Saudi Cement Company (SCC):

Concrete growth

Equity Research

1 December 2008

12-month
target price
SR115

BUY
Target price*: SR115
Current price: SR58.5
Fair value: SR143

>SR132

*12-month target

Sell

SR132-124
Consider
selling

SR123-106
Hold

Current price
SR58.5

SR105-97
Consider
buying

<SR97
Buy

Share details

Market cap (SR million)

Shares outstanding (million)
Free float (million)
Earnings per share (SR)
Dividends per share (SR)
Book value per share (SR)
52-week high (SR)
52-week low (SR)

5,967
102
88
6.45
5.0
26.62
137
55

Share price
140
130
120
110
100
90
80
70
60
9/6/2008

11/6/2008

7/6/2008

5/6/2008

3/6/2008

1/6/2008

9/6/2007

11/6/2007

7/6/2007

5/6/2007

3/6/2007

1/6/2007

50

Key ratios

Price-earnings ratio (P/E)

9.06
Price-book ratio (P/B)
2.19
Return on equity (%)
25.1
Return on total assets (%)
17.8
Gross margin (%)
64.0
Operating margin (%)
49.0
Quick ratio
0.9
Market risk (beta)
0.75
Company risk (standard deviation) 0.36
Earnings yield (%)
10.80
Dividends yield (%)
8.50

Investment summary
Saudi Cement Company (SCC) is a cement producer and exporter
based in the eastern province of Saudi Arabia. When completed, a
major expansion, currently in trial production, will give SCC the
largest cement production capacity in the Kingdom, at 11.8 million
tons per year. We believe that at its current share price SCC is
undervalued (however, our target price is lower than fair value
because it has been adjusted to reflect prevailing market sentiment).
Investment positives
Soon to be the largest cement producer in Saudi Arabia and the
GCC.
Superior access to export markets by virtue of a private shipping
terminal and proximity to other Gulf states.
Plants adjacent to the center of the rapidly growing oil, gas and
petrochemical industries in the eastern province.
Cement company least affected by a ban on exports introduced
earlier this year, as it has been able to secure the bulk of the
market in Bahrain, which is exempt from the ban.
Management has a strong proven track record.
Ability to close down older production lines means that it is well
positioned in the event of a significant downturn in demand.
Sound profitability ratios.
Investment negatives
Over-reliance on short-term debt to fund capacity expansion,
tremendously straining the liquidity position.
New larger capacity is set to hit measures of sales performance
and inventory turnover.
Looming global recession may limit demand from export markets
and intensify competition.
All companies in the sector face falling cement prices and a price
war can not be ruled out.

1 December 2008

Industry analysis
Saudi Arabia is the largest producer of cement in the GCC with
annual installed capacity estimated to reach 46.5 million tons by the
end of 2008. Actual production was 26 million tons over the first nine
months of this year. Saudi Arabia is second largest cement
production capacity in the Middle East, behind Iran, where
production is set to reach 63 million tons this year. Egypt ranks third,
with annual production capacity of 38.5 million tons.

Production, imports and exports

50000

(thousand

40000

30000

20000

10000

Raw materials

-10000
1980

1985

1990

Domestic production

1995

2000
Imports

2005
Exports

2010

The basic raw material of cement is limestone, a sedimentary rock

about half of which is calcium carbonate. Enormous deposits of
limestone exist in Saudi Arabia, although the high purity type that is
used in white cement is relatively rare. Limestone constitutes
between 70 and 80 percent of cement.
Other raw materials that go into the manufacturing of cement include
dolomite, sand, gypsum and iron ore. Together, these materials
constitute about 20 to 30 percent of the final product and all but iron
are available naturally in large quantities in Saudi Arabia. Most
cement manufacturers procure their iron ore requirements from local
petrochemical and minerals producer Sabic.

State and structure of the industry

The cement market in Saudi Arabia has historically been dominated
by a small group of companies. For decades, eight publicly listed
companies captured almost all cement revenues. Last year, the
revenues of the listed cement companies amounted to SR7.7 billion
(data is not available on the private cement companies). This is
starting to change, as six newcomers were issued licenses within the
last five years, a few of which have begun operations (all are
scheduled to commence production by 2010).
Locations and production capacities of Saudi cement companies

Company
Saudi Cement
Yanbu Cement
Arabian Cement
Yamama Cement
Southern Cement
Eastern Cement
Qassim Cement
Riyadh Cement
Najran Cement
Tabuk Cement
Northern Cement
Al-Jouf Cement1
Madina Cement
Al Safwa Cement2
Total
1
2

Capacity Capacity in
in 2008
2010
Location Region Status ('000 tons) ('000 tons)
Dammam
Yanbu
Jeddah
Riyadh
Abha
Khursanyah
Buraidah
Riyadh
Marrat
Tabuk
Ar'ar
Turaif
Najran
Makkah

Scheduled for production in 2009

Scheduled for production in 2010

Eastern
Western
Western
Central
South

Public
Public
Public
Public
Public

8,192
4,620
4,950
6,325
6,270

11,822
7,920
7,700
6,325
6,270

Eastern
Central
Central
Central
North
North
North
South
Western

Public
Public
Private
Private
Public
Private
Private
Private
Private

3,630
3,520
1,650
2,200
1,320
2,200
0
1,650
0
46,527

3,630
3,520
3,300
3,300
2,970
2,200
1,650
1,650
1,650
63,906

1 December 2008

Production capacity by region (2007)

South
S outh
22%
Central
Central
35%
North
North
3%

W estern
Western
19%
Eastern
21%
Eastern

Production capacity by region (2010)

SSouth
o uth
2 0%

C e ntral
Central
2 5%

North
North
8%

W este rn
2 7%
Western

E a stern
Eastern
2 0%

Recently, the Ministry of Petroleum and Minerals (MOPAM)

announced that seven more licenses will be issued for limestone
concessions for new cement plants. Two of these will be issued to
plants in Hail and Baha. The remaining five will be offered through
competitive auctions, where quarry concessions will be awarded to
the highest bidder. Additionally, winners have to commit to floating
50 percent of their capital through an IPO at book value in the
coming years. By the time bidding for the new licenses is completed,
there will a maximum of 21 cement companies in Saudi Arabia.
Shortlisted companies were asked to submit their bids for the
limestone quarries in July.
By awarding limestone quarries throughout Saudi Arabia, the
MOPAM has averted competition, but made sure that cement is
available where needed for infrastructure development. The pie
charts illustrate how capacity will shift towards the West, home of the
King Abdullah Economic City, and the North, where there are major
mining and infrastructure projects. The sharp fall in Central regions
share of production capacity is because the bulk of the new capacity
for this region entered production during 2007 (capacity increased
from 4.8 million tons to 8.3 million tons at end-year) whereas the new
production capacity elsewhere will come on stream later.
Competition has been mute as a result of a long standing
understanding between cement companies and regulators whereby
companies were allowed to set a floor for factory prices that is
agreeable for all. Also, the fact that factories are spread out evenly
throughout Saudi Arabia with each focusing on meeting demand in
its immediate area helped avert competition between companies.
Transporting cement is very expensive, so it is not attractive for
producers to sell outside of their home region.

Production
Saudi Arabia became self sufficient in cement in 1989 and its first
exports were in the following year. Production then went through a
period of very slow growth that coincided with weak economic
performance during the 1990s. Responding to early signs of
recovery in the economy, production started to gather strength early
this decade, but it was not until 2006 when cement output suddenly
surged, owing to new capacity and a draw down of existing stocks.
Cement production
(thousand tons)
2003

2004

2005

2006

2007

Q1-Q3
2008

Southern Cement
3,799 4,214 4,561 4,600 4,613 3,915
Saudi Cement
4,555 4,705 5,003 4,966 5,289 4,101
Yamama Cement
3,111 3,512 3,566 3,847 4,654 3,589
Yanbu Cement
4,162 4,256 3,742 3,521 4,622 3,311
Eastern Cement
2,699 2,374 2,493 3,229 3,482 2,447
Qassim Cement
1,984 2,169 2,226 2,231 3,464 2,491
Arabian Cement
2,597 2,799 3,022 3,026 2,824 2,178
Riyadh Cement
0
0
0
0
0 1,114
Tabuk Cement
1,166 1,445 1,419 1,633 1,361
937
Najran Cement
0
0
0
0
0
636
Madinah Cement
0
0
0
0
0
829
Northern Cement
0
0
0
0
0
207
Total
24,073 25,474 26,032 27,053 30,309 25,755
3.5
5.8
2.2
3.9
12.0
Annual change (percent)

1 December 2008

Production in 2007 totaled a record 30.3 million tons, up 12 percent

on the previous year. This exceeded installed operating capacity at
the start of the year, as plants were drawing from inventories of
clinker built up during lean years and new production capacity came
on stream. Exports also reached an all-time high in 2007, of 3.57
million tons. There was a small quantity of imports, mainly clinker
and types of cement that are not manufactured locally.

Production capacity

Huge increase in production capacity

70

A huge increase in production capacity is under way. We expect total

annual cement capacity will rise to 64 million tons by 2010 from 23.8
million tons in 2005. Over 12 million tons in new production capacity
was brought on stream last year and we estimate that a further 8
million tons will be added this year.

60

(million tons)

50
40
30
20
10
0
2006
Existing capacity

2007

2008
Upgrade

2009

2010
New capacity

The intensity of the major capacity ramp up should slow after 2010
and production capacity is expected to stabilize after 2012, when the
second batch of the announced cement projects is completed (bids
have already been invited for quarry allocations for prequalified
companies). For phase two of the capacity expansion, Baha and Hail
cement companies have been named as recipients of limestone
quarries. Both are under formation as public shareholding companies
and both are likely to have annual production capacities of around
3.3 million tons. Implantation and consulting contracts have been
signed and we expect both plants to go on stream by 2011 or 2012.
The current surge in capacity stems from an upgrade of existing
production facilities and the establishment of new cement
companies. In light of the construction boom within the Saudi
economy, we expect that most of the new plants will be operating at
or above designed capacity for a few years (typically, cement plants
are designed with 10-15 percent excess capacity) before returning to
pre-boom levels.

Prices
Cement is considered a strategic commodity whose pricing should
not be left entirely to the market. A price ceiling is determined
through consultations between the listed cement companies and the
Ministry of Commerce and Industry (MOCI). Factors that are taken
into consideration in determining the price include historical and
current supply and demand patterns, protecting consumers and the
best interests of cement manufacturers. Cement companies are
expected to abide by the price ceiling, but are free to charge less if
they wish. There are no restrictions on the prices that distributors can
charge. Prices vary according to type of cement; unless otherwise
stated those quoted in this report are for Ordinary Portland Cement
(OPC). The cement price ceiling has not been changed over the past
three years, except for the period within the last 12 months when
MOCI removed the price-fixing system.

Historical average cement price

300

250

(SR per ton)

200

150

100

50

0
1990

1992

1994

1996

1998

2000

2002

2004

2006

The ongoing increase in production capacity prompted concerns

within the industry that it would trigger a slump in prices. Instead,
prices have been on a volatile upward trend for most of the last 12
months, as strong local demand and rising exports (prices in
neighboring countries are around 30 percent higher than the ceiling
imposed by the MOCI) have generated shortages.

1 December 2008

Local prices surged owing to a shortage last summer and a black

market for cement and other building materials (cement blocks and
pre-mixed concrete) emerged for the first time in many years. The
shortage was so sudden and severe that construction contractors
had no option but to pass on the higher cost of cement to end users,
which resulted in work on some projects being slowed or suspended
until prices fell. This prompted the government to compensate
contractors for government projects for some of the losses incurred.

Cement production, sales and prices

35,000

275
250
225

30,000

175
150
125

20,000

100

(SR per ton)

(thousand tons)

200
25,000

The MOCI's initial reaction to the cement shortage was to abolish the
price-fixing arrangement based on the assumption that the cement
companies were deliberately keeping prices high despite the new
capacity coming on stream. This had no effect and prices continued
to rise because many distributors exported the new supplies and
some stockpiled supplies in expectation of even higher prices. A
reduction in the customs tariff on cement, to encourage imports, was
similarly ineffective.

75
15,000

50
25

10,000

1990

1992

1994

1996

Supply (left axis)

1998

2000

Demand (left axis)

2002

2004

2006

Average price (right axis)

With shortages persisting the MOCI reimposed the ceiling on the

factory price of cements of SR250 per ton and banned all cement
exports effective June 2008. It also worked closely with the cement
companies to ensure that cement supplies were rushed to the
Western province, where the shortage had been most severe. As a
result, cement prices dropped by nearly 40 percent in June from
SR440 per ton to SR280 per ton.
The huge increase in capacity under way combined with a recent
ban on exports is expected to exert considerable downward pressure
on cement prices in the years ahead. Companies and the MOCI may
attempt to influence prices, but we think that they will be unable to
prevent prices declining. We expect that prices will decline by 10
percent in 2009 and 2010 and then slip by around 5 percent per year
to 2013 owing to the continued expansion of production capacity.

The export ban

Cement exports
(first three quarters of 2008)

Madinah Cement
4%

Najran Cement
3%

Yamama Cement
12%

Riyadh Cement
8%
Southern Cement
11%
Saudi Cement
31%
Qassim Cement
11%

Eastern Cement
20%

Cement exports were on course for a record high when the export
ban was imposed. Prior to the ban, eight of the eleven cement
companies were exporting, compared to just four in 2006. None of
the companies from the central region were exporting three years
ago, whereas all four were earlier this year. Exports accounted for
12.3 percent of total production over the first half of the year,
compared to 11.8 percent for the whole of 2007.
The export ban was heavily criticized by cement manufacturers.
Many claim they have binding agreements with foreign importers and
were concerned they would incur penalties due to violating their
contractual obligations. They also emphasized that much of their
new expansions were originally intended for export, and that the ban
may cause them to lose their footing in foreign markets and send a
message that they are not reliable business partners.
Nearly six months into the ban, signs of inventory accumulation are
emerging especially in the Riyadh area. Attracted by the robust
construction activity, cement producers from other areas began to
redirect their excess production to Riyadh. This development is
viewed by cement producers in the area as an early sign of dumping,
which may ultimately lead to a price war if the ban remained in place.
Cement factories do not have the flexibility to reduce production due
to the difficulties associated with switching kilns off and the high

1 December 2008

proportion of fixed costs to total costs. We expect the export ban to

be lifted early next year.

The regional context

Each of the three largest cement producers in the Middle East are
rapidly increasing capacity and significant boost is also underway
elsewhere in the GCC. By 2010, Saudi Arabia is expected to have a
total installed capacity of 64 million tons, Iran 94 million tons and
Egypt 48 million tons. Out of 29 new cement plants in the GCC, UAE
is building 14 which are set to boost its capacity to 50 million tons by
2009, from about 19 million tons at present. The remaining plants are
distributed between Saudi, Kuwait, Qatar and Oman.
Overcapacity and its implications on prices are becoming a serious
concern for cement producers in the GCC region, especially as
Egypt and Iran are starting to eye these markets for exports.
Recently, Egypt lifted its ban on exports and Iran is abolishing a
$100/ton export tax to raise its exporters competitiveness. China,
India and Pakistan have always targeted markets in the GCC as
destinations for their cement exports.

Outlook
The cement industry faces a variety of threats and opportunities.
With the global economy slowing sharply and the region being hit by
the economic and financial crisis, the threats appear more serious at
present. Among these are:
The spillover effect of the global credit crunch may lead to the
shelving or cancellation of some major projects.
Export oriented producers will find it increasingly difficult to sell in
Europe or the US as these economies contract.
Companies from countries that have banned exports will find it
difficult to recapture market share.
A global initiative to reduce carbon emissions may force cement
producers to use more costly cleaner fuels.
A drop in prices appears imminent.
Nonetheless, there are some bright spots in the outlook for the
industry, these include:

Some planned increases in production capacity look unlikely to

go ahead. Confirmed orders to cement equipment manufacturers
are well below the level required for the production capacity
planned.

Collapsing freight rates have reduced export costs.

Long term opportunities for exports to Iraq and Afghanistan

remains a potential lucrative market.

We believe that the imbalance between supply and demand in the

Saudi market will be eliminated as activity commences on more
construction projects. The global economic and financial crisis will

1 December 2008

impact on project implementation, but we think that the bulk of

projects that are already under way will be completed and those
where investors have already secured financing will go ahead. In
addition, sharp falls in the prices of associated raw materials, such
as steel, will lower the costs of new projects. We think that a price
war among cement producers is unlikely, as producers recognize
that the consequences could be severe. Nonetheless, cement
companies will eventually accept a lower price ceiling. Whether
sound or not from an economic viewpoint, the price-setting
arrangement has served the strategic goals of the government and
industry well in the past and it is likely to remain.
The MOCI will continue to monitor cement supplies and is likely to
drop the export ban early next year (though it could reimpose it in the
event of further sharp price hikes). A new export licensing system will
help the government control supplies to the local market and
therefore prices. We view export contracts as important for the future
of the industry, particularly as other countries in the region are
building up their production capacities.

The company
Saudi Cement Company (SCC) specializes in cement manufacture
and trading. It was established in 1955 as a joint stock private
company and started production in 1961. SCC owns two cement
plants, one in Hofuf and the other in Ain Dar, and is headquartered in
Dammam. Currently, SCC is capitalized at SR1.02 billion, divided
into 102 million shares with a nominal value of SR10 each, fully
subscribed and paid up. Originally, the companys capital was SR1.6
billion, but this was reduced by SR571 million in 1997. The capital
reduction payments were made to shareholders over six years with
the last in December 2003. Major shareholders are the General
Organization for Social Insurance (GOSI), with an 8.5 percent stake,
Khalid Abdulrahman Al-Rajhi, with a 7.9 percent stake and the Public
Pension Fund with a 5 percent stake.

Production

Designed clinker capacity (2008)

Northern Cement
5%

Northern Cement
Najran Cement 5%

Yamama
13%
Yamama
13%

5%
Najran Cement
5%

Saudi Cement
Saudi17%
Cement

Madina Cement
Madina 4%
Cement
4%

17%

RiyadhCement
Cement
Riyadh
4%
4%
Tabuk
TabukCement
Cement
3%

3%

Eastern Cement

Eastern 8%
Cement
8%

Southern Cement
12% Cement
Southern

SCC will have the largest designed production capacity of any

cement producer in Saudi Arabia after the commissioning of two new
production lines is completed in 2009. Trial production, which started
during the second quarter of this year, is progressing satisfactorily
and it is expected that the first of the two lines will be fully operational
this year, with the second going on stream in 2009. The company
was also the largest producer in the Kingdom last year, at 5,289,000
tons (17.5 percent of total output). Clinker production in 2007 was
4,820,000 tons, 16 percent above design capacity. This was the
highest level of clinker production in the companys history. In order
to meet escalating local and regional demand for cement last year,
SCC drew down the stockpile of clinker built up in previous slower
years. Over the first three quarters of 2008, SCCs cement
production totaled 4,101,000 tons,

12%
Qassim
8%

Arabian Cement
11%

Arabian Cement
11%

Yanbu
10%

Yanbu
10%

Qassim
8%

Three types of cement are produced by SCC; Ordinary Portland

Cement (OPC), Sulphate Resistant Cement (SRC) and Oil Well
Cement (OWC). On average, OPC accounts for about 65 percent of
production and SRC virtually all of the remainder. OWC is produced
in very small quantities (less than 300 tons last year). About 70
percent of the cement produced is sold as bulk and 30 percent in

1 December 2008

bags. Most exports are made in bulk. SCC has ample limestone
reserves, according to management.

Production facilities
SCC has two cement plants, around 35 kilometers apart, at Hofuf
and Ain Dar in the Eastern Province.

Hofuf plant: 120 kilometers south of Dammam, established in

1961 as the original plant of the company. Commissioning of two
new lines is currently underway, which are expected to boost
designed capacity of the plant to about 28,000 tons of clinker per
day or 9 million tons/year.

Ain Dar plant: Established in 1981 by the Saudi-Bahraini

Cement Company (SBC) as an independent joint venture. In
1992, SCC acquired SBC and its assets at Ain Dar. Ain Dar
produces 6,000 tons of clinker per day or 2 million tons/year.

SCC cement production

5000

(thousand tons)

4000

3000

2000

1000

0
2002

2003

2004

2005

2006

2007

Q1-Q3
2008

Until earlier this year, SCC had 10 kilns in operation with a total
capacity of 13,825 tons of clinker per day (4.1 million tons/year). At
the end of last year SCC had nine operating cement grinding mills
with a combined annual grinding capacity of 6 million tons.
SCC owns a dedicated export facility at King Abdulaziz Seaport in
Dammam, which affords it great flexibility in controlling its export
operations and gives it a substantial edge over competitors. Transfer
of cement and clinker between the companys two plants and the
export terminal is carried out by railway using both the national
network and a dedicated railway system. In light of the new capacity
kicking in, and in line with its plans to boost exports, SCC recently
signed a contract to increase its railway wagon fleet from 105 to 210
containers. Rail transportation is more cost efficient than road
transportation for SCC.
SCC complies with the standards for controlling the dust and gas
emissions set by Saudi Arabias Meteorology and Environmental
Protection Administration. Kilns, mills and other quarry equipment
have been upgraded to ensure that emissions do not exceed local
and international anti-pollution standards. Employing the latest
technology for environmental protection was taken into consideration
early on in the planning of the fifth and sixth expansions.

New expansion
Work on two major expansion projects (the companys fifth and sixth)
at Hofuf has been completed and trial production is currently
underway. Thought to be the largest cement production capacity
expansion program in the world, the projects involve the installation
of two new integrated production lines (lines 7 and 8), with a total
daily capacity of 10,000 tons of clinker each. This is equivalent to 6.6
million tons of clinker or 7 million tons of cement per year. When they
become fully operational, the new lines are expected to boost SCCs
designed capacity to about 34,325 tons of clinker per day (about
11.3 million tons clinker per year; 12 million tons cement per year).
This gives SCC the largest production capacity in Saudi Arabia.

1 December 2008

Sinoma International of China was in charge of building the two new

integrated lines and upgrading some of the existing facilities, winning
a contract worth SR2.2 billion. Construction started early 2006. Trail
production commenced two months ahead of schedule and has been
running satisfactorily so far.

Capital expenditure
3000

(SR million)

2500
2000
1500
1000
500
0
2005

2006

2007

Jan-Sep
2008

The contract with Sinoma provided for procurement of the major

plant and equipment from European suppliers, including KHD and
Ploysius. Management told us that SCCs experience with the quality
and durability of prior jobs executed by these companies has been
extremely satisfactory. Sinoma subcontracted KHD Humboldt Wedag
of Germany to design and supply the clinker grinding plants and
supervise the erection and commissioning of the two lines in Hofuf.
Other components of the expansion include the supply and
installation of a cross-country conveyor belt, captive power plant,
crude oil pipeline (between Hofuf plant and Armacos Bqaiq facilities)
and quarry equipment. The cost of these supporting projects is
SR618 million. In addition, a housing complex to accommodate the
additional staff is underway at a cost of SR150 million.

Marketing and distribution

SCC marketing strategy is to raise its share of local and regional
markets. About half of SCCs sales are made to four major clients,
though no long-term off-take contracts exist. Management believes
that such long-term arrangements are against the interests of both
the company and the buyers due to the cyclical nature of the cement
industry.
Most of the current capacity expansion is intended for export. By
virtue of being export oriented from inception, the company has
relationships with many worldwide export destinations. Typically,
most exports go to neighboring GCC countries (mainly Bahrain and
Qatar), but shipments were made to African and European countries
in the past.

Impact of the export ban

SCC was least affected by the current export ban as it has continued
to export to Bahrain, which was the only country to receive a waiver
from the current export ban owing to long-term contractual
obligations between business entities from the two countries. The
waiver provided for exports of 25,000 tons per week to Bahrain (all
cement companies can compete to supply part or all of this). Much of
the exports went to SCC by virtue if its dedicated export terminal.
Last year, SCC exports accounted for 33 percent of total Saudi
cement exports; it had nearly 40 percent over the first three quarters
of this year.
Nonetheless, with exports to other destinations banned and the
commissioning of the new lines progressing, clinker and cement
inventory are building up rapidly. By the end of September, clinker
stocks totaled 497,000 tons compared to 138,000 tons at the same
point of last year. Similarly, the cement stockpile rose to 212,000
tons from 65,000 tons over the same period. Since finished cement
has a relatively short shelf life, the stocks will pose a serious
challenge for the company if the ban remains for much longer.

1 December 2008

Competitive position
SCC is emerging as Saudi Arabias largest and strongest cement
company in terms of production and export capacities. SCC enjoys a
competitive edge over other producers owing to its proximity to a
major sea port and dedicated export terminal. It also benefits from its
location in the Eastern province, where many construction projects
are under way, both in the oil sector and around the industrial city of
Jubail. SCCs large production capacity gives it an advantage during
prolonged market downturns, as it can shut down some older
production lines (though the management has ruled out retiring some
of the old capacity at present).

Management
The company has a strong management team and a board that
includes 11 representatives from prominent business families in the
Kingdom. General manager, Mohammed Al-Garni, is a veteran of the
Saudi cement industry and has been with SCC since 1984. He took
up the position of general manager in April 2006 and also personally
oversees the expansion project. Chief financial office, Osama Sid
Ahmed, who recently joined SCC, has over 25 years experience in
auditing and finance.
Saudis constitute about 59 percent of the company employees. SCC
maintains an extensive on-the-job training program for its technical
staff. Senior staff members are offered professional training
overseas by specialized international training firms. The company
abides by the applicable provisions of the company governance law
and is keen to implement management best practices.
SCC has held the ISO 9001 quality control certification since 1994,
and has since upgraded its quality system to comply with the ISO
9001:2000. Production of OPC and SRC is in line with American and
British standards as well as the specifications of the Saudi Standards
Organization. Oil Well Cement (OWC) complies with the standards
set by the American Petroleum Institute (API). The companys lab is
equipped with up-to-date quality control technology including a
computerized automatic sampling and analyzing system supported
by a robotics control system to eliminate human error.
SCC obtained numerous awards over the years, including the King
Abdulaziz Award for Distinguished Factory (twice), the Saudiization
Award (twice) and the award for Best Exporting Company.

Affiliates
SCC owns 36 percent of United Cement Company of Bahrain, which
transports and distributes cement and related products by land and
sea in Bahrain. Additionally, it holds a 33.3 percent stake in Cement
Products Manufacturing Company, a Saudi company based in
Jeddah. Jointly owned with other cement manufacturers, this
company makes paper sacks for cement packaging. SCC is not
making any other investments at present, as it is more focused on
the ongoing expansion of its production lines. Company
management believes that lucrative opportunities will emerge during
the next downturn in the industry and that it will be well positioned to
capitalize on them.

10

1 December 2008

Disclosure and transparency

Disclosure and transparency standards are good. The companys
annual reports contain plentiful information and are available in both
Arabic and English, while the website is informative, but does not
reflect the most recent financials or developments at SCC. We were
able to meet with the company management as part of our due
diligence process.

Financial analysis
Revenues from cement sales rose by 13.5 percent to SR1.4 billion in
2007, due to a combination of higher export volumes (up by 20.5
percent) and prices. Export revenues amounted to SR268 million last
year, up by 32 percent from 2006. Exports of finished cement
accounted for about one-fifth of SCCs total sales. Clinker exports
almost doubled last year, from 20.3 thousand tons to 40.3 thousand
tons, but their contribution to sales was meager as prices are much
lower than those for finished cement. Domestic sales accounted for
80 percent of total operating revenue, with exports accounting for the
balance.

Operating revenues and costs

1400

The export ban has hit sales growth so far this year. By the end of
the third quarter, SCC sales were 3,968,000 tons, down 0.7 percent
compared to the corresponding period last year. The decline in sales
volume was primarily due to exports declining by 6.8 percent; local
sales increased by about 1 percent during the same period.
Domestic sales continue to constitute around 80 percent of total
sales.

1200

(SR million)

1000
800
600
400
200
0
2003

2004

2005

2006

Operating revenue

2007

Jan-Sep
2008

Cost of operations

Excluding depreciation, cost of operations totaled SR494 million

which represents 36 percent of sales revenue. When depreciation is
factored in, operating costs goes up to 54 percent of revenues.
Depreciation, a non-cash book entry has the effect of deflating gross
margin when treated as operating cost. Net of depreciation, SCC
posted a healthy gross margin of 64 percent, which is consistent with
the companys historical average.

Net income
800
700
600

(SR million)

500
400
300
200
100
0
2002

11

2003

2004

2005

While sales revenue grew at an average of 17 percent over the past

five years, operating costs (net of depreciation) grew by 25.5 percent
over the same period. Last year alone, operating costs increased by
26.1 percent. This was mainly due to the escalating costs of certain
imported production inputs such as bauxite, a material for the
treatment of the high silica content of the limestone at the Ain Dar
quarry. Import costs of bauxite had nearly tripled over the few years
to the third quarter to $65 per ton . Rising freight costs also
contributed to the increase in costs. Selling, general and
administrative expenses grew by 13.7 percent in 2007, but have
remained relatively stable as a percentage of total revenues
accounting for 5.2 percent.

2006

2007

Q1-Q3
2008

Net income growth slowed to 7.6 percent last year, compared to 32

percent one-year earlier and an average of 16.3 percent over the last
five years. This was due to the jump in the cost of key inputs; in
addition, investment revenues from subsidiaries and murabaha
instruments fell 24 percent. Revenues from investments accounted
for 2.8 percent of total revenues in 2007, its lowest level over the
past five years. Net income during the first 9 months of 2008 totaled
SR490 million, down by 5.5 percent from the corresponding period

1 December 2008

last year, owing to lower export sales and higher input costs.

Sales ratios
1.6

0.6

1.4
0.5
1.2
0.4
1.0
0.8

0.3

0.6
0.2
0.4
0.1
0.2
0.0

0
2003

2004

2005

2006

Sales to fixed assets

2007

2008*

Sales to total assets

12 months ending Q3 2008.

An examination of the sales-to-fixed assets ratio indicates that SCCs

efficiency in utilizing its plant, property and equipment (PP&E) has
improved over the years; a ratio of 1.4 times was posted at end of
2007. The sales-to-total assets ratio, a more severe measure of
asset utilization, is starting to show signs of strain, declining to 0.35
times by end of the same period. However, this is acceptable given
the massive capacity expansion underway.
In terms of profitability, the net profit margin has remained relatively
flat over the past five years at a healthy 50 percent. Other profit
measures were similarly strong in 2007, with return on average
assets of 21 percent; return on average equity and return on
invested capital were both 27 percent. Both measures, however, are
destined to decline with SCC starting to take on long-term debt to
fund its capacity expansion.
Profitability ratios
(percent)
Net profit margin
Return on average assets

2004
46.5
19.7

2005
43.4
21.7

2006
53.1
25.9

2007
50.4
20.9

Q3 20081
48.1
17

Return on average equity

Return on invested capital

21.9
21.8

24.2
24.2

29.0
29.0

26.6
26.6

24.9
22.8

12 months ending Q3 2008.

SCCs liquidity position has come under severe pressure last year
and in the first three quarters of this year owing to a combination of
decreasing cash and cash equivalents and swelling short-term debt
obligations and accounts payable. Short-term debt totaled SR977
million at the end of the third quarter of 2008, up by 40 percent since
the end of last year. Accounts payable rose by 231 percent last year
and were up by a further 5.5 percent during the first nine months of
this year.
By the end of September 2008, the current ratio had dropped to 0.5,
from 0.9 at end-2007, indicating a sharp weakening of SCCs ability
to meet short-term obligations from its own resources. The acid-test
ratio (a more severe measure of liquidity) and net working capital
were in an even more precarious position of 0.13 and -SR732
million, respectively, at end September. Nonetheless, we do not think
that liquidity is a serious concern as the company continues to have
access to unutilized portions of outstanding loans as well as cash
flow from operations and reserves.

Liquidity
8
800
7
500
6

-100

(SR million)

200

3
-400
2
-700

1
0

-1000
2003

2004

2005

Current ratio
*

12 months ending Q3 2008.

12

2006

2007

2008*

Net working capital - RHS

The large increase in both short-term debt and accounts payable is

due to the massive capacity expansion programs underway. The
liquidity position has worsened because the bulk of the companys
debt is short-term Sharia-compliant loans. SCCs debt portfolio
include approved loans of SR1.15 billion from Riyad Bank and
SR400 million from Banque Saudi Fransi, both under the tawarruk
formula. A third loan for SR300 million from The Saudi Industrial
Development Fund (SIDF) was approved late last year; SCC started
drawing from it in the third quarter of this year. This is the first longterm debt that the company has assumed in four years. SCC has two
more loan applications for SIDF funding pending approval.

1 December 2008

Leverage ratios
(percent)

Long-term debt to total

Debt to equity ratio
Equity to total assets
Equity to total capital
1

2004

2005

2006

2007

Q3 20081

0
10.3
90.7
100

0
12.3
89
100

0
11.7
89.5
100

0
41.0
70.9
100

7.9
62.5
61.5
91.9

12 months ending Q3 2008.

Activity ratios were mixed in 2007. Inventory turnover accelerated to

2.1 times from 1.7 times owing to higher sales (particularly exports).
As a result, the number of days to sell inventory decreased to 171
from 212 (in 2004, it took 245 days for SCC clear its inventory). With
the new capacity starting to come on stream, we expect that
performance of this measure will once again deteriorate, especially
since most of SCCs new production was originally intended for
export. Turnover of accounts receivable declined slightly last year,
from 9.3 times to 8.7 times, which caused the average period
required to collect debts to increase to 42 days from 39 days.
Turnover of sales-to-net working capital, deteriorated last year due to
the companys increasing reliance on short-term debt to fund capital
expenditure, a policy that has the effect of straining working capital.
Activity ratios
Inventory turnover (times)
Days to sell inventory
Receivables turnover (times)
Average collection period
(days)
Sales to net working capital
1

Asset composition (third quarter-2008)

Long term
investments , 1.3%

Plant, property and

equipment, net,
20.3%

2004
1.5
245
10.8

2005
2
185
12

2006
1.7
212
9.3

2007
2.1
171
8.7

Q3 20081
1.9
190
9.4

34
1.2

30
2.3

39
1.4

42
-8.9

39
-1.9

12 months ending Q3 2008.

The long-term adequacy of the capital structure, as measured by the

equity ratio, is strong with equity at 62 percent of total assets as of
September 30; though it has declined from 90 percent over the past
five years. The debt-to-equity ratio has surged to 62.5 percent of
total shareholders equity on September 30, from a low of 10 percent
in 2004. In contrast, equity-to-total capital amounts to 91.9 percent,
down from 100 percent at end year, due to the company starting to
assume long-term debt for the first time since 2003.
SCC is the largest Saudi cement company by assets, which totaled
SR4.4 billion on September 30, 2008, up by 14.3 percent from end2007. Assets have grown by an annual average of 26.4 percent over
the past 33 months owing to the large capacity expansion. This is
reflected in the surge in the value of projects underway from SR361
million in 2005 to SR2.8 billion on September 30, 2008. Projects
underway account for 64 percent of SCCs total assets.

Inventory, 8.8%

Accounts receivable,
3.1%
Cash, 0.8%
Other, 1.7%

Projects underway,
64.1%

Assets, liabilities and shareholders equity

(SR million)

13

Assets

2004
2,248

2005
2,212

2006
2,705

2007
3,861

Q3 2008
4,414

Liabilities
Shareholders' equity

210
2,038

242
1,970

283
2,422

1,122
2,739

1,698
2,716

1 December 2008

Liability composition (third quarter 2008)

Other, 5%
SIDF long-term
loans, 14%

Accrued expenses
and other, 13%

Accounts payable,
10%

Tawarruk shortterm loans, 57.6%

Liabilities grew by an average of 74 percent over the five years to

September 30, due to the increase in both short-term and long-term
debt assumed to finance capacity expansion. Liabilities totaled
SR1.69 billion on September 30, with short-term debt (to be repaid
within 12 months) accounting for 57.6 percent of the total, which
explains the companys strained liquidity position. Shareholders
equity, which is the net worth of the company, totaled SR2.72 billion,
down by about 1 percent over the previous year.
SCC met the 50 percent statutory reserve requirement for listed jointstock companies in 2006, but has continued to put aside 10 percent
of net income into a new account dubbed voluntary reserve, which
currently has a balance of SR70 million. This reserve could be used
to fund plant expansion at Hofuf, according to the management.

Results for first three quarters of 2008

Total sales revenue from operations remained almost flat during the
first nine months this year at SR1.02 billion versus SR1.03 billion
during the same period of last year. However, sales in the third
quarter were down by 7.1 percent on the second quarter, at SR325
million. Net income during the first nine months of the year was
SR490 million, down by almost 5 percent from the same period in
2007; net income in the third quarter was down by 15.6 percent on
the second quarter. Competition, escalating input costs, such as
bauxite and the temporary freeze of cement exports are to blame for
the lackluster growth in sales and net income during this period.
On September 30, SCCs assets totaled SR4.4 billion, making it the
largest Saudi cement company in terms of asset size. This is an
increase of 32.4 percent over the corresponding period last year.
Liabilities totaled SR1.7 billion, up 123 percent on annual basis, but
up only 2 percent on quarterly basis as the period of high spending
pertinent to the expansion of production capacity is approaching its
end. Shareholders equity totaled SR2.7 billion by September 30, up
by 15 percent from the corresponding period in 2007, due to an
increase in retained earnings.

Valuation
We base our valuation of Saudi Cement on a combination of the
discounted cash flow (DCF) and relative valuation approaches. We
believe DCF analysis is the best way of determining an appropriate
fair value for a share price. Relative valuation allows us to
incorporate the prevailing market conditions of companies in the
same sector in our valuation. We have assigned 70 percent weight to
the DCF and 30 percent to relative valuation.

DCF valuation calculations

Risk free rate: 3.09
Equity risk premium: 9.7
Beta: 0.75
Terminal growth rate: 3 percent
Projected cash flows: Taking into account the outlook for the
economy, the plethora of megaprojects planned or underway, the
boom in the construction and real estate sectors, the rapid growth in
14

1 December 2008

population, the huge expansion in cement production capacities and

cement price trends, we projected that net income growth of the
company will average around 7 percent for the next five years. Sales
growth of cement companies is a function of production and prices.
Output of a cement plant is limited by its installed capacity (about
11.8 million tons of clinker per year in the case of SCC), although
companies may be able to exceed that level by 10-15 percent
(equipment manufacturers allow for some extra capacity as a
precautionary measure). As SCC has no plans to add to its designed
production capacity, its output is likely to be relatively flat once the
new production line has hit full capacity in 2010.
We expect that cement prices will decline by 10 percent in 2009 and
2010 and then slip by around 5 percent per year to 2013 owing to the
continued expansion of production capacity. SCCs operating costs
should improve given that more efficient plants have been installed
making it possible to shift production away from Ain Dar, which we
believe has a higher cost structure. Also, we assume that SCC will
be able to obtain more funding from SIDF. In our opinion, our
projections of income for the fiscal years 2008 through 2014 present
a reasonable estimate of the companys future earnings capacity
(see valuation summary annex)
We selected the net cash flow to equity (NCFe) approach as the
appropriate measure of economic income to use in this valuation.
Net cash flow represents the maximum amount of cash that could be
distributed to shareholders without affecting the companys normal
operational cash requirements. We calculated net cash flow to equity
by adding back depreciation and deducting capital expenditures,
debt repayments and increases in working capital from net income.
SCC has no further projects under way; therefore we expect that its
capital investments will be minimal going forward and that no
additional debt will be assumed. We expect SCCs requirement for
net working capital will decrease substantially over the projection
period.
We calculated that the present value of the companys NCFe for the
period November 2008 through November 2014 is approximately
SR5.7 billion. Of course, SCC will continue to generate cash flows
beyond the discrete projection period. Therefore, the DCF analysis
also projects a terminal value. In estimating an appropriate terminal
growth rate for the companys net cash flows, we considered several
factors, including the expected growth of the overall economy and
the expected long-term rate of inflation. Based on this information we
selected a long-term rate of 3 percent as appropriate for SCC net
cash flow.
Combining the present value of the terminal cash flow with the
present value of the discrete cash flow projections results in a total
value of SCC of SR14.6 billion (net of debt). Based on the above, the
DCF results in a fair market value of SCCs common stock on the
valuation date of SR142.8.

Relative valuation calculation

Relative valuation, or comparable company analysis, values a
company in reference to other publicly traded companies with similar
operating and financial characteristics. Some of the most commonly
used financial ratios for this process are the price-to-earnings ratio
(PE) and price-to-book value ratio (PB). A lower ratio than its peers

15

1 December 2008

and the industry average may suggest that a stock is undervalued

and vice versa. The rationale for using the PE is that earnings power
is the main driver of investment value. The PB ratio measures how
much investors are willing to pay for a unit of the companys net
asset value.
We have used our estimates of leading twelve months earnings per
share and book value per share to arrive at a relative valuation of
SCC. Based on a one year comparable forward PE and a one year
trailing PB, we have arrived at a fair value of SR114.5. This valuation
is based on our projections of company performance in 2009, which
would reflect the prevailing market conditions of peer group. For our
comparables, we used companies listed under the cement sector on
the TASI, as follows:

Company

Price

Market
Cap (SR
mn)

Yamama Cement
Arab Cement

31.2
35.6

2,496
4,806

EPS
(SR)

Trailing
PE

Leading
PE*

BV
(SR)

PB

4.56
4.82

6.84
7.37

6.26
6.25

29.28
20.72

1.07
1.72

Saudi Cement

58.5

5,967

6.45

9.06

8.66

26.62

2.20

Qassim Cement

88.75

3,994

12.76

6.95

7.15

36.27

2.45

Southern Cement

51.75

7,245

5.48

9.43

15.63

3.31

Yanbu Cement

35.8

3,759

5.24

6.83

6.21

21.29

1.68

Eastern Cement

39.4

3,388

5.48

7.19

7.83

21.82

1.81

Tabuk Cement
Sector (average)
Market
(average)

20.3

1,827

2.09
5.9

9.72
7.9

11.52
22.9

1.76
2.00

2.32

8.91

14.15

1.52

7.1

* Source: Tadawul and Reuters

SCCs stock is currently trading at a leading PE of 8.66, the highest

of the cement companies, suggesting that its share price is relatively
high. From a PB perspective, the stock is above the sector average.
Based on our analysis of the companys future performance, we
have assigned SCC forward earnings per share of SR8.94 and
forward book value per share of SR36.02.
Applying SCCs forward looking earnings per share to the industrys
one year leading PE gives a price of SCCs share of SR63. Applying
SCCs forward book value per share to the industrys average of one
year trailing PB gives a price of SCCs share of SR72. Averaging
these results gives a price of SR67.5 per share of SCCs stock.

Recommendation
Based on the two valuation parameters weighted 70:30 in favor of
the DCF, we arrive at a fair value price of SR120.2. To get our 12month target price, we ran a DCF as of 12 months after the valuation
date, then discounted the resulting value by the current discount
rate; we leave the relative valuation unchanged as it is already
forward looking. This generates a 12-month target price for SCC of
SR114.5. With SCC currently trading at SR58.5, we recommend that
investors buy.
Valuation method
Free cash flow to equity (DCF)
Relative valuation (PE/PB)
12-month target price (SR)

16

Price per
share (SR) Weights Contribution
134.7
67.5

70%
30%

94.3
20.3
114.5

1 December 2008

The Jadwa recommendation bar

12-month
target price
SR115

>SR132
Sell

SR132-124
Consider
selling

SR123-106
Hold

Current price
SR58.5

SR105-97

<SR97

Consider
buying

Buy

The bar on the front page of this report is Jadwas method of

conveying our investment recommendation as clearly and concisely
as possible. The bar is based on traffic lights, where green means
go (buy), yellow is slow (hold), and red is stop (sell). Our 12month target for the stock is the middle of the yellow area. This is the
price that we expect the shares to trade at in 12 months time. This is
different to fair value, which is our estimate of the fair value of the
companys share price as of the valuation date.
We use five colors in our recommendation bar, with those on either
side of the yellow area signifying that an investor should consider
buying or selling the stock. The price range for each of these
alternatives is within the colored section. These price ranges have
been adjusted to take account of share price volatility (using the
stock's variance-mean ratio). The more volatile the share price, the
larger the price ranges.

17

1 December 2008

Performance matrix
This table ranks SCCs performance against what we believe are the key success factors for the
sector it operates in (cement). A green rating is positive, yellow neutral and red negative.

Factor
Valuation
Management

Competitive
position
Technology

Quarry
concessions
Marketing and
distribution
Location

Expansion
potential

Compliance with the antipollution requirements

Labor issues

Saudiization, turnover and

visa issues.

Profitability

Activity

Performance

Liquidity

Coverage

Leverage

SCCs status

Long run supply of raw

Have sufficient limestone reservoir, but quality of raw
materials.
material at Ain Dar plant is sub-standard
The extent to which income Nearly 50 percent of local sales is made by four
depends on long term sales or distributors, but, in line with standard industry
distributorship agreements.
practice, no formal relationships exist.
Proximity to markets with high Ideally situated in the hub of the oil and
construction activity and
petrochemical industries and close to export
exports terminals.
terminals and other GCC states.
What future projects or plans Trial production for the largest capacity expansion in
does the company have to
the Middle East is underway. Inorganic growth is an
maintain growth momentum option if the right opportunity emerged.
locally or regionally.

Environment
protection

Disclosure &
transparency

18

Measures

Fair market value of the

The stock is undervalued.
company
How efficiently and effectively Senior executives are cement industry veterans and
the company is run.
were able to ensure completion of new expansion
ahead of schedule.
The position of business
Private export terminal provides advantage over
relative to others in the same competition. Has a strong brand name.
industry.
Efficiency, durability and
A Chinese company is executing the new expansion,
reliability of plant and
though most of the equipment was supplied by wellequipment.
known European manufacturers. Existing plant is in
good working order.

The company adheres to environmental policy. Dedusting equipment at old facilities have been
upgraded and new lines have the latest anti-pollution
technology.

There are no problems with labor issues.

Saudiization is 60 percent and recruitment of staff for
the expansion is progressing well.
Company practice in providing Disclosure and transparency standards are good and
information required by
adequate company governance and best practice
investors.
handbooks are in place.
The end-result of a company's At 64 percent gross margin (net of depreciation) and
operations utilizing all
50.4 percent net income, the company has very
resources at its disposal.
healthy profitability ratios.
How efficient management is Inventory turnover is slowing due to a combination of
in using its assets.
the export ban and new lines entering production.
The sales to working capital ratio is falling sharply,
reflecting very high short-term liabilities.

Efficiency in generating sales. Sales as percent of both fixed assets and total
assets are set to drop sharply due inventory build up
and large capital outlay.
Company's ability to meet
With both current and quick ratios falling below one,
short-term and current
liquidity is coming under significant pressure.
obligations on time.
Long term solvency and ability The coverage position is healthy . SCC took on its
to deal with financial
first long-term loan in the third quarter and has two
problems.
applications are pending approval at the SIDF.
Capital adequacy and ability With long-term debt accounting for 8 percent of total
to meet long-term obligations capital and equity accounts for 84 percent of total
and take advantage of
assets, the leverage position is comfortable.
opportunities as they arise.

Rating

1 December 2008

The discounted cash flow model

The DCF method estimates value on the basis of future cash flows over an investment horizon using
empirical market data, macroeconomic and industry evidence and the underlying fundamental
trends of the subject company. The DCF method then applies a present value discount rate, known
as the required rate of return on investment, to project future cash flows, which results in an estimation of net present value of projected cash flows.
The value of the company is estimated by projecting the cash flows that the company is expected to
produce and discounting those cash flows back to the valuation date using a discount rate that reflects the related risk. An in-depth analysis of the companys revenues, fixed and variable expenses
and capital structure were conducted.

DCF valuation calculations

Present value discount rate: We estimated the cost of SCC equity capital (net of long-term debt)
using the capital asset pricing model which incorporates a risk free rate, a long-term risk premium
and a companys stock beta.

Risk free rate: The risk free rate is used as to measure the opportunity cost of investing. Since
DCF analysis is based upon a long-term investment horizon, the appropriate risk-free rate is that
of a long-term government security. We use the 10-year Saudi riyal bond issued by SAMA,
which yielded 3.09 percent on the valuation date.

Equity risk premium: We calculate the equity risk premium as the average of the arithmetic
and geometric means of TASI historical returns, less the long-term rate of return on the10-year
SAMA bond. The arithmetic mean of the TASI over the period from 1980 to November 26 2008
was 14.42 percent. The geometric mean over the same period was 11.07 percent. The average
of the two is 12.74 percent, which represents the market return. Accordingly, the equity risk
premium is 9.66 percent.

Beta: Beta is a measure of the risk inherent in the companys investment returns. The market
(TASI) beta is always one. A stock beta that is lower than one, as in the case of SCC (0.75) indicates that the stock tends to be about 25 percent less volatile (up or down) than the TASI.
Applying beta to the long-term equity risk premium gives a beta-adjusted long-term equity risk
premium of 7.20 percent.

The capital asset pricing model resulted in a total estimated cost of equity capital of approximately
10.28 percent. This is arrived at by adding the beta-adjusted equity risk premium and the risk free
rate.

19

1 December 2008

DCF valuation
SR' 000
Net income
+ Depreciation
- Capital expenditure
-/+ Increase/decrease in working capital
+ Increase in long-term debt
= Net cash flow to equity

2008
2009
721,852
911,669
174,387
220,149
(189,737) (113,842)
432,900
146,808
300,000
300,000
1,439,403 1,464,784

2010
2011
2012
2013
2014
993,035
928,189
892,637
892,733
848,023
239,765
224,131
215,560
215,584
204,804
(62,613)
(65,744)
(69,031)
(72,482)
(76,107)
(357,344)
62,877
66,021
69,322
72,788
812,843 1,149,454 1,105,187 1,105,156 1,049,508

Estimating the discount rate

k = rf + (rm - rf)B
Risk-free rate (rf)
Market return (rm)
B (beta)
Discount rate (k)

Discounted Value of Equity (DFCFe)

Total DFCF
Terminal Cash Flow
Value in year 5
Assumed growth into perpetuity
Present value of terminal cash flow
Total value of business (SR '000)
Repayment of outstanding debt
Total value of business net of debt (SR '000)
Shares outstanding
Value per share (SR) as @ 26-11-2008
Closing price as @ 26-11-2008

20

3.085%
12.7%
0.75
10.28%
2008
2009
1,427,336 1,317,055
5,669,441

1,105,156
3.00%
9,498,504
15,167,483
(600,000)
14,567,483
102,000,000

142.82
58.50

2010
662,710

2011
849,758

2012
740,843

2013
671,739

2014
637,915

1 December 2008

Financial statements
Balance sheet
As of December 31

ASSETS
Current Assets:
Cash and cash equivalents

2003

2004

2005

2006

2007

Jan-Sep
2008

SR '000

SR '000

SR '000

SR '000

SR '000

SR '000

387,641

603,377

289,831

688,549

271,981

36,641

94,773

78,930

107,530

149,652

162,315

137,453

236,886

217,742

242,926

213,442

249,271

386,553

9,940

10,970

10,747

15,013

198,729

73,697

Total Current Assets

729,240

911,019

651,034

1,066,656

882,296

634,344

Long term investments

47,656

50,303

49,182

55,310

59,722

55,876

1,381,925

1,266,852

1,138,753

1,036,414

948,683

895,483

360,821

542,177

1,970,033

2,827,806

28,180

20,128

12,076

4,024

Total Fixed Assets

1,457,761

1,337,283

1,560,832

1,637,925

2,978,438

3,779,165

TOTAL ASSETS

2,187,001

2,248,302

2,211,866

2,704,581

3,860,734

4,413,509

694,621

977,380

19,119

17,710

41,150

53,646

177,747

168,004

Accrued expenses and other

124,368

116,259

129,102

158,989

162,808

220,810

Total Current Liabilities

143,487

133,969

170,252

212,635

1,035,176

1,366,194

Long-term SIDF loans

18,000

240,000

Employees end of service indemnities

75,682

75,999

71,988

70,631

86,976

91,313

237,169

209,968

242,240

283,266

1,122,152

1,697,507

1,020,000

1,020,000

1,020,000

1,020,000

1,020,000

1,020,000

Statutory reserve

381,166

424,916

473,345

510,000

510,000

510,000

Voluntary reserve

70,000

70,000

70,000

70,000

70,000

70,000

Retained earnings

478,666

523,418

406,281

821,585

1,138,582

1,116,002

TOTAL SHAREHOLDERS' EQUITY

1,949,832

2,038,334

1,969,626

2,421,585

2,738,582

2,716,002

TOTAL LIABILITIES &

SHAREHOLDERS' EQUITY

2,187,001

2,248,302

2,211,866

2,704,851

3,860,734

4,413,509

Accounts receivable, trade

Inventories (cement; finished & underprocessing)
Prepaid expenses and other receivables

Plant, property and equipment, net

Projects underway
Acquisition surplus, net

LIABILITIES & SHAREHOLDERS EQUITY

Islamic tawarruk loans
Accounts payable

TOTAL LIABILITIES
SHAREHOLDERS' EQUITY
Share capital (paid up)

21

1 December 2008

Income statement
As of December 31

Operating Revenue
Cost of operations

2003

2004

2005

2006

2007

Sept
2008

SR '000

SR '000

SR '000

SR '000

SR '000

SR '000

866,897

940,454

1,116,342

1,200,235

1,361,950

1,018,077

(327,410)

(338,610)

(454,816)

(392,151)

(494,399)

(384,221)

Gross operating income

539,487

601,844

661,526

808,084

867,551

633,856

SG&A expenses

(59,518)

(59,268)

(57,539)

(62,757)

(74,191)

(71,347)

(104,133)

(132,245)

(132,759)

(132,061)

(120,569)

(80,395)

375,836

410,331

471,228

613,266

672,791

482,114
(2,703)

Depreciation
Operating income, net
Amortization of acquisition surplus & others

(926)

(938)

(8,162)

(11,021)

(5,259)

40,430

45,204

36,904

50,259

38,393

23,058

Income before Zakat

415,340

454,597

499,970

652,504

705,925

502,469

Provision for Zakat

(12,802)

(17,095)

(15,898)

(14,745)

(19,528)

(12,849)

Net Income

402,538

437,502

484,072

637,759

686,397

489,620

Shares outstanding ('000 units)

102,000

102,000

102,000

102,000

102,000

102,000

3.95

4.29

4.75

6.25

6.73

4.80

Other revenues

Earnings per share (EPS) SR

Cash flow statement

For the fiscal year ending December 31,
2003
SR '000

Net cash from operating activities

Net cash provided (used) in investing activities
Net cash from financing activities
Cash and cash equivalents at yearend

22

2004
SR '000

2005
SR '000

2006
SR '000

2007
SR '000

Sept
2008
SR '000

473,364

591,414

536,371

774,488

681,245

585,666

9,252

6,179

(317,571)

(783,271)

(807,224)

(859,775)

(363,861)

(381,857)

(532,346)

(176,499)

(323,411)

38,769

387,641

603,377

289,831

74,549

271,981

36,641

1 December 2008

Ratio analysis
For the fiscal year ending December 31
2003

2004

2005

2006

20081

2007

Liquidity
Current ratio
Quick ratio (Acid-Test)

5.1

6.8

3.8

5.0

0.9

0.5

3.4

5.1

2.3

3.9

0.4

0.13

585.8

777.1

480.8

854.0

(152.9)

(731.9)

Sales to net working capital

1.5

1.2

2.3

1.4

(8.9)

(1.8)

Inventory

1.8

1.5

2.0

1.7

2.1

1.9

Receivables

7.2

10.8

12.0

9.3

8.7

9.4

51

34

30

39

42

39

206

245

185

212

171

190

Sales to fixed assets

0.6

0.7

1.0

1.2

1.4

1.5

Sales to total assets

0.40

0.42

0.50

0.44

0.35

0.31

Net working capital (SR million)

Activity
Turnover:

Average collection period

Days to sell inventory

Performance (Asset utilization ratios)

Profitability (per share)

Gross Margin

62.2%

64.0%

59.3%

67.3%

63.7%

62.3%

Operating margin before depreciation

55.4%

57.7%

54.1%

62.1%

58.3%

55.3%

Operating margin after depreciation

43.4%

43.6%

42.2%

51.1%

49.4%

47.4%

Pretax profit margin

47.9%

48.3%

44.8%

54.4%

51.8%

49.4%

Net profit margin

46.4%

46.5%

43.4%

53.1%

50.4%

48.1%

Total assets

18.4%

19.5%

21.9%

23.6%

17.8%

14.9%

Equity

20.6%

21.5%

24.6%

26.3%

25.1%

24.2%

Investment

27.5%

21.8%

24.2%

29.0%

26.6%

22.8%

Return on average assets

22.6%

19.7%

21.7%

25.9%

20.9%

17.0%

Return on average equity

27.7%

21.9%

24.2%

29.0%

26.6%

24.9%

Return on invested capital (ROIC)

27.5%

21.8%

24.2%

29.0%

26.6%

22.8%

Return on:

Leverage (Balance sheet)

Long-term debt to total capital
Debt to equity ratio

23

0.9%

0.0%

0.0%

0.0%

0.0%

7.9%

12.2%

10.3%

12.3%

11.7%

41.0%

62.5%

Equity to total assets (Equity ratio)

89.2%

90.7%

89.0%

89.5%

70.9%

61.5%

Equity to total capital

99.1%

100.0%

100.0%

100.0%

100.0%

91.9%

12 months ending Q3 2008.

1 December 2008

Summary of quarterly results

Balance Sheet

Q4 2007

Q1 2008

Q2 2008

Q3 2008

SR '000

SR '000

SR '000

SR '000

SR '000

Current Assets
Inventory
Investments
Fixed Assets

436,509
219,042
52,668
2,676,561

633,025
249,271
59,722
2,918,716

587,871
272,056
63,413
3,365,754

256,586
349,954
63,610
3,562,694

247,791
386,553
55,876
3,723,289

Total Assets
Current Liabilities
Non-Current Liabilities
Other Liabilities
Shareholder's Equity
Total Liabilities & Shareholder Equity

3,332,112
676,522
85,493
2,570,097
3,332,112

3,860,734
1,035,176
86,976
2,738,582
3,860,734

4,289,094
1,799,407
90,008
2,399,679
4,289,094

4,232,844
1,570,501
91,070
2,571,273
4,232,844

4,413,509
1,366,194
240,000
91,313
2,716,002
4,413,509

Income Statement

Q3 2007
SR '000

Q4 2007
SR '000

Q1 2008
SR '000

Q2 2008
SR '000

Sales
Cost of sales

Total Income

Q3 2008
SR '000

338,298

333,487

342,691

350,165

325,221

161,842

145,498

152,403

161,440

150,773

176,456

187,989

190,288

188,725

174,448

Other Revenues

7,268

9,489

10,484

11,551

1,385

Total Revenues

183,724

197,478

200,772

200,276

175,833

17,794

22,537

23,144

23,295

24,908

Other Expenses

2,408

208

1,067

1,998

Total Expenses

20,202

22,745

23,144

24,362

26,906

163,522

174,733

177,628

175,914

148,927

4,088

6,248

4,331

4,320

4,198

159,434

168,485

173,297

171,594

144,729

Admin and Marketing Expenses

Net Income Before Zakat

Provision for Zakat
Net Income
1

Including depreciation & amortization

24

Q3 2007

1 December 2008

For comments and queries please

contact:
Brad Bourland, CFA
Chief Economist
jadwaresearch@jadwa.com
or the author:
Gasim Abdulkarim
Equity Research Director
gabdulkarim@jadwa.com
Head office:
Phone +966 1 279-1111
Fax +966 1 279-1571
P.O. Box 60677, Riyadh 11555
Kingdom of Saudi Arabia
www.jadwa.com

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25