Earnings Report /
Saudi Arabia

Eastern Cement: Weak margins on lower prices and higher cost

  • Revenue increased by 2.7% yoy (-11.2% qoq) to SAR174mn, in line with our estimate of SAR172mn

  • Gross margins contracted by 435bps yoy to 28.7% in Q3 22, and was lower than our estimate of 34.2%

  • Operating expenses in absolute terms increased by 50.5% yoy to SAR17.0mn and came higher than our estimate

SNB Capital
25 October 2022
Published bySNB Capital

Eastern Cement reported a net income of SAR19.0mn in Q3 22, decreasing by 49.6% yoy (-55.8% qoq). This is lower than the SNB Capital and consensus estimates of SAR38.2mn and SAR35.1mn, respectively. We believe the negative variance in earnings is mainly driven by decreased margins from higher cost and lower realized prices. The average selling price stood at SAR364/ton (+9.6% yoy, -11.4% qoq) vs our estimates of SAR382/ton. Sales volume stood at 0.48mn tons in Q3 compared to our estimates of 0.45mn tons vs 0.51mn tons and 0.48mn tons in Q3 21 and Q2 22, respectively.

  • Total selling quantities decreased by 6.3% yoy (-0.2% qoq) to 0.48mn tons and were lower than our estimates of 0.45mn tons. This compares to the total industry increase of 14.3% yoy (11.2% qoq).

  • Revenue increased by 2.7% yoy (-11.2% qoq) to SAR174mn, in line with our estimate of SAR172mn. Average selling prices increased by 9.6% yoy (-11.4% qoq) to SAR364/ton vs SAR332/ton in Q3 21 and our estimate of SAR382/ton. Although the selling price was lower than our estimate the growth in sold volumes supported the results.

  • Gross margins contracted by 435bps yoy to 28.7% in Q3 22, and was lower than our estimate of 34.2%. We believe the yoy contraction in margins is driven by an increase in production costs. Average cost/ton stood at SAR259/ton (+16.7% yoy, -6.3% qoq) vs our estimate of 251/ton.

  • Operating expenses in absolute terms increased by 50.5% yoy to SAR17.0mn and came higher than our estimate of SAR14.4mn. Opex to sales ratio stood at 9.8% vs our estimate of 8.4%. We believe the variance is mainly due to increased SG&A expenses.

  • Other expense stood at SAR14.0mn compared to SAR7.0mn in Q3 21 and our estimate of SAR6.1mn. This is mainly led by higher than expected decrease in income from associates.

Outlook

Based on our last update, we are Neutral on Eastern Cement with a PT of SAR47.2. Although the mortgage and housing activities slowed down, we believe the sector outlook is positive with mega projects supporting the demand. The stock trades at a 2023f PE and EV/EBITDA of 17.0x and 10.9x vs covered peer group average of 19.4x and 12.3x, respectively.