Southern Cement’s Q4 misses estimates, says NCB Cap

Southern Province Cement Co.’s (Southern Cement) Q4-2016 net income of SAR 156 million, down 48 percent year-on-year (YoY) came below NCB Capital’s estimates of SAR 181 million, the brokerage said in an earnings review.

The decrease in income was due to a lower sales quantities due to the general construction slowdown, weak margins due to the revised fuel support levels and higher than expected operating expenses.

Sales quantities stood at 1.54 million tons in Q4-2016, lower than the estimate of 1.67 million tons and down 31 percent YoY.

Average selling prices stood at SAR 230/ton, while NCB Capital’s estimate was SAR 242/ton, down 5 percent YoY. As a result sales came 12.4 percent below the estimate at SAR 354 million, lower by 34.1 percent YoY.

“This is the first quarter which Southern Cement offered discounts, after being the only company resisting to do so since the demand slowdown began. We believe discounts offered by smaller players in remote regions to sell in high demand areas may lead to further discounts for Southern Cement,” the report said.

Gross margins hit its lowest since 2008 at 50.8 percent in Q4-2016, declining from 59.7 percent YoY, lower that NCB Capital’s estimate of 48.2 percent.

“We believe the main reason behind lower margins and 43.9 percent decline in gross profits to SAR 180 million is 1) revised support on fuel and utilities and 2) price discounts offered. We expect an average gross margin of 49.5 percent till 2020E.” the brokerage added.

NCB Capital rating for Southern Cement’s stock is “Neutral” with a target price of SAR 79.7 per share.

Key risks include lower prices due to increased competition from smaller players and higher costs from reduced fuel support.