: EACCO AB Country: Saudi ArabiaSector: CementPrimary Listing: KSA exchangeM-Cap: SAR4,921.8mn52 Weeks H/L (SAR): 65.50/49.00

All figures in SAR (000) 2013 E2014 E2015 E2016 E2017 E2018Sales 828,721 805,422 853,610 891,417 909,249 931,401Growth (%) -2.8% 6.0% 4.4% 2.0% 2.4%Net Income 309,157 355,272 311,301 328,302 335,105 336,019Growth (%) 14.9% -12.4% 5.5% 2.1% 0.3%EPS 3.59 4.13 3.62 3.82 3.90 3.91Gross Margins 42% 40% 42% 42% 42% 41%EBIT Margins 39% 46% 38% 38% 38% 37%Net Margins 37% 44% 36% 37% 37% 36%ROE 13.5% 15.2% 13.3% 13.9% 13.9% 13.8%ROA 12.3% 13.9% 12.1% 12.5% 12.6% 12.4%PE (x) 16.55 13.68 15.61 14.80 14.50 14.46PB (x) 2.24 2.08 2.07 2.05 2.02 1.99EV/EBITDA (x) 12.66 12.59 11.48 10.97 10.77 10.68

.Source: AlJazira Capital* We have taken respective December closing prices for 2013, while for years 2014 & onwards we used closing price of 18th Dec. 2014

Key information

Key financial data

Price Chart

Shareholding pattern

Eastern Cement Company (EACCO): was founded in late 1982 with a capital of SAR860mn. The Company started its commercial production in 1985. The company is running 3 production lines with current cement capacity of 3.3mtpa (10,300 tpd) and clinker capacity of 3.1mtpa (9,800 tpd). Eastern cement produces two types of cement (1) Portland cement production (2) Sulphates resisting and trading in all building materials, cement products and related materials. Eastern Province is a major market for the company’s sales, as well as it exports 4-5% of total cement products to Bahrain.

Initiation | KSA | Cement

Public 69.40%

General Fund investments 10.00%

GeneralOrganization for Social Insurance 10.00%

Public Pension Agency 10.60%

Eastern Province Cement Co.

40 45 50 55 60 65 70 75

5000 6000 7000 8000 9000

10000 11000

1-Ja

n-11

1-

Mar

-11

1-M

ay-1

1 1-

Jul-1

1 1-

Sep-

11

1-No

v-11

1-

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1-Ju

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1-Ja

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1-

Mar

-13

1-M

ay-1

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Jul-1

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4 1-

May

-14

1-Ju

l-14

1-Se

p-14

1-

Nov-

14

TASI Eastern Cement


December 2014


Key risks to valuation

We identified the following key risk associated with our valuation;

h Price realization pressure: weak sales performance due to labor shortage is likely to impact the sales price realization of Eastern Cement, as its cement peers with high capacity utilization have raised the competitiveness in the region.

Valuation summaryOur DCF based valuation methodology is based on 10-years explicit cash flows to reduce the sensitivity of our valuation to terminal value with the following key assumptions;

h Terminal value calculation based on Gordon Growth model

• Expected Terminal growth of 3%

• 5-years monthly raw beta of the sector 0.447 from Bloomberg; in order to reduce the impact of volatility.

h Using Capital Asset Pricing Model to calculate cost of equity. The calculation is based on the following variables:

• Risk free rate of 2.84%. The calculation of RFR is based on the summation of i) 10-year US government bond yield of 2.14%; and ii) country default spread (CDS) of 0.7% for KSA, as per Damodaran’s Equity Risk Premium; determinants, estimations & implications.

• KSA total market risk premium (annual 2014) is taken at 12.6% from Bloomberg. Hence, the equity risk premium is calculated at 9.77%.

• Capital Assets Pricing Model (CAPM) is 7.20%.

h 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

• Cost of equity based on CAPM

• Contribution from equity and debt in Eastern Cement’s Capital structure is taken at 100.0% & 0.0%, respectively

• Weighted average cost of capital (WACC) is calculated at 7.20%.

All figures in (SAR,000; (unless specified)

2013 E2014 E2015 E2016 E2017 E2018 E2019 E2020 E2021 E2022 E2023

FCF 153,114 209,403 267,938 269,410 275,408 275,382 274,978 278,203 282,969 277,466 273,444

Terminal Value 6,699,015

No of Year - 0.17 1.17 2.17 3.17 4.17 5.17 6.17 7.17 8.17 9.17

Discount Factor 1.00 0.99 0.92 0.86 0.80 0.75 0.70 0.65 0.61 0.57 0.53

Present Value 153,114 206,989 247,051 231,715 220,956 206,087 191,956 181,156 171,877 157,209 144,518

PV of Terminal Value 3,540,506

Sum of FCF 5,500,019

Net Debt 217,183.00

5,717,202.26

Price Target 66٫5Source: Aljazira capital

DCF based valuation methodology

The table below highlights the sensitivity of Eastern Cement DCF based 12-month price target with different terminal growth & WACC.

Sensitivity Analysis

WACC

Term

inal

gr

owth

5.2% 6.2% 7.2% 8.2% 9.2%1% 59.8 56.1 52.7 49.6 46.72% 66.4 62.2 58.3 54.7 51.43% 76.2 71.1 66.5 62.3 58.44% 92.1 85.7 79.9 74.5 69.75% 122.4 113.5 105.4 98.0 91.2




December 2014


Amount in SAR 000, unless otherwise specified 2013 E2014 E2015 E2016 E2017 E2018Income StatementSales 828,721 805,422 853,610 891,417 909,249 931,401% Growth In sales -2.8% 6.0% 4.4% 2.0% 2.4%Cost of Sales (480,380) (485,471) (498,446) (516,812) (527,627) (546,247)Gross Income 348,341 319,951 355,163 374,606 381,622 385,154Sales and Marketing Expenses (4,381) (4,146) (4,264) (4,205) (4,234) (4,219)General and Admin Expenses (46,115) (47,364) (48,491) (49,604) (50,596) (51,829)Income from Operations 297,845 268,441 302,409 320,797 326,792 329,106% Growth in operating profits -9.9% 12.7% 6.1% 1.9% 0.7%Financing Expenses (279) (359) (416) (388) (402) (395)Investment Income 13,282 4,065 4,251 4,446 4,652 4,867Other Income (Expenses) (13,940) (500) (500) (500) (500) (500)Gains from currency exchange 1,136 1,503 1,319 1,411 1,365 1,388Capital gain from asset sales 715 80,696 618 250 434 342Other Income 13,903 13,512 14,101 13,388 14,110 12,591Share of associated companies 9,616 800 810 805 808 806Income before Zakat 322,278 368,158 322,592 340,210 347,259 348,206Zakat (13,121) (12,886) (11,291) (11,907) (12,154) (12,187)Net Income for the Period 309,157 355,272 311,301 328,302 335,105 336,019% Growth In net income 14٫9٪ -12٫4٪ 5٫5٪ 2٫1٪ 0٫3٪EPS 3.59 4.13 3.62 3.82 3.90 3.91

Balance SheetCash and Cash Equivalent 217,183 336,719 314,680 286,962 270,412 251,671Accounts Receivable and Prepaid Expenses 157,156 165,014 173,264 181,928 191,024 200,575Inventories 421,532 435,082 427,876 432,155 436,476 440,841Total Current Assets 849,324 986,751 967,037 956,758 953,604 950,718Fixed assets 1,183,352 1,213,563 1,244,727 1,276,873 1,310,032 1,344,238Deferred expenses 22,279 25,774 21,340 25,405 24,322 25,730Investments available for sale 285,363 177,742 184,642 186,942 191,542 193,842Investments in associates 166,922 158,922 164,922 173,422 180,672 188,547Total Non-Current Assets 1,657,916 1,576,000 1,615,631 1,662,642 1,706,569 1,752,357Total Assets 2,507,240 2,562,751 2,582,668 2,619,400 2,660,172 2,703,074Total Current Liabilites 177,204 179,153 189,461 199,567 206,892 215,416Total Non-Current Liabilites 46,850 47,740 48,647 49,572 50,513 51,473Total Liabilities 224,054 226,893 238,108 249,138 257,406 266,889Total Shareholders Equity 2,283,186 2,335,858 2,344,560 2,370,262 2,402,767 2,436,185Total Liabilities and Equity 2,507,240 2,562,751 2,582,668 2,619,400 2,660,172 2,703,074

Cash Flow StatementCash Flow from Operating Activities 368,007 334,152 396,621 402,150 412,334 416,625Cash Flow from Investing Activities (234,900) 87,453 (116,551) (127,805) (126,824) (133,331)Cash Flow from Financing Activities (292,275) (302,069) (302,109) (302,063) (302,060) (302,035)Changes in Cash (159,168) 119,536 (22,039) (27,718) (16,550) (18,741)Cash Opening Balance 376,351 217,183 336,719 314,680 286,962 270,412Cash Ending Balance 217,183 336,719 314,680 286,962 270,412 251,671

Key Fundamental ratiosLiquidity RatioCurrent Ratio(x) 4.79 5.51 5.10 4.79 4.61 4.41Quick Ratio (x) 2.41 3.08 2.85 2.63 2.50 2.37Efficency Ratios Receivables Days Turnover 68.6 70.0 69.3 69.7 69.5 69.6Inventory Days Turnover 179.9 220.0 190.0 175.0 165.0 167.0Payables Days Turnover 49.63 49.60 49.60 49.60 49.60 49.60Cash Cycle 198.9 240.4 209.7 195.1 184.9 187.0Asset Turnover 0.33 0.32 0.33 0.34 0.34 0.35Profitability ROE 13.5% 15.2% 13.3% 13.9% 13.9% 13.8%ROA 12.3% 13.9% 12.1% 12.5% 12.6% 12.4%ROIC 36.3% 34.5% 36.4% 37.6% 37.8% 38.2%Gross Margins 42.0% 39.7% 41.6% 42.0% 42.0% 41.4%EBITDA Margins 47.1% 45.1% 46.9% 47.3% 47.4% 46.8%EBIT Margins 38.9% 45.7% 37.8% 38.2% 38.2% 37.4%Net Margins 37.3% 44.1% 36.5% 36.8% 36.9% 36.1%Leverage Ratios Debt/Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Debt/Capital 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Debt/Assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Times interest Earned (TIE) 1067.5 747.7 726.9 827.9 813.4 834.0Valuations Dividend Yield 5.9% 6.2% 6.2% 6.2% 6.2% 6.2%Book Valuer Per Share (BVPS) 26.5 27.2 27.3 27.6 27.9 28.3Market Capitalization(in SAR Bn) 5.12 4.86 4.86 4.86 4.86 4.86Enterprise value (in SAR Bn) 4.95 4.57 4.59 4.62 4.64 4.66PE (x)** 16.6 13.68 15.6 14.8 14.5 14.5PB (x) 2.24 2.08 2.07 2.05 2.02 1.99EV/EBITDA (x) 12.7 12.6 11.5 11.0 10.8 10.7

.Source: Company financial reports & Aljazira Capital *we have taken respective Dec end prices for 2013, while for years 2014 & onwards we used closing price of 18th Dec 2014

** (2014 PE after excluding the gain from asset sales is 17.7X)

Key financial data




December 2014

Please read Disclaimer on the backInitiation | KSA | Cement

City Cement Company

• Investment consideration – By employing DCF valuation methodology, we arrived at a 12-month price target of SAR27.0/share for City Cement. This indicates the stock, at a current market price of SAR22.45/share (as of 18th Dec 2014), is offering a potential upside of 20.3% and trading at prospective 2014 PE and PBV of 19.8x and 2.3x, respectively. We, therefore initiate our coverage on City Cement with ‘Overweight’ recommendation.

A New Production Line to Drive Dispatches Growth • Fuel allocation barriers lead to lower exploitation of the new expansion: City cement

is expected to run the plant by 107% of the full capacity in 2014 as compared with 103% in 2013. The company announced completion of 90% of the new 2nd production line for further capacity of 1.9 mtpa of cement (5,500tpd of clinker). The trail production is expected to start in Dec-2014. Although the fuel is not allocated for the new project, Waste Heat Recovery System (WHR) and alternative fuels are expected to supply 30-40% of fuel needed to run a portion of the new capacity. Therefore, we estimate CITYC to achieve 64% and 70% of the full capacity for 2015, 2016 respectively. On the other hand, the cost efficiency may exert pressure on margins due to use of unsubsidized fuel for the new production line.

• Location to assist in achieving sales growth: the company is located in the central region, close to the capital city of Riyadh, which is one of the strongest demand centers in KSA. Heavy demand is anticipated due to the introduction of the mortgage law and the transport sector, particularly public transportation and metro, which will constitute a large proportion of the high-value construction contracts in coming years. Moreover, the heavy investment in the housing sector and population growth will keep cement demand strong. Some major projects in the central region are (1) King Abdullah Financial Center (2) Communications and Information Technology Complex (3) Riyadh Metro line (4) Railway Expansion Program (5) King Khaled International Airport Expansion. Given its proximity of such demand center, the company’s transport cost are low.

• Financial growth - Based on our estimates, the company’s revenue will increase at a CAGR of 14.9%, during 2013-17; where the growth in revenues is mainly based on increase in sales due to expectations of demand recovery in the local market and increase in production capacity to 3.65 million tons. Moreover, the company was able to show net margin of 50.4% during 2013 and we expect it to post average net margins of 51.9% over the period of our forecast, which is due to expected increase in production efficiency. We expect improvement in sales and operating profit margin, which consequently will lead the company’s net profitability to increase at a 2013-17 CAGR of 15.8%.

• Strong balance sheet leads to financial independence: Although the company currently is bearing the new expansion expenses; the company is a cash-rich company with cash and cash equivalents totaling SAR397.1mn as of September 31, 2014. The debt-free balance sheet provides the company with much needed financial independence and flexibility given the capital-intensive nature of the business. The upcoming capacity addition on the 2nd production line (worth SAR970mn) has been primarily funded by capital raised through the IPO. City cement also offers regular dividends to its shareholders (dividend payouts of ~87% in 2013).

• Dividend payments: We expect the company to maintain its growth potential and financial health in 2014 and the coming years over our forecast horizon. The financial strength of the company will be reflected in the company’s decision to increase cash dividends to about SAR 1.25 in the year 2014 (from SAR1.0 in 2013) taking its dividend yield to about 5.5% at current price as compared to average market Div yield of 3.2%. Given the continued growth , the new production line, and the attractive dividend yield makes the stock attractive for investors


12-month price target; SAR27٫0

Current Price: SAR22.45


Reuters code: 3003.SEBloomberg code: CITYC:AB Country: Saudi ArabiaSector: CementPrimary Listing: KSA exchangeM-Cap: SAR4,247.6mn52 Weeks H/L (SAR): 32.50/18.60

All figures in SAR (mn) 2013 E2014 E2015 E2016 E2017 E2018Sales 433 449 561 614 641 685Growth (%) 3.6% 24.9% 9.5% 4.4% 7.0%Net Income 218 235 293 319 332 357Growth (%) 7.4% 24.8% 9.0% 4.0% 7.6%EPS 1.15 1.24 1.55 1.69 1.75 1.89Gross Margins 59% 58% 58% 58% 58% 58%EBIT Margins 55% 54% 54% 54% 54% 54%Net Margins 50% 52% 52% 52% 52% 52%ROE 10.9% 11.7% 14.2% 14.9% 14.9% 15.2%ROA 10.3% 11.1% 13.3% 14.0% 13.9% 14.2%PE (x) 19.88 18.11 14.51 13.31 12.80 11.90PB (x) 2.17 2.12 2.07 1.99 1.90 1.81EV/EBITDA (x) 20.08 21.85 19.82 17.57 16.60 14.84

.Source: AlJazira Capital* We have taken respective December closing prices for 2013, while for years 2014 & onwards we used closing price of 18th Dec 2014

Key information

Key financial data

Price Chart


City Cement Company: (CITYC) was founded in mid-2005 and listed on TASI in 2012 with a capital of SAR 1,892mn. The company started its commercial production in 2008, with cement capacity of 1.75 mtpa (5,500 tpd) and clinker capacity of 1.6 mtpa (5,000 tpd). The company produces two types of cement (1) ordinary Portland cement (2) sulfate resisting cement. Riyadh city is a major market for the company’s sales. The company has almost a 3.5% stake in KSA Cement Product Industry.

Public 68.50%

Al Abdullatif Holding Group 25.20% Prince Mishal Al Saud 6.30%

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TASI City Cement


December 2014


City Cement Company



h Labor Shortage: The step by the government to standardize the labor market has result in shortage in labor availability, which if continued can result in lower than expected sales..






• Risk free rate of 2.84%. The calculation of RFR is based on the summation of i) 10-year US government bond yield of 2.14%; and ii) country default spread (CDS) of 0.7% for KSA, as per Damodaran’s Equity Risk Premium; determinants, estimations & implications.





• Contribution from equity and debt in City Cement’s Capital structure is taken at 100.0% & 0.0%, respectively

• Weighted average cost of capital (WACC) is calculated at 9٫81%.

All figures in (SAR,mn; (unless specified)

E2014 E2015 E2016 E2017 E2018 E2019 E2020 E2021 E2022 E2023

FCF (109) 280 314 339 356 380 399 421 444 461

Terminal Value 6,975

No of Year 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25

Discount Factor 0.98 0.89 0.81 0.74 0.67 0.61 0.56 0.51 0.46 0.42

Present Value (107) 249 255 250 239 232 222 214 205 194

PV of Terminal Value 2,934

Sum of FCF 4,887

Net Debt (217.95)

5,105.07

Price Target 27.0

Source: Aljazira capital


The table below highlights the sensitivity of City Cement DCF based 12-month price target with different terminal growth & WACC.


WACC

Term

inal

gr

owth

7.8% 8.8% 9.8% 10.8% 11.8%1% 26.5 24.8 23.2 21.8 20.52% 28.4 26.6 24.9 23.3 21.93% 30.9 28.9 27.0 25.3 23.74% 34.3 32.0 29.8 27.9 26.15% 39.1 36.4 33.9 31.6 29.5


December 2014


City Cement Company

Amount in SAR mn, unless otherwise specified 2013 E2014 E2015 E2016 E2017 E2018Income StatementSales 433.4 448.8 560.5 613.7 640.6 685.2% Growth In sales 3.6% 24.9% 9.5% 4.4% 7.0%Cost of Sales (179.4) (189.1) (237.0) (260.0) (271.4) (290.3)Gross Income 254.0 259.8 323.5 353.6 369.2 394.8Sales and Marketing Expenses (4.4) (4.6) (5.2) (5.5) (6.1) (6.6)General and Admin Expenses (11.9) (10.3) (12.8) (14.7) (15.5) (16.6)Income from Operations 237.7 244.9 305.4 333.4 347.5 371.6% Growth in operating profits 3.05% 24.70% 9.16% 4.22% 6.94%Financing Expenses - - - - - -Other Income 0.2 (2.6) (3.1) (3.8) (4.6) (2.8)Income before Zakat 237.9 242.3 302.3 329.7 342.9 368.8Zakat (19.5) (7.8) (9.7) (10.5) (11.0) (11.8)Net Income for the Period 218.4 234.6 292.6 319.1 331.9 357.0% Growth In net income 7٫4٪ 24٫8٪ 9٫0٪ 4٫0٪ 7٫6٪EPS 1.15 1.24 1.55 1.69 1.75 1.89

Balance SheetAccounts Receivables,net 30.5 31.4 39.3 43.2 45.3 48.6Prepaid Expenses 21.8 16.3 21.2 25.7 24.8 27.1Total Current Assets 737.0 388.6 462.5 549.6 644.9 770.0Land 3.2 3.2 3.2 3.2 3.2 3.2Property Plant and Equipment 1365.6 1722.8 1726.2 1729.7 1733.4 1737.2Accrued Expenses 8.8 4.8 6.3 7.1 8.7 8.1Total Non-Current Assets 1377.6 1727.6 1732.5 1736.8 1742.1 1745.3Total Assets 2114.6 2116.2 2195.0 2286.4 2387.0 2515.3Total Current Liabilites 107.5 111.2 134.2 143.4 148.8 157.0Total Non-Current Liabilites 4.6 5.4 6.2 7.0 7.9 8.8Total Liabilities 112.1 116.5 140.4 150.4 156.7 165.7Total Shareholders Equity 2002.8 1999.7 2054.6 2136.0 2230.2 2349.6Total Liabilities and Equity 2114.9 2116.2 2195.0 2286.4 2387.0 2515.3Total Shareholders Equity 2,283,186 2,335,858 2,344,560 2,370,262 2,402,767 2,436,185Total Liabilities and Equity 2,507,240 2,562,751 2,582,668 2,619,400 2,660,172 2,703,074

Cash Flow StatementCash Flow from Operating Activities 319.2 305.9 384.0 423.2 453.2 476.0Cash Flow from Investing Activities (492.3) (413.7) (108.4) (113.6) (120.6) (122.3)Cash Flow from Financing Activities (199.2) (241.5) (246.5) (247.4) (247.8) (248.7)Changes in Cash (372.3) (349.3) 29.0 62.2 84.8 105.1Cash Opening Balance 939.5 567.2 218.0 247.0 309.2 394.0Cash Ending Balance 567.2 218.0 247.0 309.2 394.0 499.1

Key Fundamental ratiosLiquidity RatioCurrent Ratio(x) 6.85 3.50 3.45 3.83 4.33 4.91Quick Ratio (x) 5.76 2.39 2.29 2.64 3.12 3.66Efficency Ratios Receivables Days Turnover 25.7 25.5 25.6 25.7 25.8 25.9Inventory Days Turnover 99.2 100.0 101.0 102.0 103.0 104.0Payables Days Turnover 126.1 120.0 119.0 118.0 117.0 116.0Cash Cycle (1.2) 5.5 7.6 9.7 11.8 13.9Asset Turnover 0.21 0.21 0.26 0.27 0.27 0.28Profitability ROE 10.9% 11.7% 14.2% 14.9% 14.9% 15.2%ROA 10.3% 11.1% 13.3% 14.0% 13.9% 14.2%Gross Margins 58.6% 57.9% 57.7% 57.6% 57.6% 57.6%EBITDA Margins 66.4% 66.9% 71.9% 70.9% 70.8% 70.8%EBIT Margins 54.9% 54.0% 53.9% 53.7% 53.5% 53.8%Net Margins 50.4% 52.3% 52.2% 52.0% 51.8% 52.1%Leverage Ratios Debt/Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Debt/Capital 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Debt/Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Valuations Dividend Yield 4.4% 5.6% 5.6% 5.6% 5.6% 5.6%Book Valuer Per Share (BVPS) 10.6 10.6 10.9 11.3 11.8 12.4Market Capitalization(in SAR Bn) 4.3 4.2 4.2 4.2 4.2 4.2Enterprise value (in SAR Bn) 3.8 4.0 4.0 3.9 3.9 3.7PE (x) 19.9 18.1 14.5 13.3 12.8 11.9PB (x) 2.2 2.1 2.1 2.0 1.9 1.8EV/EBITDA (x) 20.1 21.9 19.8 17.6 16.6 14.8

Source: Company financial reports & Aljazira Capital * We have taken respective Dec end prices for 2013, while for years 2014 & onwards we used closing price of 18th Dec 2014.

Key financial data


December 2014


Northern Region Cement Co.

• Investment consideration –By employing DCF valuation methodology, we arrived at a 12-month price target of SAR26.8/share for Northern Cement. This indicates the stock, at a current market price of SAR21.05/share (as of 18th December 2014), is offering a potential upside of 27.3% and trading at prospective 2014 PE and PBV of 16.03x and 1.81x, respectively. We, therefore initiate our coverage on Northern Cement with ‘Overweight’ recommendation.

• Improved capacity utilization to drive dispatches growth: the company has been steadily increasing its capacity utilization since the commencement of the 2nd production line in late 2012 to achieve dispatches improvement of 13%YoY in 10M-2014 as compared to 10M-2013. The company reached 80.5% in 2013 of the full cement capacity, and we estimate the company to achieve utilization off about 88%, 90% and 94% of the full cement capacity (9,687 tpd) in 2014, 2015 and 2016 respectively. Whereas, the performance of Jordan business (1.0mtpa of cement) is running with 90% of the capacity. On the other hand, we expect that the higher inventories (1.24MT) and spare capacity levels will translate into higher growth for Northern cement as it will serve as a cushion against any unexpected increase in demand, this will strengthen its position in the sector and improve its market share.

• Located in the low demand region, neighboring regions to support sales: The company’s plant is located in the Northern region (50 km from the city of Turaif ), where demand is comparatively low as compared to central, western and eastern region. However, The Plant is close to a number of regional markets, which are useful for any plans of opening export outlets near neighboring border lines. In addition, one of the major projects in the Northern region is (Waad El-Shammal) locating on 440 square km, with intentions to establish an industrial mining city (SAR 21bn) that is expected to be completed in late 2016. Moreover, infrastructure, housing and North-South Railway projects are the basic pillars of development in the region for the next years. On the other hand, in order to achieve healthy capacity utilization levels, the company has signed a partnership agreement with Arabian Cement with convention exchange of 700tpa of clinker, which has resulted in better capacity utilization.

• Financial growth - Based on our expectations, the company’s revenue will increase at a CAGR of 4.2%, during 2013-17; where the growth in revenues is mainly based on increase in sales due to robust demand in the local market and improved capacity utilization. Moreover, Northern was able to show net margin of 29.8% during 2013 and we expect the company to post on average net margins of 28% over the period of our forecast due to higher finance expenses and decline in lower expected returns of associated companies. We expect improvement in the sales and operating profit margin will lead the company’s net profitability to increase at 2013-17 CAGR of 2.5%.

• Foreign investment to determine a portion of the company’s growth: The company has officially acquired 25.5% of AlKobaisah cement plant (1.82mtpa of clinker) in Iraq and the effect of its associate in 2013 was a positive outcome of SAR15.9mn, however, the company’s share of its associates until Q3-2014 was about SAR0.7mn, which shows signs of adverse consequence In conjunction with the deteriorating situation in Iraq. Therefore, We believe that this provides a negative outlook for the company’s investment value and its future potential growth, as there is not enough disclosure from the company about its associates located in unstable area of Iraq. On the other hand, the enhancement in its subsidiary’s margins in (Northern plant – Jordan) has improved dramatically due to the exchange contract with Arabian Cement, which could ensure the permanence of development as long as the contract is effective.

• Continuity of attractive DPS (SAR2.0 DPS) is under pressure: Although the operational cash flow for the earlier years was less than the paid dividends of SAR360mn (SAR 2 DPS), the company was able to distribute this attractive dividend due to the financial abundance (reserves and Murabaha loans). Therefore, we expect that the company’s capability to keep their high dividend yield is doubtful over next years, unless they refinance their loans. Therefore, we expect the company to reduce dividend payments for 2015 to SAR1.5 DPS (DY of 7.1%) from SAR2.0 DPS (9.5%) for 2014.


12-month price target; SAR26.8

Current Price: SAR21.05


Reuters code: 3004.SEBloomberg code: NORTHCEM:AB Country: Saudi ArabiaSector: CementPrimary Listing: KSA exchangeM-Cap: SAR3,789.1mn52 Weeks H/L (SAR): 29.10/17.25

Company Snapshot 2013 E2014 E2015 E2016 E2017 E2018Sales 787,347 851,480 866,588 905,777 927,982 955,004Growth (%) 8.1% 1.8% 4.5% 2.5% 2.9%Net Income 234,615 236,397 243,327 257,129 258,345 260,567Growth (%) 0.8% 2.9% 5.7% 0.5% 0.9%EPS 1.30 1.31 1.35 1.43 1.44 1.45Gross Margins 37% 37% 38% 38% 37% 36%EBIT Margins 32% 29% 29% 30% 29% 28%Net Margins 30% 28% 28% 28% 28% 27%ROE 10.6% 11.3% 12.3% 13.1% 12.9% 12.8%ROA 8.1% 7.7% 8.4% 9.3% 9.5% 9.6%PE (x) 17.76 16.03 15.57 14.74 14.67 14.54PB (x) 1.88 1.81 1.92 1.93 1.90 1.87EV/EBITDA (x) 29.11 23.85 24.56 23.78 23.57 23.21

Source: AlJazira Capital* We have taken respective December closing prices for 2013, while for years 2014 & onwards we used closing price of 18th Dec 2014

Key information

Key financial data

Price Chart


Northern Region Cement: Company (NORTHCEM) was founded in late 2006 and listed on TASI in Jan 2013 with a capital of SAR1,800mn. The Company started its commercial production in 2008, with current cement capacity of 3.1 mtpa (9,687 tpd) and clinker capacity of 2.88 mtpa (9,000 tpd). The company produces two types of cement (1) Portland cement (2) Sulphates resisting. The company is engaged in the management, operation and maintenance of industrial cement plants. Northern region is a major market for the company’s sales, as well as it expands its market sales by signing an agreement to exchange 700tpa of clinker with Arabian cement for 3 years period.

Public 88.00%

Pan Kingdom Investment Company - PKI 12.00%

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TASI-LHS Northern Cement-RHS


December 2014




h Foreign investment concerns: The company is investing in the AlKobaisah cement plant with stake of 25.5%, which could be exposed to political and economic risks, as Iraq witnessed a long period of political instability, which led to economic deterioration.






• Risk free rate of 2.84%. The calculation of RFR is based on the summation of i) 10-year US government bond yield of 2.14%%; and ii) country default spread (CDS) of 0.7% for KSA, as per Damodaran’s Equity Risk Premium; determinants, estimations & implications.





• Cost of Debt at 3.59%

• Contribution from equity and debt in Northern Cement’s Capital structure is taken at 74.4% & 25.6%, respectively

• Weighted average cost of capital (WACC) is calculated at 7.48%.

All figures in (SAR,000; (unless specified)

E2014 E2015 E2016 E2017 E2018 E2019 E2020 E2021 E2022 E2023

FCF 198,226 248,399 301,452 300,917 303,261 317,341 324,891 338,248 342,579 345,491

Terminal Value 6,117,590

No of Year 0.17 1.17 2.17 3.17 4.17 5.17 6.17 7.17 8.17 9.17

Discount Factor 0.99 0.92 0.86 0.80 0.74 0.69 0.64 0.60 0.55 0.52

Present Value 195,857 228,350 257,835 239,464 224,534 218,608 208,232 201,706 190,071 178,346

PV of Terminal Value 3,157,961

Sum of FCF 5,300,963

Net Debt 470,257.66-

4,830,705.35

Price Target 26.8

Source: Aljazira capital


The table below highlights the sensitivity of Hail Cement DCF based 12-month price target with different terminal growth & WACC.


WACC

Term

inal

gr

owth

5.5% 6.5% 7.5% 8.5% 9.5%1% 25.6 23.8 22.1 20.6 19.22% 28.0 26.0 24.1 22.4 20.93% 31.2 28.9 26.8 24.9 23.24% 35.8 33.1 30.7 28.5 26.45% 42.7 39.5 36.5 33.9 31.4



December 2014


Amount in SAR 000, unless otherwise specified 2013 E2014 E2015 E2016 E2017 E2018Income StatementSales 787,347 851,480 866,588 905,777 927,982 955,004% Growth In sales 8.1% 1.8% 4.5% 2.5% 2.9%Cost of Sales (497,937) (534,210) (540,975) (564,307) (584,507) (608,151)Gross Income 289,410 317,270 325,613 341,470 343,475 346,853Sales and Marketing Expenses (9,671) (12,219) (12,436) (12,998) (13,317) (13,704)General and Admin Expenses (37,405) (48,349) (49,207) (51,432) (52,693) (54,228)Income from Operations 242,334 256,702 263,970 277,039 277,465 278,921% Growth in operating profits 5.9% 2.8% 5.0% 0.2% 0.5%Financing Expenses (13,387) (17,526) (17,701) (16,816) (15,975) (15,177)Share of associated companies 15,976 2,500 2,500 2,500 2,500 2,500Other Income 4,355 4,613 4,744 4,979 4,986 5,012Minority Interests share of net loss of consilodated subsidiary (214) (407) (311) (359) (335) (347)Income before Zakat and Tax 249,064 245,882 253,202 267,343 268,641 270,910Zakat (12,000) (7,376) (7,596) (8,020) (8,059) (8,127)Income tax of the subsidiary (2,449) (2,109) (2,279) (2,194) (2,236) (2,215)Net Income for the Period 234,615 236,397 243,327 257,129 258,345 260,567% Growth In net income 0.8% 2.9% 5.7% 0.5% 0.9%EPS 1.30 1.31 1.35 1.43 1.44 1.45

Balance SheetCash and Cash Equivalent 124,705 288,638 127,414 29,755 19,396 58,962Accounts Receivable 74,804 74,650 75,975 79,411 81,357 83,726Inventories 353,275 365,897 377,170 389,975 405,728 421,206Total Current Assets 597,384 783,779 632,674 554,784 562,409 621,549Fixed assets 1,602,177 1,638,865 1,631,275 1,580,354 1,528,523 1,475,765Investments in associates 111,849 115,650 117,803 119,957 122,111 124,264Intangible assets 506,157 506,157 506,157 506,157 506,157 506,157Total Non-Current Assets 2,294,066 2,297,325 2,255,235 2,206,468 2,156,791 2,106,187Total Assets 2,891,449 3,081,104 2,887,910 2,761,253 2,719,200 2,727,737Total Current Liabilites 667,781 977,302 902,224 785,968 708,533 679,010Total Non-Current Liabilites 6,776 8,674 10,582 12,593 14,859 17,237Total Liabilities 674,558 985,976 912,806 798,561 723,393 696,247Total Shareholders Equity 2,210,547 2,086,944 1,967,839 1,954,968 1,988,313 2,023,881Total Liabilities and Equity 2,891,449 3,081,104 2,887,910 2,761,253 2,719,200 2,727,737

Cash Flow StatementCash Flow from Operating Activities 155,523 307,316 322,216 339,938 340,092 343,138Cash Flow from Investing Activities (126,363) (68,549) (32,073) (33,160) (33,842) (34,518)Cash Flow from Financing Activities (5,109) (74,834) (451,367) (404,436) (316,608) (269,053)Changes in Cash 24,051 163,934 (161,225) (97,659) (10,359) 39,566Cash Opening Balance 100,653 124,705 288,638 127,414 29,755 19,396Cash Ending Balance 124,705 288,638 127,414 29,755 19,396 58,962

Key Fundamental ratiosLiquidity RatioCurrent Ratio(x) 0.89 0.80 0.70 0.71 0.79 0.92Quick Ratio (x) 0.37 0.43 0.28 0.21 0.22 0.30Efficency Ratios Receivables Days Turnover 34.7 32.0 32.0 32.0 32.0 32.0Inventory Days Turnover 259.0 250.0 254.5 252.2 253.4 252.8Payables Days Turnover 18.78 18.80 18.79 18.79 18.79 18.79Cash Cycle 274.86 263.20 267.69 265.45 266.57 266.01Asset Turnover 0.28 0.29 0.29 0.32 0.34 0.35Profitability ROE 10.6% 11.3% 12.3% 13.1% 12.9% 12.8%ROA 8.1% 7.7% 8.4% 9.3% 9.5% 9.6%ROIC 8.3% 7.9% 8.7% 9.6% 9.9% 9.9%Gross Margins 36.8% 37.3% 37.6% 37.7% 37.0% 36.3%EBITDA Margins 41.3% 38.7% 39.9% 40.5% 39.7% 38.9%EBIT Margins 31.6% 28.9% 29.2% 29.5% 28.9% 28.4%Net Margins 29.8% 27.8% 28.1% 28.4% 27.8% 27.3%Leverage Ratios Debt/Equity 26.8% 42.8% 41.6% 35.8% 31.3% 29.2%Debt/Capital 20.6% 29.1% 28.5% 25.5% 23.0% 21.8%Debt/Assets 20.6% 29.1% 28.5% 25.5% 23.0% 21.8%Times interest Earned (TIE) 18.1 14.6 14.9 16.5 17.4 18.4Valuations Dividend Yield 8.6% 9.5% 7.1% 7.1% 5.9% 5.9%Book Valuer Per Share (BVPS) 12.3 11.6 11.0 10.9 11.1 11.3Market Capitalization(in SAR Bn) 4.17 3.79 3.79 3.79 3.79 3.79Enterprise value (in SAR Bn) 4.64 4.40 4.48 4.46 4.39 4.32PE (x) 17.8 16.03 15.6 14.7 14.7 14.5PB (x) 1.88 1.81 1.92 1.93 1.90 1.87EV/EBITDA (x) 29.1 23.9 24.6 23.8 23.6 23.2

Source: Company financial reports & Aljazira Capital *we have taken respective Dec end prices for 2013, while for years 2014 & onwards we used closing price of 18th December 2014.

Key financial data


Asset Management | Brokerage | Corporate Finance | Custody | Advisory

Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068

Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37

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Disclaimer

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.

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4. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.

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Senior Analyst Syed Taimure Akhtar +966 11 2256146 [email protected]

AnalystSultan Al Kadi+966 11 [email protected]

Senior Analyst

Talha Nazar +966 11 [email protected]

Analyst

Saleh Al-Quati+966 11 [email protected]

Analyst

Jassim Al-Jubran +966 11 [email protected]

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Ala’a Al-Yousef+966 11 [email protected]

AGM-Head of international and institutional

brokerage

Luay Jawad Al-Motawa +966 11 [email protected]

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Brokerage

Abdullah Q. Al-Misbani +966 12 6618400 [email protected]

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Central Region

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