Global Investment House –- Eastern Provnice Cement Company Equity Research - Eastern Province Cement Company (EPCC) was established in 1983 as Saudi Kuwaiti Cement Company. The first commercial clinker production was started on 6th October 1984. The 2 x 3500 MT/day clinker production capacity plant is located at Al Khursaniyah near to the Khursaniyah oil field reservation and close to the Dammam-Kuwait and Jubail-Abu Hadriah Highway. It is located just over 60 kms away from the biggest commercial port of Jubail making easier cost effective export facilities to any part of the globe.
The technical concept for the plant was formulated by EPCC management assisted by prospective Engineering Gestion (PEG) of Geneva, Switzerland. All the plant machineries were from the leaders of cement machinery manufacturing namely M/s Krupp Polysis Germany, supported by another Global Leader M/s ABB, Switzerland the Electrical and control system. The current annual clinker capacity stands at 2.2mtpy, while the cement grinding capacity is 2.4mtpy. EPCC is planning to expand capacity by 1.0mtpy and the expansion is likely to come on-stream by the end of 2005.
EPCC is an ISO 9002 certified company as well the products are certified by SASO (Saudi Arabian Standard Organization.)
Equity History
Eastern Province Cement Co. (EPCC) is a hundred percent Saudi owned company having public and private share holders. At the end of 1H2005, the company had a paid-up equity capital of SR645mn, divided into 12.9mn shares of face value SR50 each. Among the major shareholders of the company are government organizations such as Public Investment Fund (10%), Saudi Industrial Development Fund (10%) and General Organization for Social Insurance (10%). 70% of the shareholding rests in the hand of Saudi investors. The company is currently listed on the Saudi Stock Market (Tadawul). The share turnover increased from 37.2% in 2003 to 42.6% in 2004. The company, unlike other Saudi listed companies, has not increased its capital through the issuance of rights or bonus issue.
Sales
EPCC is one of the leading cement producers in the Middle East and one of the largest manufacturers of Ordinary Portland and Sulphate Resisting Portland Clinker and Cement in the Kingdom of Saudi Arabia. The company produces various types of cement, such as ordinary portland cement (OPC), sulphate resisting cement (SRC) and portland pozzolanic cement.
The company produced 2.699mt of cement in 2004 as compared to 2.374mt of cement in the previous year. The clinker capacity utilization was more than 100% during 2004. About 65%-70% of its sales comprise bulk sales, bagged cement (mostly OPC) constituting the rest. The ready-mix companies (RMCs) are its main customers, picking up nearly the entire bulk sales of the company. Small traders too pick up a part of its bulk sales as well as its bagged cement. Most of its sales now are in the domestic market to meet the high domestic demand, though the company has in the past exported around 336,000 tonnes in 2004 which was mainly to the neighboring countries of Bahrain and Kuwait.
In the first seven months of 2005, the company produced around 1.31mn tonnes of clinker, up 5.3% as compared to the corresponding period of the previous year. There is not much change in the production levels as the plants had been operating at more than 100% capacity in the said period. However, this is likely to increase significantly once the expansion plans come on-line. For the first 7-months of 2005, the cement production stood at 1.55mt as compared to 1.44mt in the corresponding period of 2004.
The company has a gas-based plant and the company sources gas from the Aramco plant through a 50km gas pipeline. Gas as fuel is cheaper to transport over the distance of 100-200km after which it become unviable proposition. For power, the company is using grid electricity and paying at government prices. However, with the new electricity regulatory set-up, the management has indicated that it might re-negotiate the electricity costs that it pays to the electricity corporation.
Expansion plans
The company is increasing its clinker capacity from 2.2mtpy at present to 3.2mtpy which is expected to cost around SR200mn. The new production line represents the final completion of the company's upgrading plans for the grinding machines, control room and analytical equipment. The financing of the project is expected to be met by a mix of loan from SIDF and internal accruals. The new capacity is likely to go on stream by the end of 2005. The loan from the SIDF is at the minimal rates of around 1.6%-1.7% and is expected to be of 7-year tenor.
The company is also expanding regionally as it has taken a 30% stake in the Arabian Yemeni Cement Company in Yemen. It signed an agreement with a number of Saudi and Yemeni businessmen to establish a large cement factory in the Yemeni city of Mukkala at an estimated cost of US$200mn.The Arabian Yemeni Cement Company, with a capital of US$100mn, will supply clinker and ordinary cements to meet the region's requirements. The plant will have the capacity of 1.2mtpy and is expected to come on-stream by end of 2007.
Past financial performance
The company reported the gross profit of SR274.53mn in 2004, representing 4.5% growth as compared to the profit of SR262.7 reported in the previous year. The company used to report the sales and COGS figures till 2003 but has not reported them in 2004. The operating profit too reported a 5% increase as compared to the previous year and stood at SR245.2mn in 2004. This was aided by the 58% decline in the selling and distribution expense. Among the non-operating income, gains from investments decreased marginally from SR19.8mn in 2003 to SR18.1mn in 2004. Other income reported a strong growth from SR4.7mn in 2003 to SR13.6mn in 2004.
The selling and distribution expenses declined which was result of zero-cost in the transportation expenses as compared to SR2.01bn incurred in 2003. This comes from the high demand for the cement in which the companies are operating at 100% capacity and the cement is taken from the plant immediately and therefore, they do not have to spend much on transportation effort. The salaries and employee benefits (which was the part of selling & distribution expense) decreased from SR2.4bn in 2003 to SR1.9bn in 2004.
The net profit of the company went up 7.6% to SR269.9mn in 2004 from SR250.7mn in 2003. The EPS rose to SR20.9 in 2004 from SR19.4 in 2003.The return on average assets remained flat at around 18.1% while the return on common capital increased from 38.9% in 2003 to 41.8% in 2004. The company paid 40% cash dividend in 2004.
Results for the first half of 2005
EPCC first-half net income after zakat rose 6.7% to SR162.4mn as compared with the same period in 2004. The gross profit of the company reached SR164.76mn in 1H05, up 16.1% from the corresponding period of the previous year. The company reported EPS of SR12.6 in 1H05 as compared to EPS of 11.79 reported in 1H04.
The total assets of EPCC at the end of 1H05 stood at SR1.73bn as compared to SR1.58bn reported at the end of 2004. The company also sold its investments worth SR260mn in 1H05 to raise resources for its expansion plans. EPCC took a loan from the industrial development fund in 1H05 to fund its capital expenditure plans. Shareholders equity stood at SR1.49bn at the end of 1H05, down from SR1.58bn recorded at the end of 2004.
Strategy
EPCC’s strategy seems to be to garner the maximum leverage from the booming real estate sector. It was one of the first to expand its production line. The company’s revenues and profitability are expected to leap once the new production line starts. The company is not only looking at the Saudi market but seems intent on exploring new territories (Yemen). We believe that the company will not face any pressure in the short term even with the new capacities and new companies coming on-line as the demand for cement continues unabated. The company was a major exporter in the past but has now reduced its exports to a minimum to cater to domestic demand. But it benefits from the proximity to Kuwait and Bahrain which are also experiencing construction boom and can provide company with growth if demand in Saudi tapers down in future. The company is also hopeful of exporting to Iraq and sees it as a big market, once it stabilizes.
The value of EPCC’s shares derived from the weighted average of the DCF and peer comparison methods is SR721.4 per share. The stock currently trades at around SR765.75 on the Saudi Stock Exchange, which implies that the value of EPCC’s shares, arrived at using the weighted average of the two methods, is 5.8% lower than the current market price. We, therefore, recommend a 'HOLD' on the Eastern Province Cement Company stock at its prevailing price levels.
