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Yamamah Saudi Cement

Source: NCB Capital

Profitability supports positive view

We maintain our Overweight rating on Yamama Cement with upside of 19%. 2Q10 net income growth of 16%, the highest in the sector for two quarters running, supports our positive stance on the stock. Yamama is well located to take advantage of the increased momentum of the construction sector in 2010, particularly in the Central region.

Premium pricing, lower costs and higher other income boosted 2Q10: Yamama registered another strong quarter in 2Q10 with revenues up 8% YoY and 6% above our estimate, led by prices 2% ahead of the sector. Net income grew a robust 16% YoY and beat our estimate by 17%, driven mainly by lower operating expenses as well as higher other income YoY.

H10 dividend indicates potential dividend yield of over 8% for 2010: Yamama announced a dividend of SR2 per share for 1H10; this is higher than the SR1.75 we had expected, and if annualized, is higher than the SR3.5 we expect for 2010. A SR4 per share dividend for 2010 would lead to a dividend yield of over 8% at the current share price.

Central region remains key centre for cement demand in KSA; Yamama ideally positioned to benefit: Around 40% of the total KSA cement demand is based in the Central region with real estate projects here seeing the most progress in 1H10. Due to its location just outside of Riyadh, Yamama is ideally located to meet this demand and incurs minimal logistical costs in order to meet this demand. The reliability of receiving cement from Yamama is a key attraction for buyers to source their needs from the company.

Change in estimates leads to higher net income estimates: We have lowered our 2010e sales volume estimate for Yamama due to its strategy of keeping prices high leading to some lost business. However, through a combination of increased cement price estimates and lower expected costs, this leads to our 2010e net income estimate increasing by 4% to SR662mn

Valuation in-line, deserves to be at premium: Yamama currently trades at 10.5x for 2011e P/E, discount to the industry average. However we believe it deserves to trade at a premium due to its advantageous location and ability to meet new demand , thus the discount is encouraging.

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