Equity Analysis /
Saudi Arabia

Arabian Cement: Q1 19: Strong results on higher selling prices and margins

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    9 May 2019
    Published by

    Arabian Cement reported better-than-expected Q1 19 results, with a net profit of SAR37mn versus a loss of SAR6mn in Q1 18. This is higher than the NCBC estimate of SAR12mn. We believe the strong results are mainly due to higher-than-expected selling prices in Saudi Arabia (+49.5% yoy, +28.4% qoq) and strong expansion in gross margins. Lower losses in Jordan operations further supported net profits.

    Arabian Cement announced a strong set of Q1 19 results with net income of SAR37mn versus a loss of SAR6mn in Q1 18.This is higher than the NCBC and consensus profit estimates of SAR12mn and SAR7mn, respectively. We believe the positive variance is mainly due to better-than-expected revenue growth on higher selling prices and strong expansion in margins. We believe average selling price in Saudi Arabia increased +49.5% yoy and +28.4% qoq to SAR183/ton. Lower losses from Jordanian operations further supported profitability.

    Sector-wide increase in prices: We believe the qoq increase in prices was sector-wide and not just specific to Arabian Cement. Accordingly, we expect a similar outperformance for the remaining players.

    Total local cement sales volume of its Saudi operations stood at 0.66mn tons in Q1 versus NCBC estimates of 0.61mn tons. Sales quantities declined 35.8% yoy (11.7% qoq) in Q1, underperforming the industry, which declined 9.4% yoy (+2.8% qoq). We expected selling prices in Saudi to be similar to Q4 18 levels of SAR143/ton. Depending on the sales of Jordanian operations, we believe actual selling prices in Saudi may have been as high as SAR183/ton (+49.5% yoy, +28.4% qoq). 

    Gross margins expanded to 32.6% in Q1 19 from 6.4% in Q1 18, higher than our estimates of 20.2%. We believe the expansion came primarily from higher-than-expected sales in the domestic market as the Jordanian operations of the company run at significantly lower gross margins. 

    We are Neutral on Arabian Cement with a PT of SAR36.7. We believe the higher selling price is a positive, while the ongoing muted demand outlook remains a key short-term risk for the sector. Demand from mega projects is expected to begin as of Q4 19, and Arabian Cement will be a key beneficiary given its favourable geographical location in the western region.