Arabian Cement Company (ACC) was the first cement company to be established in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Saudi Arabia back in 1956. The original plant, which was located North of Jeddah city, started production in 1959, with 300 tonnes per day (tpd) clinker and 100tpd lime capacity. The capacity of the plant was expanded in 1968 to 1,000tpd of clinker, and subsequently to 2,000tpd in 1974. A new plant with a capacity of 4,000tpd clinker was inaugurated in Rabigh in 1984. The capacity was further increased to 4,400tpd. The current annual clinker capacity of the company stands at 2.4mtpy, while the cement grinding capacity is 2.5mtpy. The company is currently expanding its clinker capacity yet again.
Equity History
At the end of 2004, the company had a paid-up equity capital of SR600mn, divided into 12mn shares of face value SR50 each. Among the major shareholders of the company are prominent business families, such as Al Sulaiman, Al Rajhi, Al Issa and Binladen families, and institutions, such as Riyad Bank and National Commercial Bank.
The company is currently listed on the Saudi Stock Market (Tadawul). The high/low prices of the stock on the Tadawul over the last 12 months were SR919/365. It has had a turnover of over 77.7% on the exchange so far this year.
Business Description
The company produces and markets various types of cement, such as ordinary portland cement (OPC), sulphate resisting cement (SRC) and portland pozzolanic cement. In 2004, OPC constituted about 75% of its sales; SRC and pozzolanic cement contributing the balance 25%.
The company produced 2.5mt of clinker (up 4.2% from 2.4mt in the previous year) and 2.8mt of cement (up 7.5% from 2.6mt in the previous year) in 2004. The clinker capacity utilization was 105.1% during 2004. About 65% of its sales comprise bulk sales, bagged cement (mostly OPC) constituting the rest. Most of its sales now are in the domestic market to meet the high domestic demand, though the company has in the past exported its cement to countries in the neighbourhood.
Expansion Plans
The company is nearly doubling its clinker capacity from 2.4mtpy at present to 4.7mtpy at a cost of SR1,200mn ($325mn). The new line, designed to produce OPC, with a flexibility to switch to pozzolanic cement, is expected to replace four of the existing lines, totaling 1.3mtpy, to result in a total capacity of 3.4mtpy at the end of the expansion. The financing of the project is expected to be met by a mix of rights issue, internal accruals and a loan of SR400mn from SIDF. The company is proposing a 1:3 rights issue, offering 4mn shares at SR50 each, to raise SR200mn in the current year. The new capacity is likely to go on stream by the middle of 2007. The company is also setting up a new captive power unit to meet its enhanced power requirements.
Proposed JV with Italcementi
ACC's proposed 50:50 joint venture with Italcementi, the world's fifth-largest cement producer, entails setting up of a 2.3-3.3mtpy capacity greenfield cement plant, along with export facilities and port terminal. The site for the proposed unit is located about 120kms away from ACC's existing plant in Rabigh. The feasibility study for the project is currently on. This will be Italcementi's first foray into the GCC cement market. The Group already has a controlling stake in Suez Cement Company, Egypt’s leading cement producer.
Past Financial Performance
Income
The company had operational revenues of SR578.8mn during the year ended December 2004, a rise of 10.7% from SR522.7mn in the previous year.
Among the non-operating income, gains from short-term investments rose by 181.0% to SR7.6mn in 2004 from SR2.7mn in 2003. Income from available-for-sale investments rose by 122.0% to SR14.9mn in 2004 from 6.7mn in 2003. Other income declined by 56.5% to SR3.1mn in 2004 from SR7.2mn in the previous year. It consisted of rental income and other income. There was also realized income of SR72.1mn from sale of available-for-sale investments during 2004 (nil during 2003).
Expenditure
The cost of production of ACC went up by 7.1% to SR315.2mn in 2004 from SR294.2mn in the previous year. The break-up of the cost of production is not available in the company's annual reports. The staff costs went up by 8.5% to SR21.6mn in 2004, while as a percentage of gross profit they declined to 8.2% during the year, as against SR19.9mn (8.7% of gross profit) in 2003. The general & administration expenses simultaneously rose by 20.9% to SR5.0mn (1.9% of gross profit), from SR4.1mn (1.8% of gross profit) in the previous year. The distribution expenses at SR1.2mn (0.4% of gross profit) in 2004 were up 33.0% over that in 2003.
Gross Profit, Operating Profit and Net Profit
At the operating level, the gross profit grew by 15.4% to SR263.6mn in 2004 from SR228.5mn in 2003. The lower rise in the cost of production saw the gross profit margin (GPM) increasing to 45.5% in 2004 from 43.7% in the previous year. The operating profit simultaneously went up 22.9% to SR222.9mn in 2004 from SR181.4mn in 2003. Simultaneously, the operating profit margin (OPM) went up from 34.7% in 2003 to 38.5% in 2004.
The net profit of the company went up 45.5% to SR306.4mn in 2004 from SR210.6mn in 2003. The net profit margin, following the trend seen in the GPM and OPM, increased from 40.3% to 52.9% during the period. The EPS rose to SR25.5 in 2004 from SR17.5 in 2003.
Dividends
The company paid 32% cash dividend, with a dividend payout ratio of 62.7%, in 2004. It had paid a dividend of 27% in the previous year.
Assets and Liabilities Structure
The asset structure of the company has changed over the previous year, in tune with the expanding business of the company. The improved performance in 2004 saw the total assets go up by 6.3% to reach SR1.57bn. While the accounts receivable were up 9.7% to SR108.9mn, inventories were down 16.4% to SR160.3mn. While the accounts receivable rose on the back of trade receivables, the inventories fell due to a decline in the stock of both spare parts as well as clinker during 2004. The net fixed assets declined by 6.0% to SR655.6mn, on the back of lower additions and higher depreciation charge during the year.
On the liabilities side, the accounts payables declined during 2004 to SR45.4mn, down 1.7% from those in 2003, even though the trade payables increased marginally during the period. The employee end of service benefits went up by 14.0% to SR23.3mn during 2004.
Results for the First Half of 2005
The company had sales of SR342.7mn in the first half of 2005, up 20.9% year-on-year. Gross profit during the period of SR176.2mn was up 36.3% year-on-year. Selling & distribution expenses were up 3.4%, whereas general & administrative expenses were up 10.6% during the period. Its net profit during the period of SR165.9mn was, however, down 13.6% year-on-year. The company had booked income from sale of securities of SR72.1mn in 1H2004. Netting it off from the net profit for the period, the net profit in 1H2005 was up 38.3% year-on-year.
Short-term investments at the end of the first half of 2005 of SR462.1mn were up 54.2% year-on-year. Inventories were down 23.4%, whereas accounts receivable were up 31.4% year-on-year. Long-term investments of SR284.2mn were up 80.8% year-on-year. The total assets of the company at SR1.7bn were up 15.7% year-on-year.
Earnings & Profitability Outlook
Our projections of the company’s net profit, margins, returns ratios, earning per share and book value per share have been shown in the Table below.
Valuation & Recommendation
DCF Method
Based on our future earnings projections, the DCF value of Arabian Cement arrived at by us is SR581 per share.
Peer Comparison Method
The weighted average P/E of the eight listed cement companies in Saudi Arabia, based on the projected financial results for the year ending December 2005 and their current market prices, is 29.9x. On the basis of this weighted average P/E and ACC's projected 2005 earnings, the company’s stock valuation comes to SR622 per share.
Weighted Value & Recommendation
The value of ACC’s shares derived from the weighted average of the DCF (80% weightage) and peer comparison methods (20% weightage) is SR589 per share. The stock currently trades at SR805 (pre-dilution), or SR603.75 (post-dilution, assuming issuance of 1:3 rights shares in 2005) on the Tadawul, which implies that the weighted average value of ACC’s shares is at a discount of 2.5% to the stock’s current market price. At the current price (post-dilution), ACC’s shares have a P/E multiple of 31.5x the 2004 earnings, and forward multiples of 29.0x and 26.2x the estimated 2005 and 2006 earnings respectively. The valuation of the stock at a discount to its prevailing market price is purely on valuation considerations. The stock has had a good run on the stock market in the first eight months of the current year, appreciating by 78.9%, on the heels of a 45.0% appreciation in 2004. We, therefore, recommend a 'HOLD' on the Arabian Cement stock at its prevailing price levels.
