Global values EPCC at SR83.7/share and recommends a BUY on the stock
Saudi Arabia – Eastern Province Cement Company – Result Update Eastern Province Cement Company production capacity of clinker and cement is 3.3mtpa and 3.5mtpa respectively. The company is ranked number fifth in Saudi cement sector by virtue of its production capacity. EPCC performed outstandingly during 2003-07 with the net revenue earned by the company increasing at a CAGR of 17%. During 2007, the company was able to earn revenue of SR924mn, which was higher by 19.6% when compared with that of 2006.
EPCC’s net profit for the year 2007 rose by 22% to SR541mn as against SR445mn in 2006. During the year the company was able to complement its net margins by 100bps to 59% from 58% in 2006.
The value of EPCC’s shares derived from the weighted average of the DCF and relative valuation methods is SR83.7 per share. The stock closed at SR68.5 on the Saudi Stock Exchange at the end of trading on 21st July, 2008. The value of the stock has a potential upside of 22% from its current price level. At current price, EPCC shares are trading at a P/E multiple of 9.8x and 9.4x for 2008 and 2009 respectively. We, therefore, recommend a ‘BUY’ on the stock.
The Company performed outstandingly as during 2003-07, the net revenue earned by the company increased at a CAGR of 17%. During 2007, the company was able to earn revenue of SR924mn, which was higher by 19.6% when compared with that of 2006. Such a growth was possible because of increase in the sales volume along with an increase in the price of cement during the year. Sales volume rose by 8.5% to 3.5mn tons while the price increased to SR265/tons from SR240/ton during 2006. Over the past five years the price has increased at a CAGR of 10%. Such an increase is due to huge construction and real estate projects being carried out in the Kingdom of Saudi Arabia.
The Company continued to improve the efficiency of its plant and remained focused on cost reduction techniques and as a result was able to minimize the cost CAGR at 12% during 2003-07, despite high oil and coal prices. In 2007, cost rose by 20% to SR359mn as against SR300mn in 2006. As a result gross profit increased by 20% to SR564mn as against SR472mn in 2006. Gross margins however remained static at 61%.
In 2007, selling and distribution expense declined by 29% to SR3.5mn as against SR4.8mn in 2006. Decline in the expense can be attributed to reduction in the transportation and port handling fees to SR1.8mn as against SR4.06mn in 2006. While general and administrative expense increased by 16% to SR11.6mn in 2007 as against SR9.9mn in 2006. The major thrust in the expense came from the other expenses part of the account which rose to SR7.3mn as against SR4.3mn in 2006. As a result of better cost control measures, the company was able to reduce its operating expenses during the year which resulted in better operating margins in 2007 when compared to 2006. Operating profit rose by 21% to SR526mn as against SR436mn in 2006. In the year, operating margins rose by 50bps to 57% as against 56.5% in 2006.
Decline in the long term loan from SR185mn in 2006 to SR155mn in 2007 resulted in a decline in the financial charges. The company is in no more need of additional funds as it is not undergoing any expansion which resulted in a 6% decline in financial charges to SR3.5mn in 2007 as against SR3.7mn in 2006.
The Company’s other income comes from gain on sale of fixed assets, return on cash deposits, return on investments and treasury activities. During the year the other income rose by 43% to SR40.4mn as against SR28.2mn in 2006. The non-core income portion supported the bottom line and envisaged the company in maintaining better net profit margins.
The Company has four companies under its portfolio which are: Brainsa, Arabian Yemeni Cement Company, Industrialization and Energy Services Company and Saudi Industrial Investment Group. The company considers Brainsa as subsidiary as it has 50% stake in it which is worth SR2.5mn at the end of 2007. EPCC has 30% stake in Arabian Yemeni Cement Company worth SR12.5mn. Arabian Yemeni Cement Company is involved in the construction and operation of a green-field, integrated cement plant, with a cement production capacity of 1.54mtpa in the eastern part of the Republic of Yemen. In terms of real investments, the company has 5.44% stake in Industrialization and Energy Services Company and 1.2% stake in Saudi Industrial Investment Group. Industrialization and Energy Services Company provides services for the oil and gas industry including exploration and drilling of oil and gas; conducts geophysical surveys; manufacturing of pipes and water supply while Saudi Industrial Investment Group invests in the petrochemical sector in Saudi Arabia.
Company net profit for the year 2007 rose by 22% to SR541mn as against SR445mn in 2006. During the year the company was able to complement its net margins by 100bps to 59% from 58% in 2006.
The total assets of the company increased by 13% to SR2.5bn at the end of 2007 as compared to SR2.2bn in 2006. There was no such big increase in the assets because the company has no plans to undergo any expansion with only routine capital expenditure being incurred. Current assets rose by 7% at the end of 2007 to SR1bn. The major reason for the increase in current asset can be attributed to increase in cash balances and receivables of the company by 4%. Inventories of the company increased by 5% to SR201mn.
The Company earned a profit before tax of SR304mn in 1H-2008, which was down by 0.9% against SR307mn earned in the corresponding period of last year. However decline in Zakat deductions, rose the profit marginally which at the end of 1H-2008 was reported at SR296.7mn, up by 0.3%.
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