Southern Cement reported a broadly in-line set of Q2 22 results, with the net income declining by 29.9% yoy (-31.5% qoq) to SAR61.0mn. This compares to the SNB Capital and consensus estimates of SAR66.2mn and SAR59.0mn, respectively. Revenues came-in at SAR234mn (-18.6% yoy, -29.1% qoq) vs our estimates of SAR244mn, mainly due to lower selling prices. We note, this is the lowest quarterly revenue since Q3 18. We believe the variance in earnings is driven by higher than expected production costs as cost per ton stood at SAR144/ton vs our estimate of SAR130/ton.
Total selling quantities in Q2 22 stood at 1.24mn tons (-13.2% yoy, -29.7% qoq) in-line with our estimate of 1.23mn tons. This compared to the total industry decline of 1.7% yoy (-15.5% qoq). Domestic cement sales decreased 16.3% yoy to 1.20mn significantly lower than local industry decline of 5.6% yoy. Clinker exports stood at 43,000 tons in Q2 22 (-69.7% qoq).
Revenue declined by 18.6% yoy (+0.5% qoq) to SAR234mn, lower than our estimates of SAR244mn. This is the lowest quarterly revenue since Q3 18. The yoy decline and variance in revenue is mainly driven by lower average selling prices, which stood at SAR189/ton (-6.1% yoy, +0.9% qoq) vs our estimate of SAR199/ton.
However, we do highlight price for Southern cement has remain more resilient as compared to its covered peers (an average decline of 10.0% yoy in Q2 22). Najran cement (also another key player in the south region) reported 12.0% yoy decline in selling prices. We believe this is a key highlight of the results.
Gross margins contracted significantly to 23.9% in Q2 22, compared to 35.8% in Q2 21 and our estimate of 34.7%. We believe the yoy contraction and variance in gross margins is driven by higher production costs. Average cost/ton in Q2 22 stood at SAR144/ton (+11.3% yoy, +13.2% qoq) vs our estimate of SAR130/ton.
Opex in absolute terms increased by 8.3% yoy to SAR13.0mn, coming lower than our estimate of SAR16.0mn. Opex-to-sales ratio stood at 5.6% vs 4.2% in Q2 21 and our estimate of 6.6%. Other non-operating income stood at SAR18.0mn compared to our estimate of non-opex of SAR2.5mn. We believe the variance is mainly due to higher other income.
Based on our last update, we are Neutral on Southern Cement with a PT of SAR70.6. Although the large volume decline and contraction in margins are the major concerns, resilience in selling prices represents a key positive. The stock currently trades at a 2022f PE of 17.5x vs covered peers' average of 20.9x.