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31-Jan-2019

Qassim Cement 4Q18 first glance: Strong earnings recovery Q-o-Q on better cement prices; beat estimates

Net income: SAR40mn, -41% Y-o-Y, +6x Q-o-Q, +111% vs. EFGe
Revenues: SAR115mn, -32% Y-o-Y, +55% Q-o-Q, +15% vs. EFGe
Gross profit: SAR46mn, -39% Y-o-Y, +3x Q-o-Q, +104% vs. EFGe
Net operating profit: SAR38mn, -43% Y-o-Y, +10x Q-o-Q, +124% vs. EFGe
 
Qassim Cement Company reported its 4Q18 financial highlights, showing a substantial recovery in earnings Q-o-Q to SAR40mn (-41% Y-o-Y, +6.9x Q-o-Q), beating our estimate (+111%) and Bloomberg consensus (+172%). The significant beat was mainly driven by a strong recovery in cement prices after two consecutive weak quarters. 
 
The company reported revenue of SAR115mn (-32% Y-o-Y, +55% Q-o-Q), well ahead of our estimates (+15%), as cement prices touched SAR159/tonne (-2% Y-o-Y, +43% Q-o-Q and +27% vs. EFGe), although sales volumes continued its weak trend and came below our estimates of 0.73mn tonnes (-31% Y-o-Y, +8% Q-o-Q, -9% vs. EFGe). In addition, cash cost per tonne remained stable during the quarter at SAR71/tonne (-2% Y-o-Y, +1% Q-o-Q and -6% vs. EFGe), which resulted in a sizeable improvement in margins, with gross margin expanding substantially to 40% vs. 44.8% in 4Q17, 13% in 3Q18 and vs. EFGe of 22.6%, and EBITDA margin to 49% (-2pp Y-o-Y, +20pp Q-o-Q and +14pp vs. EFGe). 
 
Our view: Overall, a good set of numbers in a weak market. We believe this recovery in cement prices was partly due to seasonal factor. However, the continued weak cement demand would still bring in volatility in cement prices, in our view, especially given the high clinker inventory levels in the market. We currently have a Buy rating on Qassim as it is valued at decent multiples (2020e EV/EBITDA 9.4x, div. yield 6.2%) despite being in a high-demand region and enjoys a cash-rich balance sheet (cash and investments make up c20% of the company’s market cap) and strong FCF yield of 9% over our forecast horizon.