Yamama Cement reported strong set of Q3 22 results with net income increasing 154% yoy to SAR101mn. This is higher than the SNB Capital and consensus estimates of SAR66.2mn and SAR95.8mn. The positive variance in earnings is mainly driven by 1) higher than expected selling prices which stood at SAR141/ton vs our estimate of SAR136/ton, 2) decline in production costs to SAR76.1/ton vs SAR98.4/ton in Q3 21 and our estimates of SAR86.6/ton. As a result, gross margins improved to 46.0% vs 31.9% in Q3 21 and our estimate of 36.2%.
Total selling quantities increased +51.9% yoy (+35.9% qoq) to 1.80mn tons in Q3 22, in-line with our estimates of 1.79mn tons. This is significantly higher than the industry volume growth of 14.3% yoy (+11.2% qoq).
Revenue increased 48.5% yoy (+21.1% qoq) to SAR253mn and came higher than our estimates of SAR242mn. Average selling prices stood at SAR141/ton (-2.3% yoy, -10.9% qoq) higher than our estimate of SAR136/ton. Despite strong volume growth, we believe the prolonged pressure on selling prices is a key concern for the company.
Gross margins expanded significantly on yoy basis to 46.0% in Q3 22, vs our estimates of 36.2%. The yoy expansion and positive variance in gross margins was driven by improvement in selling prices and decline in production costs. Average cost/ton stood at SAR76.1/ton (-22.6% yoy, -7.3% qoq), lower than our estimate of SAR86.6/ton. The company has continued to deplete its inventory, which we believe has result in lower cost per ton.
Operating expenses in absolute terms increased 41.2% yoy to SAR20.1mn vs our estimate of SAR19.0mn while opex to sales ratio stood at 7.9% vs 8.3% in Q3 21 and our estimate of 7.8%. We believe the increase in opex is mainly driven by increased marketing expenses.
Other non-operating income in Q3 22 stood at SAR4.8mn vs non-operating expense of SAR0.2mn in Q3 21 and our estimate of SAR2.5mn. We believe the variance is driven by higher investment income.
Based on our last update, we are Neutral on Yamama Cement with a PT of SAR28.0. Strong growth in selling quantities and expansion in margins are the key positives of the results. We expect the company to benefit from the close proximity to central region mega projects. Moreover, we believe the completion of the move to the new factory will support EBITDA margins on efficiency improvement. The stock currently trades at a 2022f PE and EV/EBITDA of 27.0x and 18.4x, respectively vs covered peers average of 19.4x and 12.3x, respectively.