Earnings Report /
Saudi Arabia

Eastern Cement: Highest average selling prices on record

  • Total selling quantities decreased by 29.3% yoy (-14.2% qoq).

  • Revenue decreased by 7.7% yoy (+21.7% qoq) to SAR196mn.

  • Gross margins contracted by 528bps yoy to 32.7% in Q2 22, but came higher than our estimate of 30.3%.

SNB Capital
11 August 2022
Published bySNB Capital

Eastern Cement reported a net income of SAR43.0mn in Q2 22, decreasing by 30.5% yoy (+48.3% qoq). This is higher than the SNB Capital and consensus estimates of SAR32.2mn and SAR28.9mn, respectively. We believe the positive variance in earnings is mainly driven by the strong growth in average selling prices which stood at SAR411/ton (+30.6% yoy, +41.9% qoq) vs our estimates of SAR294/ton. We highlight this is the highest average selling prices on record. Although the decline in selling volumes is a concern, we believe the growth in prices represents a key positive for the company.

  • Total selling quantities decreased by 29.3% yoy (-14.2% qoq) to 0.48mn tons and were lower than our estimates of 0.54mn tons. This compares to the total industry decline of 1.7% yoy (-15.5% qoq).

  • Revenue decreased by 7.7% yoy (+21.7% qoq) to SAR196mn, but came higher than our estimate of SAR159mn. Average selling prices increased by 30.6% yoy (+41.9% qoq) to SAR411/ton vs SAR315/ton in Q2 21 and our estimate of SAR294/ton. We note this is the highest average selling prices on record.

  • Gross margins contracted by 528bps yoy to 32.7% in Q2 22, but came higher than our estimate of 30.3%. We believe the yoy contraction in margins is driven by increase in production costs. Average cost stood at SAR277/ton (+41.7% yoy, +33.8% qoq) vs our estimate of 205/ton.

  • Operating expenses in absolute terms increased by 21.0% yoy to SAR20.0mn and came higher than our estimate of SAR14.5mn. Opex to sales ratio stood at 10.2% vs our estimate of 9.1%. We believe the variance is mainly due to increased administrative and selling expenses.

  • Other expense stood at SAR1.0mn compared to SAR2.2mn in Q2 21 and our estimate of SAR1.5mn. This is mainly led by higher than expected income from investments and associates.

Outlook

Based on our last update, we are Neutral on Eastern Cement with a PT of SAR47.2. Although decline in sales volume and contraction in margins are the major concerns, we believe the company’s ability to sustain average selling prices during a volatile period is its key strength. The stock trades at a 2022f P/E and EV/EBITDA of 17.5x and 11.3x vs covered peer group average of 20.9x and 13.6x, respectively.