KUWAIT: Yanbu Cement Company (YCC) is one of the biggest cement producers in Saudi Arabia with the capacity of around 3.5mtpy at the end of 2004. YCC was established in 1976 with initial production capacity of 3000 tonnes of clinker per day, which was subsequently raised to 4000 tons per day. YCC commissioned two of its long dry kilns each 1500tpd at Ras Baridi 60km north of the city of Yanbu on the west coast of Saudi Arabia.
The company commissioned its third long dry kiln with a capacity of 1000tpd in 1982 thus increasing the total plant capacity. All three kilns were supplied, installed, and commissioned by the reputable German company KHD Humboldt Wedag Ag. The company further expanded its capacity during 1998 by another 7000 tpd clinker by setting up a new cement plant adjacent to the old factory at Yanbu, thus having a total installed capacity of 11,500 tons of clinker per day which is 3.5 million tons per annum. The company is also adding a new line of 1mtpy capacity which is expected to come on stream by end of 3Q-2005.
The company recorded cement production of 4.25mt in 2004 as compared to 4.16mt in the previous year which was the result of the company using the stocks in catering to the strong demand in the domestic economy. As a result, the company's plants have been operating at a capacity of more than 100% in the last couple of years in order to take advantage of strong cement demand emanating from the real estate sector. The company employed more than 1000 personnel at the end of 2004. The company has a 60% stake in the Paper Sacks Factory in Saudi Arabia.
Equity History
At the end of 2004, the company had a paid-up equity capital of SR1.05bn, divided into 21mn shares of face value SR50 each. Among the major shareholders of the company are government organizations such as Public Investment Fund (10%) and General Organisation for Social Insurance (11%). Other important business houses such as NCB and Al Rajhi too have a marginal stakes (as investments) in the company. The company is currently trading on the Saudi Stock Market (Tadawul). The share turnover has in 2004 was 86.95% and the share has high liquidity on the bourse. The company has not increased its capital through the issuance of rights or bonus issue.
Sales
YCC is one of the largest manufacturers of Ordinary Portland and Sulphate Resisting Portland Clinker and Cement. The company was ranked second in terms of cement production as it produced 4.25mt of cement in 2004, just next to Saudi Cement Company. About 60% of its sales comprise of bulk sales, bagged cement constituting the rest. The ready-mix companies (RMCs), big contracting companies (catering to both private & government sector projects) are its main customers, picking up nearly the entire bulk sales of the company. All of the sales in 2003 and 2004 were in the domestic market.
In the first seven months of 2005, YCC recorded the production of 2.36mt of cement as compared to 2.55mt reported for the corresponding period of the previous year. The clinker stock levels too declined 271,000 at the end of July-2005 as compared to 598,000 tonnes recorded in the same period last year.
Raw Materials
As is the usual case, the company operates limestone quarries which are taken from the Saudi government on a long-term lease. The company pays an amount of fixed royalty which is not much, besides excavation charges of SR2.25 per tonne of the mined, payable every year to the government.
The company has a marketing set-up, which is typical of the Saudi cement industry. It markets its cement through three distributors, who, in turn, sell it to RMCs and small retailers. The company gives the delivery to the distributors only against the cash/Letter of Credit or Letter of Guarantee which reduces the possibility of the bad-debts for the company. All the retail sales of the company's cement in the market, therefore, are routed through the retailers.
Expansion plans
The company is increasing its clinker capacity by 1mtpy which is expected to start production by the end of 3Q-2005. The upgradation is being done by the German company KHD. The company has a current capacity of 3.5mtpy. The agreement was done after technical and commercial discussions with KaneCem, a UK-based technical consultant, KHD, the supplier, and ACC India, the operator. They were meant to overcome the bottlenecks of raising the production capacity of the largest clinker production line in the Middle East from 7,000 tonnes to 9,500 tonnes per day and boost the company's total clinker production to exceed 4.2mtpy.
The SR243.4mn contract with KHD also includes procurement, erection and commissioning of a new cement mill with a designed capacity of 1.4mtpy. As a result, the total YCC grinding capacity will cross six million tons per annum before the end of 3Q-2005.
The company is intending to put up a new kiln of 3.3mtpy which will start production by 2008, but the management did not indicate whether they will be using the European technology partners or Chinese technology.
The net profit (after zakat) of the company went up 13.2% to SR427.7mn in 2004 from SR377.9mn recorded in the previous year. The EPS rose to SR20.4 in 2004 from SR18 reported in the previous year. The return on average assets increased from 18.2% in 2003 to 20.4% in 2004 while the return on average equity increased from 20.2% in 2003 to 21.5% recorded in 2004. YCC distributed the dividends at 40% on the basis of SR 20 per share.
The total assets of the company increased from SR2.02bn in 2002 to SR2.11bn in 2004 representing a marginal CAGR of 1.36%. However, the company has managed a strong liquidity position with cash and bank deposits in the range of 17%-18% of the total assets in the last couple of years. The major portion of the assets is constituted by the fixed assets which amounted to SR1.39bn at the end of 2004. However, the project under construction increased considerably from SR5.4mn in 2003 to SR80.16mn in 2004. This is expected to increase further as the construction of the new line increases its pace in 2005.
Results
The net income of the company remained flat at SR215mn in 1H05, up 3.02% as compared to the net profit of SR208.7mn recorded for the corresponding period of the previous year. The net profit in 2004 amounted to SR427.7mn. However, we believe that there will be significant growth in sales and profits in the fourth quarter of 2005 and in the year 2006 as the new capacity come on-stream.
The total assets of YCC at the end of 1H05 reached SR2.0bn which included the fixed assets amounting to SR1.48bn. Shareholders equity stood at SR1.80bn at the end of 1H05, down from SR2.01bn recorded at the end of 2004 which is mainly attributed to the dividend payment amounting to SR440mn paid in the first quarter of 2005.
Strategy
Yanbu Cement Company enjoys the benefit of being near to the high-growth areas of Jeddah and the holy cities of Mecca and Medina where the construction activity is in the boom phase. The company is increasing its capacity in order to match the demand and supply but in the long-run has indicated that it will certainly look at export opportunity if the demand in domestic economy dampens. The company is also going to benefit from the proximity of the port which reduces the distribution cost as well as cost of importing the raw materials. The company seems to be well-positioned as the leading manufacture of cement and will be benefited from the increase in government spending on housing and infrastructure projects. The economies of scale after expansion are likely to improve its margins which will further improve its profitability.
The value of YCC's shares derived from the weighted average of the DCF and peer comparison methods is SR665.8 per share. The stock currently trades at around SR683.8 on the Saudi Stock Exchange, which implies that the value of YCC's shares, arrived at using the weighted average of the two methods, is 2.6% lower than the current market price. We, therefore, recommend a 'HOLD' on the Yanbu Cement Company stock at its prevailing price levels.
© Kuwait Times 2005
