a Saudi Cement Company

KMEFIC Research
Equity Analysis Report – Initiation of Coverage
Yamama Saudi Cement Co.
Expected rate of return on equity in GCC
January
2012
KMEFIC Research Department
شرآة الكويت والشرق الأوسط للإستثمارالمالي ش.م.ك.م
Kuwait and Middle East Financial Investment Company K.S.C.C

January 2012
Table of Contents
KMEFIC Research
Equity Analysis Report
EXECUTIVE SUMMARY ...................................................................................................................................................................... 3
YAMAMA, THE STOCK IN TADAWUL ........................................................................................................................................... 4
BUSINESS PROFILE ............................................................................................................................................................................. 5
YAMAMA SAUDI CEMENT COMPANY ............................................................................................................................................................................ 5
EXPANSIONS & STRATEGIES ............................................................................................................................................................................................ 5
INDUSTRY: OVERVIEW & OUTLOOK ............................................................................................................................................. 6
CEMENT ................................................................................................................................................................................................................................ 6
SAUDI CEMENT INDUSTRY ............................................................................................................................................................................................... 8
SAUDI CEMENT INDUSTRY PERFORMANCE .................................................................................................................................................................. 8
KEY DRIVERS: CEMENT DEMAND ................................................................................................................................................................................ 10
POSITIVE OUTLOOK .......................................................................................................................................................................................................... 10
PORTER’S FIVE FORCES MODEL ................................................................................................................................................................................... 11
FINANCIAL PERFORMANCE .......................................................................................................................................................... 12
DOMESTIC SALES VS. EXPORTS .................................................................................................................................................................................... 12
REVENUE & MARGINS.................................................................................................................................................................................................... 12
ASSETS BREAKDOWN .................................................................................................................................................................................................... 13
FINANCIAL LEVERAGE...................................................................................................................................................................................................... 13
FORECASTS & ASSUMPTIONS ..................................................................................................................................................... 14
REVENUE............................................................................................................................................................................................................................ 14
CAPITAL EXPENDITURES ................................................................................................................................................................................................ 14
SHARE CAPITAL ............................................................................................................................................................................................................... 14
NET INCOME ..................................................................................................................................................................................................................... 14
VALUATION .......................................................................................................................................................................................... 15
DISCOUNTED CASH FLOW ANALYSIS ......................................................................................................................................................................... 15
RELATIVE VALUATION ..................................................................................................................................................................................................... 15
CONCLUSION ..................................................................................................................................................................................................................... 15
KMEFIC RECOMMENDATION SCALE .......................................................................................................................................................................... 16
APPENDICES ....................................................................................................................................................................................... 17
BALANCE SHEETS ............................................................................................................................................................................................................ 17
INCOME STATEMENTS .................................................................................................................................................................................................... 17
RATIOS ............................................................................................................................................................................................................................... 18
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KMEFIC Research
Equity Analysis Report
Yamama Saudi Cement Co.
Listing: Saudi Stock Exchange (Tadawul) CMP (01-Jan-12): SAR 70.50
Ticker: 3020 *Adjusted CMP: SAR 47.00
Reuters Code: 3020.SE Fair Value: SAR 56.71
Bloomberg Code: YACCO:AB Upside: 20.6%
Sector: Cement Recommendation: ACCUMULATE
*Adjusted for the 50% capital increase
Note: The following report is based on the scenario that the 50% capital increase will be
approved.
Executive Summary
We initiate in this report our coverage of Yamama Saudi Cement Company. Established as a
Saudi joint stock company in 1961, Yamama (which commenced operations in 1966) is the
second largest producer of cement in Saudi Arabia. The company is primarily engaged in the
manufacture and sale of cement and cement related products with a full production capacity of 6.0
million tons per annum (mtpa) of clinker, the equivalent of 6.3 mtpa of cement. Yamama is listed on
the Saudi Stock Exchange (Tadawul) with 77.6% of its shares in free float. The stock has
outperformed the market index by an impressive 39.0% during the year 2011.
In 2010, the company expanded regionally by acquiring a 20% stake in the Yemeni Saudi Cement
Company. On the 19 th of October 2011, Yamama announced that it will replace five old production
lines with a standalone production line. After the project is completed, Yamama’s expected
production capacity will be 23,000 tons of clinker per day, or approximately 7.4 mtpa.
Saudi Arabia is the largest cement producer in the GCC with a production capacity exceeding 42
mtpa at the end of 2010. The Saudi cement industry enjoys an abundance of limestone reserves at
low prices in addition to natural gas subsidies provided by Aramco. This allows Saudi cement
companies to enjoy higher gross margins than their GCC peers. On June 6 th , 2008, the Ministry of
Commerce & Industry took a decision to ban cement exports in order to fix and lower the domestic
price of cement. As a result, Saudi cement companies have suffered from escalating clinker
inventories during the last 2 years. However, huge government spending on construction projects
is expected to fuel cement demand in the Kingdom. The construction sector is foreseen to remain
active and will continue to be the major driver for the cement industry. According to BMI, the
construction sector is expected to grow at an average rate of 4% (in real terms) over the years
2012 – 2015 due to a healthy project pipeline and strong government support.
Yamama’s revenues grew at an average of 8.1%
annually over the 2006 – 2010 period and by 12.1% in
the first 9 months of 2011 in comparison to the same
period last year. Net income declined in 2008 and
2009 but has recovered ever since, growing 16.9% in
2010 and 10.4% in the first 9 months of 2011 in
comparison to the same period last year. Revenues
reached SAR 1,272 million in 2010 and net income
SAR 657 million, a 52% profit margin. Yamama’s
Financial Highlights (mil. SAR)
30-Sep-10 30-Sep-11
Total Assets 3,472 3,567
Total Liabilities 483 412
Total Equity 2,989 3,155
9M-2010 9M-2011
Sales 957 1,073
Operating Income 500 555
Net Income 497 549
assets have grown at an average annual rate of 3.9% over the 2006 – 9M-2011 period, reaching
SAR 3,567 million at the end of September 2011. Fixed assets account for the majority of
Yamama’s total assets, representing 56% at the end of September 2011.
We valued Yamama Cement using two main approaches: Discounted Cash Flow Analysis and
Relative Valuation. In order to compute the fair value per share for Yamama Cement, we used a
weighted average of the two approaches. We allocated a 40% weight to the discounted cash flow
method and equal weights of 30% to the P/E multiple and P/BV multiple valuation methods. We
reached a final fair value of SAR 56.71 for the company’s share, representing a 20.6% upside
from the current price level (as of 1/1/2012 and adjusted for the 50% capital increase).
Accordingly, we issue our report with an “ACCUMULATE” recommendation for Yamama Cement.
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Equity Analysis Report
Table 1 - Key Performance Indicators
in mil. SAR unless otherwise
indicated
FY-09 A FY-10 A FY-11 F FY-12 F FY-13 F FY-14 F FY-15 F
Revenues 1,163 1,272 1,422 1,464 1,570 1,635 1,668
Gross Profit 616 712 806 826 888 921 900
Operating Profit 574 666 754 772 830 861 839
Net Profit 562 657 739 758 817 847 824
Operating Profit Margin 49.3% 52.4% 53.0% 52.7% 52.9% 52.7% 50.3%
Net Profit Margin 48.3% 51.6% 51.9% 51.8% 52.0% 51.8% 49.4%
EPS (SAR) 2.77* 3.25* 3.65* 3.74 4.03 4.18 4.07
P/E 11.4 10.6 12.8 15.2 14.1 13.6 13.9
P/B 2.1 2.2 2.8 3.0 2.9 2.8 2.7
ROAE 19.1% 21.1% 22.7% 21.2% 21.0% 20.9% 19.6%
Dividend yield 4.3% 5.7% 2.9% 5.4% 5.9% 6.1% 5.9%
*Adjusted for the 50% capital increase
Sources: Company filings, KMEFIC Research
Yamama, The Stock in Tadawul
Figure 1 - Yamama vs Tadawul Index
80
70
60
Volume (000s)
Yamama (SAR)
Tadawul (Rebased)
800
700
600
Price
50
40
500
400
Volume
30
300
20
200
10
100
0
Jan-11 Feb-11Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11
Source: KMEFIC Research
0
The graph shows the stock’s performance versus the performance of the Tadawul index (rebased
for comparison purposes) for the year 2011. The stock outperformed the index, recording a
growth of 35.9% over the period in comparison to the 3.1% decline in Tadawdul. Initially, the
stock’s movements were highly correlated to the index’s movements but the breakaway point
came in April 2011, when the stock began outpacing the index. The share turnover ratio for the
stock during the year 2011 was 28.0%. Using the same set of data, the stock’s beta for 2011
(measured using the daily returns of the stock and the index over the year) was 0.729, indicating
that the stock’s movements were less volatile than the overall market. The average daily trading
volume for 2011 stood at 152 thousand shares.
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January 2012
Business Profile
Yamama Saudi Cement Company
KMEFIC Research
Equity Analysis Report
Yamama Saudi Cement Co. is a Saudi joint stock company established shed in 1961 and commenced
operations in 1966. Yamama produces clinker, ordinary Portland cement, and sulfate resisting
cement. Its manufacturing facilities are located in Riyadh, with an annual production capacity of 6.0
million tons of clinker and 6.3 million tons of cement. Its manufacturing facilities consist of seven
production lines and the company currently aims to replace five of its oldest production lines with a
single standalone line in 2015.
Yamama is listed on the Saudi Stock
Exchange (Tadawul) with 77.6% of its
shares in free float. The remaining
shares are divided among 3 other
shareholders: HH Prince Sultan
Mohammed Saud Al Kabir Al Saud
(9.7%),, General Organization for
Social Insurance - Saudi
Arabia
(7.4%), and The Public
Pension
Agency (5.3%). As of December 28,
2011, Yamama’s market
capitalization stood at SAR 9,518
million.
Expansions & Strategies
Figure 2 - Yamama Cement's Ownership Structure
77.60%
9.70%
Sources: Zawya, KMEFIC Research
7.40%
5.30%
HH Prince Sultan
Mohammed Saud
Al Kabir Al Saud
General
Organization for
Social Insurance -
Saudi Arabia
Public Pension
Agency
Public
The company started out with one production line in 1966 that had a daily production capacity of
300 tons of clinker. . By 1982, Yamama had added four more production lines, bringing the total to
five lines that had a daily production capacity of 5,600 tons of clinker. Yamama then added another
production line in 1991 with a daily production capacity of 3,000 tons of clinker. The company’s
latest expansion to production capacity was in 2007, when it added its seventh line that had a daily
production capacity of 10,000 tons of clinker a day. The seventh line brought the total daily
production capacity of Yamama to 18,600 tons of clinker a day, or equivalently, 6 million tons per
annum (mtpa).
On the 27 th
of April 2011, Yamama’s board of directors met and discussed the feasibility of
replacing five of Yamama’s oldest production lines with a standalone production line. On the 19 th of
October 2011, the board of directors announced that they have completed the feasibility study and
that the results were positive. . Consequently, the company began checking for execution offers with
specialized companies and further updates are still pending.
Apart from replacing older and less efficient production lines with a newer one, the increased
capacity brought on by the new production line will help Yamama meet growing domestic demand
for cement. The new production line will have a production capacity of 10,000 tons of clinker per
day, compared with 5,600 tons provided by the old production lines to be replaced. After the
project is completed (estimated to be in 2015), , Yamama’s expected production capacity will reach
23,000 tons of clinker per day, or approximately 7.4 mtpa.
As for Yamama’s product portfolio and regional expansions, the company added two new cement
products to its product portfolio in 2009. In 2010, the company expanded regionally by acquiring a
20% stake in the Yemeni Saudi Cement Company, which is expected to begin commercial
operations at the end of 2011 with a production capacity of 1.4 million tons of cement a year.
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One of the company's key strategies is to continually improve its information systems and to keep
up with the rapid pace of development in the industry. As a result, the company contracted with a
private consulting firm in 2010 to study and implement an integrated information system named
“YES” with the goal of improving efficiency by reducing time and costs. The system will help the
company organize various information as well as speed up the information sharing process
between different departments.
Industry: Overview & Outlook
Cement
Introduction
The term "cement" most commonly refers to hydraulic cement. A fine grey powder made of a
combination of calcined limestone and clay, cement is mixed with water and sand to make mortar
or with water, sand, and aggregate to make concrete. The most common type of cement around
the world is Portland cement and was first created by bricklayer Joseph Aspdin in 1824. Portland
cement, the fundamental ingredient of concrete, is a closely monitored chemical combination of
calcium, silicon, aluminum, iron, and small amounts of other ingredients. Gypsum, a very soft
mineral composed of calcium sulfate dihydrate, is added in the final grinding process to regulate
the setting time of the concrete.
Uses of Cement
The most common use for Portland cement is in the production of concrete. In its simplest form,
concrete is a mixture of paste and aggregates (sand, gravel, and crushed stone). The paste,
composed of Portland cement and water, coats the surface of the fine (sand) and coarse (gravel or
crushed stone) aggregates. Through a chemical reaction called hydration, the paste hardens and
gains strength to form the rock-like mass known as concrete. Concrete is composed of 6% air,
11% Portland cement, 41% gravel or crushed stone (coarse aggregate), 26% sand (fine
aggregate), and 16% water. (Source: Portland Cement Association).
Cement is of vital importance to the construction industry as it is the main ingredient in the
production of concrete. Typically, concrete is the essential material used in all types of construction
(residential housing, non-residential offices, roads, bridges, etc.), making cement the most
significant input to the construction industry.
In the long term, cement consumption has increased and will continue to increase due to the rise
in construction brought on by population growth.
Cement around the World
According to the 9th edition of the Global Cement Report, global cement consumption grew 9.9%
in 2010 to reach 3,294 million tons. There are about 149 cement producing nations with China
and India crowning the top producers’ as well as the top consumers’ lists. Due to the large costs
associated with transporting cement across nations, traded cement amounted for only 5% of the
total cement produced worldwide in 2010. Lastly, Bangladesh was the largest importer of cement
and Turkey was the largest exporter.
Transportation & Costs
Cement, being a bulk commodity, is freight intensive and transporting it over long distances can
prove to be uneconomical. Every ton of cement manufactured involves the transportation of 1.6
tons of limestone, 0.25 tons of coal, 0.05 tons of gypsum, and 1 ton of the finished product. It is
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Equity Analysis Report
estimated that freight expenses account for about 18% of the total cost. This has resulted in
cement being largely a regional play. Furthermore, the cement industry is power intensive and it is
estimated that about 120 kWh of power is required to produce one ton of cement.
Cement Manufacturing Process
Put simply, cement is manufactured by combining a uniform blend of carefully proportioned raw
materials (chalk and clay/shale) at a very high temperature (1400 °C) in a rotary kiln. The raw
materials fuse together to form “clinker,” a hard granular material. Clinker is ground to a powder
along with gypsum to make cement. By altering the chemistry of the raw material and selecting
specific materials for grinding alongside the clinker and gypsum, different types of cement can be
made with properties suited to their intended use. (Source: CEMEX)
A more detailed & technical explanation of the cement manufacturing process is presented in the
following figure.
Quarry
• Cement is made from raw materials containing four essential minerals: calcium, silicon, aluminum, and iron. The
most common combination of raw materials is limestone (for calcium) coupled with much smaller quantities of
clay and sand (as sources of silica, aluminum, and iron).
• Limstone and clay are blasted from rock quarries by boring the rock and setting off explosives.
• Rock blasted from the quarry is transported to the crushers, where it is reduced by crushing or pounding to
chunks approzimately 1 1/ /2 inches in size.
Prportioning
, Blending &
Grinding
• The raw materials are analyzed in the labortory and blended in the proper proportion.
• Plants grind the raw materials with heavy, wheel-type rollers that crush the materials into powder against a
rotating table. The grinded material is now ready for the kiln or preheater, depending on plant type.
Preheater
Tower
• The preheater tower supports a series of vertical cyclone chambers through which the raw materials pass on
their way to the kiln.
• To save engery, modern cement plants preheat the materials before they enter the kiln. Hot exit gases from the
kiln heat the raw materials as they swirl in the cyclones.
Kiln
• Raw materials enter a huge rotating furnance called a kiln. It's the heart of the cement making process - a
horizontally sloped steel cylinder, lined with firebrick, turning about one to three revolutions per minute. The kiln is
the world's largest piece of moving industrial equipment.
• Inside the kiln, temperatures of about 1500°C transform the raw materials into clinker: small, dark grey nodules
that are about 3-4 cemtimeters in diameter.
Clinker
Cooling &
Grinding
• The clinker is cooled on a grate and is then ground in a ball mill - a horizontal steel tube filled with steel balls. As
the tube rotates, the steel balls tubble and crush the clinker into super-fine powder known as Portland cement.
• A small amount of gypsum is added during the final grinding to extend the cement's setting time.
Bagging &
Shipping
• From the grinding mills, the cement is conveyed to silos where it awaits shipment. Most cement is shipped in bulk
by trucks, rail, or bage. However, a small percentage of the cement is bagged for customers who need only small
amounts or for special uses such as mortar.
Source: Portland Cement Association (PCA)
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Saudi Cement Industry
Saudi Arabia is the largest cement producer in the GCC with a production capacity exceeding 42
mtpa at the end of 2010. The Saudi cement industry enjoys an abundance of limestone reserves at
low prices in addition to natural gas subsidies provided by Aramco. This allows Saudi cement
companies to enjoy higher gross margins than their GCC competitors. Saudi cement companies
have raised a request to increase the natural gas subsidies in order to meet growing domestic
cement demand caused by new expansions.
On June 6 th , 2008, the Ministry of Commerce & Industry took a decision to ban cement exports in
order to fix and lower the domestic price of cement. The ban also called for cement companies to
maintain 10% of their total cement production in reserves. However, a lot of the companies did not
respond to this request despite strong governmental support in the form of low interest rate loans
(from the Saudi Industrial Development Fund - SIDF) as well as obtaining quarries at low prices. As
a result of the export ban, Saudi cement companies suffered from escalating clinker inventories
during 2008 and 2009. Clinker inventory reached 10.9 million tons at the end of 2009, and 7.4
million tons in 2008 against 1.7 million at the end of 2007.
In an attempt to curb piling clinker inventories, a lot of the cement companies have shut down
some of their production lines. As a result of this step, and in an atmosphere of growing domestic
demand due to huge infrastructural projects, clinker inventories of Saudi cement companies fell
0.8 million tons to reach 10.0 million tons at the end of 2010.
Saudi Cement Industry Performance
Table 2 - Total Domestic Volume Sales of Cement (thousand tons)
2010
Jan - Nov
2011
Jan - Nov
Growth
% of Total
Domestic Sales
Jan - Nov 2011
Yamamah Saudi Cement Co. 4,998 5,442 8.9% 13.3%
Saudi Cement Co. 5,389 6,049 12.2% 14.3%
Eastern Province Cement 2,664 2,887 8.4% 7.1%
Qassim Cement Co. 3,831 3,887 1.5% 10.2%
Yanbu Cement Co. 3,536 4,010 13.4% 9.4%
Arabian Cement Co. 2,906 3,473 19.5% 7.7%
Southern Province Cement 4,803 6,142 27.9% 12.8%
Tabuk Cement Co. 1,207 1,455 20.5% 3.2%
Riyadh Cement Co. 2,313 3,032 31.1% 6.2%
Najran Cement Co. 2,749 2,732 -0.6% 7.3%
Al Madina Cement Co. 1,859 1,664 -10.5% 4.9%
Northern Cement Co. 1,005 641 -36.2% 2.7%
Al Jouf Cement Co. 324 1,061 227.5% 0.9%
Total 37,584 42,475 13.0% 100.0%
Source: Yamama Cement
Total domestic demand for cement improved and recorded a notable YoY growth of 13% in sales
volume, reaching 42.5 million tons in the first 11 months of 2011 against 37.6 million tons for the
same period last year. Saudi Cement Co. had the highest % of total domestic sales (at 14.3%)
followed by Yamama Cement (at 13.3%).
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Table 3 - Total Production of Cement (thousand tons)
Yamamah Saudi Cement Co.
Saudi Cement Co.
Eastern Province Cement
Qassim Cement Co.
Yanbu Cement Co.
Arabian Cement Co.
Southern Province Cement
Tabuk Cement Co.
Riyadh Cement Co.
Najran Cement Co.
Al Madina Cement Co.
Northern Cement Co.
Al Jouf Cement Co.
Total
5,032
6,231
2,864
3,850
3,516
2,910
4,794
1,228
2,344
2,761
1,864
1,321
415
39,130
5,423
6,529
3,044
3,935
4,024
3,483
6,094
1,429
3,100
2,726
1,684
1,059
1,319
43,849
7.8%
4.8%
6.3%
2.2%
14.4%
19.7%
27.1%
16.4%
32.3%
-1.3%
-9.7%
-19.8%
217.8%
12.1%
12.9%
15.9%
7.3%
9.8%
9.0%
7.4%
12.3%
3.1%
6.0%
7.1%
4.8%
3.4%
1.1%
100.0%
Source: Yamama Cement
2010
Jan - Nov
2011
Jan - Nov
Growth
% of Total
Production
Jan - Nov 2011
Total cement production of the Saudi cement companies reached 43.8 million tons in the first 11
months of 2011, up 12.1% from the same period last year. Saudi Cement Co. had the highest % of
total domestic production (at 15.9%) followed by Yamama Cement (at 12.9%).
Figure 3 - Financial performance of Saudi cement companies for the period 9M-2011 (SAR Millions)
1,400
Revenue Operating Income Net Income
1,200
1,000
800
600
400
200
0
Al Jouf
Cement Co.
Source: KMEFIC Research
Arabian
Cement Co.
Eastern
Province
Cement
Qassim
Cement Co.
Saudi
Cement Co.
Southern
Province
Cement
Tabuk
Cement Co.
Yamamah
Saudi
Cement Co.
Yanbu
Cement Co.
Looking at the corporate results of Tadawul’s cement industry, , the performance of the nine listed
Saudi cement companies was strong during the first 9 months of 2011 (note: Hail Cement was
not included in this analysis due to the absence of historical financials as it is a newly listed
company). . Total revenue of the nine listed companies reached SAR 7.1 billion for the first 9 months
of 2011, growing 18.6% YoY. . Furthermore, operating profit and net income witnessed significant
YoY growth of 21.3% and 19.3% respectively, , with total net income of the companies reaching
SAR 3.4 billion. The average profit margin of the companies stood at 45.2%, reflecting low energy
and raw material costs.
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Key Drivers: Cement Demand
Construction Sector
According to the latest Saudi Arabia Infrastructure Report published by Business Monitor
International (BMI), the Kingdom’s construction industry is set to grow 4.1% this year to reach SAR
87 billion ($23.2 billion). The construction sector in Saudi Arabia accounted for 6.9% of the
country’s gross domestic product (GDP) in 2010, with a growth of 3.7% YoY. During the first
quarter of 2011, the value of contracts awarded by the government grew five folds over the same
period last year. A report by National Commercial Bank estimates the total value of these
contracts to be around SAR 49.7 billion ($13.5 billion), with the majority of them in the oil and gas
sectors.
Construction Projects
According to industry experts, Saudi Arabia, Qatar, and Abu Dhabi are attracting the bulk of
projects in the region. The construction boom in Saudi Arabia is a result of increased government
spending and through the establishment of six ‘’economic cities’’ in different regions of the country.
In addition, the Kingdom is planning to spend USD 373 billion between 2010 and 2014 on social
development and infrastructure projects to advance Saudi Arabia’s economic development
(Source: CIA - The World Fact Book). Table 4 shows a list of some major construction projects in
the Kingdom.
Population
Table 4 - Major Ongoing Construction Projects in Saudi Arabia
Project Name
Value
(USD
Billion)
Completion
Date
Modon - Sudair Industrial City 40 2028
KHC - Kingdom Tower 30 TBA
Gulf Cooperation Council - GCC Rail Network 30 2017
SAGIA - Jazan Economic City 27 2037
SAGIA - King Abdullah Economic City (KAEC) 27 2026
SAGIA - Ras Al Zour Economic City 25 2020
Sadara Chemical Company - Jubail Petrochemicals Complex 20 2015
SATORP - Jubail Refinery and Petrochemical Complex 14 Dec-13
Khuzam Real Estate Company - Qasr Khuzam 13 2014
Saudi Kayan - Jubail Petrochemicals Complex 12.5 H2-2013
Source: Zawya projects
According to the Central Department of Statistics and Information, the population distribution in
2009 showed that 66% of the Saudi population was aged 30 years or less; indicative of an
increase in housing demand in the future. The International Monetary Fund (IMF) expects the Saudi
population to grow 2.2% in 2011 and at an average rate of 2.1% over the next five years.
Furthermore, King Abdulla bin Abdulaziz ordered in 2011 the construction of 500,000 housing
units, the building of hospitals, and an increase in mortgage lending. These factors will consequently
increase the demand for cement (both directly and indirectly).
Positive Outlook
The Saudi cement industry witnessed an increase in output to meet market demand caused by the
government's continued spending on mega infrastructural projects. It is expected that Saudi
cement companies should be able to satisfy the market’s demand through new expansions or
restorations of stopped production lines.
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The construction sector is foreseen to remain active and will continue to be the major driver for
the cement industry. According to Business Monitor International (BMI),, the construction sector is
expected to grow at an average rate of 4% (in real terms) over the years 2012 – 2015 due to a
healthy project pipeline and strong government support. Lastly, the 2022 World Cup being hosted
in Qatar will stimulate demand for cement as well as other construction materials. Saudi Arabia
stands to benefit from this increased demand as it borders Qatar (the only country that does),
putting Saudi cement companies in a good position to meet the excess demand of cement.
Porter’s Five Forces Model
Below is Porter’s Five Forces Model applied to the Saudi cement industry in order to assess its
attractiveness.
Figure 4 – Porters’ Five Forces Model
Suppliers'
power:
HIGH
Threat of
new
entrants:
MODERATE
Cement
Industry
Threat of
substitutes:
VERY LOW
Business
rivalry:
MODERATE
Customers'
power:
MODERATE
Source: KMEFIC Research
Threat of New Entrants: The biggest entry barriers to the Saudi cement industry are plant and
equipment costs, in addition to carbonic energy requirements of the cement mills and plants. Entry
barriers are slightly lowered by the fact that the Saudi government provides energy subsidies to
cement companies, low interest rate loans from the Saudi Industrial Development Fund (SIDF), and
quarries at low prices as aid to the industry. However, these subsidies do not completely offset the
huge costs required for venturing into the industry and hence, the threat of new entrants to the
Saudi cement industry is moderate.
Suppliers’ Power: Saudi cement companies are under low pressure in terms of production costs
due to the abundance of limestone reserves in addition to the energy subsidies provided by the
government. . However, the government remains the most important supplier to the cement
industry in Saudi Arabia, thus making suppliers’ power high.
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Equity Analysis Report
Customers’ Power: A lot of the Saudi cement companies have shut down some of their production
lines due to the export ban placed on cement. This reduction in supply is being coupled with an
increase in demand due to the huge ongoing infrastructural projects. While the possibility of excess
demand weakens customers’ power, the standardized nature of the product (cement) raises their
power due to very low switching costs. Thus, customers’ power in the Saudi cement industry is
moderate.
Threat of Substitutes: Cement is a necessary input in most types of construction, and there is no
real substitute for it in such projects. Thus, the threat of substitutes is very low.
Business Rivalry: The large number of competing firms (13 to be exact) in the Saudi cement
industry as well as the standardized nature of the product (cement) intensifies competition.
However, an increase in total cement production is being met with an increase in sales volume due
to growing demand. This makes price wars among the cement companies unlikely. Additionally,
firms do not have to compete fiercely for market share due to the nature of the growing industry.
Firms are able to improve revenues simply because of the expanding market. Furthermore, the
companies are geographical dispersed due to the Kingdom’s size. Thus the business rivalry in the
Saudi cement industry is moderate.
Financial Performance
Domestic Sales vs. Exports
Yamama’s sales volume has been in an Figure 5 - Domestic Sales Volume vs Exports Volume (mtpa)
upward trend over the 2007 – 2010
6.0
period, growing on average 0.0
0.0
6.2% a year 5.0
to reach 5.5 million tons in 2010.
0.3
0.3
Exports
4.0
Exports volume faded away after 2008
following the government’s decision to 3.0
5.2 5.5
ban cement exports in June 2008 and all
Domestic
2.0 4.3 4.1
Sales
subsequent sales volume were domestic.
1.0
This did not impact Yamama as domestic
sales volume grew 28% YoY in 2009
and 5.4% in 2010, largely due to the hike
in cement demand across the Kingdom.
0.0
2007 2008 2009
Sources: Company filings, KMEFIC Research
2010
Yamama’s sales volume in the first 11 months of 2011 reached 5.4 million tons, growing 8.9%
YoY and slightly below the industry’s average sales volume growth of 13%.
Revenue & Margins
Revenues grew at an average of 8.1%
annually over the 2006 – 2010 period
and grew 12.1% in the first 9 months of
2011 in comparison to the same period
last year. Net income declined in 2008
and 2009 but has recovered ever since,
growing 16.9% in 2010 and 10.4% in
the first 9 months of 2011 in
comparison to the same period last year.
Revenues reached SAR 1,272 million in
2010 and net income SAR 657 million,
representing a 52% profit margin.
Yamama’s profit margin has declined
over time, going from 63% in 2006 to
Figure 6 - Revenues, Net Income, and Profit Margin
Revenue Net income
Profit margin
1,400 63% 62%
70%
1,200
54%
48%
52% 51% 60%
1,000
50%
SAR Millions
800
600
400
200
0
Sources: Company filings, KMEFIC Research
40%
30%
20%
10%
0%
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KMEFIC Research
Equity Analysis Report
51% in the first 9 months of 2011. The first big decline took place in 2008 and was due to lower
sales (caused by the entrance of new competitors as well as the export ban on cement). Cement
companies are associated with high fixed costs and a contraction in sales can hurt margins. In
addition, Yamama conducted maintenance on some of its production lines in 2008 that further
lifted fixed costs. Lastly, the company completed construction of its seventh production line in
2007 and its cost was transferred to the company’s fixed assets, leading to higher depreciation in
subsequent years. The export ban in 2008 led to a buildup of inventory in the Saudi cement
industry and this excess supply caused cement prices to decline in 2009, adversely affecting
Yamama’s margins that year. However, prices began to recover ever since and this is reflected in
the improvement of Yamama’s profit margin in 2010. Yamama’s operating margin was virtually
identical to its profit margin over the 2006 – 9M-2011 period. This was largely due to the fact that
the majority of the company’s income originated from operating activities; its other gains/losses
were minimal and had no material impact on the company’s bottom line.
Assets Breakdown
Yamama’s assets have
grown at an average annual
rate of 3.9% over the 2006
– 9M-2011 period,
reaching SAR 3,567 million
at the end of September
2011. Fixed assets account
for the majority of
Yamama’s total assets,
representing 56% at the
end of September 2011.
The company has a strong
cash position with cash and
cash equivalents standing at
SAR 639 million at the end
of September 2011 and
representing 18% of total assets.
representing 18% of total assets. The company’s cash position has experienced exceptional
growth, expanding at a compounded annual growth rate (CAGR) of 20.9% over the 2006 – 9M-
2011 period.
Financial Leverage
Table 5 - Leverage & Interest Coverage
Debt/Equity
Interest Coverage
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
Sources: Company filings, KMEFIC Research
Figure 7 - Assets Breakdown (SAR Millions)
0
2007 2008 2009 2010
Sources: Company filings, KMEFIC Research
9M-2011
2006 2007 2008 2009 2010 9M-2011
39.3% 21.1% 19.8% 13.8% 8.5% 6.0%
- - 50.5x 45.2x 115.3x 195.0x
Other Assets
Inventory
Recievables &
Prepayments
Investments
Yamama was debt free in 2003 but borrowed funds in 2004 and 2005 in order to fund its capital
expenditures. Its seventh and latest production line was completed in 2007 and the company has
been deleveraging itself ever since 2005, with debt-to-equity equity declining from 39% in 2006 to 6% at
the end of September 2011. The company’s interest coverage ratio has been strong over the
entire period and stood at an outstanding 195x for the first 9 months of 2011.
Cash
Fixed Assets
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January 2012
Forecasts & Assumptions
Revenue
KMEFIC Research
Equity Analysis Report
We broke down the company’s annual historical revenue into average cement price per ton (for
the year) and sales volume (in million tons per annum). This allowed us to isolate the effects on
revenue caused by price fluctuations and sales growth. We expect sales volume to grow at an
average annual rate of 4% over the next 2 years, in line with BMI’s (Business Monitor International)
forecast for real construction industry growth in the Kingdom (the main driver of cement demand).
However, we expect sales volume to level off after 2013 due to Yamama Cement reaching its
maximum production capacity of 6.3 mtpa.
We anticipate a small decline in Yamama’s average cement price per ton in 2012 due to new
cement firms entering the market but expect average prices to increase moderately afterwards
due to growing cement demand. Lastly, Yamama’s new planned production line (that will replace
five of its older production lines) is not scheduled to be completed until 2015 and thus will have no
effect on revenues over the forecast period.
Based on the these assumptions and other relevant factors, we forecast revenues to grow during
the 2010 – 2015 period at a compounded annual growth rate (CAGR) of 5.57% to reach SAR
1,668 million in 2015.
Capital Expenditures
On the 19 th
of October 2011, Yamama announced that they will proceed with their intended
cement plant restoration. The project aims to replace five of Yamama’s oldest production lines
(that have a production capacity of 5,600 tons of clinker per day) with a standalone production line
(that will have a production capacity of 10,000 tons of clinker per day). We have incorporated the
planned project into our forecasts and valuation by taking the following assumptions:
• The new production line will cost approximately SAR 1.5 billion.
• Yamama will not pay a cash dividend for the 2 nd half of 2011 but will alternatively issue 1-to-
2 bonus shares (which has already been submitted to the general assembly for approval by
the board of directors). The cash will instead be utilized to help finance the production line.
• Also to help the company finance the production line, Yamama will borrow part of the
project’s cost.
Share Capital
We have assumed that the proposed 1-to-2 bonus shares will be approved by the general
assembly and will take place in 2012, raising Yamama’s number of shares outstanding to 202.5
million and its share capital to SAR 2,025 million.
Net Income
We forecast net income to grow at a compounded annual growth rate (CAGR) of 4.65% over the
2010 – 2015 period to reach SAR 824.5 million in 2015.
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January 2012
Valuation
KMEFIC Research
Equity Analysis Report
We valued Yamama Cement using two main approaches: Discounted Cash Flow Analysis and
Relative Valuation.
Discounted Cash Flow Analysis
Discounted Cash Flow Analysis was used to discount the company’s forecasted Free Cash Flows to
Firm. We applied a top down approach by firstly taking into account all relevant factors to estimate
the company’s primary sources of income. These estimates were then coupled with forecasts of
expenses in order to work out the company’s operating profits and net profits over the forecast
horizon. Capital expenditures and variations in working capital requirements were taken into
account when computing Enterprise Value. Adjustments for debt, investments in associates, and
cash & cash equivalents were made to compute the company’s equity value.
We used a WACC of 9.3% in our DCF Analysis (the CAPM was used to compute the cost of equity)
and the terminal growth rate was set to 1.5%. Our DCF model yielded an estimated fair value of
SAR 60.57 per share, representing a 28.9% upside to Yamama’s closing share price (adjusted
for the 50% capital increase) on the 1 st of January, 2012.
Relative Valuation
In our relative valuation model, we used the industry’s trailing P/E ratio and P/BV ratio. Based on
Yamama’s forecasted EPS in 2011 and the trailing P/E for the industry, we reached a fair value of
SAR 52.64 per share, representing an upside of 12.0%.
Similarly, based on the forecasted BVPS in 2011 and the trailing P/BV for the industry, we
obtained a fair value of SAR 55.62 per share, representing an upside of 18.3%.
Conclusion
In order to compute the fair value per share for Yamama Cement, we used a weighted average of
the previously mentioned valuation approaches. We allocated a 40% weight to the discounted cash
flow method and equal weights of 30% to the P/E multiple and P/BV multiple valuation methods.
We reached a final fair value of SAR 56.71 for the company’s share, representing a 20.6% upside
from the current price level (as of the 1 st
of January, 2012 and adjusted for the 50% capital
increase). Accordingly, we issue an “ACCUMULATE” recommendation for Yamama Cement.
Table 6 - Yamama Cement Fair Value per Share
Method Value Weight Weighted Value
DCF - FCF to firm 60.57 40% 24.23
Relatives - P/E 52.64 30% 15.79
Relatives - P/B 55.62 30% 16.69
Fair value per share 56.71
Current market price* (as of 1/1/2012) 47.00
Potential upside / (downside) 20.6%
*Adjusted for the 50% capital increase
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Equity Analysis Report
Table 7 - Sensitivity analysis of Fair Value to WACC and Terminal Growth Rate
Terminal Growth
Rate
WACC
7.3% 8.3% 9.3% 10.3% 11.3%
0.50% 60.75 57.24 54.55 52.42 50.69
1.00% 62.57 58.58 55.56 53.21 51.32
1.50% 64.71 60.11 56.71 54.09 52.02
2.00% 67.25 61.88 58.01 55.07 52.79
2.50% 70.32 63.96 59.50 56.19 53.64
KMEFIC Recommendation Scale
BUY potential upside is more than 30%
ACCUMULATE potential upside is between 15% and 30%
HOLD potential upside or downside is less than 15%
REDUCE potential downside is between 15% and 30%
SELL potential downside is more than 30%
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January 2012
Appendices
KMEFIC Research
Equity Analysis Report
Balance Sheets
(SAR million) FY-10 A FY-11 F FY-12 F FY-13 F FY-14 F FY-15 F
Cash 700 908 1,045 860 857 891
Recievables & prepayments 270 298 312 338 357 369
Inventory 132 117 121 130 136 146
Current assets 1,102 1,324 1,478 1,328 1,350 1,406
Investments 394 399 404 410 416 423
Fixed assets 2,106 1,962 1,863 1,749 1,645 3,008
Capital projects under construction 7 29 375 750 1,125 3
Other long term assets 44 49 54 56 60 64
Noncurrent assets 2,552 2,439 2,697 2,965 3,246 3,497
Total assets 3,653 3,763 4,175 4,293 4,596 4,903
LT debt - current portion 77 63 63 63 38 75
Payables & other current liabilities 168 160 183 193 204 218
Current liabilities 246 224 246 256 241 293
LT debt 190 127 63 0 150 263
Other noncurrent liabilties 59 55 61 63 67 72
Noncurrent liabilties 249 181 124 63 217 334
Total liabilities 495 405 371 319 458 627
Total equity 3,159 3,358 3,804 3,974 4,138 4,276
Income Statements
(SAR million) FY-10 A FY-11 F FY-12 F FY-13 F FY-14 F FY-15 F
Revenues 1,272 1,422 1,464 1,570 1,635 1,668
COGS (560) (616) (639) (682) (714) (768)
Gross profit 712 806 826 888 921 900
Operating income 666 754 772 830 861 839
Net income 657 739 758 817 847 824
EPS (SAR) 3.25* 3.65* 3.74 4.03 4.18 4.07
*Adjusted for the 50% capital increase
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Equity Analysis Report
Ratios
FY-10 A FY-11 F FY-12 F FY-13 F FY-14 F FY-15 F
Current ratio 4.48x 5.92x 6.00x 5.18x 5.60x 4.79x
Quick ratio 3.92x 5.37x 5.47x 4.65x 5.00x 4.27x
Cash ratio 2.85x 4.06x 4.24x 3.36x 3.56x 3.04x
Gross profit margin 56.0% 56.7% 56.4% 56.5% 56.3% 54.0%
Operating profit margin 52.4% 53.0% 52.7% 52.9% 52.7% 50.3%
Net profit margin 51.6% 51.9% 51.8% 52.0% 51.8% 49.4%
Return on total capital 19.2% 20.8% 19.3% 20.2% 19.6% 17.9%
Return on average assets 17.9% 19.9% 19.1% 19.3% 19.1% 17.4%
Return on average equity 21.1% 22.7% 21.2% 21.0% 20.9% 19.6%
LT Debt to Equity ratio 0.08x 0.06x 0.03x 0.02x 0.05x 0.08x
Debt to assets ratio 13.5% 10.8% 8.9% 7.4% 10.0% 12.8%
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KMEFIC Research
Equity Analysis Report
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decision. This report is not an offer to buy or sell any of the securities that may be referred to herein. In no event will KMEFIC be liable for
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Yamama Saudi Cement Co. P a g e | 19

Research Team:
Safaa Zbib, CVA Ali Al-Moussawi Reda Farran
Snr. Manager Equity Analyst Asst. Equity Analyst
Research Department Research Department Research Department
s.zbib@kmefic.com.kw a.almoussawi@kmefic.com.kw r.farran@kmefic.com.kw
ص.ب:‏‎819‎ الصفاة
الكويت
شرآة الكويت والشرق الأوسط للإستثمار المالي ش.م.ك.م
فاآس
(+965) 22252563 :
– هاتف : 22255000 (+965) –
13009 –
Kuwait and Middle East Financial Investment Company K.S.C.C
P.O.Box 819 Safat 13009 Kuwait – Telephone: (+965) 22255000 – Fax: (+965) 22252563
research@kmefic.com.kw – www.kmefic.com.kw