Saudi Cement Sector Positives - GulfBase.com · Saudi Cement Sector Cement –Industrial Saudi...

Saudi Cement Sector Cement –Industrial Saudi Arabia

June 2013

January 18, 2010

US$ 20.91bn 77.8% US$0.12mn Market cap Free float Avg. daily volume

Disclosures Please refer to the important disclosures at the back of this report.

Powered by Enhanced Datasystems’ EFA Platform

Target mkt cap SAR84.2bn 7.4%over current Consensus mkt cap. SAR81.9bn 4.5% over current Current mkt cap. SAR78.4bn at 11/06/2013

Underweight Neutral Overweight Neutral

Key themes & Implications

Robust demand on the back of large-scale government invesments should boost cement consumption in the Kingdom. We expect cement consumption to grow at a CAGR of 7% through 2017, with the lion’s share of the demand emanating from the western region followed by the central region.

We remain Overweight on Yamama Cement; however, we have cut our price target on Yamama on potential risks associated with its plant relocation. We have also upgraded our rating on Saudi Cement to Overweight, while downgrading Arabian and Al Jouf Cement to Neutral. We remain Neutral on Qassim Cement as we feel that the company lacks long-term growth as it has not achieved any fuel approval on its expansion.

What do we think?

Stock Rating Price Target

Yamama Cement Overweight SAR58.5

Saudi Cement Overweight SAR118.0

Arabian Cement Neutral SAR78.0

Al Jouf Cement Neutral SAR20.0

Qassim Cement Neutral SAR90.0

Why do we think it?

Stock YTD gain 2014E P/E

Arabian Cement 40.0% 11.3x

Yamama Cement 6.3% 11.5x

Al Jouf Cement 12.5% 18.5x

Saudi Cement 7.3% 12.1x

Qassim Cement 2.1% 12.6x

Positives

- Strong construction demand fuelled by govt.

spending.

- Cement consumption per capita currently highest

in the world.

- Favourable demographics demanding for

residential housing and general facilities.

- One of the booming sectors of the Saudi economy

- Carries one of the highest margins in the world.

Negatives

- A drop in crude prices will lead to slowdown

- Continuous export ban preventing few companies

growth

- Govt. capping over the prices

- Fuel allocation issues limited future growth

- Cut throat competition among players and

competitive prices.

Research Department Mazhar Khan

Tel 966 11 2119248, [email protected]

Saudi Cement Sector: Government restrictions affect growth prospects The Saudi cement sector continues to witness strong demand on the back of

government-backed infrastructure projects. On the flip side, the government

has imposed several restrictions on the sector to avoid price inflation, which

has hurt the profitability of these companies. In addition, the lack of fuel supply

too is hampering their capacity expansion plans. We remain positive on the

companies, which are in close proximity to the high demand areas, or have

lined up expansion plans.

Saudi, the biggest construction market in the GCC region: Saudi Arabia’s

construction market is the largest in the GCC region with a strong project

pipeline of US$600bn, which is expected to be completed over the next five

years. This includes expected awarding of projects worth around US$80bn in

2013, up from US$50bn in 2012. Moreover, the Ninth Five Year Development

Plan focuses on spending across various sectors, up by around 67% from the

previous five-year plan. Given the pipeline boom, we expect cement demand to

grow at a CAGR of around 7% till 2017.

Government restrictions affecting growth: The government has imposed a

number of restrictions on the cement sector to curb inflation in the Kingdom.

The government has not only banned export of cement but also imposed a price

ceiling on it at various distribution levels. Moreover, cement producers are also

facing delays in obtaining fuel supply assurance from Saudi Aramco, leading to

capacity expansion delays.

Profitability growth remains limited due to price cap: Although we expect

cement companies to operate at full capacity for at least another three years, we

believe the overall growth would stagnate as the government is strict about

maintaining cement prices at SAR240/ton. Hence, the companies are left with

one option – to reduce their production costs. Cash costs stood at around

SAR110 a ton, which is at its lowest level. Thus, it is difficult for players to

further cut their costs and achieve a reasonable profitability growth. Hence,

companies which are replacing old lines with new ones, or lining up expansion

plans stand to benefit the most. Nevertheless, we expect few companies to report

close to double-digit growth over the next three years.

Valuation – looks reasonable for selected stocks: We remain Overweight on

Yamama Cement (SAR58.5), and upgrade Saudi Cement to Overweight

(SAR118). We remain Neutral on Qassim Cement (SAR90) while we downgrade

Arabian Cement and Al Jouf Cement to Neutral with a revised target price of

SAR78 and SAR20 respectively. Cement sector has witnessed a decent YTD gain

of 14%, and thus now trades at aggregate 2013 PE of 13.4x, above Tadawul PE of

12.4x. That said, we see an upside potential on select companies in the sector.

Figure 1 Companies under coverage - Key fundamentals

Companies Market Cap.

Enterprise

Value EPS growth ROE PE EV/EBITDA EV/ton

Dividend

Yield

(US$ mn) (US$ mn) 3 yr CAGR 2013E 2013E 2013E (US$) 2013E

Arabian Cement 1,504 1,660 8.5% 15.7% 12.0 8.4 307 4.9%

Yamama Cement 2,646 2,363 2.9% 24.5% 11.4 9.2 375 6.1%

Saudi Cement 4,059 4,294 5.6% 41.4% 12.5 10.5 499 7.3%

Al Jouf Cement 626 755 24.2% 7.9% 21.0 12.8 431 2.8%

Qassim Cement 1,944 1,784 0.7% 32.4% 12.5 9.6 432 7.6%

Source: Company data, Al Rajhi Capital

Saudi Cement Sector Cement –Industrial

June 2013

Disclosures Please refer to the important disclosures at the back of this report. 2

Saudi Cement Sector Government spending a major demand driver

The Saudi government has allocated about SAR1.4tn in its Ninth Five-Year Development Plan (2010-2014) for various sectors, up by around 67% from the previous five-year plan. Under the ninth plan, half of the government’s spending is allocated to education, which includes building more than 100 educational and training institutes, while about a fifth will be spent on social and healthcare development, which includes the construction of 117 hospitals, 750 primary healthcare centers, and 400 emergency centers.

Figure 2 Breakup of spending in 9th development plan

Title:

Source:

Please fill in the values above to have them entered in your report

50.60%

19%

15.70%

7.70%

7%

Human Resources Social and Health Economic Resources

Transportation & Communication Municipal & Housing Services

Source: Ministry of Economy and Planning, Al Rajhi Capital

Housing remains a key part of the Ninth Plan The Ninth Five-Year Development Plan also aims to build 1mn residential housing units to meet around 80% of the projected demand. Further, the King has announced building 500k homes worth SAR250bn for the Saudi citizens. The Ministry of Housing has divided the work in three phases – phase one includes constructing 200,000 homes, while phase two and three will involve setting up 150,000 units each. The housing project will cover 11 major cities, including Riyadh, Al-Kharj, Dammam, Al-Ahsa, Al-Qatif, Jeddah, Madina, Tabuk and Khamis Mushayt. In addition, the government has announced several projects for ports, railways, airports, and other infrastructure constructions, which are under various stages of development. An increased focus on such mega construction projects will continue to fuel cement demand for a major part of this decade. The recent finalization of the key regulations of mortgage law reflects the government’s seriousness about housing projects (for further details please refer to our note on mortgage law dated March 12, 2013).

Figure 3 Major projects planned in KSA

Title:

Source:


86

66.7 119.4

7.56.7 4.5 3.2 1.5 1.3

197.8

0

50

100

150

200

250

Economic City

500k Homes

Khuzam City

Centre

Haramain Railway Project

KAFD Phase

Airports Riyadh Metro

Sea Port Jeddah Gate

Kingdom Tower

Jeddah

Total

US$

bill

ion

Source: govt. announcements, Al Rajhi Capital

Saudi Arabia has a strong project pipeline of US$600bn over the next five years, with the government accounting for over 60% of it

Ministry of Housing implementing a plan to develop 200,000 affordable housing units


June 2013


Demand outlook remains positive The year 2012 witnessed a robust demand for cement, as its consumption grew by 12%. Our conversation with various cement players convinces us that the cement consumption would grow by around 8% in 2013, reaching about 57mn tons. We expect the growth to moderate this year as compared to the past (although it still remains healthy) due to the high base effect of 2012 and the lag effect of the construction sector’s slow down in 2012. We expect the consumption growth in Saudi Arabia to moderate from the double-digit growth witnessed over the last five years, but still grow at a healthy CAGR of around 7.0% to reach more than 75mn tons by 2017.

We have talked to various cement companies, which confirm that over 25mn tons of new cement capacity is expected to be commissioned in the Kingdom by 2017 to cater to the strong project pipeline. Most cement manufacturers are in the process of expanding their capacities. Saudi Cement recently restarted its three old kilns, with a combined capacity to produce 1,325 tons per day (tpd) of clinker. Najran Cement is adding 8,000 tons per day (tpd) of cement capacity, while Qassim Cement is adding 5,500 tpd of capacity. In addition, Al Jouf Cement has roped in a US consultancy firm to set up a third kiln with a capacity to produce 5,000tpd of clinker, even as it is constructing a second line with the same capacity.

Figure 4 Expected capacity additions (mn tones) and fuel allocation status

Company Name Current Capcity

Additional

Expected Capacity

Expected first Year

of Production Fuel Allocation

Riyad Cement Company 3.5 3.47 2015

Al Madinah Cement 1.6 2.43 2015

Hail Cement Company 0 1.6 2013 Yes

Yanbu Cement Company 5.1 3 2012 Yes

Arabian Cement Company 4.5 2.43 2015

Al Safwa Cement Company 2 0 N/A

Tabuk Cement Company 1.4 1.32 2014

Northern Region Cement 2 0.96 2012

Al Jouf Cement Company 1.5 3.2 N/A

Southern Province Cement 6.9 1.5 2012 Yes

Najran Cement Company 3.1 2.43 2014

New Players* 0 2.08 2015 Source: Northern Region Cement IPO Prospectus, Al Rajhi Capital

Few concerns persist for the Saudi cement industry Although the demand outlook for the Saudi cement sector is bright, it is plagued by a host of issues which are hindering its growth. We examine below the key issues faced by the cement sector in detail, which could dent its profitability and growth potential.

Construction slowing down Saudi Arabia witnessed a slowdown in construction activities in the second part of 2012 and in 2013. Although a number of projects were announced in the Kingdom, the actual construction of the projects are facing delays. Moreover, there was also a sharp decline in the value of contracts awarded in 2012. Only projects worth US$50bn were awarded in Saudi Arabia in 2012, down from around US$70bn deals awarded in 2011. The slowdown is attributed to a combination of factors, including bureaucratic hurdles, and technical and capacity challenges faced by contractors.

However, we expect the Saudi construction sector to perform reasonably well in 2013, with contracts worth US$80bn expected to be awarded during the year. The Western and the Central regions are witnessing majority of the construction projects, thus offering a competitive advantage to cement companies located in those areas. The Western region of Makkah, Medina and Jeddah has a number of ongoing construction projects. The government has allocated SAR47bn for 127 projects in Jeddah alone. The Central region, with its capital Riyadh, has also lined up a number of projects, including the expansion of the King Khalid International Airport, Riyadh Metro and phase 2 of King Abdullah Financial District.

Cement demand is likely to moderate, yet grow at a healthy rate of around 7%

…healthy demand has led most cement companies to embark on expansion programs

24mn tons of cement capacity is expected to come online by 2015-2017

Contracts worth US$80bn to be awarded in 2013


June 2013


Government ban on export and price cap hurting profitability The sharp rise in domestic demand led the Saudi government to impose a full export ban on cement in H2 2011 and allow imports. The government had also introduced a price ceiling on cement at SAR250 per ton, which was subsequently reduced to SAR240/ton in early 2012. Price realization will remain capped until the government revises the price ceiling or allows exports. Additionally, the government has set a price limit of SAR12 per bag for wholesalers and SAR14 per bag for end-users. This cap on prices at both, the manufacturing and retail level, has negatively impacted the margins of the cement companies in the second half of 2012, and is likely to pressurize their margins in 2013.

Companies depleting clinker inventory to maintain high production levels Inventory levels have fallen sharply across the industry over the last couple of years due to rising demand witnessed during this period. Total clinker inventories for companies at the end of December 2012 stood at 6,397mn tons, as compared to 7,504mn tons at the end 2011 and 10,048mn tons at the end of 2010. Inventory days of major cement companies, too, fell. For instance, the inventory days of Saudi Cement fell from 223 days in 2010 to 120 days in 2012, while Yamama Cement’s inventory dropped from more than 83 days in 2010 to about 36 days in 2012. We believe the falling inventory levels of companies will lead to a gradual decline in production, which might lead to an acute shortage of cement in the market. Thus, cement companies are thus opting for clinker purchases to stimulate production. Last year, Arabian Cement and Qassim Cement bought clinker from Saudi Cement, while this year Arabian Cement has signed a clinker swap agreement, wherein it agreed to swap clinker from its Jordanian subsidiary with Northern Cement’s partner in Jordan, in return for clinker from Northern Cement in Saudi Arabia. The contract is for swapping of 700,000 tons of clinker annually for a period of three years. Additionally, the government’s approval of imports should also help in building clinker for the Saudi cement industry.

Figure 5 Inventory days for cement companies

Title:

Source:


0

50

100

150

200

250

300

350

400

450

500

Saudi Cement Yamama Arabian Cement Al Jouf Yanbu Qassim Najran

2010 2011 2012

Source: Company financials, Al Rajhi Capital

Tight supply leading to black-marketing of cement in Saudi Arabia The strong demand for cement in the western region has encouraged black-marketing activities. According to industry sources, cement is hoarded by suppliers, creating further shortage in the market, and is being sold in the black-market at more than 75% premium to the retail price cap of SAR14 per bag. Cement prices touched SAR25 per bag in the black-market in Jeddah and SAR20 per bag in Madina in February, as contractors were forced to approach black-marketers in order to avoid delays and meet their construction deadlines. The contractors are already under pressure due to the stringent actions taken by the authorities to clean up the labor market. Although most cement companies meet their Saudization quotas, the new law is directly affecting construction companies, since the labor-intensive sector mostly employs expats. The push for Saudization is also leading to a delay in visa approvals for foreign workers.

Fuel supply constraints affect capacity additions The shortage of subsidized fuel is threatening the growth of Saudi cement firms, despite substantial capacity expansion plans as mentioned earlier. Cement companies are facing major risks, as they are receiving limited supply from Saudi Aramco, who is not providing

Excessive government control on cement prices creating a slew of issues for cement companies

Inventory days across all companies have fallen drastically since 2010


June 2013


any fuel supply assurance to cement companies for their new production lines. As a result, cement companies are delaying their expansions programs. The cement shortage in the Saudi market had resulted in a royal decree in March 2012, ordering Saudi Aramco to fulfill all fuel requirements for the newly-added cement capacities for a temporary period of six months, thus easing the supply situation. An assurance of uninterrupted fuel supply for the planned capacities will serve as a major catalyst for the growth of the cement sector and also mitigate cement supply concerns, which is currently proving to be a bottleneck for the construction industry.

Cement imports is only a short-term solution The Saudi government, in a bid to improve cement supply in the country, has approved importing cement in the country. The government plans to import 10mn tons of cement over the next three years, to fulfill the shortage created by heavy demand in the country. As a result, various ports in the country are ramping up their facilities for carrying out cement imports. We have talked to various cement players, which convince us that importing is only a temporary solution for the sector. Cement companies also remain upbeat about securing approval of their expansion plans as importing cement will squeeze the margins of the existing companies as it involves high import costs.

Key changes in estimates We have cut our near-term forecasts slightly for all major companies, especially on the realization side, as prices have been capped at SAR240/ton. We have also adjusted our capacity utilization estimates for companies depending on their inventory levels.

Figure 6 Saudi Cement Sector: Changes to our near term estimates

In SAR mn 2013E 2013E % chng. 2014E 2014E % chng.

Old New Old New

Arabian cement

Revenues 1,423 1,401 -1.5% 1,518 1,469 -3.3%

Net Profit 502 483 -3.8% 523 499 -4.6%

Yamama Cement

Revenues 1,727 1,628 -5.7% 1,732 1,648 -4.8%

Net Profit 897 874 -2.6% 902 868 -3.8%

Saudi Cement

Revenues 2,225 2,286 2.7% 2,342 2,349 0.3%

Net Profit 1,118 1,220 9.2% 1,191 1,259 5.7%

Al Jouf Cement

Revenues 391 385 -1.6% 409 396 -3.2%

Net Profit 122 112 -8.3% 131 127 -3.1%

Qassim Cement

Revenues 1,145 1,076 -6.0% 1,127 1,082 -4.0%

Net Profit 626 594 -5.1% 603 592 -1.8% Source: Company data, Al Rajhi Capital

Q1 2013 results:

The Q1 results of the cement companies under our coverage were mostly above our estimates. Sales volumes for the sector was better-than-expected, leading to an improved bottom-line.Yamama Cement sold 1.98mn tons of cement in Q1, and reported a net profit of SAR277mn (down 3% y-o-y), beating our estimates. Saudi Cement’s bottom-line was 10% ahead of our estimates at SAR340mn, even though the revenue figure was in line with our estimates. Arabian Cement reported a net profit of SAR157.3mn, 14% ahead of our estimates, as production at the company’s Jordanian unit normalized. Al Jouf reported a 25% decline in its net profit as realizations fell due to the export ban and price cap on cement. Qassim Cement’s results were mostly in line with expectations, as the company’s net profit grew 6.3% y-o-y on the back of higher sales volume.

Saudi government plans to import 10mn tons of cement in the next three years to cover domestic shortage

We have cut our near term forecasts; considering the cap on prices limiting profitability


June 2013


Valuation

Price target changed for companies under coverage We have used the DCF and comparative valuation to calculate the fair value of cement companies under our coverage. Our WACC calculations for companies are below:

Figure 7 WACC calculations for companies

Arabian

Cement

Yamama

Cement

Saudi

Cement

Al Jouf

Cement

Qassim

Cement

Risk-free Rate 4.3% 4.3% 4.3% 4.3% 4.3%

Country Risk Premium 1.1% 1.1% 1.1% 1.1% 1.1%

Equity Market Risk Premium 5.2% 5.2% 5.2% 5.2% 5.2%

Adjusted Beta 1.00 0.84 0.76 1.04 0.76

Cost of Equity 10.6% 9.7% 9.3% 10.8% 9.3%

Pre-tax Cost of Debt 5.2% 2.7% 1.5% 2.6% 0.0%

Effective Tax rate 2.4% 2.7% 3.0% 3.2% 0.0%

After-tax Cost of Debt 5.1% 2.6% 1.5% 2.6% 0.0%

Target D/(D+E) 13.4% 0.3% 5.3% 21.3% 0.0%

WACC 9.8% 9.7% 8.9% 9.0% 9.3% Source: Company data, Bloomberg, Al Rajhi Capital

In our CAPM model to calculate cost of equity, we have used the last ten year average of the US 10-year bond yield (at 3.6%), and the country default premium of 0.7% based on Moody’s sovereign rating, to arrive at a risk free rate of 4.3%. We have then added a country risk premium of 1.05% (default premium of 0.7% multiplied by an average equity-to-debt market volatility of 1.5x times). Our equity market risk premium of 5.2% is based on historical US market premium of 4.2% and an additional 1% premium for the local market.

Our WACC calculations have been mainly dependent on the companies’ debt/assets ratio and effective interest cost at the end of 2013. Our WACC ranges between 8.9-9.8% with Yamama Cement and Arabian on the higher band due to their high beta.

DCF Valuation:

Saudi Cement offers the highest potential We have changed our valuation model to a blended approach including both DCF method and relative valuation. We have raised our price target on Arabian Cement on better operating prospects this year, after suffering higher impairment charges at its Jordanian subsidiary last year. We have also raised our price target and rating on Saudi Cement following its double-digit growth in 2012 and better outlook for this year and next year. The company also stands a good chance of increasing its dividends. We have cut our fair value on Yamama Cement on risks associated with its plant relocation; however, we remain Overweight. We have raised the fair value on Al Jouf Cement on its line 2 expansion program which we estimate in 2015.

Figure 8 Companies valuation: DCF

Arabian

Cement

Yamama

Cement

Saudi

Cement

Al Jouf

Cement

Qassim

Cement

Valuation as per FCFF 6,159 11,726 18,985 3,391 8,149

Adjust:

Associates and non-core assets 367 528 98 68 0

Net debt (250) (146) (620) (354) 105

Minorities (49) 0 0 0 0

Equity Value 6,228 12,108 18,463 3,105 8,254

Number of shares 80 203 153 130 90

Fair Value per share 77.9 59.8 120.7 23.9 91.7 Source: Company data, Al Rajhi Capital

Saudi Cement, Yamama and Al Jouf provide higher upside as per DCF valuation


June 2013


Relative Valuation:

Saudi and Yamama Cement offer value We have assigned a 30% weight to the relative valuation approach using local cement companies as peers.

We believe Saudi cement companies still have a fair upside, considering the favorable demand outlook for the next three years. As per comparative valuation, Yamama Cement appear the most attractive company with a PE of 11.4x and EV/EBITDA of 8.4x, while Al Jouf Cement looks expensive on a peer basis with PE of 21.0x. It is worth noting that Al Jouf is in the process of tripling its production capacity, which should be a value driver. But lack of clarity on the commencement of its new line have lead us to be conservative on our near term forecasts. Qassim Cement’s dividend yield is the most attractive (7.5%) followed by Saudi Cement at 7.2%, while others such Yamama Cement and Arabian Cement have fairly decent yields.

Analyzing the EPS CAGR for the next years, Al Jouf Cement has the highest growth of 24%, which stems from the fact that it is coming up with a new line in 2015. This is followed by Arabian Cement at 8.5% and Yamama Cement at 7.1%.

Figure 9 Comparative multiple analysis

Companies

Market

Cap.

Enterprise

Value EV/ton EPS growth

Dividend

Yield

(US$ mn) (US$ mn) Current (US$) 2013E 2014E 2013E 2014E 3 yr CAGR 2013E

Arabian Cement 1,504 1,660 307 12.0 11.3 8.4 8.4 8.5% 4.9%

Yamama Cement 2,646 2,363 375 11.4 11.5 9.2 9.3 7.1% 6.1%

Saudi Cement 4,059 4,294 499 12.5 12.1 10.5 10.1 4.5% 7.3%

Al Jouf Cement 626 755 431 21.0 18.5 12.8 10.0 24.2% 2.8%

Qassim Cement 1,944 1,784 432 12.5 12.6 9.6 9.8 0.7% 7.6%

Southern Cement 3,771 3,584 498 12.5 11.3 10.8 9.8 0.1% 7.7%

Yanbu Cement 2,909 2,979 662 12.4 12.9 10.5 10.6 NA 5.5%

Tabuk Cement 742 654 409 12.7 10.1 8.4 7.0 0.2% NA

Eastern Cement 1,359 1,347 374 13.5 12.9 10.8 10.3 0.0% 6.8%

Average 2,173 2,158 443 13.4 12.6 10.1 9.5 5.7% 6.1%

PE Ratio EV/EBITDA

Source: Company data, Bloomberg, Al Rajhi Capital

Price target calculation By assigning a weight of 70% to DCF and 30% to relative valuation, we have arrived at the target price of companies under coverage. We have upgraded Saudi Cement to Overweight and have remained Overweight on Yamama Cement. We remain Neutral on Qassim, and have downgraded Al Jouf and Arabian Cement to Neutral. The table below shows our calculation and the upside potential for each companies. Although Al Jouf deserves a premium relative valuation multiple due to its higher expected growth rate, we have not factored in the same now in our valuation, as the company has not made any subsequent announcements about its expansion plans. As we get more clarity, we will revisit our relative valuation multiple for AL Jouf to reflect its higher expected earnings growth compared to the sector.

Figure 10 Cement companies : blended valuation table

Fair value Fair Value

Target

Price

Upside

Potential Rating

DCF Relative valuation DCF Relative

Arabian Cement 77.9 78.4 70% 30% 78.0 13.0% Neutral

Yamama Cement 59.8 55.6 70% 30% 58.5 17.2% Overweight

Saudi Cement 117.8 112.0 70% 30% 118.0 15.1% Overweight

Al Jouf Cement 23.9 11.2 70% 30% 20.0 9.6% Neutral

Qassim Cement 91.7 86.0 70% 30% 90.0 9.1% Neutral

Weight


Selected cement companies are still trading at a discount to its peers

Al Jouf overall valuation getting impacted due to its higher relative value

Arabian Cement Cement ARCCO AB: Saudi Arabia

June 2013

Rating NEUTRAL

Target price SAR78.00 (13.0% upside)

Current

price SAR69.00

Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform 8

Key themes & implications

We downgrade Arabian Cement to Neutral as it has rallied 30% post our initiation and reached our price target. We expect the company to deliver decent growth in 2013 on account of higher demand in the western region and additional clinker purchases from Northern Cement.

Share information

Market cap (SAR/US$) 5.64bn / 1.504bn

52-week range 43.90 - 71.50

Daily avg volume (US$) 3.22mn

Shares outstanding 80.00mn

Free float (est) 81%

Performance 1M 3M 12M

Absolute 4.8% 30% 28.8%

Relative to index -1.3% 20.8% 14%

Major Shareholder:

Abdulaziz Abdullah Sulaiman Al Sulaiman 7.5%

Abdullah Abdulaziz Saleh Al Rajhi 6.1%

Valuation

12/12A 12/13E 12/14E 12/15E

P/E (x) 14.7 12.0 11.3 10.8

P/B (x) 1.9 1.8 1.7 1.6

EV/EBITDA (x) 9.2 8.4 8.3 8.1

Dividend Yield 4.3% 5.0% 5.0% 5.0%

12/12A 12/13E 12/14E 12/15E

P/E (x) 14.7 12.0 11.3 10.8

P/B (x) 1.9 1.8 1.7 1.6

EV/EBITDA (x) 9.2 8.4 8.3 8.1

Dividend Yield 4.3% 5.0% 5.0% 5.0%


Performance

76

83

90

97

105

112

119

126

41

46

51

56

61

66

71

76

Price Close Relative to TADAWUL FF (RHS)

-10

30

70

06/12 09/12 12/12 03/13

RS

I10

77

84

91

98

106

113

120

127

41

46

51

56

61

66

71

76


-10

30

70

06/12 09/12 12/12 03/13

RS

I10

Source: Bloomberg, Company data, Al Rajhi Capital

Company summary

Established in 1956, Arabian Cement Company is a Saudi Arabia-based cement manufacturer. The company's products include ordinary Portland cement, sulphate-resistant cement, Portland pozzolan cement and other types of cement. The company’s plant is located in the Rabigh area of Saudi Arabia with a clinker capacity of 2.5 million tons per annum and a grinding capacity of over three million tons per annum.It also owns stakes in Jordan-based Qatrana Cement Company (85%).

Arabian Cement Downgrading to Neutral The year 2012 was a tough year for Arabian Cement as it incurred impairment

losses at its Jordanian subsidiary. We expect the company to deliver a better

performance in 2013 on the back of a clinker swap agreement with Northern

Cement, as it is expected to boost its domestic sales. Arabian Cement by virtue

of being in close proximity to the high demand areas, enjoys a competitive

advantage over its peers. That said, we think all positives on the stock have

already been priced in and thus we downgrade to Neutral.

Agreement with Northern Cement: Arabian Cement has entered into a clinker

swap agreement (700,000 tons for three years) with Northern Cement. The

company through this deal has secured clinker supply for its Saudi unit. This

deal could lead to a gradual decline in the company’s EBITDA margin,

(exchanging the expensive Jordanian clinker for the comparatively low-cost

Saudi clinker) but will certainly boost sales. Hence, we expect the company’s

EBITDA margin to fall gradually from 49% in 2012 to around 44% in 2015.

Jordan unit issues resolved: The labor strike at its Jordanian subsidiary,

Qatrana Cement, led Arabian Cement to incur an impairment charge of around

SAR100mn in 2012. Although the company may report another impairment

charge in 2013 (of a much smaller amount), the management has indicated that

the operational issues at its Jordanian subsidiary have been resolved, and the

unit is now functioning normally. However, by selling clinker of its Jordanian

subsidiary, the company has indicated that they do not expect cement demand

in Jordan to pick up any time soon.

No expansion plans as of now: Arabian Cement’s plans to build a new

production line with a capacity of 7,000 tpd, has been put on hold, as it awaits

the fuel supply confirmation from Aramco. We expect cement production to

increase in 2013, as the company restarts production from its fire hit mill no. 3.

Arabian Cement has also tied up with Northern Cement for clinker. We expect

the company to sell 4.7mn tons of cement in 2013, up 13% from 2012.

Target revised on higher cash flows: The clinker swap agreement with

Northern Cement, coupled with better business in Jordan will lead to improved

cash inflow over the next three years. We estimate an EPS growth of 23% and

6% in 2013 and 2014 respectively. Arabian Cement is trading at a discount to its

peers in terms of EV/ton and 2014 PE. We have been positive on the company’s

location, which is close to the high demand areas as it ensures stable profitability

for another couple of years. The stock has rallied 30% post our initiation and

seems to be fairly valued at the moment.

Period End (SAR) 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue (mn) 1,079 1,371 1,401 1,469 1,520

Revenue Growth 44.9% 27.1% 2.2% 4.8% 3.5%

Gross profit margin 46.9% 38.9% 40.3% 39.9% 38.9%

EBITDA margin 57.9% 49.3% 48.6% 45.3% 44.2%

Net profit margin 38.0% 28.0% 33.7% 34.0% 34.3%

EPS 5.12 4.80 5.90 6.24 6.52

EPS Growth 7.8% -6.3% 23.0% 5.7% 4.6%

ROE 15.8% 13.6% 15.7% 15.6% 15.4%

ROCE 11.6% 13.1% 13.1% 13.1% 12.7%

Capex/Sales 9.3% 2.7% 3.3% 4.5% 4.5% Source: Company data, Al Rajhi Capital

Research Department Mazhar Khan,

Tel 966 112119248, [email protected]

Arabian cement Company Cement – Industrial June 2013


Income Statement (SARmn) 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue 1,079 1,371 1,401 1,469 1,520

Cost of Goods Sold (573) (837) (836) (882) (929)

Gross Profit 505 533 565 586 591

Government Charges

S.G. & A. Costs (51) (39) (53) (65) (73)

Operating EBIT 454 495 512 521 518

Cash Operating Costs (454) (695) (720) (803) (848)

EBITDA 625 676 681 666 672

Depreciation and Amortisation (171) (181) (169) (145) (153)

Operating Profit 454 495 512 521 518

Net financing income/(costs) (46) (41) (42) (32) (13)

Forex and Related Gains

Provisions (5) (100) (1) - -

Other Income

Other Expenses 7 20 17 10 15

Net Profit Before Taxes 406 372 480 492 515

Taxes (5) (8) (12) (10) (10)

Minority Interests 9 20 4 16 17

Net profit available to shareholders 409 384 472 499 522

Dividends (240) (240) (280) (280) (280)

Transfer to Capital Reserve

12/11A 12/12A 12/13E 12/14E 12/15E

Adjusted Shares Out (mn) 80.00 80.00 80.00 80.00 80.00

CFPS (SAR) 7.14 6.81 7.96 7.84 8.22

EPS (SAR) 5.12 4.80 5.90 6.24 6.52

DPS (SAR) 3.000 3.000 3.500 3.500 3.500

Growth 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue Growth 44.9% 27.1% 2.2% 4.8% 3.5%

Gross Profit Growth 15.6% 5.5% 5.9% 3.8% 0.9%

EBITDA Growth 20.1% 8.2% 0.8% -2.3% 0.9%

Operating Profit Growth 15.0% 8.9% 3.6% 1.6% -0.5%

Net Profit Growth 7.8% -6.3% 23.0% 5.7% 4.6%

EPS Growth 7.8% -6.3% 23.0% 5.7% 4.6%

Margins 12/11A 12/12A 12/13E 12/14E 12/15E


EBITDA margin 57.9% 49.3% 48.6% 45.3% 44.2%

Operating Margin 42.1% 36.1% 36.6% 35.5% 34.1%

Pretax profit margin 37.6% 27.1% 34.2% 33.5% 33.9%


Other Ratios 12/11A 12/12A 12/13E 12/14E 12/15E

ROCE 11.6% 13.1% 13.1% 13.1% 12.7%

ROIC 12.8% 13.5% 15.0% 16.8% 16.9%

ROE 15.8% 13.6% 15.7% 15.6% 15.4%

Effective Tax Rate 1.3% 2.2% 2.4% 1.9% 2.0%

Capex/Sales 9.3% 2.7% 3.3% 4.5% 4.5%

Dividend Payout Ratio 58.6% 62.6% 59.3% 56.1% 53.7%

Valuation Measures 12/11A 12/12A 12/13E 12/14E 12/15E

P/E (x) 13.8 14.8 12.0 11.3 10.9

P/CF (x) 9.9 10.4 8.9 9.0 8.6

P/B (x) 2.1 1.9 1.8 1.7 1.6

EV/Sales (x) 6.1 4.5 4.1 3.8 3.6

EV/EBITDA (x) 10.6 9.2 8.4 8.4 8.1

EV/EBIT (x) 14.5 12.6 11.2 10.7 10.5

EV/IC (x) 1.8 1.9 1.9 1.9 1.8

Dividend Yield 4.2% 4.2% 4.9% 4.9% 4.9% Source: Company data, Al Rajhi Capital

We estimate revenue and net profit to grow at a CAGR of 7%, and 11% till 2015

We estimate a dividend of SAR3.5 this year

Arabian Cement’s profitability ratios should remain stable

2014 P/E ratio stands at 11.3x

Arabian cement Company Cement – Industrial June 2013


Balance Sheet (SARmn) 12/11A 12/12A 12/13E 12/14E 12/15E

Cash and Cash Equivalents 305 285 621 732 746

Current Receivables 209 211 195 213 251

Inventories 309 302 333 364 380

Other current assets 45 59 101 101 101

Total Current Assets 867 856 1,249 1,410 1,477

Fixed Assets 3,245 3,015 2,902 2,822 2,737

Investments 312 347 367 394 426

Goodwill - - - - -

Other Intangible Assets 15 15 15 15 15

Total Other Assets 8 14 14 14 14

Total Non-current Assets 3,580 3,391 3,298 3,245 3,192

Total Assets 4,448 4,247 4,547 4,656 4,669

Short Term Debt 286 205 121 150 150

Trade Payables

Dividends Payable - 34 234 234 140

Other Current Liabilities

Total Current Liabilities 507 443 592 632 554

Long-Term Debt 1,105 814 756 606 456

Other LT Payables - - - - -

Provisions 39 43 42 42 42

Total Non-current Liabilities 1,144 857 799 649 499

Minority interests 50 32 42 83 129

Paid-up share capital 800 800 800 800 800

Total Reserves 1,947 2,115 2,314 2,491 2,687

Total Shareholders' Equity 2,747 2,915 3,114 3,291 3,487

Total Equity 2,797 2,947 3,156 3,375 3,616

Total Liabilities & Shareholders' Equity 4,448 4,247 4,547 4,656 4,669

Ratios 12/11A 12/12A 12/13E 12/14E 12/15E

Net Debt (SARmn) 1,086 734 256 24 (140)

Net Debt/EBITDA (x) 1.74 1.09 0.38 0.04 (0.21)

Net Debt to Equity 38.8% 24.9% 8.1% 0.7% -3.9%

EBITDA Interest Cover (x) 13.6 16.4 16.4 21.0 50.0

BVPS (SAR) 34.34 36.44 38.93 41.14 43.59

Cashflow Statement (SARmn) 12/11A 12/12A 12/13E 12/14E 12/15E

Net Income before Tax & Minority Interest 406 372 480 492 515

Depreciation & Amortisation 171 181 169 145 153

Decrease in Working Capital (160) 54 (33) (39) (38)

Other Operating Cashflow 5 18 (7) (10) (10)

Cashflow from Operations 422 625 609 588 620

Capital Expenditure (101) (38) (46) (66) (68)

New Investments 12 15 (13) (10) (15)

Others - - - - -

Cashflow from investing activities (89) (23) (59) (76) (83)

Net Operating Cashflow 333 602 550 512 537

Dividends paid to ordinary shareholders (163) (259) (107) (280) (374)

Proceeds from issue of shares - - - - -

Effects of Exchange Rates on Cash - (1) - - -

Other Financing Cashflow (2) (2) 1 - -

Cashflow from financing activities (179) (633) (221) (401) (524)

Total cash generated 154 (32) 328 112 14

Cash at beginning of period 147 305 285 621 732

Implied cash at end of year 301 273 613 732 746

Ratios 12/11A 12/12A 12/13E 12/14E 12/15E


Inventory levels look stable

Negative net debt situation to come with excess cash in the balance sheet

Capex /sales ratio should remain healthy

Yamamah Cement Cement – Industrial YACCO AB: Saudi Arabia

June 2013

Rating OVERWEIGHT


Current

price SAR49.9



We rate Yamama Cement as Overweight based on its robust operating performance and healthy balance sheet. Further, it is also a direct beneficiary of the infrastructure boom in the central region. That said, the company has been asked to move its factory out of Riyadh, which will remain a major risk for the company’s performance going ahead.

Share information


52-week range 43.30 - 49.90





Absolute -0.8% 8.2% 2.3%

Relative to index -5.8% -0.7% -9.6%

Major Shareholder:

Prince Sultan Mohammed Saud Al Kabeer Al 9.7%

GOSI 7.7%

Valuation

12/12A 12/13E 12/14E 12/15E

P/E (x) 12.2 11.4 11.5 11.2

P/B (x) 2.8 2.8 2.6 2.5

EV/EBITDA (x) 9.3 9.2 9.3 9.2

Dividend Yield 6.1% 6.1% 6.1% 6.6% Source: Company data, Al Rajhi Capital

Performance

88

90

92

94

96

98

100

102

104

106

42

44

46

48

50


-10

30

70

06/12 09/12 12/12 03/13

RS

I10


Company summary

Yamama Cement Company is one of the leading cement companies in KSA. Yamama Cement was established in 1961 by Prince Mohammed Bin Saud Al-Kabeer, primarily to manufacture and sell cement in the central region. The company enjoys a comparative advantage over its peers due to its close proximity to the central region and integrated plant. Thus, the company has been able to achieve higher gross and net profit margins.

Yamama Cement Cut in price target on relocation risk

We have cut our target price on Yamama due to increased risk of relocation

and a lack of confirmation from the company. However, we believe Yamama

will continue to run on full capacity on account of rising demand for cement in

the Kingdom for the next three years. Moreover, the company still stands to

benefit from its strategic location. We remain overweight with a revised target

price of SAR58.5.

High capacity utilization amid clinker burn: Yamama Cement has been

running at around 95% capacity for the past two years. As a result, clinker

inventory has come down to only SAR48mn at the end of Q1 2013, and only 10%

of quarterly sales, which provides an indication that future growth will remain

dull. Hence, we estimate a 3% rise in sales for 2013 and a 7% improvement in

overall profits for the company in 2013.

Progress in plant relocation remains a big trigger: Yamama has been

ordered to relocate its factory to the outskirts of Riyadh, though, there hasn’t

been any concrete news on this from the company yet. We believe Yamama has a

good opportunity to revamp its factory and construct a plant with the latest

technology. However, lack of substantial progress make us concerned about

delays in plant shifting. Hence, we have not included the line expansion plan,

which we cannot confirm yet, in our model. However, we believe the

construction of the new factory could begin by next year and thus, we estimate a

capex/sales ratio of 19-40% over the next two years.

We still remain positive: With the Saudi market facing cement supply crunch,

we believe Yamama will continue to ramp up its capacity and be able to maintain

a capacity utilization of above 100% for the next couple of years. Any imports

will automatically run down its EPS growth.

Valuation – Yamama looks cheap: Yamama remains one of the most

undervalued stocks in the cement sector, with a held-up rally. The stock trades

at 2013E 11.4x and 11% below the sector’s PE of 13.4x. Combined with a healthy

dividend yield of 6%, we remain Overweight on the stock. Our new target price is

SAR58.5, slightly below the previous target of SAR60, due to a WACC increase

(9.7% v/s. 9.1%).


Revenue (mn) 1,442 1,576 1,628 1,648 1,652

Revenue Growth 13.4% 9.3% 3.3% 1.2% 0.2%


EBITDA margin 65.8% 67.6% 66.5% 65.0% 65.1%


EPS 3.65 4.02 4.32 4.27 4.37

EPS Growth 12.7% 10.1% 7.4% -1.2% 2.4%

ROE 22.6% 23.3% 24.5% 23.5% 22.6%

ROCE 22.0% 23.9% 22.3% 23.8% 22.7%


Research Department

Mazhar Khan, Tel 966 112119248, [email protected]

Yamamah Cement Cement – Industrial June 2013



Revenue 1,442 1,576 1,628 1,648 1,652


Gross Profit 809 914 958 964 974

Government Charges

S.G. & A. Costs (56) (48) (53) (58) (58)

Operating EBIT 753 866 905 907 917


EBITDA 949 1,065 1,083 1,071 1,076



Net financing income/(costs) 9 (7) (1) (5) 1


Provisions (2) (2) (3) (2) (2)

Other Income

Other Expenses 15 5 6 - -


Taxes (24) (48) (32) (36) (32)

Minority Interests - - - - -


Dividends (540) (608) (608) (608) (658)


12/11A 12/12A 12/13E 12/14E 12/15E


CFPS (SAR) 4.62 5.00 5.20 5.08 5.15

EPS (SAR) 3.653 4.021 4.317 4.266 4.367

DPS (SAR) 2.667 3.000 3.000 3.000 3.250

Growth 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue Growth 13.4% 9.3% 3.3% 1.2% 0.2%


EBITDA Growth 10.2% 12.3% 1.7% -1.1% 0.4%

Operating Profit Growth 12.5% 15.0% 4.5% 0.2% 1.1%

Net Profit Growth 12.7% 10.1% 7.4% -1.2% 2.4%

EPS Growth 12.7% 10.1% 7.4% -1.2% 2.4%

Margins 12/11A 12/12A 12/13E 12/14E 12/15E


EBITDA margin 65.8% 67.6% 66.5% 65.0% 65.1%





ROCE 22.0% 23.9% 22.3% 23.8% 22.7%

ROIC 31.3% 36.4% 44.3% 42.7% 40.2%

ROE 22.6% 23.3% 24.5% 23.5% 22.6%


Capex/Sales 4.4% 4.7% 8.1% 19.3% 40.0%



P/E (x) 13.4 12.2 11.4 11.5 11.2

P/CF (x) 10.6 9.8 9.4 9.6 9.5

P/B (x) 2.9 2.8 2.8 2.6 2.5

EV/Sales (x) 6.9 6.3 6.1 6.0 6.0

EV/EBITDA (x) 10.5 9.3 9.2 9.3 9.2

EV/EBIT (x) 13.2 11.5 11.0 10.9 10.8

EV/IC (x) 4.4 5.0 4.9 4.5 3.6


We expect revenues to remain flat till the company’s plant shifting is completed

We expect margins to remain healthy as the company is highly efficient

Yamama enjoys a significant ROE and an impressive ROIC

Yamama is trading below sector multiples

Yamamah Cement Cement – Industrial June 2013




Current Receivables 1,134 1,506 1,171 1,187 1,186

Inventories 149 66 71 68 116

Other current assets 864 1,247 882 882 882

Total Current Assets 1,380 1,675 1,462 2,049 1,779

Fixed Assets 1,999 1,879 1,832 1,986 2,488

Investments 419 438 528 528 539

Goodwill - - - - -


Total Other Assets - - - - -


Total Assets 3,822 4,005 3,835 4,576 4,818

Short Term Debt 142 17 (479) 510 500

Trade Payables

Dividends Payable 39 43 49 49 49


Total Current Liabilities 304 146 (341) 653 670

Long-Term Debt 48 31 510 - -


Provisions 94 229 116 116 116

Total Non-current Liabilities 142 261 627 116 116

Minority interests - - - - -

Paid-up share capital 1,350 2,025 2,025 2,025 2,025

Total Reserves 2,025 1,574 1,525 1,781 2,007


Total Equity 3,375 3,599 3,550 3,806 4,032


Ratios 12/11A 12/12A 12/13E 12/14E 12/15E

Net Debt (SARmn) (708) (1,193) (985) (1,079) (773)

Net Debt/EBITDA (x) (0.75) (1.12) (0.91) (1.01) (0.72)

Net Debt to Equity -21.0% -33.1% -27.7% -28.3% -19.2%

EBITDA Interest Cover (x) (111.5) 153.0 879.0 215.6 (772.8)

BVPS (SAR) 16.67 17.77 17.53 18.79 19.91




Decrease in Working Capital (36) 131 (130) (8) (19)


Cashflow from Operations 937 1,222 936 1,020 1,024


New Investments (189) (358) 257 - (11)

Others - - - - -

Cashflow from investing activities (253) (432) 125 (319) (672)

Net Operating Cashflow 684 790 1,060 702 352



Effects of Exchange Rates on Cash - - - - -

Other Financing Cashflow (171) (52) (2) - -


Total cash generated (109) 27 136 573 (316)



Ratios 12/11A 12/12A 12/13E 12/14E 12/15E


Cash position will increase as the company takes debt to fund its factory shifting program

We expect a net cash position despite the increase in debt due to the plant shifting program

Capex-to-sales will increase sharply, following the plant shift

Saudi Cement Cement – Industrial SACCO AB: Saudi Arabia

June 2013

Rating OVERWEIGHT


Current

price SAR102.5



We upgrade our rating on Saudi Cement to Overweight as we expect the company to increase its dividend distribution in 2013 since there is no major capital expenditure. Moreover, the company’s cash flows remain healthy over the medium term.

Share information


52-week range 86.50 - 101.3





Absolute -1.3% 4.5% 11.5%


Major Shareholder:

GOSI 8.7%

Khaled Abdulrahman Saleh Al Rajhi 7.9%

Valuation

12/12A 12/13E 12/14E 12/15E

P/E (x) 13.8 12.5 12.1 11.7

P/B (x) 4.8 5.6 5.4 5.3

EV/EBITDA (x) 11.4 10.5 10.1 9.7


Performance

92

94

96

98

100

102

104

106

108

110

85

90

95

100


-10

30

70

06/12 09/12 12/12 03/13

RS

I10


Company summary

The Saudi Cement Company (SCC) was established in 1955 to produce cement, cement products and invest in cement-related fields. The company operates two plants in the eastern region of Saudi Arabia. It produces ordinary Portland, sulphate resistant as well as oil-well cement, which is used for oil & gas infrastructure purposes. Saudi Cement used to export its products to the GCC countries, however, the 2008 export ban has somewhat slowed its growth and production volumes.

Saudi Cement Upgrading to Overweight Saudi Cement posted a strong performance in 2012, with its revenues and net

profit jumping by 28.4% and 32.5%, respectively, supported by improved

capacity utilization. Going forward, we expect this growth to moderate to mid-

single digits due to price cap. Nevertheless, we believe the company stands a

good chance to increase its dividend payout this year since there is no major

capital expenditure. Thus, based on higher cash flows and stability, we

upgrade our rating on Saudi Cement to Overweight with a target price of

SAR118.

Cement production to witness moderate increase: Saudi Cement’s capacity

utilization jumped from 84% in 2011 to more than 101% in 2012. For 2013, the

company has decided not to sell its clinker to other cement manufacturers, but

to utilize it internally. In November 2012, the company announced its plans to

construct two new cement mills in order to replace its three aging mills, which

would increase its cement grinding capacity by 600,000 tons per annum.

However, the project is still in the initial stages and its completion date is

unknown. Therefore, we have not included it in our estimates. Thus, we estimate

Saudi Cement’s production to show a moderate increase of 4% in 2014, after a

5% increase in 2013 to 8.7mn tons.

Inventory levels are drawn down: Over the last couple of years, Saudi Cement

has drawn down its clinker inventory levels drastically. Inventory levels are

down from around 2mn tons at the end of 2010, to only about 4,69,000 tons by

the end of April 2013, which could cover only about one month of cement sales.

Cement inventory is down from 191,000 tons to 122,000 during the same

period. Due to the low clinker and cement inventories, the company will have a

limited ability to increase its production volumes. However, due to the strong

cement demand in the region, the company has reopened three old kilns with a

total capacity of 1,325 tons per day, representing 5% of the company’s total

capacity. This addition would serve to meet any unexpected increase in demand.

Dividend payout: Saudi Cement increased its dividend from SAR6.5 in 2011 to

SAR7.0 per share in 2012, a payout ratio of 64.8%. Now that the company has

achieved the statutory reserves worth 50% of the share capital, the company will

have more freedom in distributing dividends from its net profit. Moreover, the

company does not have any major capacity expansion plans, and also has a

favorable debt-to-equity ratio. Thus, with no major commitments for the next

couple of years, we believe the company might increase its dividend payout in

2013 by SAR0.50 to SAR7.5 per share.


Revenue (mn) 1,716 2,203 2,286 2,349 2,401

Revenue Growth 12.4% 28.4% 3.7% 2.8% 2.2%


EBITDA margin 61.3% 60.9% 63.9% 63.5% 64.0%


EPS 5.43 7.20 7.98 8.23 8.54

EPS Growth 5.0% 32.5% 10.8% 3.1% 3.7%

ROE 25.0% 34.2% 41.4% 45.5% 46.2%

ROCE 23.4% 32.7% 41.0% 41.1% 42.1%




Saudi Cement Cement – Industrial June 2013



Revenue 1,716 2,203 2,286 2,349 2,401


Gross Profit 951 1,229 1,355 1,398 1,446

Government Charges

S.G. & A. Costs (86) (87) (90) (94) (91)

Operating EBIT 865 1,142 1,265 1,304 1,354


EBITDA 1,051 1,343 1,461 1,492 1,537


Operating Profit 865 1,142 1,265 1,304 1,354



Provisions - - - - -

Other Income 7 12 5 5 -

Other Expenses

Net Profit Before Taxes 853 1,142 1,259 1,298 1,344

Taxes (21) (41) (38) (39) (38)

Minority Interests

Net profit available to shareholders 831 1,102 1,220 1,259 1,306

Dividends (995) (1,071) (1,109) (1,186) (1,262)


12/11A 12/12A 12/13E 12/14E 12/15E


CFPS (SAR) 6.65 8.51 9.26 9.46 9.73

EPS (SAR) 5.43 7.20 7.98 8.23 8.54

DPS (SAR) 6.50 7.00 7.25 7.75 8.25

Growth 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue Growth 12.4% 28.4% 3.7% 2.8% 2.2%


EBITDA Growth 17.6% 27.7% 8.8% 2.1% 3.0%


Net Profit Growth 26.0% 32.5% 10.8% 3.1% 3.7%

EPS Growth 5.0% 32.5% 10.8% 3.1% 3.7%

Margins 12/11A 12/12A 12/13E 12/14E 12/15E


EBITDA margin 61.3% 60.9% 63.9% 63.5% 64.0%





ROCE 23.4% 32.7% 41.0% 41.1% 42.1%

ROIC 20.4% 27.9% 33.6% 38.9% 42.4%

ROE 25.0% 34.2% 41.4% 45.5% 46.2%


Capex/Sales 5.3% 2.0% 4.4% 4.5% 5.0%



P/E (x) 18.3 13.8 12.5 12.1 11.7

P/CF (x) 15.0 11.7 10.7 10.5 10.2

P/B (x) 4.6 4.8 5.6 5.4 5.3

EV/Sales (x) 9.1 7.0 6.7 6.4 6.2

EV/EBITDA (x) 14.8 11.4 10.5 10.1 9.7

EV/EBIT (x) 18.0 13.4 12.1 11.6 11.0

EV/IC (x) 4.0 4.2 4.7 4.9 5.0


We expect revenue growth to improve gradually over the next three years

EPS growth in 2012 received a boost due to additional clinker sales

Saudi Cement is one of the higher margin cement companies in KSA

ROE stands at an impressive 34% and we expect it to strengthen on account of increasing profits

Saudi Cement Cement – Industrial June 2013





Inventories 479 323 425 474 459


Total Current Assets 936 808 945 1,119 1,192

Fixed Assets 3,584 3,434 3,342 3,260 3,197

Investments 79 98 98 98 98

Goodwill - - - - -

Other Intangible Assets - - - - -



Total Assets 4,599 4,340 4,385 4,477 4,487

Short Term Debt 550 485 497 405 305

Trade Payables



Total Current Liabilities 824 773 1,224 1,232 1,198

Long-Term Debt 420 335 358 369 369






Total Reserves 1,752 1,629 1,201 1,274 1,318


Total Equity 3,282 3,159 2,731 2,804 2,848


Ratios 12/11A 12/12A 12/13E 12/14E 12/15E

Net Debt (SARmn) 738 587 620 393 216

Net Debt/EBITDA (x) 0.70 0.44 0.42 0.26 0.14

Net Debt to Equity 22.5% 18.6% 22.7% 14.0% 7.6%


BVPS (SAR) 21.45 20.65 17.85 18.33 18.61


Net Income before Tax & Minority Interest 853 1,142 1,259 1,298 1,344


Decrease in Working Capital 69 86 (283) (5) (5)


Cashflow from Operations 1,118 1,437 1,150 1,441 1,484


New Investments (13) (16) 0 - -

Others - - - - -


Net Operating Cashflow 1,014 1,379 1,049 1,336 1,364

Dividends paid to ordinary shareholders (914) (1,226) (1,072) (1,109) (1,186)

Proceeds from issue of shares

Effects of Exchange Rates on Cash - - (7) - -


Cashflow from financing activities (873) (1,376) (1,047) (1,191) (1,286)

Total cash generated 141 2 2 145 78



Ratios 12/11A 12/12A 12/13E 12/14E 12/15E


Long-term debt should remain steady over the next few years

Net debt/ EBITDA is healthy around 0.42x

With no planned increase in capacity, capex/sales will remain modest

Al Jouf Cement Cement – Industrial JOUF AB: Saudi Arabia

June 2013

Rating NEUTRAL


Current

price SAR18.25



Al Jouf Cement was listed in 2010. The company’s year-to-date share price has outperformed the sector. We do not expect the export ban on cement to materially impact the company, since domestic demand is sufficient enough to absorb the company’s production.

Share information


52-week range 15.35 - 18.25





Absolute 0.3% 12.1% 0.8%

Relative to index -4.7% 3.2% -11.1%

Major Shareholder:

KSB Capital Group 5.7%

0 0.0%

Valuation

12/12A 12/13E 12/14E 12/15E

P/E (x) 22.2 21.0 18.5 15.1

P/B (x) 1.7 1.6 1.6 1.6

EV/EBITDA (x) 14.8 12.8 10.0 8.5


Performance

87

89

92

94

96

98

101

103

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5


-10

30

70

06/12 09/12 12/12 03/13

RS

I10


Company summary

Al Jouf Cement Company is engaged in manufacturing ordinary Portland cement and sulfate resistant cement. The company’s factory is located in the north-west region of Saudi Arabia, close to the borders of Iraq and Jordan.

Al Jouf Cement capacity expansion holds key Al Jouf Cement has performed reasonably well despite the challenges posed by

the export ban and delays in its capacity build up. The company is on the verge

of completing two new lines, which will increase its capacity to 15,000tpd.

However, we have not seen any news about the recent developments nor the

fuel approval from Aramco. The expansion plan certainly holds the key for

growth, but still attaching a time line to it seems unfeasible at the moment. We

downgrade our rating on Jouf to Neutral with a revised target of SAR20.

Capacity build up: Jouf has planned two new production lines. The company’s

second production line (5,000tpd capacity) should become operational next

year. Jouf also plans to build a third line with a similar capacity. Although the

company has not given any formal announcement in this regard, we think these

expansions will be key triggers for Al Jouf, as the company has the potential to

triple its top line within the next three years.

Iraqi expansion should be beneficial: Al Jouf Cement has signed a MoU with

the Iraqi Ministry of Construction and Housing to establish a manufacturing

plant in Iraq with 5,000-7000tpd capacity. The company should benefit from

this investment as it can take advantage of the cement undersupply situation in

the war-torn country (Iraq has lined up huge infrastructure projects). As of now,

we have no knowledge about its development or the start of commercial

production. Hence, we have not updated our model with this information.

Profitability still remains low: Since Al Jouf is a newly established company,

we believe it will not be able to pay steady dividends until 2014 due to its

relatively low retained earnings and high debt repayment obligations. We expect

a dividend of 0.75 per share in 2014, which translates into a modest 4% yield

based on the current price.

Valuation – seems fairly valued at the moment: We have used a blended

valuation approach using DCF and relative valuation to arrive at our new target

price of SAR20.0 (earlier SAR19.0) for Al Jouf. The stock trades at a high PE of

21.0x and EV/EBITDA multiple of 12.8x. We think the company will need

another couple of years to show visibility in its plans and become a stable player

in the cement sector.


Revenue (mn) 316 369 385 396 462

Revenue Growth 206.0% 16.9% 4.3% 2.9% 16.7%


EBITDA margin 47.7% 49.7% 53.1% 66.7% 66.8%


EPS 0.64 0.81 0.86 0.98 1.19

EPS Growth 399.6% 28.1% 5.8% 13.4% 22.4%

ROE 6.3% 7.7% 7.9% 8.7% 10.6%

ROCE 5.5% 6.3% 6.7% 6.7% 8.4%




Al Jouf Cement Cement – Industrial June 2013



Revenue 316 369 385 396 462


Gross Profit 119 154 157 172 205

Government Charges

S.G. & A. Costs (25) (32) (30) (27) (31)

Operating EBIT 94 122 128 144 174


EBITDA 151 183 204 264 309





Provisions - - - - -

Other Income



Taxes (4) (9) (4) (3) (4)

Minority Interests - - - - -


Dividends - (130) (65) (98) (163)


12/11A 12/12A 12/13E 12/14E 12/15E


CFPS (SAR) 1.072 1.285 1.449 1.899 2.231

EPS (SAR) 0.635 0.814 0.861 0.976 1.195

DPS (SAR) 0.000 1.000 0.500 0.750 1.250

Growth 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue Growth 206.0% 16.9% 4.3% 2.9% 16.7%


EBITDA Growth 206.8% 21.7% 11.4% 29.3% 16.9%


Net Profit Growth 459.6% 28.1% 5.8% 13.4% 22.4%

EPS Growth 399.6% 28.1% 5.8% 13.4% 22.4%

Margins 12/11A 12/12A 12/13E 12/14E 12/15E


EBITDA margin 47.7% 49.7% 53.1% 66.7% 66.8%





ROCE 5.5% 6.3% 6.7% 6.7% 8.4%

ROIC 7.6% 7.5% 6.9% 8.2% 9.5%

ROE 6.3% 7.7% 7.9% 8.7% 10.6%


Capex/Sales 114.2% 96.7% 27.5% 54.8% 20.0%



P/E (x) 28.4 22.2 21.0 18.5 15.1

P/CF (x) 16.8 14.0 12.5 9.5 8.1

P/B (x) 1.7 1.7 1.6 1.6 1.6

EV/Sales (x) 7.8 7.4 6.8 6.7 5.7

EV/EBITDA (x) 16.4 14.8 12.8 10.0 8.5

EV/EBIT (x) 26.3 22.2 20.4 18.4 15.0

EV/IC (x) 1.7 1.5 1.5 1.5 1.5


We estimate revenues to grow at a CAGR of 25% until 2015

Revenue growth will be capped due to price constraint

Margins should strengthen over the coming years

Profitability ratios are below the peers, which should improve over the coming years

Valuation multiples are high for the company

Al Jouf Cement Cement – Industrial June 2013





Inventories 80 120 97 106 116


Total Current Assets 312 259 436 431 409

Fixed Assets 1,063 1,450 1,561 1,658 1,616

Investments 56 68 68 68 68

Goodwill - - - - -

Other Intangible Assets 35 28 - - -

Total Other Assets 342 259 206 206 206


Total Assets 1,809 2,064 2,270 2,363 2,299

Short Term Debt 65 60 260 60 60

Trade Payables

Dividends Payable - 1 66 98 98



Long-Term Debt 355 507 395 620 560

Other LT Payables - 54 64 64 64





Total Reserves 48 90 137 167 160


Total Equity 1,348 1,390 1,437 1,467 1,460


Ratios 12/11A 12/12A 12/13E 12/14E 12/15E

Net Debt (SARmn) 202 466 354 393 364

Net Debt/EBITDA (x) 1.34 2.54 1.73 1.49 1.18

Net Debt to Equity 15.0% 33.5% 24.6% 26.8% 24.9%


BVPS (SAR) 10.37 10.70 11.06 11.28 11.23




Decrease in Working Capital (1) 0 29 (4) (6)




New Investments (10) (12) - - -

Others (4) (1) - - -


Net Operating Cashflow (231) (193) 114 26 191

Dividends paid to ordinary shareholders - (64) - (65) (163)



Other Financing Cashflow 396 - - - -

Cashflow from financing activities 435 83 89 (40) (223)

Total cash generated 205 (110) 202 (14) (31)



Ratios 12/11A 12/12A 12/13E 12/14E 12/15E


Cash position is strengthening

Net Debt/EBITDA will fall gradually

Capex/sales ratio will remain high on possible expansion

Qassim Cement Cement – Industrial QACCO AB: Saudi Arabia

June 2013

Rating NEUTRAL


Current

price SAR82.50



Although Qassim Cement offers an attractive dividend yield of 7.7%, we rate the stock as Neutral due to the lack of growth prospects over the medium-term. The company’s expansion plans are currently riddled with uncertainty due to lack of fuel supply allocation.

Share information


52-week range 75.00 - 83.00





Absolute 1.3% -0.3% 3.2%


Major Shareholder:

Public Investment Fund 23.3%

GOSI 19.9%

Valuation

12/12A 12/13E 12/14E 12/15E

P/E (x) 13.0 12.3 12.3 13.0

P/B (x) 3.7 4.3 4.3 4.4

EV/EBITDA (x) 9.8 9.4 9.6 10.0

Dividend Yield 7.4% 7.7% 8.0% 8.0% | Source: Company data, Al Rajhi Capital

Performance

909294959799101103104106108

74

76

78

80

82

84


-10

30

70

06/12 09/12 12/12 03/13

RS

I10

| Source: Bloomberg, Company data, Al Rajhi Capital

Company summary

Qassim Cement Company was established in 1976 and produces mainly ordinary portland, sulphate-resistant and limestone cement. The company relies on Riyadh and the Central regions for supply of its products. Qassim Cement enjoys the highest margin among the cement players, but has not lined up any capacity expansion plans, which might limit its future growth.

Qassim Cement Expansion plan the key catalyst Qassim Cement’s growth prospects are limited due to its already high capacity

utilization rates and lack of capacity additions for the last three years, which

prevents any room for a ramp-up. The company has announced an addition of

5,500tpd clinker capacity to its existing line, but lack of clarity on fuel supply

remains a major concern. Two key positives for the company are: 1) one of the

low-cost cement producers in Saudi Arabia; 2) High cash flows enable the

company to dole out a high dividend payout. Thus, we maintain our Neutral

rating on Qassim Cement with a revised target price of SAR90.

Expansion plans on track: Qassim Cement had drawn up plans to build a new

line with a clinker capacity of 5,500tpd, and has invited contractors for

construction. However, we remain unsure on its fuel allocation from Saudi

Aramco for this planned line. The new line will improve the grinding efficiency

for the company.

Sales volume to remain flat: Qassim Cement has been operating at more than

100% capacity utilization rate over the last three years. The company’s capacity

utilization stood at 103.8% in 2011, but fell marginally to 101% in 2012. Although

Qassim Cement has built up its clinker stocks after it bought 200,000 tons of

clinker from Saudi Cement in 2012, it has been unable to raise its cement

production due to the already high utilization of its cement grinding capacity.

The company’s production and sales volumes are likely to remain stagnant

around the current levels unless new line come into operation.

Attractive dividend yield: Qassim Cement has maintained a dividend payout of

more than 90% since 2009. In 2012, the company paid a dividend of SAR6 per

share, resulting in a payout ratio of 96%. The stock is currently trading at a

dividend yield of 7.7%, which is among the best in the sector. We believe the

company will maintain a dividend of SAR6 per share in 2013 as well, which

translates into a dividend payout of 87.5%, as low capex and zero debt will

ensure that the profits are distributed.

Valuation: Qassim Cement currently trades at a PE of 12.3 and an EV/ton of

US432/ton. We have assigned a target price of SAR90 to Qassim Cement and

rate the company Neutral. The company’s biggest attraction is its high dividend

yield, which is currently at 7.7%.


Revenue (mn) 1,035 1,048 1,076 1,082 1,055

Revenue Growth 6.9% 1.3% 2.7% 0.5% -2.5%


EBITDA margin 64.1% 63.8% 64.8% 63.1% 61.8%


EPS 6.14 6.23 6.60 6.58 6.24

EPS Growth 11.3% 1.5% 5.9% -0.3% -5.1%

ROE 29.0% 28.5% 32.4% 34.9% 33.3%

ROCE 29.3% 29.4% 36.0% 34.8% 32.3%




Qassim Cement Cement – Industrial June 2013



Revenue 1,035 1,048 1,076 1,082 1,055


Gross Profit 609 614 645 635 614

Government Charges

S.G. & A. Costs (36) (34) (36) (36) (45)

Operating EBIT 573 580 609 599 569


EBITDA 664 669 697 682 652



Net financing income/(costs) - - - - -


Provisions (0) - - - -

Other Income



Taxes (29) (32) (25) (25) (20)

Minority Interests 0 0 0 0 0


Dividends (518) (540) (563) (585) (585)


12/11A 12/12A 12/13E 12/14E 12/15E


CFPS (SAR) 7.15 7.22 7.58 7.50 7.17

EPS (SAR) 6.14 6.23 6.60 6.58 6.24

DPS (SAR) 5.75 6.00 6.25 6.50 6.50

Growth 12/11A 12/12A 12/13E 12/14E 12/15E

Revenue Growth 6.9% 1.3% 2.7% 0.5% -2.5%

Gross Profit Growth 10.0% 0.8% 5.0% -1.5% -3.3%

EBITDA Growth 7.6% 0.8% 4.2% -2.0% -4.5%

Operating Profit Growth 10.5% 1.1% 5.0% -1.5% -5.1%

Net Profit Growth 11.3% 1.5% 5.9% -0.3% -5.1%

EPS Growth 11.3% 1.5% 5.9% -0.3% -5.1%

Margins 12/11A 12/12A 12/13E 12/14E 12/15E


EBITDA margin 64.1% 63.8% 64.8% 63.1% 61.8%





ROCE 29.3% 29.4% 36.0% 34.8% 32.3%

ROIC 40.0% 42.2% 47.3% 61.9% 58.1%

ROE 29.0% 28.5% 32.4% 34.9% 33.3%


Capex/Sales 1.8% 1.9% 3.7% 5.6% 4.8%



P/E (x) 13.5 13.3 12.5 12.6 13.3

P/CF (x) 11.6 11.5 10.9 11.0 11.5

P/B (x) 3.8 3.8 4.4 4.4 4.4

EV/Sales (x) 6.6 6.4 6.2 6.2 6.4

EV/EBITDA (x) 10.2 10.0 9.6 9.8 10.3

EV/EBIT (x) 11.8 11.6 11.0 11.2 11.8

EV/IC (x) 5.2 5.4 7.2 7.1 7.2


Revenues are likely to remain stagnant over the next few years

We expect the company to maintain its dividend payout in 2013

ROE is expected to be at an impressive 32% in 2013, and improve further over the next couple of years






Inventories 189 211 170 178 179


Total Current Assets 900 1,002 997 1,018 1,065

Fixed Assets 1,191 1,126 1,078 1,055 1,022

Investments - - - - -

Goodwill - - - - -




Total Assets 2,126 2,157 2,103 2,101 2,115

Short Term Debt - - - - -

Trade Payables




Long-Term Debt - - - 27 88

Other LT Payables 2 - - - -



Minority interests (1) (1) (1) (1) (2)

Paid-up share capital 900 900 900 900 900

Total Reserves 1,057 1,076 791 798 775


Total Equity 1,956 1,975 1,690 1,697 1,673


Ratios 12/11A 12/12A 12/13E 12/14E 12/15E

Net Debt (SARmn) (657) (741) (760) (753) (737)

Net Debt/EBITDA (x) (0.99) (1.11) (1.09) (1.10) (1.13)

Net Debt to Equity -33.6% -37.5% -45.0% -44.4% -44.1%

EBITDA Interest Cover (x)

BVPS (SAR) 21.74 21.96 18.79 18.87 18.61




Decrease in Working Capital 43 (116) (52) (37) 3

Other Operating Cashflow (7) 10 (15) (25) (20)



New Investments - (199) 79 (20) -

Others - - - - -

Cashflow from investing activities (18) (219) 40 (81) (50)

Net Operating Cashflow 690 356 681 558 598






Total cash generated 242 (181) 81 0 46



Ratios 12/11A 12/12A 12/13E 12/14E 12/15E


Qassim is a zero-debt company

Capex will increase gradually as the company implements its capacity expansion plans



Disclaimer and additional disclosures for Equity Research

Disclaimer

This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients 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 Al Rajhi 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 Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. 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.

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Additional disclosures

1. Explanation of Al Rajhi Capital’s rating system

Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law:

"Overweight": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.

"Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 6-9 month time horizon.

"Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.

2. Definitions

"Time horizon": Our analysts make recommendations on a 6-9 month time horizon. In other words, they expect a given stock to reach their

target price within that time.

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the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis.

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why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from estimated fair value per share, and explain our reasons for doing so.

Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.

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