Lowest 2Q net income on record



Arabian Cement reported a lower than expected set of 2Q17 results, with net income declining -74.8% YoY to SR36mn. This is the lowest 2Q net income on record and compares to the NCBC estimate of SR68mn. We believe the weakness is due to 1) lower sales quantities (-35% YoY), 2) lower selling prices due to increasing competition (-21% YoY), and 3) lowest 2Q gross margins on record at 23.8%. Arabian Cement trades at a 2018E P/E of 10.8x vs covered peers at 12.2x.

NCBC View on Results: Arabian Cement reported a lower than expected set of 2Q17 results, with net income declining -74.8% YoY (-64.7% QoQ) to SR36mn. This is below the NCBC and consensus estimates of SR68.0mn. We believe the weakness came from 1) lower sales quantities due to the overall slowdown in the construction sector and 2) low margins due to discounts offered. Based on our calculations, we expect the operations in Jordan outperformed Saudi, with sales declining -9.6% YoY to c.SR85mn.

We believe average selling prices for cement sold in Saudi stood at SR170/ton vs. the NCBC estimates of SR182/ton (-21% YoY, -7.0% QoQ). We believe these discounts came as a result of the slowdown in the construction sector and increasing competition.

The company reported its lowest 2Q gross margin on record, contracting from 44.8% in 2Q16 to 23.8% in 2Q17. This compares to our estimates of 35.6%. We believe this is due to the price discounts offered, in addition to the impact of the revised fuel support on companies. We expect an average gross margin of 36.1% till 2021E.

We believe Opex stood at SR16mn, higher than our estimates of SR14mn. Moreover, we believe other income came at SR5mn, higher than our estimates of SR1mn.

We are Neutral on Arabian Cement with a PT of SR41.7. Lower prices due to competition is key risk. However, the stability in the Jordanian operations is an advantage in comparison to other peers. The stock trades at a 2018E P/E of 10.9x vs. peer average of 12.2x.


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