Saudi Cement Company
Company Initiation Report
May 2013
Please read Disclaimer on the back
• Largest Cement Producer in the Kingdom : With a cement capacity of
11,500mtpa, and market share of above 17% in the local dispatches, SCC is the largest cement producer & supplier of cement in the Kingdom of
Saudi Arabia
• Strategic location: SCC is located in the eastern region with easy access to the cities of Jubail and Riyadh, where an estimated USD 158bn woth projects are expected to be completed in the coming years.
• Housing demand to provide impetus to cement demand: The decree by the King and the subsequent measure to support the housing demand by the government will result in an improvement in housing supply.
• Export to Bahrain: Given the 25,000tons per week export quota to
Kingdom of Bahrain by the government, Saudi Cement and Eastern
Cement are the only two companies that are able to capitalize on the exemption. Out of the two producers, Saudi Cement accounts for more than 80% of the exports to the Kingdom of Bahrain. However, due to the political instability in the country, demand has dwindled in the last couple of years.
• Replacing Old Kilns: The company recently announced that it is looking to replace its 3 old Kilns with a combined capacity of 360tons/hour, with
2 new kilns with a combined capacity of 440tons/hour. This will add an additional 600,000tons of cement capacity, and achieve enhanced milling efficiency, cement quality, and meet environmental requirements
• Valuation: SCC with the a cement capacity of 11.5mtpa is the largest cement producer in the Kingdom, strategically located in the eastern region, from where has access to demand centres like Jubail and Riaydh.
We initiate our coverage on SCC with a “ Neutral ” stance based on our
12-month target price of SAR 103.5/share .
• Risk to our Valuation: h h
Complete restriction on Exports: on the back of the recent decree by the government to import 10mn tons of cement, the government can, impose a ban on cement export to kingdom of Bahrain if the demand/supply gap widens. However due to the weak demand from the country, we believe the impact will be limited.
Per tonne price can come under the radar: We believe the current upsurge in cement demand, has potentially resulted in a black market for cement, where prices are being inflated in light of the shortfall in supply. In this scenario, a backlash from the government to control prices, can have a negative impact on the sector and the company.
Recommendation
12-month price target
Current market price
Upside / (Downside)
Reuters code:
Bloomberg code:
Country:
Sector:
Primary Listing:
M-Cap:
52 Weeks H/L (SAR):
NEUTRAL
SAR 103.5
SAR 101.25
2.22%
Price Chart
7500
7300
7100
6900
6700
6500
6300
TASI SCC
5-May-12 5-Jun-12 5-Jul-12 5-Aug-12 5-Sep-12 5-Oct-12 5-Nov-12 5-Dec-12 5-Jan-13 5-Feb-13 5-Mar-13 5-Apr-13
90
85
80
75
105
100
95
SACCO.AB
SACCO:AB
Saudi Arabia
Cement
Tadawul
SAR 15,185mn
101.25/85
Senior Analyst
Talha Nazar
+966 2 6618603
Analyst
Jassim Al-Jubran
+966 2 6618602
Company Snapshot
Revenues (Sales)
% Growth in Revenues
Net Income
% Growth in Gross Profit
EPS
Return On Equity (ROE)
Retun On Asstes (ROA)
EBIT Margins
Net Margins
PE (x)
PB (x)
Dividend Yeild
2011
1,716
12%
831
24%
5.43
22%
14%
51%
49%
8.70
1.90
7%
2012
2,203
28%
1,102
29%
7.20
19%
12%
52%
43%
9.98
1.89
6%
2013e
2,430
10%
1,189
10%
7.77
20%
14%
51%
43%
13.46
2.63
7%
2014e
2,530
4%
1,238
4%
8.09
25%
18%
51%
48%
10.86
2.75
11%
2015e
2,572
2%
1,254
1%
8.19
35%
25%
51%
50%
13.78
4.81
7%
Source: Company reports, Aljazira Research
2016e
2,645
3%
1,297
3%
8.48
38%
28%
51%
49%
13.03
4.96
7%
1
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Saudi Cement Company May 2013
Please read Disclaimer on the back
Discounted Cash Flow
We have used the Discounted Cash Flow valuation to attain company’s 12 month price target. Following are the key basic steps & assumptions we have assumed to value Saudi Cement Company.
• 4-year forecasted cash flow
• Terminal value calculation based on Gordon Growth model h
Expected Terminal growth of 2%
• Using Capital Asset Pricing Model to calculate cost of equity. The calculation is based on the following variables h h
Risk free rate of 2.7% based on 10 years US bond Yield of 2.0% + country risk premium of Saudi Arabia of 0.7%
Equity Risk Premium of 10.45% h
Beta of 0.744 from Bloomberg
• We are using weighted Average Cost of Capital (WACC) for discounting the future FCF of the company, where the calculation of WACC is based on the following variables h h
Cost of equity based on CAPM
Cost of Debt at 5% h
Contribution from equity and debt in Saudi Cement’s Capital structure is taken at 79% & 21%, respectively
• Using the above assumption, we arrived at DCF based value of SAR 99/share for the company.
Growth
1%
2%
2%
3%
3%
7%
119.0
127.9
138.4
151.1
166.7
WACC
8%
102.2
108.5
115.8
124.4
134.6
9.34%
88.8
93.4
98.7
104.7
111.7
10%
79.3
83.0
87.0
91.6
96.8
11%
71.2
74.1
77.3
80.8
84.8
EV/Tonne
Based on the Saudi sector EV/tonne of USD 433mn/tonne (SAR 1586mn/tonne) , value of Saudi Cement Company stands at
SAR 111/share .
Price Target
We have allocated 70% weight to our DCF valuation and 30% to our EV/tonne valuation. Based on the above assumptions our 12months price target for the company is SAR 103.5/share . We expect the company to trade at a 2013 expected PE of 12.32x. We recommend a
“ Neutral ” stance on the stock with an upside potential of 2.2% .
Growth
1%
2%
2%
3%
3%
7%
115.7
121.0
127.3
134.9
144.3
WACC
8%
105.6
109.4
113.8
118.9
125.1
9.34%
97.6
100.4
103.5
107.2
111.4
10%
91.9
94.1
96.5
99.3
102.4
11%
87.1
88.8
90.7
92.8
95.2
2
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Saudi Cement Company May 2013
Please read Disclaimer on the back
Saudi Cement Company with a capacity of 11.5mtpa is the largest cement producer in the Kingdom. Strategically located in the Eastern region with easy access to demand centers like Dammam, Khobar and Riyadh along with easy access to Bahrain makes it one of the premium cement producer in the Kingdom of Saudi Arabia.
Chronology
1955-Saudi
Cement a joint
Stock Company established
1961-SCC Starts its operations with One Kiln with capacity of
300tpd at Hofuf
1981-Saudi
Bahraini Cement
Company (SBCC) starts Operation at its 6,000tpd
Plant in Ain Dar.
1992-SBCC merged with SCC under the banner of Saudi Cement
Company (SCC)
1997-Saudi Cement
Capacity adds new klin witha capcity of 3,500tpd at
Hofuf Plant, taking its capcity to
7,825tpd.
Source: Aljazira Research
Saudi Cement company is ideally located in the Eastern Region of the Kingdom of Saudi Arabia. The huge demand expected from the region especially from Riyadh and Jubail, where an estimated USD 158bn projects are under construction or are expected to commence, is going to keep the company’s capacity utilization levels above 90%.
Strategic Location
Tabuk
Al Jowf
Al Madinah
Hail
Makkah
Al Bahah
Al Hudud ash
Shamaliah
Al Qasim
R I Y A D H
A total of 980 projects, worth USD
70.4bn
Central Province
USD 80bn Expansion in
Jubail and Yanbu
B ahrain
Dammam
Al Hofuf
Ash Sharqiyah
Asir
Jizan
Source:d-maps.com,Aljazira Research
3
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Saudi Cement Company May 2013
Please read Disclaimer on the back
Although Cement Companies in Saudi Arabia are barred from exporting cement to other neighboring countries, however the government has given a relief on exporting to the Kingdom of Bahrain as long as it does not exceed 25,000 tons per week. Given Saudi Cement Company’s proximity to Bahrain, the company has been able to benefit most from this decision, as more than 80% of cement exported to Bahrain is by
Saudi Cement. However, given the current instability in the country demand from the Kingdom of Bahrain has suffered. Exports to Bahrain for
2012, showed a decline of -22% Y/Y.
Saudi Cement Exports
1,200
1 , 026
1,000
12 %
843
20%
10%
800
756
0%
600
-11 %
539
-10%
421
400 -20%
200
-26 %
-36 %
-22 %
-30%
-
2008 2009
Saudi Cement Exports -LHS
2010
-40%
2012 2013
% Change-RHS
Source: Saudi Cement Company, Yamamah Cement Company
The Largest Cement Producer
Saudi Cement Company with a clinker capacity of 11.2mtpa is the largest cement producer in the Kingdom of Saudi Arabia. The Company’s share in industry stands at 20%, whereas its share of the industry dispatches stand at 16.8%. The parity in share in dispatches and share in
Capacity is due to management decision to halt production, in light of the ban on exports, at a couple of its old kilns with a combined capacity of 4.8mtpa. However, given the strong demand in 2012, the company decided to re-operate its non-operational plants. The company in 4Q-
2012 was able to restart its Kilns 1,2,3 and 6 and further the management has decided to re operate Kiln 4 and 5 during 4Q-2013, we have not considered the impact of the re-operation of Kilns 4 and 5, due to expected delays. Once the company announces the recommencement we will adjust our estimation and price target accordingly.
Replacing Old Kilns for New……Improving Efficiency
As mentioned above that a couple of SCC Kilns are old , which has resulted in inefficiencies for the company. The management has decided to replace 3 old Kilns with a combined capacity of 360tons/hours at Ain Dar plant with two new Kilns at its Hofuf plant with a combined capacity of 440tonnes/hour, hence resulting in an addition of 600,000 tons per annum of cement capacity. With the new Kilns ,Saudi Cement company will be able to achieve enhanced milling efficiency, cement quality, and meet environmental requirements. However It should be noted that the time-line on the project is not clear, as no ECP (Engineering Construction & Procurement) contracts has yet been awarded. Once the company announces the details about the project, we will adjust our model accordingly and come up with our revised estimations.
Clinker Supply to other Producers
In order to achieve improvement in its capacity utilization in 2012, the company announced that it was looking to sell 600,000 tons of clinker to other producers in the kingdom. The company went through negotiations with a number of companies, however a final agreement was reached with only two companies, Qassim Cement Company and Arabian Cement Company. We believe, given the current demand in the
Eastern and Central Provinces, such contracts in 2013 are unlikely.
Dispatches to improve…
The company in 2012 sold 8.7mn tons of cement as compared to 7.2mn tons in 2011, depicting a jump of 21%YoY. The was due to the restart of Kiln no 6 and higher capacity utilization from the operational Kilns (Kilns # 7 & 8). The company’s share in dispatches in 2012 showed an improvement to 16.8% from 14.7% in 2011. Going forward given the strong cement demand in the region we believe the company will achieve higher capacity utilization levels. According to the company it was achieving above 90% utilization on its operational lines, however on full capacity (operational+ non-operational),capacity utilization was between the 80%-85% mark. Over our forecast horizon,we expect capacity utilization to reach 90%.
4
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Saudi Cement Company May 2013
Please read Disclaimer on the back
Industry & SCC dispatches
80,000
70,000
60,000
50,000
In tons
40,000
30,000
20,000
10,000
-
42 ,721
6,742
2010
48 ,987
7,218
2011
SCC Dispatches
0.90
0.85
51 ,705
8,699
56 ,876
9,545
2012 2013e
Industry Dispatches
61 ,426
9,890
64 ,497
10 ,005 10, 235
2014e 2015e
Share In Dispatches-RHS
2016e
25%
20%
0.80
15%
0.88 0.88
0.88 0.87
0.89
0.75
10%
0.70
0.74
0.77
5%
0.65
2010 2011
D/C (x)-LHS
2014e 2015e
Share in Capacity-RHS
2016e
0%
2012 2013e
Share In Dispatches-RHS
Source: Yamamah Cement Company, AlJazira Research,* D/C(Share in Dispatches/Share in Capacity)
SCC’s grinding capacity is located at two locations, namely Hofuf and Ain Dar. The company mainly utilizes the Hofuf plant and is partially dependent on the Ain Dar plant. However, the company is looking to concentrate all it grinding capacity to its Hofuf plant. The aim of the project is to cut cost, and improve its services to it customers. This will result in the centralization of the dispatches from the Hofuf plant through road or rail. The project according to the company will take at least 18months to complete after the EPC contract has been awarded.
We believe this along with the new replacement kilns will result in improvement in operational efficiency, hence resulting in improved cost structure.
19%
17%
15%
13%
11%
9%
7%
5%
5
© All rights reserved

Saudi Cement Company May 2013
Please read Disclaimer on the back
Strengths
• Subsidized heavy fuel , however the advantage is prevalent for all the cement producers.
• Strong local demand, backed by the heavy housing demand in the Kingdom and huge infrastructure investment by the government.
• SCC is strategically located in the Eastern region which gives it easy access to the Riyadh province and Jubail in Eastern region, where an estimated SAR 158bn worth projects are underway.
• SCC with a capacity of 11.5mtpa, is able to achieve economies to scale.
• The company along with Eastern cement company are the only two companies that are able to export to Bahrain, given their proximity.
Weaknesses
• Given the subsidy on heavy fuel, the cement industry as a whole in Saudi Arabia is becoming inefficient in terms of energy management practices.This we believe will have a negative impact on the companies if the fuel subsidy is lifted.
• The price cap of SAR 240/tonne, is restricting the Saudi cement companies revenue growth.
Opportunities
• Further initiatives by the government for housing units, along with more infrastructure investment will drive the cement demand.
• SCC is looking to expand its capacity by replacing 3 of its old kilns with a combined capacity of 360 tons/hour with 2 kilns with capacity of 440 tons/hour, adding a total of 0.6mtpa of cement capacity.
• The recent decree by the King to import 10mn tons of through the existing players, provides SCC with an opportunity to further enhance its revenue stream. Since the government has directed cement companies to Import cement in order to curtail meet demand.
Threats
• The industry and along with SCC is highly susceptible to policy change by the government.
• Any removal of subsidy with result in margin compression, and will have a multi-fold impact on the companies, as Saudi cement producers have no adopted to the latest technological advance to save cost
• Expansion by companies located in the Eastern and
Central regions in the long run can negatively impact
SCC’s market share
6
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Saudi Cement Company
P&L In mn SAR
Revenues (Sales)
% Growth in Revenues
Cost of Revenues (COGS)
Gross Profit
% Growth in Gross Profit
Admin, General Expenses
Marketing Expenses
Total Operating Expenses
Other revenues and gains
Cost of financing
EBT
Tax and Zakah
Net Income
% Growth in Net income
EPS
Balance sheet In mn SAR
Cash, cash equivalents and banks balances
Inventory and Goods
Total Current Assets
Total Net Fixed Assets
Total Non Current Assets
Total Assets
Total Current Liabilities
Total Non Current Liabilities
Total Liabilities
Total Owners Equity
Total Owners Equity and minority interest
Total Liabilities & Owners Equity
Cash Flow in mn SAR
Cash Flow from Operating Activities
Cash Flow from Investing Activities
Cash Flow from Financing Activities
Changes in Cash
Opening Balance
Ending Balance
May 2013
Please read Disclaimer on the back
2011
7
(17)
853
(21)
831
26%
5.4
1,716
12%
(765)
951
24%
(36)
(50)
(86)
2012
12
(14)
1,142
(41)
1,102
33%
7.2
2,203
28%
(974)
1,229
29%
(33)
(54)
(87)
2013e
9
(17)
1,220
(31)
1,189
8%
7.8
2,430
10%
(1,079)
1,351
10%
(53)
(72)
(125)
2014e
9
(20)
1,271
(33)
1,238
4%
8.1
2,530
4%
(1,129)
1,401
4%
(54)
(69)
(123)
2015e
9
(18)
1,287
(33)
1,254
1%
8.2
2,572
2%
(1,154)
1,419
1%
(55)
(72)
(126)
2016e
9
(17)
1,331
(34)
1,297
3%
8.5
2,645
3%
(1,179)
1,466
3%
(56)
(74)
(130)
4,599
824
492
1,317
3,282
3,282
4,599
232
479
936
3,516
3,663
4,333
767
408
1,175
3,158
3,158
4,333
227
323
802
3,346
3,532
4,317
785
411
1,196
3,121
3,121
4,317
253
443
974
3,175
3,343
4,449
908
408
1,316
3,133
3,133
4,449
426
464
1,159
3,122
3,290
4,484
916
408
1,324
3,160
3,160
4,484
479
474
1,249
3,068
3,235
4,526
888
408
1,296
3,230
3,230
4,526
446
549
1,276
3,082
3,250
1,118
(104)
(873)
141
91
232
1,432
(59)
(1,378)
(5)
232
227
1,283
(33)
(1,224)
26
227
253
1,312
(41)
(1,098)
173
253
426
1,297
(38)
(1,205)
54
426
479
1,214
(38)
(1,208)
(33)
479
446
Source: Company reports, Aljazira Research
7
© All rights reserved

Saudi Cement Company
Ratios
Liquidity Ratio
Current Ratio(x)
Quick Ratio (x)
Efficency Ratios
Receivables Days Turnover
Inventory Days Turnover
Payables Days Turnover
Cash Cycle
Profitability
Return On Equity (ROE)
Retun On Asstes (ROA)
Return On Invested Capital (ROIC)
Gross Margins
EBIT Margins
Net Margins
Leverage Ratios
Debt/Equity
Debt/Capital
Debt/Assets
Times Interest Earned (TIE)
Valuations
Dividend Yeild
Book Valuer Per Share (BVPS)
Market Capitalization(in SAR Bn)
Enterprise value (in SAR Bn)
PE (x)
PB (x)
EV/EBITDA (x)
May 2013
Please read Disclaimer on the back
2012
1.04
0.62
35%
25%
56%
52%
50%
34
53
16
71
26%
21%
19%
155
7.1%
20.64
10.1
11.2
13.78
4.81
11.9
2011
1.14
0.55
25%
18%
55%
51%
48%
37
102
20
119
30%
23%
21%
99
11.0%
21.45
6.0
7.4
10.86
2.75
11.0
2013
1.24
0.68
38%
28%
56%
51%
49%
32
67
11
87
26%
21%
19%
140
6.9%
20.40
15.5
16.3
13.03
4.96
16.0
2014
1.28
0.77
2015
1.36
0.85
2016
1.44
0.82
40%
28%
55%
51%
49%
29
67
16
80
32
67
16
83
40%
28%
55%
51%
49%
30%
23%
21%
127
30%
23%
21%
143
29%
23%
21%
152
6.9%
20.47
15.5
16.2
12.51
4.95
15.1
6.9%
20.65
15.5
16.0
12.36
4.90
14.9
6.9%
21.11
15.5
16.0
11.95
4.80
11.9
Source: Company reports, Aljazira Research
40%
29%
55%
51%
49%
29
76
16
89
8
© All rights reserved

Saudi Cement Company
AGM - Head of Research
Abdullah Alawi
+966 2 6618275 a.alawi@aljaziracapital.com.sa
Senior Analyst
Talha Nazar
+966 2 6618603 t.nazar@aljaziracapital.com.sa
May 2013
Senior Analyst
Syed Taimure Akhtar
+966 2 6618271 s.akhtar@aljaziracapital.com.sa
Analyst
Saleh Al-Quati
+966 2 6618253 s.alquati@aljaziracapital.com.sa
Analyst
Jassim Al-Jubran
+966 2 6618602 j.aljabran@aljaziracapital.com.sa
General Manager - Brokerage Division
Ala’a Al-Yousef
+966 1 2256000 a.yousef@aljaziracapital.com.sa
Sales And Investment Centers Central Region
Manger
Sultan Ibrahim AL-Mutawa
+966 1 2256364 s.almutawa@aljaziracapital.com.sa
AGM-Head of international and institutional brokerage
Luay Jawad Al-Motawa
+966 1 2256277 lalmutawa@aljaziracapital.com.sa
Area Manager - Qassim & Eastern Province
Abdullah Al-Rahit
+966 6 3617547 aalrahit@aljaziracapital.com.sa
Regional Manager - West and South Regions
Abdullah Al-Misbahi
+966 2 6618404 a.almisbahi@aljaziracapital.com.sa
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