Qassim Cement reported a weak set of Q3 22 results with net income declining by 61.2% yoy (-19.1% qoq) to SAR23.4mn. This is lower than the SNB Capital and consensus estimates of SAR46.6mn and SAR44.7mn, respectively. We believe the variance in earnings is primarily driven by 1) lower revenues which stood at SAR167mn (-2.1% yoy, +9.6% qoq) vs our estimate of SAR182mn, due to lower in selling prices. 2) lower than expected gross margins which stood at 22.8% vs our estimate of 33.4% driven by higher production costs. 3) higher non-opex which stood at SAR10.6mn vs our estimate of SAR5.2mn, due to unrealized losses from investments at FVTPL.
Total selling quantities (composed entirely of local cement sales) in Q3 22 stood at 1.12mn tons (+3.6% yoy, +22.9% qoq) and came in line with our estimates of 1.14mn tons. This compares to the local cement industry growth of 7.4% yoy (+13.7% qoq).
Revenues decreased by 2.1% yoy (+9.6% qoq) to SAR167mn, and came lower than our estimates of SAR182mn. The yoy decline and variance in revenues is the result of decline in average selling prices which stood at SAR149/ton (-5.5% yoy, -10.8% qoq) vs our estimate of SAR160/ton. We believe the continued pressure on prices is a concern.
Gross margins contracted significantly to 22.8% in Q3 22 vs 40.9% in Q3 21 and our estimates of 33.4%. We believe the yoy contraction and variance in gross margins is mainly driven by a mix of lower prices and increased production costs. Average cost/ton in Q3 22 stood at SAR115/ton vs SAR93/ton in Q3 21 and our estimate of SAR107/ton.
Operating expenses in absolute terms decreased by 54.6% yoy (-42.6% qoq) to SAR4.1mn, and came lower than our estimate of SAR9.0mn while opex to sales ratio stood at 2.4% vs 5.2% in Q3 21 and our estimate of 4.9%.
Non-operating expenses increased to SAR10.6mn in Q3 22 vs SAR0.3mn in Q3 21 and our estimate of SAR5.2mn. The yoy increase and variance is mainly driven by the unrealized losses from investments at FVTPL.
Based on our last update, we are Overweight on Qassim Cement with a PT of SAR84.4. Growth in volume and decline in opex are the key positives of the result while decline in prices and higher production costs are the key concerns. The company’s proximity to central region is a key strength, as it plans to expand production by 2023f to supply the anticipated demand growth in the region. The stock trades at 2023f P/E of 17.1x vs peer group average of 19.6x.