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Yanbu Cement

Source: NCB Capital

Cementing its position

Yanbu Cement’s location advantage, coupled with expansion plans and expected cost savings, positions it well to tap growth in the near future. Despite a disappointing FY08 due to production shutdowns that impacted sales and costs, we believe Yanbu’s growth drivers make it an attractive buy.

• New capacity to fuel growth: YCC has announced an SR1.5bn expansion plan to increase annual cement production capacity to 7.5mn tons (FY11) from 3.8mt, currently. Once operational, the new capacity would enable the company to meet domestic requirements and allow it to sell outside the KSA as and when the export restrictions are removed

• Competitively positioned: YCC is not only advantageously positioned in terms of demand centers in the golden triangle of Jeddah, Makkah and Madinah, but also benefits from its location near raw material sources. In addition, its nearness to the Red Sea gives it the option of exporting cement to countries like Egypt

• Not burdened with inventory pile-ups: While most cement companies in the KSA are weighed down by large stockpiles, YCC and its nearest competitor, Arabian Cement are not burdened with inventory pileups. This is because of strong construction activity in the vicinities of the holy cities of Makkah and Madinah, which keeps demand high. The western region is believed to account for 30% of all residential projects in KSA

• Growth intact despite loss of market share: YCC remains the largest cement selling company in western Saudi Arabia despite the considerable decline in its market share (from 17.3% in FY07 to 14.3% in FY08). We expect the company’s revenue to grow at a CAGR of 5.9% over FY08-FY12 backed by the strong demand in the region and its ability to generate above industry realizations

• Valuation: At the current price, YCC trades at a P/E of 9.7x and EV/EBITDA of 7.8x, both at a discount of 21.1% and 19.1% respectively to the industry on a TTM basis. YCC offers an attractive dividend yield of 7.9% - second highest in the industry. We assign YCC an OVERWEIGHT rating due to its strategic location advantage, capacity expansion plans, and cheap valuation

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