Equity Analysis /
Saudi Arabia

Eastern Cement: Strong results on higher volumes and margins

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    2 May 2019
    Published by

    Eastern Cement reported a better than expected set of Q1 19 results, with net income increasing 170.6% yoy to SAR46mn. This is higher than the NCBC estimates of SAR27mn. We believe the variance came from higher than expected sales volumes and strong margins due to favourable cost/ton. 

    NCBC view on the results

    Eastern Cement reported a better than expected set of Q1 19 results, with net income increasing 170.6% yoy to SAR46mn. This compares to the NCBC and consensus estimates of SAR27mn and SAR31mn, respectively. We believe the variance came from higher than expected sales volumes and a strong expansion in margins due to a lower than expected cost/ton.

    Sales increased 30.2% yoy to SAR181mn in Q1 19, coming higher than our estimates of SAR172mn. Assuming pre-cast concrete sales of SAR41mn in Q1 19, we believe average selling prices of cement stood at SAR216/ton (+21.0% yoy), coming in-line with our estimates of SAR219/ton and compared to SAR223/ton in Q4 18.

    Total sales quantity of Eastern Cement (cement and clinker) increased +12.1% yoy to 0.65mn tons in Q1 19, higher than our estimate of 0.60mn tons. This is higher than the +10.2% yoy increase in total industry sales during Q1 19. However, domestic sales of cement declined by -12.0% yoy for Eastern Cement in Q1 19 vs the sector declines of -9.4% yoy.

    Gross margins expanded significantly yoy from 23.0% in Q1 18 to 32.0% in Q1 19, exceeding NCBC estimates of 25.1%. We believe the better than expected margins are mainly due to higher than expected sales of clinker. Cost/ton increased 2.4% yoy to SAR190/ton vs. our estimates of SAR215/ton. We expect an average gross margin of 26.2% until 2022f for Eastern Cement.

    We are Neutral on Eastern Cement with a PT of SAR28.5. We believe the muted construction outlook is a key risk for Eastern Cement. Moreover, the company’s geographic location is not favourable to benefit from mega projects in the Western and North Western regions. However, new export contracts would be a positive catalyst for the stock.