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Yamamah Saudi Cement

Source: Global Investment House

Sales growth to slowdown considerably after 2010
Yamama cement is likely to post an increase of 8.5% in sales revenue in 2010 to SR1.26bn driven by increase in volumes sold. Yamama cement has been successful in increasing its dispatches by 9.0% to 4.21mn tons in 9M-2010 despite the entry of new players and cement export ban. However, we expect the sales growth to reduce substantially post-2010 and grow at a 2010-13 CAGR of 0.91% due to capacity limitations and over-supply in the sector.

Advantageous cost structure
Yamama Cement has a cost advantage relative to the sector due to its integrated production plant and captive power supply. In addition, proximity to the demand centers in the central region where a large proportion of activity is taking place helps in keeping transport and freight costs down.

Margins to remain higher relative to sector
Though margins are likely to face downward pressure due to over-capacity and lower prices, we believe Yamama Cement gross margins are likely to be the highest after Qassim cement compared to the cement companies under our coverage due to the above mentioned cost advantages. In addition, Yamama Cement has been able to charge premium prices due to its proximity to the demand centers as witnessed by the increase in realization prices by 3.2% to SR232.3 per ton at a time when most other cement companies have witnessed a decline in realization prices.

Net profit growth to stay flat
We expect net profits to decline at a 2010-13 CAGR of 0.3% after an expected sharp jump of 14.6% to SR643.5mn in 2010 due to increase in volumes sold and average realization prices in 2010.

Attractive FCF yield and dividend yield
With no expansion plans in the pipeline, Yamama cement has an attractive estimate FCF yield of 9.4% and dividend yield of 7.9% in 2011. The stocks 2011E price earnings multiple of 10.57x is at a 3.0% premium to the peer average 2011E multiple of 10.27x. We believe Yamama cement deserves to trade at a premium to industry P/E due to its proximity to high demand central region. The stock is trading at SR50.5 which is at a 16.3% discount to our fair value of SR58.7 based on the weighted average of discounted cash flow method and market multiple method. Thus we recommend a BUY for the stock.

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