Yanbu Cement -Equity Report -08-08-2017

Source: AlBilad Investment Co.

Yanbu Cement Company disclosed its lowest quarterly bottom line in 10 years revealing net profit of SAR 80.6 million in Q2 2017 compared to SAR 159 million in Q2 2016 falling 50% YoY, and 35% QoQ from SAR 124 million in the previous quarter. This resulted in a net profit margin of 37.6% in Q2 2017 compared with 45.7% for Q2 2016 and 40.6% for Q1 2017. Therefore, the semiannual figure dwindled 38% to SAR 205 million versus SAR 330 million in H1 2016.

Total revenues amounted to SAR 214 million in Q2 2017 compared to SAR 348 million in Q2 2016 slumping 38%, while sliding 30% from SAR 307 million in Q1 2017. Thus, the semiannual revenues totaled SAR 521 million compared with SAR 748 million in H1 2016 shrinking 30%.

The company sold 1.21 million tons of cement in Q2 2017 compared to 1.47 million tons in Q2 2016, decreasing 18% YoY and 24% QoQ. Therefore, semiannual sales reached 2.80 million tons in H1 2017 versus 3.30 million tons in H1 2016, down 15%.

The YoY decline in bottom line during Q2 2017 and H1 2017 was triggered by the dip in selling prices and dispatches, despite an unrealized gain on the market value of derivatives compared to unrealized loss in Q2 2016. Compared with the previous quarter, Q2 2017 was also affected by coinciding with Ramadan and the holiday of Eid al-Fitr.

Operating profit concluded Q2 2017 at SAR 71 million compared with SAR 156 million in Q2 2016 slumping 55% YoY and dropped 42% QoQ, thus the operating margin shrank to 33.4% versus 44.8% in Q2 2016 and 40.1% in Q1 2017. The semiannual operating profit edged down 38% posting SAR 205 million compared to SAR 330 million in H1 2016.

Total market sales in Q2 2017 tumbled 23.4% YoY reaching 11.2 million tons compared to 14.7 million tons in Q2 2016, despite the addition of the sales of Umm Al-Qura Cement and United Cement for the first time, while sliding 17.7% QoQ from 13.6 million tons in Q1 2017. The semiannual sales dwindled 21.6% hitting SAR 24.9 million compared with SAR 31.7 million in H1 2016. Meanwhile, clinker inventory reached the highest level recording 31.2 million ton by the end of June 2017.

On the other hand, a ministerial committee has approved the reduction of cement export fees by 50% to stimulate the competitiveness of local cement in external markets, where the committee has endorsed the cement export fees ranging between SAR 85 to SAR 133 per every exported ton. However, we still believe that Saudi cement companies are unable to compete under current export fees, especially given the slowdown in main neighbouring economies and the hefty cost of exporting to remote markets.

The earnings figure for Q2 2017 was remarkably affected by the weak demand and the drop in the average selling prices compared to Q1 2017; bringing net profit for the second quarter below our estimate of SAR 95 million and analysts’ consensus of SAR 93 million. Furthermore, we expect a tough competition as demand continued to weaken in the local market and high levels of clinker stocks. Meanwhile, we believe the pressure on cement prices will continue till local demand recovers.

In light of the above, we revised our future estimates and profit margins, therefore our valuation is downgraded from SAR 33 to SAR 31 per share.


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