a Saudi Cement Company

January 2012
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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