Net income: SAR52mn, -54% Y-o-Y, +10x Q-o-Q, +97% vs. EFGe
Revenues: SAR240mn, -20% Y-o-Y, +23% Q-o-Q, +3% vs. EFGe
Gross profit: SAR71mn, -48% Y-o-Y, +4x Q-o-Q, +61% vs. EFGe
Net operating income: SAR63mn, -48% Y-o-Y, +5x Q-o-Q, +110% vs. EFGe
 
Earnings 97% ahead of EFGe: Southern Province Cement Company (SPCC) has reported 4Q18 financial highlights, showing a substantial recovery in earnings Q-o-Q to SAR52mn (-54% Y-o-Y, +10x Q-o-Q), which beat our estimate by a wide margin (+97%). The beat was driven by a mix of better-than-estimated sales volume and lower-than-estimated costs during the quarter.
 
Volumes grew at the expense of cement prices: Revenue came broadly in line with our estimate of SAR240mn (-20% Y-o-Y, +23% Q-o-Q, +3% vs. EFGe), as stronger-than-expected sales volumes of 1.7mn tonnes (+14% Y-o-Y, +16% Q-o-Q, +5% vs. EFGe), was overshadowed by marginally weaker cement prices of SAR141/tonne (-30% Y-o-Y,+6% Q-o-Q, -2% vs. EFGe).
 
Operating margins grew on strong cost control: The company managed to rationalise its cost and expenses during the quarter, with the cash cost per tonne down sizeably to SAR74/tonne (-8% Y-o-Y, -19% Q-o-Q, -18% vs. EFGe), and its SG&A expenses fell to SAR8mn (-46% Y-o-Y, -2% Q-o-Q, -44% vs. EFGe). This resulted in a better GPM expanding to 29.5% (vs. 45.2% in 4Q17, 9.3% in 3Q18, and EFGe 19%) and EBITDA margin increased to c45% (-11 pp Y-o-Y, +17pp Q-o-Q, and 13pp vs. EFGe). 
 
Our take on the results: A good set of operating numbers. However, the growth in volumes was at the expense of prices and was not in line with cement prices seen in other regions, where prices improved significantly during 4Q18 (especially in the Central region). We believe this could be due to the low demand in the Southern region, and hence the company might have pushed its volumes to the high demand regions at a competitive price. Having said that, we appreciate the cost-conscious approach by the company, but we see limited further cost saving potential in this low demand and inflationary environment. We have a Neutral rating on Southern Cement due to its lofty valuation (2019e EV/EBITDA of 15.4x), but will provide a further update once the full financials are released.

Sameer Kattiparambil, Dina Hicham
 
Southern Cement: SAR43.50 as of 10 Mar. 2019, Rating: Neutral, TP: SAR41.10/share, MCap: USD1,624mn, SOCCO AB/3050.SE