Q2: In line, low sale price weigh down earnings

Southern cement’s Q2 2017 results were in-line with our estimates. Despite of lower cash cost per ton of ~SAR72 (vs. SAR90 in Q2 2016) and higher other income of ~SAR5mn, the company reported weak set of numbers for Q2 2017 on the back of a sharp fall in the average realized price along with lower sales volume. The company’s net profit stood at SAR95mn, down 65% y-o-y, in line with our (SAR99mn) as well as consensus (SAR97mn) estimates. The company’s performance was impacted by 37% y-o-y drop in sales volume in Q2, compared to the sector average of -22%. Also, we believe that stiff competition in the Western region weighed on the company’s average realized price which declined 22% y-o-y and -6% q-o-q to ~SAR188/ton. In the coming few quarters, oversupply and competitive pricing in the western region may lead to further decline in selling prices. We continue with our Neutral rating on Southern cement with a revised target price of SAR48 per share.

Revenue: : Southern cement reported revenue of SAR 243mn (down 50.7% y-o-y). The company’s sales volume declined 37% y-o-y in Q2 to 1.3mn tons. The company currently holds 2.75mn tons, representing 47% of last 12- month sales volume

Gross and Operating margins: Southern cement’s gross profit declined 63% y-o-y to SAR100mn. The company’s operating profit came at SAR92mn (-64% y-o-y). The company’s gross and operating margins declined to 41% and 38%, respectively (from 54% and 52% in Q2 2016), while the improvement on sequential basis was due to lower cost/ton.

Net profit and valuation: Reported net profit of SAR95mn was in line with our estimate of SAR99mn. Looking to current market weak conditions, high inventories, and company’s capacity addition of 3mn (1.5mn tons at both Bisha and Tuhama plants), we expect the company to operate these new production lines only partially and to offer more discounts on its sale prices. The stock currently trades at ~14.2x its 2018E earnings. We value the company based on an equal weighted average of DCF and relative valuation method. We revised our estimates to reflect the drop in selling prices, our target price stands at SAR48/sh which implies a potential downside of 4.8%. Thus, we continue with our Neutral rating on the stock.

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