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Eastern Province Cement 3Q19: Inflated cost structure leads to earnings miss

Net income: SAR36mn, +306% Y-o-Y, +13% Q-o-Q,-8% vs. EFGe
Revenue: SAR174mn, +43% Y-o-Y, +10% Q-o-Q, 0% vs. EFGe
Gross profit: SAR51mn,+140% Y-o-Y, +29% Q-o-Q, -5% vs. EFGe
Earnings miss despite top-line being in line with estimate: Eastern Province Cement reported its 3Q19 financial highlights, with earnings of SAR36mn (306% Y-o-Y) but came 8% short of our estimate, on high cost escalation during the quarter, although the top-line came in line with our estimate.
Cement prices stable, while sales volumes recover Q-o-Q: Revenue improved sequentially by 10% to SAR174mn (+43% Y-o-Y) and came in line with our estimate. The sequential growth was mainly driven by: i) strong cement sales volumes, which recovered by 9% Q-o-Q to 0.5mn tonnes (+9% Y-o-Y, exactly in line with EFGe); and ii) relatively better concrete sales, which touched SAR45mn (+7% Y-o-Y; +15% Q-o-Q); however, cement prices remained stable Q-o-Q at SAR230/t (+31% Y-o-Y; +2% vs. EFGe).
Inflated costs impacted EBITDA margin estimate: Cash cost inflated by c17% Y-o-Y to SAR126/tonne (+17% Y-o-Y, +5 vs. EFGe), but higher cement prices supported EBITDA margin, which expanded to c36% (vs. 27% in 3Q18, 31% in 2Q19) and came -40bps vs. EFGe. We assume higher revenue contribution from the low-margin concrete segment led to the inflated cost structure.
Our take on the results: The key highlight of the quarter is the stability of cement prices at SAR230/t. However, we currently have a Neutral rating on EPCC, as valuation remains full (2020e EV/EBITDA of 10.5x) and the Eastern region lacks any major growth triggers, unlike other regions. 

Sameer Kattiparambil, Dina Hicham
Eastern Province Cement Company: SAR33.25 as of 4 Nov. 2019, Rating: Neutral, TP: SAR33.20/share, MCap: USD763mn, EACCO AB/3080.SE

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