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Yanbu Cement

Source: NCB Capital

Old lines to limit progress in 2010

2010 is expected to be a repeat of 2009 with the old lines at Yanbu Cement limiting production and efficiency gains. Its new line will raise capacity by 80%, but is expected in 12-18 months time. Hence we expect 2010 to remain tough for the stock and downgrade our rating to Neutral with a price target of SR46.9/share.

• Problems with older lines led to missed opportunity in 2009; we expect this to be repeated in 2010: We expect a difficult year for Yanbu in 2010e with sales to fall by 6.5% and net income expected to be down by 7.3%. Despite strong demand in the western region, we believe Yanbu’s sales volume will decline in 2010 due to problems at its older lines, as well as competitors being forced to sell their excess production in the western region due to the export ban.

• Top-line support from premium pricing expected to continue: Yanbu’s average cement price in 2009 was SR242 per ton, 3% ahead of the sector, limiting its sales declines. We believe it will be able to maintain a small price premium over its peers due its location advantage close to the demand points in the western region. This should help support growth in the outer years.

• Estimates reduced: We have reduced our sales estimates for 2010e by 10% considering inefficiencies with its old lines are expected to continue in 2010, coupled with increased competition in the region. Our net income estimates have fallen by 7% in 2010e as the improvement in cost per ton is expected to be limited due to concerns over the old lines.

• Outlook for 2010 looks challenging, brighter once new line opens: YCC’s new capacity in 2011 is expected to aid the top-line once operational. However, due to YCC’s current capacity constraints, reluctance to reduce prices coupled with other cement players aggressively selling in the western region, we are concerned about Yanbu’s performance in the coming 12-18 months. This has led to a 20% fall in our price target. Hence, although prospects for the stock look stronger in the long run, we downgrade to Neutral from our previous Overweight rating on the stock.

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