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Yanbu Cement

Source: Taib Bank

Outlook

The cement sector in the GCC region is witnessing a period of unprecedented expansion in demand, on the back of amplified construction and real estate activities coupled with initiatives put in place by the local governments to diversify from an oil and gas dependent economy. The combined value of projects planned or being carried out in the GCC totaled around USD 2.1 trillion, at the end of the second quarter of 2009, more than four times the estimated value of projects in June 2005, an annual growth of nearly 50%. The Saudi government is currently undertaking a huge scheme to provide new schools for 1.7 million pupils. As part of this about 3,500 schools of different sizes are to be built all over the country at a total cost of SAR 20 billion. Among the GCC economies, Saudi Arabia is the largest manufacturer and consumer of cement, accounting for more than half of the region’s total cement consumption. However, the effect of export ban has definitely hit Saudi cement companies. Moreover, the companies are trying to offset export ban by local demand growth and exports to Bahrain, which is exempt from the ban. Recently the government lifted ban on cement export saying that companies are allowed to export a percentage of the surplus provided they maintain at least 10% of the production as a reserve for the local market.

In the first half of 2009, YCC registered a 4.9% rise in net profits and a 8% jump in sales. In order to meet long-term organizational goals, the company plans to spend SAR 1.5 billion to raise its production capacity by 48% by 2011. Presently, trading at the current market price of SAR 49.70 (as on 28 July, 2009) YCC’s stock has a P/E of 8.21 and P/B of 2.32. We believe that the company’s future expansion and technology up-gradation strategies will enhance profitability in near future in line with the numerous big budget construction activities planned in the region. Therefore, we reiterate our OVERWEIGHT opinion on the stock.

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