Raysut Cement Company (SAOG) – Investment Update
Global Investment House – Kuwait – Raysut Cement Company – Investment Update – April 2008-Raysut Cement Company recorded total revenue of RO63.01mn for the year ended December 2007, witnessed an increase of 31% from RO47.97mn in the previous year. The net profit of the company increased by 46% to reach RO30.12mn in 2007 from RO20.65mn reported in the previous year. The company is expected to continue witnessing growth in both revenues and profits, driven by the healthy market demand for cement and helped along by its scaled up clinker/cement grinding capacity, thanks to the commissioning of the company’s new cement capacity in August 2007.
The value of RCC derived from the weighted average of the DCF and relative valuation methods is RO2.63 per share. The stock has gained significantly since the beginning of 2008. This implies that the market has already priced-in the value of the stock; it has, in fact, a potential downside of 5.6 percent from its current price level. We, therefore, recommend a ‘Hold’ on the Raysut stock.
Financial Performance
The total revenue of the company was RO63.01mn for the year ended December 2007, an increase of 31% from RO47.9mn in the previous year. Healthy growth in revenue can be attributed to 18% increase in the sales volume of the company. Company sold 2.25mn tons of cement as against 1.88mn tons in 2006. Average realizations firmed up to RO28.29/ton from RO25.5/ton in the previous year.
Cost of sales of the company was RO35.06mn during 2007, 30% higher than in the previous year. The increase in cost of sales can be attributed to the increase in energy consumption due to the higher production and also because of 126% increase in the cost of imported cement. Fuel, gas and electricity charges of the company rose by 16% to RO6.58mn in 2007. Despite a y-o-y increase, cost as a percentage of sales declined to 55.6% as against 56.1% in 2006.
The gross profit increased by 33% to RO27.95mn in 2007. As a result of a better realization prices and healthy growth in sales volume, the gross profit margin increased to 44.4% in 2007 from 43.9% in 2006.
General & administrative expenses declined by 36% during the year to RO0.47mn as against RO0.74mn in 2006. The major reason for the decline in operational expenses is because of significant reduction in legal expenses which declined to RO3,237 from RO245,047 in 2006. Apart from that higher utilization of vessels resulted in lower distribution cost. As a percentage to sales they declined to 16.6% from 17% in 2006. This despite increased charter rates by approximately 10% and increase in bunker fuel prices by 20%.
Income from associates during the year rose by 14% to RO3.15mn as against RO2.76mn in 2006. Investments in an associated company represents company’s 49% equity interest in Mukalla Raysut Trading & Industrial Company Ltd. (MRTIC), a limited liability company incorporated in Yemen. Investment in Raysut Cement and Partners represents 51% equity interest. Raysut Cement and Partners is still in formation stages.
The net profit of the company increased by 46% to RO30.12mn in 2007 from RO20.65mn in 2006. The net profit margin simultaneously increased to 47.8% from 43.1% in 2006. As a result, the EPS rose to RO0.15 in 2007 from RO0.10 in the previous year. The company approved cash dividend of 100% in 2007. In 2006, the company distributed a 50% cash dividend.
The total assets of the company rose by 17% to RO113mn at the end of 2007. Current assets increased by 9% at the end of the year to RO38mn while account receivables witnessed an increase of 83% to RO6.06mn at the end of the year. Simultaneously, inventories increased by 62% to RO5.75mn at the end of the year. Short-term deposits rose handsomely during the year to RO12mn, 16% higher, while investment in associate amounted to RO3.31mn, up 19% at the end of the previous year. The net fixed assets of the company rose by 22% to RO71.5mn in 2007.
On the liabilities side, the account payables increased by 147% to RO2.97mn at the end of 2007. Short-term loans of the company declined by RO5.4mn to RO2.4mn at the end of the year. On the other hand, medium-term loans decreased by 31% to RO5.03mn at the end of the year. The paid-up equity capital of the company remained unchanged during the year at RO20mn.
RCC has an early mover advantage in the Oman following its capacity expansions in 2005 and 2007. The positive effect of that expansion has already been felt by the company, with more than doubling of its net profit in 2007. The company is effectively poised to take advantage of not only the boom in its home market, but also in its major export market of Yemen. The coming years should continue to see over 50% of its sales revenues coming from exports, with a large part from exports to Yemen. The growth momentum seems to be continuing in 2008 as well. The new capacity which is being promulgated by the company if falls in plan and comes online by beginning of 2010, would result in a change in valuations.
