Global Investment House –- Yanbu Cement Company Equity Research update - The sales revenue of Yanbu Cement Co (YCC) for the year 2005 increased only by 0.6% to SR778.9mn from SR774.6mn reported in 2004. The was mainly due to the decline in the production of clinker which for the year 2005 stood at 3.04mn tones (from 4 kilns) as compared to 3.45mt reported in the previous year. Cement production for the year 2005 stood at 3.74mt, down 12% as compared to 4.25mt reported in the previous year due to the above mentioned reasons. As a result, sales volume stood at 3.72mt in 2005, down 12.9% as compared to 4.27 mt reported in 2004.
The gross profit of Yanbu Cement Co (YCC) for the year 2005 increased by 5.9% to SR476.3mn from SR449.7mn reported in 2004. The price realization per tonne cement sold increased by 15.4% to SR209.3 during 2005 from SR181.4 recorded in the previous year, underscoring strong demand for cement in the Saudi market. The EPS (adjusted for 5:1 stock-split) of the company increased to SR4.3 from SR4.1 reported in 2004.
The total assets of the company reached SR2.24bn at the end of 2005 witnessed an increase of 6.3% over the previous year-end. There was a huge spurt in the projects-in-operation, in view of the ongoing capacity expansion project. On the liabilities side, the company has total available financing facility of SR268mn for expansion plans from local banks but has utilized only SR115mn in 2005. The debt-equity ratio of the company rose to 0.6x during the year. The company was zero-debt company in 2004.
The sales revenue of Yanbu Cement Co (YCC) for the first quarter of 2006 increased by 8% to reach SR210.2mn as compared to SR194.6mn reported in the corresponding period of the previous year. However, the cost of production rose only by 0.4% to reach SR83.8mn which resulted in 13% growth in gross profits in 1Q-2006 over the corresponding quarter of the previous year. Finance expenses are expected to increase substantially as the company is expected to utilize its credit facilities. The net profit has grown in-line with our estimates, up 15.4% in 1Q-2006 over 1Q-2005.
The company has increased its investment in funds from SR240.2mn reported at the end of 2005 to SR313.4mn reported at the end of 1Q-2006. However, the company seems to have not availed any extra available credit facility in 1Q-2005 as the debt outstanding stood at SR114.3mn, unchanged as compared to the outstanding at the end of 2005.
Recent Developments
In October 2005, capacity of the fourth line of the company was increased to 9000 tons/day from 7000 tons/day. The company is intending to put up a new kiln of 3.3mtpy which will start production by 2009.Yanbu Paper products Co, collaboration between YCC (60% stake) and Shuaiba Paper Products Co (40%) of Kuwait began operation in September-2005 with a production capacity of 70mn bag/yr.
YCC recently signed a contract at a value of SR20mn to build a management office building over 3000sqm in Jeddah. It is expected to be completed by 2006. Also, ience to the directive from the stock market regulators, the YCC stock was split 5:1 with effect from April 15, 2006. As a result, the total number of shares currently outstanding has gone up to 105 million of face value SR10, from 21 million of face value SR50 at the end of 2005.
Outlook
Over the medium-term, the cement demand in Saudi Arabia is expected to be robust in view of the massive investments planned all across the country. Assuming that all the investment projects valued at $182bn announced in Saudi Arabia so far are implemented, we project a cement demand growth at a CAGR of about 12% in volume-terms during 2005-’08. Assuming also that all the proposed clinker/cement capacity expansions are completed in the country as planned, we project high surpluses of cement in Saudi Arabia in the years after 2007-‘08.
Valuation & Recommendation
In our previous Research Report on YCC in September 2005, with which we had initiated coverage of the stock, we had arrived at a weighted average share value of SR665.8 per share (SR133.2 post the share-split), and had recommended a 'Hold' on the stock at the then prevailing price of SR683.8 (SR136.7 post the share-split). The stock has had a good run at the stock market since then, touching a high of SR164.5 (post the share-split) in the six months following the release of our Report, before the Saudi stock market went for a major correction in late-February 2006.The variations (actual vs. projected) in gross profit, operating profit and net profit of the company in 2005 have been -6%, -6.2% and -5.7% respectively. The variation in the gross profit has largely been due to decline in production and sales as production at one line stopped for more than two months (for capacity expansion works).
Since our last Report, a lot of positive news-flow has favorably impacted the GCC cement sector, in general, and the Saudi Arabia cement sector, in particular. While countries all across the GCC have continued to announce investments in projects, covering various segments of the economy, Saudi Arabia has a large share of these projects. According to data currently available, projects currently under execution in the GCC amount to about $620bn. Out of these, Saudi Arabia is believed to account for about 29.3%, or $182bn worth of projects. Of these about $80bn worth of projects are believed to be in the civil segment. New clinker capacities of about 21.3mt and cement capacities of about 22.0mt are believed to be coming up in the Kingdom in the coming 2-3 years by way of expansions as well as green-field projects. The projections for the years 2006-‘09 have been revised keeping in view the company’s 2005 and 1Q2006 performance.
While we had assumed a risk-free rate of 4.66% in our earlier Report, it has been lowered to 4.625% in this Update, based on the current coupon on 10-year Saudi government bonds. We have retained the market risk premium and beta at the earlier levels, while revising the cost of debt upwards to more realistically reflect the cost of debt financing. The expected long term gearing of debt is increased from 20% assumed in our previous Report to 25% of total liabilities. As a result, WACC has increased to 9.22% in this Update from 9.13% in the earlier Report.
The combination of the revised financial projections, WACC and the number of shares outstanding has now led to the DCF value of SR90.9. Based on the 2006 (P) Sector P/E multiple of 18.5x, the peer valuation arrived at now is SR94.0. The combined effect of these two has led to a revision in the weighted average share value of YCC, which is now SR91.5. At the current market price of SR86.75 on the Tadawul, the YCC share is quoting at a discount of 5.5% to its intrinsic value. We, therefore, reiterate our earlier recommendation of ‘Hold’ on the YCC stock with a medium term perspective.
