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Southern Province Cement

Source: NCB Capital

Access to key demand centers

With exposure to the USD30bn Jizan Economic City in the south, coupled with expansion in its Makkah facilities, SPCC has access to the majority of key cement demand points in Saudi Arabia. Increased competition in its local southern market, as well as timing of its expansion in Makkah limits its prospects, we believe. We initiate on Southern Cement with a Neutral rating and a price target of SR65.8/share.

• Capacity expansion near Makkah, although timing a concern: SPCC has signed a USD147 million agreement to double capacity at its Tuhama plant to 3 million tons per year, expected to come online in mid-2012. This expansion will better enable SPCC to meet demand across the Western and Central regions, the key demand centers in Saudi Arabia. However, Yanbu Cement will be opening its new 3.3 million ton line in mid 2011, leading it to take a significant market share prior to SPCC’s new line, limiting the gains from this expansion.

• Southern location supports growth but increasing competition: SPCC’s location in the south near Jizan, where the planned construction of the USD30bn Jizan Economic City and other infrastructure projects are taking place, is a positive for the stock. However, increasing competition from Najran Cement in the southern region we believe will lower SPCC’s market share in its local market.

• Pricing premium to fall: With its cement price falling by only 4% YoY in 2009 (compared to 7% for the sector), Southern has been able to charge a premium for perceived quality, as well as take advantage of limited competition in the south to date. Going forward, we believe it will be increasingly difficult for it to maintain such a premium due to the increased supply in the market.

• Trades at premium to sector: At the current price of SR71.3 per share, Southern is trading at a P/E of 13.6x 2010e earnings and EV/EBITDA of 10.6x 2010E earnings, above the industry average of 11.8x and 9.2x respectively.

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