Southern Cement reported a broadly in line set of Q3 22 results with the net income increasing by 20.3% yoy (+47.1% qoq) to SAR89.0mn. This compares to the SNB Capital and consensus estimates of SAR84.0mn and SAR74.5mn, respectively. Revenues increased by 13.6% yoy (+38.1% qoq) to SAR323mn, but came lower than our estimates of SAR364mn, mainly due to lower selling prices. We believe the variance in earnings is driven by lower than expected production costs as cost per ton stood at SAR115/ton vs SAR129/ton in Q3 21 and our estimate of SAR145/ton.
Total selling quantities in Q3 22 stood at 1.89mn tons (+31.2% yoy, +52.2% qoq) slightly higher than our estimate of 1.82mn tons. This compared to the total industry growth of 14.3% yoy (+11.2% qoq). Domestic cement sales grew 1.1% yoy to 1.45mn lower than local industry growth of 7.4% yoy. Clinker exports increased significantly at 432,000 tons in Q3 22 (+905% qoq).
Revenues increased 13.6% yoy (+38.1% qoq) to SAR323mn, but came lower than our estimates of SAR364mn. The yoy increase was mainly due to sharp increase in sales volume while the variance in revenue is mainly driven by the lower selling prices which stood at SAR171/ton (-13.4% yoy, -9.3% qoq) vs our estimate of SAR200/ton.
We note the decline in selling prices represents the key negative of the results, as other covered peers reported an average decline of 3.1% yoy in Q3 22, while Najran cement (also operates in south of Saudi) reported 9.7% yoy decline in selling prices.
Gross margins contracted by 201bps yoy to 32.8% in Q3 22, but, came ahead of our estimates of 27.5%. We believe the variance in gross margins is driven by lower production costs. Average cost/ton in Q3 22 stood at SAR115/ton vs SAR129/ton in Q3 21 and our estimates of SAR145/ton.
Opex in absolute terms decreased 40.9% yoy to SAR13.0mn and came marginally lower than our estimate of SAR14.1mn while opex to sales ratio stood at 4.0% vs 7.7% in Q3 21 and our estimate of 3.9%. Other non-operating expenses stood at SAR4.0mn compared to our estimate of SAR2.0mn. We believe the variance is mainly due to lower other income.
Based on our last update, we are Neutral on Southern Cement with a PT of SAR70.6. Since our last update the stock declined 23.1% and we will revise our PT after the financial published. Although the decline in prices and margins contraction are concerns, strong growth in volume represents a key positive. The stock currently trades at a 2023f PE of 17.4x vs covered peers average of 20.3x.