Al Jazira Capital recommended Qassim Cement "Overweight"

16/10/2017 08:48 AST

Higher than expected net income of SAR 51.2mn (EPS; SAR 0.57) for 3Q2017, indicating a decline of 26.2%YoY and 3.7%QoQ. Revenue came in line with our estimates; however, production cost came blow our estimates by 4.8% . Deviation in net income is mainly attributed to higher than expected other income (around 41.1%YoY higher). We maintain our PT of SAR 44.5/share while updating recommendation to "Overweight" due to current downward movement in prices.

Net income came above our estimates of SAR 40.4mn, indicating a deviation of 26.7%. According to the company, the decline in net income is attributed to lower sales price despite the 7.9%YoY increase in dispatches and increase in other income. We expect other income to show an increase of 41.1%YoY. We expect net margin to stand at 40.2% for the FY2017 compared to 47.9% in FY2016.

Revenue stood at SAR 130.7mn, a decline of 23.63%YoY, in-line with our estimates of SAR 131.5mn. The decline in revenue was attributed to weak selling prices despite the increase in dispatches. Cement sales for 3Q2017 showed an increase of 7.9%YoY to stand at 871KT in 3Q2017 from 807KT in 3Q2016. For 3Q2017, we expect the selling price to stand at SAR 150.1/ton vs. SAR 212.2/ton in 3Q2016 and SAR 153.3 /ton in 2Q2017.

Gross profit stood at SAR 53.3mn depicting a decline of 37.1%YoY and 5.5%QoQ, above our estimates of SAR 48.8mn, impacted by decline in revenue despite the higher production efficiency. Gross margin declined to 40.8% in 3Q2017 from 49.5% in 3Q2016 due to high discount in selling prices. We expect gross margin for 2017 to stand at 44.0%, a decline from 52.6% in 2016. Based on our calculation, the cost/ton is expected to stand at SAR 88.9/ton vs. SAR 107.5/ton in 3Q2016. Operating profit stood at SAR 47.0mn showing a decline of 39.6%YoY and 4.0%QoQ. OPEX stood at SAR 6.3mn.

AJC view: We expect the cement sector to show signs of recovery in FY2018, due to newly announced mega projects that are expected to start in next two years. We expect Qassim cement to post net income of 248.9mn (EPS of SAR 2.77) a decline of 39.1%YoY. Furthermore, we expect the company to continue selling at a discount for the year. Based on our estimates, the company is trading at forward P/E and P/BV of 14.55x and 2.00x, respectively based on the current price (as of 12th of October). The company reduced its dividend payment in 1H2017 to SAR 1.5/share. For 2017, we expect the company to pay dividend of SAR 2.5/share, depicting a yield of 6.2% based on current market price. We update our recommendation to "Overweight" with PT of SAR 44.5 on the stock.

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