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Southern Province Cement

Source: NCB Capital

Fundamentals remain weak

We retain our Underweight rating on SPCC off the back of poor numbers in 2Q10. We continue to believe increasing pressure from competitors, particular Najran Cement, is denting the prospects of SPCC. It’s higher than average prices remain a support to profitability of the company.

Poor 2Q10 numbers support our Underweight call: Despite only a 1% decline in revenues, 2Q10 net income fell by 13% YoY in 2Q10, 8% below our estimate, highlighting the ongoing pressures at SPCC. Sales volumes grew by only 2% in 2Q10 against 17% for the sector, with gross margins falling by 570bps adding to the pressure on profitability.

Limited catalysts present in the short-term, new line in 2012 to be a boost: Given the lack of any mega-projects in the south of KSA, we see limited positive catalysts for SPCC in the short-term. If anything, we believe the ongoing excess supply, export ban and increasing competition levels leads to a tougher outlook. The new 1.5mn capacity line expected in mid- 2012 will be a major catalyst for SPCC as it will give it increased ability to meet demand in the Central/Western regions.

Competition from Najran Cement putting a squeeze on SPCC: In 2Q10 SPCC reported a 1.7% increase in sales volumes as against the 17% increase for the sector as a whole. We believe Najran Cement, a recently established private cement company also based in the south, is aggressively marketing its cement, leading to increased pressure for SPCC. In 2Q10, Najran increased its sales volume by 97% and took its KSA market share to 7.2% from 4.3% YoY.

Outlook tough, valuation expensive: With SPCC continuing to fare worse than expected against competition from Najran cement, we remain negative on the stock and thus retain our Underweight rating. SPCC is trading at a P/E of 13.5x 2010e earnings, above the industry average of 10.7x.

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