1Q2017 net income of SAR 124mn came above our expectation of SAR 70.2mn indicating a deviation of 76.6% from our estimate, due to higher than expected selling price. Net income showed a decline of 27.5%YoY and 18.1%QoQ growth. Despite the decline in production cost, the YoY decline in net income is attributed to the decline in volumetric sales and selling price. We remain “Overweight” on the stock due to current market price. However, we maintain a cautious outlook on the sector for 2017.

Revenue stood at SAR 296mn; a decline of 25.9%YoY and above our estimates of SAR 243.4mn. This shows the continuation of pressured fundamentals resulting in lower sales and realization price. Cement sales showed a decline of 13.1%YoY to stand at 1.59MT in 1Q2017 from 1.83MT in 1Q2016. For 1Q2017, we expect the selling price to be around SAR 185.8/ton vs. SAR 217.9 in 1Q2016 and SAR 151.7 in 4Q2016.

Gross profit stood at SAR 132mn depicting a decline of 34.0%YoY and 2.9%QoQ, impacted by decline in revenue despite the decline in production cost. Gross margin declined to 44.6% in 1Q2017 from 50.1% in 1Q2016 and 45.4% in 4Q2016. We expect further decline in gross margins in upcoming quarters. Based on our calculation, the cost/ton is expected to be at SAR 103.0/ton vs. SAR 108.0/ton in 1Q2016 and 82.9/ton in 4Q2016. Operating profit stood at SAR 123.0mn showing a decline of 34.9%YoY and 2.4%QoQ. OPEX at SAR 9.0mn, showed a decline of 14.3%QoQ and 20.3%YoY

AJC view: In addition to high inventory level (2.85MT at end of March), we believe the company will continue to sell at a discount in upcoming quarters, as lower dispatches will continue to exert pressure on price realization. This is due to high competition in the market as demand remains weak. Therefore, we maintain our cautious outlook on the sector for the coming quarters due to weak construction activity and upcoming hike in electricity rates. For 2017, we expect Yanbu cement to post net income of SAR 457.5mn (EPS of SAR 2.90) a decline of 14.6%YoY. Based on our estimates, the company is trading at forward P/E and P/BV of 11.74x and 1.52x, respectively. The company reduced its dividend payment in 2016 to SAR 3.0/share, we further expect the company to reduce its dividend to 2.50/share for FY2017. We maintain our “Overweight” recommendation and PT of SAR 40.2 on the stock.

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