Equity Analysis /
Saudi Arabia

Saudi Cement Company: Strong prices offset by increased cost/ton

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    30 July 2019
    Published by

    Saudi Cement reported a lower than expected set of Q2 19 earnings. Though net income increased +59.0% yoy to SAR92mn, it was lower than our estimates of SAR101mn. We believe the variance in earnings is mainly due to a higher than expected cost/ton, despite sales exceeding estimates due to a change in product mix towards higher priced oil-well cement.

    NCBC view on the results:

    Saudi Cement reported a lower than expected set of Q2 19 results, though net income increased +59.0% yoy to SAR92mn. This compares to the NCBC and consensus estimates of SAR101mn and SAR104mn respectively. With sales coming 8% higher than expected, we believe the variance in earnings came from a higher than expected cost/ton potentially due to an increased production of oil-well cement.

    Sales increased +37.8% yoy to SAR339mn, coming higher than our estimates of SAR314mn. We believe the positive variance in sales was mainly due to the change in product mix. We anticipate an increased contribution of higher priced oil-well cement resulted in +25% yoy increase in blended selling price to SAR218/ton, vs our estimates of SAR205/ton and SAR174/ton in Q2 18. Total sales quantity of Saudi Cement (domestic and exports) increased +10.0% yoy to 1.56mn tons, coming in-line with our estimates. This is stronger than the industry’s performance of +0.4% yoy increase in volumes. We believe the outperformance was driven by +9.6% yoy increase in domestic cement sales vs -7.2% yoy for the industry) on the back of higher demand for oil-well cement. 

    Gross margins expanded by 232bps yoy to 41.4%, driven mainly by higher selling prices. However, gross margins came lower than our estimates of 46.3% and Q1 19 levels of 46.4%. We believe this is due to a higher cost/ton of SAR218/ton vs our estimates of SAR205/ton, due to a higher proportion of sales from oil-well cement. Opex to sales ratio came in-line with our estimates at 12% in Q2 19, an improvement from 13% in Q2 18. This resulted in a higher EBIT margin expansion of 335bps yoy to 29.4%. 

    We are Underweight on Saudi Cement, with at PT of SAR58.3. The stock price has rallied +61.7% ytd taking the 2019f PE to 24.4x vs covered stocks at 23.1x. We believe these valuations are unjustified, due to lower relative growth prospects vs peers, specifically those in the Western region.