Yanbu Cement

Source: Global Investment House

Weak 9M-2010 numbers not surprising
As we anticipated, Yanbu Cement Company sales witnessed a decline of 9.3% YoY to SR683mn in 9M-2010 due to decline in cement dispatches and realization prices in the backdrop of new capacity additions and export bans. Consequently, net profits witnessed a decline of 17.3%YoY to SR331mn in 9M2010.

2010 likely to end on a weak note ?
With the Haj season falling in the 4Q2010, cement dispatches are likely to remain slack as economic activity cools down. We expect the 2010 revenues to be SR874.1mn, a decline of 7.3% YoY while net profits to be SR417.2mn, a decline of 13.4%YoY.

Capacity expansion in 2011 likely to be a double-edged sword
Yanbu Cement is expected to increase its capacity to 7.8mn tons in 2H2011. Expansions in an over-supply scenario are tantamount to “bad asset growth” making FCF yield a useful indicator. We expect FCF yield to be negative for 2010 and 2011 at -3.0% and -4.6% respectively due to capital spending associated with expansion.

Net profits to increase at the cost of falling margins
2010 performance of Yanbu Cement was held back by old inefficient lines as it saw a decline in dispatches by 5.5% in 9M-2010 to 3.1mn tons. New production lines will help the company increase its cement dispatches and reduce costs. However, expected under-utilization of capacity is likely to offset any efficiency gains. We expect net profits to increase at a 2010-13 CAGR of 6.8%. The net profits will be driven by expected increase in sales. However, the net margins are expected to decline to 47.7% in 2010 and to 45.7% in 2011 before improving slightly to 46.3% in 2012.

Valuation
The stocks 2011E price earnings multiple of 10.18x is at a 0.8% discount to the peer average 2011E multiple of 10.27x. The stock is trading at SR40.8 which is at a 2.0% discount to our weighted average fair value of SR41.5 based on discounted cash flow method and market multiple method. Thus we recommend a HOLD for the stock.


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