Yamama Saudi Cement Company (YSCC) ranks among the biggest cement producers in the country and one of the earliest as well. The company derives its name from the historical name of Riyadh area. It was founded in 1961 in Riyadh city by H H Late Prince Mohammad Bin Saud Al-Kabir, with a capital of SR25mn, to produce and sell cement. The commercial production started in 1966 with a 300tpd line. With time, YSCC expanded its plant capacity by adding new production lines. Today, YSCC has clinker capacity of 2.8mtpy and cement capacity of 3.0mtpy.
The company also has a paper bags unit, with a capacity to produce 30mn bags every year, for captive consumption.
Equity History
At the end of 2004, the company had a paid-up share capital of SR450mn, consisting of 9mn shares of face value of SR50 each. About 90% of the shares are held by Saudi banks, prominent families and public, while the balance 10% are held by prominent Kuwaiti families.
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 SR1,510/682.50. It has had a turnover of over 83.4% on the exchange so far this year.
Business Description
The company produces and markets two types of cement – ordinary portland cement (OPC) and sulphate resistant cement (SRC). In 2004, OPC constituted about 65-70% of its sales, with SRC contributing the balance 30-35%.
The company produced 2.5mt of clinker and 3.5mt of cement in 2004. The capacity utilization, thus, was 89.3% for clinker and 116.6% for cement during the year. The lower capacity utilization in the clinker plant was due to work stoppage of about 60 days for carrying out repairs in the raw material mill. About 65-70% of its sales comprise bulk sales, bagged cement constituting the balance 30-35%.
Expansion Plans
The company is expanding its clinker capacity from 2.8mtpy at present to 6.1mtpy, and from 3.0mtpy cement capacity to 6.5mtpy. The new line, with all other support facilities, is being set up with technology from Polysius (Germany), (a subsidiary of Thyssen Krupp), at an approximate total cost of over SR1,500mn ($405mn). The civil and structural jobs will be carried out by Gama Almoushegah Arabia (the local subsidiary of the Turkish parent company). The project investment is expected to be funded by internal accruals and an SIDF loan of SR400mn. The SIDF loan is to be repaid by 2012-’15. An amount of over SR300mn has also been spent by the company on the first stage of a new captive power unit in 2004. The new cement capacity is likely to go on stream by the end of 2006 or early-2007.
Past financial performance
Income
The company does not show its sales revenues and cost of production in its Annual Reports, starting its Profit & Loss Statement with the gross profit, instead. The gross profit of the company grew by 9.2% to SR436.3mn in 2004 from SR399.4mn in 2003. The company sold a total of 3.5mt of cement in 2004, up 11.7% from 3.1mt in 2003. Among the non-operating income, investment income decreased by 80.3% to SR6.0mn in 2004 from SR30.4mn in 2003. Other income decreased by 19.3% to SR7.1mn in 2004 from SR8.8mn in the previous year. The company also had profit from disposal of investments of SR144.8mn from the sale of its 3.25% shareholding in Saudi Industrial Investment Group, which contributed handsomely to the growth in its profit during the year.
Expenditure
The cost of production is not available in the company's Annual Reports. In the operating costs, the staff costs increased by 24.6% to SR21.6mn in 2004, while as a percentage of gross profit they increased to 4.9% during the year, as against SR17.3mn (4.3% of gross profit) in 2003. The general & administration expenses almost remained flat at SR11.8mn in 2004 (2.7% of gross profit), from SR11.8mn (2.9% of gross profit) in the previous year. The distribution expenses at SR0.7mn (0.2% of gross profit) in 2004 were down by 11.2% from SR0.8mn (0.2% of gross profit) in 2003.
Gross Profit, Operating Profit and Net Profit
At the operating level, the gross profit of the company grew by 9.2% to SR436.3mn in 2004 from SR399.4mn in 2003. The operating profit simultaneously went up by 8.9% to SR400.3mn in 2004 from SR367.6mn in 2003. The operating profit as a percentage of gross profit had a marginal decline from 92.0% in 2003 to 91.7% in 2004.
The net profit of the company increased by a robust 39.5% to SR542.2mn in 2004 from SR388.8mn in 2003, driven in no small measure by the profit on disposal of investments of SR144.8mn. The zakat of SR16.0mn for 2004 was lower by 11.1% from SR18.0mn in the previous year. The net profit as a percentage of gross profit increased from 97.3% to 124.3% during the period, the highest among all the eight companies during 2004. The EPS rose to SR60.2 in 2004 from SR43.2 in 2003.
Dividends
The company paid 60% cash dividend, with a dividend payout ratio of 49.8%, in 2004. It had paid dividend at the same rate in the previous year as well.
Assets and Liabilities Structure
The asset structure of the company has changed over the last year, in tune with the expanding business of the company. The improved performance in 2004 saw the total assets go up by 31.7% to reach SR1.96bn from SR1.49bn in the previous year. The trade receivables were up 11.9% to SR177.6mn, while the inventories were down 35.6% to SR69.0mn, on the back of a decline in cement stocks. The long-term investments declined by 6.1% to SR311.3mn in 2004. Capital work-in-progress increased by a whopping 6 times to SR812.6mn from SR116.5mn in the previous year. This was due to the work currently underway on YSCC’s capacity expansion project. The net fixed assets went up by 7.4% to SR255.3mn during the year.
On the liabilities side, the accounts payable increased by 8.5% during 2004 to SR21.0mn. Other current liabilities decreased by 14.9% to SR46.2mn in 2004, due mainly to a decrease of 19.0% in sundry payables. The company took a long-term loan of SR200.0mn during the year to fund its expansion/conversion projects. The employees’ indemnity provision went up by 14.4% to SR39.9mn during 2004.
Results for the First Half of 2005
The company had gross profit of SR224.7mn in the first half of 2005, up 2.5% year-on-year. Selling & distribution expenses were down 33.3%, whereas general & administrative expenses were up 1.9% during the period. Its net profit during the period of SR206.9mn was, however, down 40.3% year-on-year. The company had booked income from sale of securities of SR144.8mn in 1H2004. Netting it off from the net profit for the period, the net profit in 1H2005 was up 2.6% year-on-year.
Inventories at the end of the first half of 2005 were down 39.9%, whereas accounts receivable were up 5.8% year-on-year. Work in progress of SR1.1bn was up 140.5% year-on-year. The total assets of the company at SR2.3bn were up 45.3% year-on-year.
Earnings & Profitability Outlook
Our projections of the net profit, returns ratios, earning per share and book value per share of the company have been shown in the Table below.
Valuation & Recommendation
DCF Method
Based on our future earnings projections, the DCF value of Yamama Cement arrived at by us is SR1,250 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 YSCC's projected 2005 earnings, the company’s stock valuation comes to SR1,373 per share.
Weighted Value & Recommendation
The value of YSCC’s shares derived from the weighted average of the DCF (80% weightage) and peer comparison methods (20% weightage) is SR1,275 per share. The stock currently trades at SR1,398 per share on the Tadawul, which implies that the weighted average value of YSCC’s shares is at a discount of 8.8% to the current market price. At the current price, YSCC’s shares have a P/E multiple of 23.2x the 2004 earnings, and forward multiples of 30.4x and 29.0x the estimated 2005 and 2006 earnings respectively. The stock has had a good run on the stock market in recent months, with an appreciation of 49.8% in the first eight months of the current year, following a gain of 52.8% in 2004. Our recommendation of a 'HOLD' on the Yamama Cement stock, therefore, is purely on valuation considerations.
