Earnings Report /
Saudi Arabia

Southern Province Cement Company: Margin contraction despite price resilience

  • Total selling quantities stood at 1.70mn tons during Q4 21 (-19.9% yoy, +18.7% qoq)

  • Revenue declined by 23.8% yoy to SAR328mn (+15.4% qoq), and came in-line with our estimates

  • Gross margins contracted by 223bps to 35.7% in Q4 21, coming lower than Q4 20 levels of 38.0%

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

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SNB Capital
10 March 2022
Published bySNB Capital

Southern Cement reported a net income of SAR96.6mn in Q4 21, decreasing 31.5% yoy (+15.8% qoq). This is lower than SNB Capital and consensus estimates of SAR118mn and SAR110mn, respectively. We believe the variance in earnings was mainly driven by 1) higher than expected production costs, which stood at SAR124/ton, compared to our estimates of SAR117/ton and 2) slightly higher than expected volumes, which stood at 1.70mn tons, compared to our estimates of 1.64mn tons.

  • Total selling quantities stood at 1.70mn tons during Q4 21 (-19.9% yoy, +18.7% qoq) and was slightly higher than our estimates of 1.64mn tons. This compares to the total industry decline of 11.0% yoy (+15.3% qoq).

  • This marks a recovery in selling volumes for the company after selling volumes declined to 1.4mn tons in Q2 21 and Q3 21, which we believe could be related to a production halt at its Jizan facility.

  • Revenue declined by 23.8% yoy to SAR328mn (+15.4% qoq), and came in line with our estimates. The yoy decline in revenue was driven by the drop in selling volumes, while average selling prices remained resilient at SAR193/ton (-4.9% yoy, -2.7% qoq) vs our estimate of SAR200/ton.

  • This represents a key positive for the company, as companies located in the Central and Western regions announced Q4 21 results with average selling prices declining by 43.9% and 15.7% yoy, respectively. The major price discounts reaffirm the heavy competition on cement selling prices throughout Saudi.

  • Gross margins contracted by 223bps to 35.7% in Q4 21, coming lower than Q4 20 levels of 38.0% and our estimates of 41.5%. The average cost/ton stood at SAR124/ton (-1.5% yoy, +0.8% qoq) vs our estimates of SAR117/ton. This is Southern Cement’s lowest gross margin since Q4 18.

  • In absolute terms, opex stood at SAR14.0mn in line with our estimates but lower than Q3 21 levels of SAR22.0mn, leading to an opex-to-sales of 4.4%. Non-operating expenses stood at SAR6.3mn, compared to Q4 20 of SAR2.5mn and our estimates of SAR5.2mn.

Outlook

Based on our last update, we are Neutral on Southern Cement with a PT of SAR70.6. Although volumes are yet to fully recover, the resilience in average selling prices represents a key positive. The stock trades at 2022f P/E of 19.7x compared to 21.1x for covered peers.