Southern Cement’s Q2 net profit in-line with estimates, says NCB Cap

Southern Cement Co.’s net profit of SAR 95 million in the second quarter this year came in-line with NCB Capital and the consensus estimates of SAR 99.6 million and 91.8 million, respectively, the brokerage said in an earnings review.

Net profit in Q2 was the company’s lowest ever, as it was down 64.5 year-on-year (YoY) and 9.1 percent quarter-on-quarter (QoQ).

“We believe the YoY decline was driven by lower sales quantities due to the slowdown in the construction sector, weak margins due to the discounts offered, despite the operating expense (Opex) efficiencies specifically in general and administrative costs (SAR 8 million versus our estimates of SAR 15 million in Q2 2017),” the brokerage said.

Sales stood at 1.30 million tons in Q2, meeting the estimates of 1.37 million tons, while sales of SAR 243 million missed the estimates of SAR 274 million by 11.2 percent.

Selling prices were SAR 188 per ton, which also missed the estimates of SAR 200 per ton, due to the slowdown in the construction sector and the fierce competition, the report said, adding that the discounts were also triggered by the limited export potential as a result of the high export tariff.

Gross margins were similar to the estimates, as it contracted significantly to 41.2 percent in Q2 from 54.1 percent in Q2 last year, leading to a lower variance of a 10.9 percent decrease at the gross profit level, mainly due to the hiked fuel prices, in addition to the company’s discounts.

The brokerage forecasts an average gross margin of 32.8 percent till 2021 for Southern Cement.

NCB Capital maintained its “Neutral” rating on the stock and raised the target price to SAR 69.9 per share from SAR 50.1 per share.

“Lower prices due to competition and limited export potential due to the high tariff are key risks for the company,” it added.