Arabian Cement Company –Global values ACC at SR89 per share and recommends a BUY on the stock
Global Investment House – Kuwait - Arabian Cement Company–Investment Update : Arabian Cement Company (ACC) was the first cement producer in the Kingdom and Arabian Gulf. Due to high demand and continuous growth the company embarked on an expansion program during the past years and currently its cement capacity stands at 3.8mtpa.
The company has embarked upon regional expansion and is currently in the process of preparing 2.5mtpa plant capacity in Al-Qattaran, Jordan of which ACC holds 95% stake. The Qattaran Cement plant is upgradable to 4mtpa based on the demand supply scenario as currently Jordan has only one player, Jordan Cement Factories Company which has a production capacity of 4.4mtpa and the country is a net importer of cement.
The company has a 50:50 partnership with Italcementi in International City Ready mix Co. (ICC). The company is capitalized at SR100mn and anticipates total investment over the next 3 years to exceed SR500mn through acquisition and expansion. The first batch plant is near completion in Rabigh (near the KAEC project) and expected to be the largest single batch plant in the Middle East with production capacity of 1mn m3 per year.
The company has undertaken a 51:49 joint venture with, Italcementi, to prepare a cement plant with a production capacity of 3mtpa to be located in Labouna (90 Km NE of the existing Rabigh plant). The new plant will cover local market but will also target export markets through shipments from the planned KAEC port.
The value of ACC’s shares derived from the weighted average of the DCF and relative valuation methods is SR89 per share. The stock closed at SR67.75 on the Saudi Stock Exchange at the end of trading on 6th August 2008, which implies that the weighted average value of ACC’s shares is at a premium of 30.9% to the share’s current market price. At their current price, ACC’s shares have a P/E multiple of 12.6x and 11.7x for 2008 and 2009 respectively. We, therefore, recommend a ‘BUY’ on the Arabian Cement Company’s stock at its prevailing price levels.
The company’s sales revenue rose during 2003-07 at a CAGR of 8%. During 2007, the company was able to earn revenue of SR721mn, which was lower by 3.5% as compared to 2006. The decline was a result of drop in production and subsequently in the sales volume to 2.8mn tons in 2007 as compared to 3.0mn tons in 2006. In 2006, the company imported 248k tons of clinker which ramped up its production and sales however in 2007 the company was not able to do so which resulted in a drop in the production. On the other hand sales price was some how able to balance the situation as it rose by 3.2% to SR255/ton in 2007 as against SR247/ton in 2006. Over the past five years the price has increased at a CAGR of 6%.
The company over the years has focused on increasing its efficiency and controlling its cost, which has resulted in cost of sales growing at a rate of 0.5% during 2003-07. In 2007, the cost of sales dropped by 20%, more than the decline in the sales revenue which increased the gross profit from SR372.6mn in 2006 to SR421.5mn in 2007. As a result, the gross margins rose by 8.6% to 58.4% in 2007.
In 2007, selling and distribution expense declined by 36% to SR0.9mn as compared to SR1.4mn in 2006. Decline was a result of drop in the sales volume which reduced the company’s distribution charges. General and administrative expense rose at a CAGR of 12% during 2003-07. In the year 2007, general and administrative expense increased by 7% to SR11.4mn as against SR10.6mn in 2006.
The company’s net profit for the year 2007 rose by 18% to SR392mn (EPS: SR4.9) as against SR333mn (EPS: SR4.2) in 2006. The company was able to improve its net margins to 54% in 2007 as compared to 45% in 2006.
The total assets of the company increased by 31% to SR2.36bn at the end of 2007 as compared to SR1.80bn reported in the previous year. Such an increase was because of the increase in fixed assets of the company by 87% to SR1.59bn in 2007 as compared to SR853mn in 2006. During the year the company also piled up its cash balances to SR116mn as compared to SR0.96mn in 2006.
In 1H-2008 the company’s earning rose by 5.2% to SR205.6mn as against SR195mn in 1H-2007. This translated into an earning per share of SR2.57 as against SR2.44 in 1H-2007. Total assets witnessed a rise of 26.4% to SR2.98bn as compared to SR2.36bn reported at the end of 2007.