Equity Analysis /
Saudi Arabia

Saudi Cement Company: Profits decline on margin contraction, higher opex

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    1 May 2019
    Published by

    Saudi Cement reported a mixed set of Q1 19 results with net income declining 6.9% yoy to SAR132mn. This is in line with NCBC and consensus estimates of SAR130mn and SAR127mn, respectively. The strong sales growth, which we believe was led by higher prices of oil-well cement, was offset by the overall increase in cost/ton and higher opex.

    NCBC view on results

    • Saudi Cement reported a mixed set of Q1 19 results with net income declining 6.9% yoy to SAR132mn. This is in line with the NCBC and consensus estimates of SAR130mn and SAR127mn, respectively. We believe higher sales of oil-well cement led to better-than-expected sales, but also led to a higher-than-expected cost/ton. This reduced the variance, leading to earnings in line with our estimates. 
    • Sales increased 18.1% yoy to SAR390mn in Q1 19, higher than our estimates of SAR317mn. We believe this is mainly due to a change in the product mix towards higher priced oil-well cement. Selling prices stood at SAR211/ton in Q1 19 (-7.6% yoy), higher than the Q4 18 levels and NCBC estimates of SAR187/ton. Total sales quantity of Saudi Cement (domestic+export) increased 27.8% yoy to 1.85mn tons in Q1 19, coming broadly in line with our estimates. This is stronger than the 10.2% yoy growth in total industry sales (domestic+export) in Q1 19. We believe the outperformance is due to higher export sales of Saudi Cement. Domestic sales declined 16.5% yoy, weaker than the sector domestic sales declines of 9.4% yoy.
    • Gross margins contracted 487bps yoy to 46.4% in Q1 19 versus 51.2% in Q1 18. This is lower than our estimates of 50.3%. We believe the contraction in margins was mainly due to higher sales of oil-well cement, which led to a higher-than-expected cost/ton of SAR113/ton versus our estimates of SAR93/ton. This, along with an opex of SAR40mn versus our estimates of SAR24mn, led to net profit in line with our estimates at SAR132mn.

    We are Neutral on Saudi Cement with a PT of SAR54.5. We believe the increase in selling prices for Saudi Cement and the remaining players is positive. However, despite the increase in prices, we believe quantities will remain low during H1 19 and may put pressure on selling prices going forward. We expect further clarity on the timeline of mega projects to be the key catalyst for an improvement in cement demand in Saudi.