Net income: SAR79mn, +230% Y-o-Y, vs. net loss of SAR2mn in 3Q18 and EFG estimate of SAR5mn
Recurring income: SAR34mn, +42% Y-o-Y, vs. net loss of SAR2mn in 3Q18 and EFG estimate of SAR5mn
Revenues: SAR88mn, -39% Y-o-Y, +35% Q-o-Q, 0% vs. EFGe
Gross profit: SAR42mn, +27% Y-o-Y, +8x Q-o-Q, +243% vs. EFGe
 
City Cement Company reported its 4Q18 financial highlights yesterday. Earnings spiked to SAR79mn vs. a net profit of SAR24mn in 4Q18 and net loss of SAR2mn in 3Q18 and beating our estimate of SAR5mn. The beat was due to stronger-than-expected operations metrics (higher cement price and low COGS) and below EBIT items. Barring the one-off, recurring earnings of cSAR34mn would have still been well ahead of our estimate.
 
Management has clarified that the earnings were inflated due to one-off revenue of SAR43mn booked as the final settlement for the construction delays at the company’s second production line with the main contractor, Sinoma International Company, which is worth 8% of the total contract value.
 
Operationally, the company’s revenue came exactly in line with our estimate of SAR88mn (-39% Y-o-Y, +35% Q-o-Q), supported by a stronger cement price recovery during the quarter to SAR158/tonne (-6% Y-o-Y, +29% Q-o-Q, +17% vs. EFGe), which more than compensated for its weaker-than-expected cement sales volume of 0.56mn tonnes (-35% Y-o-Y, +5% Q-o-Q, -14% vs. EFGe). GPM expanded to c47% (vs. 22.6% in 4Q17, 8% in 3Q18) and beating our GPM estimate of c14%), mainly due to: i) low cost structure reported during the quarter, with cash cost/tonne, declining to SAR47/tonne (-51% Y-o-Y, -37% Q-o-Q, and -45% vs. EFGe); and ii) the spike in cement selling prices to SAR158/tonne during the quarter.
 
The company’s BoD has proposed a cash dividend of SAR0.40/share for FY18 (vs. SAR0.40/share in FY17 and well ahead of our FY18 DPS estimate of SAR0.19/share). This implies a payout ratio of 68% and a dividend yield of c4%.
 
Our take on the results: Overall, good operational results. The spike in cement prices during the quarter was in line with the Central region’s other cement players, and we assume companies started shifting their focus on improving margins rather than volumes. Although we assume cement prices to recover from their beaten down levels of 2018, we still believe the continued weak demand trend and the presence of high clinker inventory in the market means cement prices will continue to be volatile over the short term. Moreover, we do not assume the level of cost savings in 4Q18 would be sustainable (it might be because of accounting adjustments), in our view. City remains one of our top picks In the Saudi market as we see it as a play on the cement price recovery story from the high-demand Central region, and the company carries a cash-rich balance sheet (cash makes up 16% of MCap) with an attractive valuation (2020e EV/EBITDA 8.4x, vs. sector average of 11x). (Company, Sameer Kattiparambil, Dina Hicham)
 
City Cement: SAR10.30 as of 3 Feb. 2019, Rating: Buy, TP: SAR11.50/share, MCap: USD520mn, CITYC AB/3003.SE