Northern Cement reported its 2Q18 highlights, showing a net loss of SAR6.7mn (Vs net profit of  SAR8mn in 2Q17, SAR1mn in 1Q18), significantly missing our net profit estimate of SAR3mn. The earnings miss was primarily driven by lower-than-estimated volumes of 0.21mn (-24% Y-o-Y, -40% Q-o-Q, -20% EFGe). 
 
The company reported revenues of SAR108mn (-4% Y-o-Y, -5% Q-o-Q), broadly in line with our estimate. Although the revenue breakdown is not available, we assume the Jordanian and Iraqi subsidiaries revenues might have supported its topline. Our calculation suggests cement prices of SAR144/tonne at its Saudi operation (-17% Y-o-Y, +25% Q-o-Q, -4% EFGe). The gross margin declined further during the quarter to 18% Vs 33% in 2Q17, 21% in 1Q18 and below EFGe 29.5%, which suggests that  cost have escalated further during the quarter. 
 
Our View: Very weak results. Although cement prices were somewhat comforting compared to other Northern players, they have taken a hit on the volume side. This shows the intensity of competition in the Northern region, which we believe will continue over the short term due to the low-demand summer months. We have a Sell rating on Northern Cement as the valuation (2019e P/E of 20x, EV/EBITDA of 14x) does not reflect its earnings profile. 
 
Northern Region Cement Company: SAR8.96 as of 8 Aug. 2018, Rating: Sell, TP: SAR8.46/share, MCap: USD430mn, NORTHCEM AB/3004.SE

 Sameer Kattiparambil, Dina Hicham