Saudi Cement Sector - Cementing The Future - 2023 Report

Saudi Cement Sector, cementing the future… 21 May 2023
➢ The KSA construction sector is poised for robust growth supported by improving government
Company Rating fiscal position amid recovery in oil prices.
➢ Strong mega projects pipeline under “Vision 2030” provides strong demand visibility for the
Saudi Cement Co. Accumulate construction materials such as cement in the KSA.
(SACCO) ➢ Favorable demographics and rapid urbanization to propel housing demand, benefitting the
cement sector.
City Cement Co. Buy
➢ Domestic cement producers well positioned to leverage construction activity recovery with
(CITYC)
ample capacity and inventory levels
Qassim Cement Hold
Co. We initiate our coverage on the Saudi Arabia Cement Sector with four companies – Saudi Cement
(QACCO) Co. (SACCO), City Cement Co. (CITYC), Qassim Cement Co. (QACCO), and Yamama Cement Co.
(YACCO). Our overall view on the sector is positive, driven by sustainable economic growth,
Yamama Cement Accumulate
improving sector dynamics underpinned by mega projects, and favorable housing demand
(YACCO)
supported by demographic trends. We have used a combination of different valuation
methodologies (DCF, DDM and peer-group P/E and EV/EBITDA multiples) to arrive at our target
price.
• KSA GDP growth to moderate after a strong FY22. The KSA economy experienced a significant
boost in GDP during FY22, driven by a pick-up in demand as the economy reopened post pandemic
related lockdowns and an increase in crude oil prices. This boost led to a fiscal surplus, allowing
the government to increase its spending on construction activities. Additionally, rapid
urbanization in the country has increased the demand for housing as young populations shift to
cities. This surge in demand for housing and increased spending on construction activities is
expected to benefit cement, a major raw material used in construction. With a focus on
construction and infrastructure development, the Saudi Arabian economy is poised for growth in
the coming years.
• Construction of Megaprojects under “Vision 2030” to boost demand for cement in Saudi Arabia.
Saudi Arabia has plans to diversify its economy away from oil and focus on other non-oil sectors.
Under its Vision 2030 plan, the country aims to build megaprojects to attract tourism, improve
healthcare, and enhance other sectors of the economy. These projects include major initiatives like
the Neom City Project, worth USD 500 billion, ROSHN worth USD 90 billion, King Salman
International Park worth USD 23 billion, among others, and are expected to increase the demand
for cement in the future. Cement companies near these projects will likely experience better
demand and price dynamics.
• Strong growth prospects for KSA cement producers driven by construction activities: Domestic
cement producers in Saudi Arabia are well-positioned to benefit from the pick-up in construction
activities. This growth in demand is expected to create ample opportunities for cement
manufacturers to increase their production capacity and improve their utilizations, catering to the
incremental cement demand in the region. As a result, higher sales volume, steady realizations, and
healthy financial performance are expected going forward.
Last Px Target Price Upside / P/E'23e, P/B'23e, EV/EBITDA' Cash Div
Name ROE'23e, (%)
(SAR) (SAR) (Downside) (%) (x) (x) 23e, (x) Yield, %
Saudi Cement 56.9 63.0 10.7% 20.8 4.0 13.7 18.8% 6.2%
City Cement 22.1 26.5 20.0% 19.3 1.7 12.1 8.9% 6.3%
Qassim Cement 67.8 64.3 -5.1% 25.1 3.7 18.0 14.7% 4.4%
Neetika Gupta Yamama Cement 33.1 38.0 14.7% 17.4 1.4 12.8 8.2% 3.0%
Vice President - Head of Average 20.7 2.7 14.2 12.7% 5.0%
Research Source: Bloomberg, U Capital Research; Last price as on 18 May 2023
[email protected]
Tel: +968 79064609
Page 1 of 39
Contents
Valuation ................................................................................................................................................... 3
Risks to Valuation...................................................................................................................................... 5
Sensitivity Analysis .................................................................................................................................... 5
Peer Group Valuation ............................................................................................................................... 7
Macro-economic & Sector Overview ....................................................................................................... 8
Saudi Cement .......................................................................................................................................... 16
City Cement ............................................................................................................................................. 22
Qassim Cement ....................................................................................................................................... 28
Yamama Cement ..................................................................................................................................... 33
Disclaimer ................................................................................................................................................ 39
Page 2 of 39
Valuation
We have used DCF, DDM, P/E-based valuation, and EV/EBITDA multiple and assigned 50% weightage to DCF, 15% each to P/E-based
valuation, and EV/EBITDA multiple and 20% to DDM to derive the target price for each cement company. For DCF and DDM, we have
used a 5-year explicit forecast period (2023-27) and afterward have assumed a 2% terminal growth rate. We have then calculated the
present value of future cash flows/dividends (Enterprise Value/Fair Value) using the weighted average cost of capital (WACC). After
arriving at the enterprise value, we have made the required adjustments such as net debt, minorities, investments, pension obligations
to derive equity value for the company.
For the relative valuation, we have considered the average 1Y TTM of relevant peers due to the unavailability of forward data. The
adjusted P/E and EV/EBITDA multiples are then multiplied by the forecasted FY23 EPS and EBITDA, respectively.
Page 3 of 39
Valuation
SACCO CITYC QACCO YACCO
(Currency) SAR SAR SAR SAR
DCF (50% Weight)
PV of Free Cash Flow (mn)
Sum of PV of FCFs (Year 1 to 5) 2,501 914 1,287 1,783
Terminal 11,758 4,082 5,829 11,738
Total PV of Excess Returns 8,153 2,640 3,893 7,445
Equity value (mn) 10,341 3,935 6,084 8,136
Target Price 67.6 28.1 67.6 40.2
DDM (20% Weight)

PV of Dividends (mn)
Sum of PV of Dividends (Year 1 to 5) 2,351 1,015 1,473 1,468
Terminal 10,721 3,993 7,107 9,304
Total PV of Excess Returns 7,433 2,582 4,747 5,901
Fair value (mn) 9,785 3,597 6,220 7,370
Target Price 64.0 25.7 69.1 36.4
Assumptions
Risk Free Rate (%) 4.3% 4.3% 4.3% 4.3%
Adj. Beta 0.61 0.8 0.69 0.9
Risk Premium (%) 7.0% 7.0% 7.0% 7.0%
Cost of Equity (COE) (%) 8.6% 9.9% 9.1% 10.6%
WACC (%) 8.2% 9.9% 9.1% 10.3%
Outstanding Shares (mn) 153 140 90 202
P/E Based Relative Valuation (15% weight)

Target multiple for 2023e 20 20 20 20
EPS 2023e 2.74 1.14 2.7 1.9
Target Price 54.8 22.9 54.0 38.1
EV/EBITDA Based Relative Valuation (15% weight)

Target multiple for 2023e 13 13 13 13
EBITDA 2023e 665.67 250.87 327.24 592.79
Target Price 54.5 26.0 57.3 32.7
Weighted Average Target Price 63.0 26.5 64.3 38
Current Market Price 56.9 22.1 67.8 33.1
Upside/(Downside), % 10.7% 20.0% -5.1% 14.7%
Recommendation Accumulate Buy Hold Accumulate
Source: Company Filings, Bloomberg, U Capital Research
Page 4 of 39
Risks to Valuation
Key downside risks to our valuations include:
• Fall in demand might impact realization prices which can restrict revenue growth during the forecasted period.
• Slow pick-up of construction activities led by weak economic growth may lead to lack of cement demand.
Key upside risks to our valuations include:
• Commissioning more megaprojects can increase the demand for cement which can boost volume as well as realization for
the companies.
• More M&As in the sector can help the companies to gain market share and increase production volume.
Sensitivity Analysis
Our TP for Saudi Cement changes about +/-1-2% to +/- 0.25% changes to terminal growth or in WACC assumptions. Our TP also
changes less than +/-1% to +/- 0.5x changes in the target P/E multiple.
Saudi Cement
Terminal growth 2023e EPS (SAR)
26.38 1.5% 1.8% 2.0% 2.3% 2.5% 62.98 1.74 2.24 2.74 3.24 3.74
7.7% 63.03 64.59 66.29 68.13 70.15 19.0x 59.73 61.15 62.58 64.00 65.43
P/E multiple
WACC
8.0% 61.53 62.99 64.57 66.28 68.15 19.5x 59.86 61.32 62.78 64.25 65.71
8.2% 60.15 61.51 62.99 64.57 66.30 20.0x 59.99 61.49 62.99 64.49 65.99
8.5% 58.85 60.13 61.51 63.00 64.61 20.5x 60.12 61.66 63.19 64.73 66.27
8.7% 57.64 58.84 60.14 61.53 63.04 21.0x 60.25 61.82 63.40 64.97 66.55
Our TP for City Cement changes about +/-2-3% to +/- 0.25% changes to terminal growth or in WACC assumptions. Our TP also
changes less than +/-1% to +/- 0.5x changes in the target EV/EBITDA multiple.
City Cement
Terminal growth 2023e EBITDA (SAR mn)
26.38 1.5% 1.8% 2.0% 2.3% 2.5% 26.38 151 201 251 301 351
EV/EBITDA multiple
9.4% 26.80 27.28 27.78 28.32 28.90 13.0x 26.26 26.26 26.26 26.26 26.26
WACC
9.6% 26.23 26.67 27.13 27.63 28.17 13.5x 26.40 26.40 26.40 26.40 26.40
9.9% 25.69 26.09 26.53 26.99 27.49 14.0x 26.53 26.53 26.53 26.53 26.53
10.1% 25.17 25.56 25.96 26.39 26.85 14.5x 26.66 26.66 26.66 26.66 26.66
10.4% 24.69 25.05 25.43 25.83 26.26 15.0x 26.80 26.80 26.80 26.80 26.80
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Our TP for Qassim Cement changes about +/-1-2% to +/- 0.25% changes to terminal growth or in WACC assumptions. Our TP
also changes less than +/-1% to +/- 0.5x changes in the target EV/EBITDA multiple.
Qassim Cement
60.13 1.5% 1.8% 2.0% 2.3% 2.5% 60.13 227 277 327 377 427
EV/EBITDA multiple
8.6% 64.99 66.27 67.64 69.12 70.72 12.0x 63.78 63.78 63.78 63.78 63.78
WACC
8.9% 63.48 64.66 65.92 67.29 68.75 12.5x 64.06 64.06 64.06 64.06 64.06
9.1% 62.07 63.16 64.33 65.58 66.94 13.0x 64.33 64.33 64.33 64.33 64.33
9.4% 60.74 61.76 62.84 64.00 65.25 13.5x 64.60 64.60 64.60 64.60 64.60
9.6% 59.50 60.45 61.46 62.53 63.68 14.0x 64.87 64.87 64.87 64.87 64.87
Our TP for Yamama Cement changes about +/-1-2% to +/- 0.25% changes to terminal growth or in WACC assumptions. Our TP
also changes less than +/-1% to +/- 0.5x changes in the target EV/EBITDA multiple.
Yamama Cement
32.86 1.5% 1.8% 2.0% 2.3% 2.5% 32.86 493 543 593 643 693
EV/EBITDA multiple
9.8% 38.46 39.29 40.17 41.10 42.10 12.0x 37.54 37.54 37.54 37.54 37.54
WACC
10.1% 37.45 38.22 39.04 39.91 40.84 12.5x 37.76 37.76 37.76 37.76 37.76
10.3% 36.50 37.22 37.98 38.79 39.66 13.0x 37.98 37.98 37.98 37.98 37.98
10.6% 35.60 36.27 36.99 37.75 38.55 13.5x 38.20 38.20 38.20 38.20 38.20
10.8% 34.75 35.38 36.05 36.76 37.51 14.0x 38.42 38.42 38.42 38.42 38.42
Page 6 of 39
Peer Group Valuation
Mkt Cap (SAR Px Change Px Change 3M, Px Change EV/EBITDA' P/E'23e, ROE'23e, Div Yield' 23e,
Name Last Px (SAR) FCF Yield'22 (%)
mn) 1M, % % YTD, % 23e, (x) (x) (%) (%)
Cement
SOUTHERN PROVINCE CEMENT CO 7,210 51.5 -2% 3% 1% NA 25.7 8.2% 5.2% 2.4%
NAJRAN CEMENT CO 2,390 14.1 -4% 12% 17% NA NA NA 5.2% 1.8%
YANBU CEMENT CO 5,694 36.2 3% 2% 1% NA 23.1 NA NA 7.8%
NORTHERN REGION CEMENT CO 2,192 12.2 1% 10% 13% NA 15.0 NA 5.3% 1.8%
SAUDI CEMENT 8,706 56.9 1% 8% 12% 13.7 20.8 18.8% 6.2% 6.5%
CITY CEMENT CO 3,094 22.1 2% 9% 1% 12.1 19.3 8.9% 6.3% 5.0%
QASSIM CEMENT/THE 6,102 67.8 -1% 2% 12% 18.0 25.1 14.7% 5.2% 0.2%
YAMAMA CEMENT CO 6,703 33.1 -2% 11% 23% 12.8 17.4 8.2% 3.0% NA
Average 13.1 21.4 13.1% 5.0% 3.6%
Median 13.2 22.3 12.4% 5.2% 2.4%
Source: Bloomberg, U Capital Research, values as of 18 May 2023
Fig. 1: Cement - Price to Earnings & Dividend Yield Fig. 2: Cement - EV to EBITDA & Dividend Yield
7.0% 7.0%
City Cement Southern Cement City Cement Qassim
6.0% 6.0%
Cement
Dividend Yield
Dividend Yield
5.0% 5.0%
Saudi Cement
4.0% 4.0%
3.0% 3.0%
2.0% 2.0% Yamama Saudi Cement

Northern
Yamama Qassim 1.0% Cement
1.0% Cement
Cement Cement
0.0%
0.0%
0 5 10 15 20
0.0 5.0 10.0 15.0 20.0 25.0 30.0
Price to Earnings (x) EV to EBITDA (x)
Source: Bloomberg, U Capital Research, as of 18 May 2023 Source: Bloomberg, U Capital Research, as of 18 May 2023
Page 7 of 39
Macro-economic & Sector Overview
GDP growth expected to moderate after strong growth in FY22
The Saudi Arabian economy experienced a significant boost in GDP during FY22 driven by a pickup in oil prices and demand as the
economy reopened. In FY22, Saudi Arabia’s GDP grew by 8.7%, the highest YoY growth in 11 years as the economic recovery was
aided by a sharp rebound in energy prices, particularly crude oil and natural gas, which are major revenue sources for the country.
Looking ahead, the IMF expects that Saudi Arabia's GDP growth will slow down to a moderate pace of 3% during the years 2023-2025,
mainly due to lower oil production as agreed with OPEC+. However, the non-oil sector of the economy is expected to grow at a
relatively faster pace.
Fig. 3: Saudi GDP showed strong growth post-pandemic Fig. 4: Saudi economy growth to normalize from 2022 levels
14.0% 12.2% 10.0% 8.7%

12.0% 9.9% 8.0%
10.0% 8.6%
6.7% 6.0% 3.9%
8.0% 7.0% 3.1% 3.1% 3.1%
5.5% 4.0% 2.8%
6.0% 0.8%
1.9% 2.0%
4.0%
2.0% 0.0% -4.3%
-2.6% -2.0%
0.0%
-2.0% -3.8% -4.0%
-4.0% -6.0%
-6.0% 2018 2019 2020 2021 2022 2023E 2024E 2025E
4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22
Real GDP growth YoY - KSA
Real GDP growth YoY - KSA
Source: General Authority for Statistics, Saudi Arabia, U Capital Research Source: IMF, U Capital Research
Improving fiscal balance to boost government spending

Most GCC countries, including Saudi Arabia, have faced significant budgetary pressures due to the sharp decline in energy prices
between 2015 and 2020. This led to the implementation of austerity measures, which had a further impact on investment spending
and consumption across the region. However, since 2020, energy prices, especially crude oil and natural gas, have shown a sharp
recovery due to various factors such as the OPEC+ production cut agreement, gradual demand recovery post-Covid era, geopolitical
issues, and logistics challenges. Higher energy prices have increased government revenues, significantly easing fiscal pressures, as
evidenced by the actual performance of 2022 and the expected higher government revenues for 2023. In 2022, Saudi Arabia recorded
revenue of SAR 1.26 trillion, resulting in a fiscal surplus of SAR 103.85 billion. Oil revenue, which contributed 68% of total revenue,
grew by 52% YoY. The 2023 budget for Saudi Arabia is conservative, reflecting a cautious approach to any major development in the
domestic or global economy. The expenditure is expected to increase due to the implementation of capital projects delayed by Covid-
19 and the Vision 2030 programs and Giga projects. Despite increased expenditure, it is expected that Saudi Arabia will achieve a
fiscal surplus of 0.4% of GDP in 2023.
Furthermore, it is expected that the general government gross debt as a percentage of GDP in Saudi Arabia will decline, mainly driven
by higher fiscal revenue. This will create further room to increase spending across various sectors, especially infrastructure, as it is
expected to have a major role in the success of Saudi Vision 2030. Increased spending on infrastructure will have a positive impact on
cement demand in the country.
Page 8 of 39
P.O.BOX 1137, PC 111 – CPO, Sultanate of Oman l CR No. 1279406 l Tel: +9682494 9000 l Fax: +968 2494 9099 l Email: [email protected] l Web: www.u-capital.net
Fig. 5: Saudi Arabia Gross Debt % of GDP Fig. 6: Production of crude oil has been falling in Saudi Arabia
35 28%
31 360 26% 30%
29 23% 16% 12%
30 340 4% 25%
24 320 19%
25 23 23
22 300 2% 20%
YoY growth
mn barrels
20 17 18 280 15%
%
260 10%
15
240
220 5%
10
200 0%
5
Dec-22
Jun-22
Jul-22
Nov-22
Feb-22
Oct-22
Sep-22
Feb-23
Apr-22
Aug-22
Mar-22
May-22
Jan-23
0
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E Crude oil production YoY growth (RHS)
Source: IMF, U Capital Research Source: Energy Information Administration, U Capital Research
Fig. 7: Improving Saudi Arabia Fiscal Budget (SAR bn)

1400 104 200
9 71
1200 21 100
1000 0
SAR bn
800 -133 -73

-174 -100
600
-238 -200
400 -294
1059
1114
1079
1076
1039
1270
1160
1123
1146
1125
1205
1134
692
930
906
927
782
965
200 -300
0 -400
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E
Revenue Expenditure Surplus/Deficit
Source: General Authority for Statistics, Saudi Arabia, U Capital Research
Construction sector set for strong growth led by planned mega projects
Like other GCC countries, Saudi Arabia has also been focusing on diversifying its economy to reduce its reliance on energy prices and
increase contributions from non-oil sectors. To achieve this, Saudi Arabia has laid out long-term strategic plans under "Vision 2030".
The country has been investing heavily in infrastructure development, particularly in sectors such as transportation, energy, and
healthcare. As a result, the construction sector is expected to receive significant government support in the coming years, leading to
likely higher demand for construction materials such as cement.
Below are some of the big-ticket projects which would help the governments to achieve their long-term goals:
Major projects in Saudi Arabia

According to Mordor Intelligence report, in 2023, the Saudi Arabian construction industry was valued at USD 140.2 billion, with a
projected 5% growth from 2023 to 2028. The Saudi government has allocated approximately 14% (SAR 157 billion) of the total
expenditure (SAR 1.14 trillion) towards capital expenditure, representing a YoY increase of 4.7%. The ongoing construction of
megaprojects such as NEOM and Qiddiya is expected to drive growth in construction activities in Saudi Arabia, leading to increased
demand for cement.
In the table below, we show mega projects along with strong construction spending is likely to boost demand the building and
construction materials including Cement which should benefit local cement companies in the KSA.
Page 9 of 39
Projects Description Project Value
(USD bn)
Neom City Project is a planned cross-border city in northwestern Saudi Arabia, Tabuk Province
located in the northern part of Red sea. Covering an estimated area of 26,500 km extending
Neom City
460 km on the coast of the Red Sea, the project will have smart city technologies and be an 500
Project
attractive tourist destination. The first phase of the Neom City Project is expected to complete
by 2025.
Qiddiyah City Development Project is a megaproject that focuses on entertainment and is

currently under development in Al Qidiya, which is 45 km from Riyadh. The project occupies a
Qiddiyah City
total of 334 sq. km with a planned build-up area of 223 km. Qiddiyah City project has been 8
Development Project
divided into five development areas, such as a Resort Core, a City Centre, an Eco Core, a Motion
Core, and a Golf and Residential Neighborhood.
Riyadh Metro Riyadh Metro Project is a transit system, including six metro lines that span a total length of 176
22.5
Project km. It will be served by 85 stations that will include several interchange stations.
Saudi Arabia launched an ambitious project in 2023. Construction will begin this year on four
schemes — King Salman Park, Sports Boulevard, Green Riyadh and Riyadh Art. The four projects
King Salman
- King Salman Park, Sports Boulevard, Green Riyadh and Riyadh Art – will complement the Saudi 23
International Park
Vision 2030’s “Quality of Life” Program and are aligned with the UN Sustainable Development
Goals
Rua Al Madinah Project which will be constructed in the area east of the Prophet’s Mosque and
the project will raise the capacity to facilitate hosting 30 million Umrah pilgrims by 2030. After
Rua Al Madinah rehabilitating 1.5msqm, the project is set to add over 47,000 hotel rooms by 2030. It will also 10
boost the hotel inventory of the area on the east side of the Prophet’s Mosque, including the
luxury segment.
The project is located just 20 minutes northwest of Riyadh’s city center, Diriyah will be
Diriyah Gate transformed into one of the world’s foremost lifestyle destinations for culture and heritage, 20
hospitality, retail, and education, and will become one of the world’s great gatherings places
Saudi Arabia has an ambitious target of building 1mn affordable residential units across the
ROSHN kingdom over the next five years through Roshn, a leading Saudi real estate developer powered 90
by PIF.
The AlUla Project is a long-term plan to preserve a living museum of cultural heritage. Saudi
Arabia plans to transform Alula desert landscape into a tourist destination for travelers eager to
see preserved tombs, monuments, and sandstone structures. The project will include sub-
Alula project 15
projects such as The Sharaan Resort and Nature Reserve, a luxury holiday destination scheduled
to open in 2024. The project is expected to attract 2Mn annual visitors, contribute SAR 120bn
to the GDP and create 38k jobs by 2035.
Source: Media articles, U capital Research
Page 10 of 39
Mega- Projects in KSA and its proximity to Cement producers
Source: Media Articles, Company website, U Capital Research
Rising population and rapid urbanization to increase housing demand

Saudi Arabia benefits from a favorable demographic profile, with a large and growing population, more than half of whom are under
30. The population is projected to continue growing at an annual rate of 2.5%, according to the IMF, reaching 36.92mn in 2025 from
34.79mn in 2022. A young and expanding population typically drives urbanization and reduces household size, which leads to
increased demand for housing. Historically, homeownership rates in Saudi Arabia have been low, but “Vision 2030” aims to increase
this to 70% by 2030. The strong demand for housing is reflected in the rapidly growing mortgage market, which surged from SAR
14.9bn in 2016 to SAR 152.5bn in 2021 before normalizing at SAR 120.3bn in 2022.
Furthermore, the unemployment rate in Saudi Arabia has fallen to 8% in 4Q22 from 11.7% in 1Q21, giving locals greater purchasing
power and potentially boosting demand for housing. We anticipate that although the growth rate may be lower than that seen in
2020-21, housing demand will remain strong in the future, driven by population growth, decreasing unemployment, and urbanization.
This will ultimately increase the demand for cement, which is a crucial raw material for housing construction.
Page 11 of 39
Fig. 8: Saudi Arabia population is expected to grow at a good pace Fig. 9: Saudi Arabia Unemployment Rate (%)
38 14%
37
37 36
12%
36 35 12% 11% 11%
35 11%
35
35 34 10%
34 10% 10%
Mn
34 33 10%
33 33
8%
32 8%
31
30 6%
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E FY25E Q1 FY21 Q2 FY21 Q3 FY21 Q4 FY21 Q1 FY22 Q2 FY22 Q3 FY22 Q4 FY22
Source: International Monetary Fund, U Capital Research Source: General Authority for Statistics, Saudi Arabia, U Capital Research
Fig. 10: Strong Growth in Residential New Mortgages Finance Fig. 11: Youngsters constitute most of the population
180 3.5% 1.9%
153 8.5%
160 151
140 31.3%
120
120
SAR bn
100 17.0%
79
80
60
40 28
15 19
20
37.8%
0
FY16 FY17 FY18 FY19 FY20 FY21 FY22 0-19 20-39 40-49 50-59 60-69 70+
Source: Argaam, U Capital Research Source: General Authority for Statistics, Saudi Arabia, U Capital Research
Page 12 of 39
Saudi Arabia’s cement industry – an overview
Highly fragmented market
The Saudi Arabian cement industry is a highly fragmented market, with a large number of small and medium-sized players operating
alongside a few larger companies. The industry is characterized by intense competition, with companies vying for market share
through price wars and aggressive marketing tactics. Despite being one of the largest cement producers in the world, the Saudi cement
industry faces several challenges, including rising energy costs, a shortage of skilled labor, and an unpredictable regulatory
environment.
To stay competitive in this challenging market, cement companies in Saudi Arabia are increasingly focusing on innovation and
sustainability. Many are investing in new technologies to improve production efficiency to reduce power consumption as well as lower
their environmental impact, while others are developing new products and services to meet the evolving needs of customers.
Fig. 12: Market share by sales volume in 2022
United Cement, 3.39% Arabian Cement, 6.51%

Riyadh Cement, 5.64% Eastern Province Cement, 4.03%
City Cement, 5.05%
Qassim Cement, 8.31%
Najran Cement, 5.64%
Saudi Cement, 12.06%
Hail Cement, 3.22%
Southern province, 11.06%

Yanbu Cement, 8.32%
Yamama Cement, 13.26% Tabuk cement, 3.04%
Source: Argaam, U Capital Research
Overcapacity led to Low plant utilizations, but likely better demand presents positive outlook
During 2011-2022, the production capacity of the Saudi cement industry had grown at a compound annual growth rate (CAGR) of
approximately 4%, whereas cement production only increased at a sluggish CAGR of around 1%. This resulted in most cement plants
operating at low utilization levels. The sluggish demand can be attributed to the government's financial pressure amid low oil prices,
which has caused a delay in the progress of many large-scale construction projects. Furthermore, the outbreak of the pandemic
impacted construction activities, resulting in lower production and sales volumes.
Going forward, we expect local cement producers' utilization rate and sales volume to increase, driven by increased government
spending on construction activities and increased homeownership among local population.
Page 13 of 39
Fig. 13: Plant utilization trending between 60-75% Fig. 14: Sector’s Sales to production ratio remaining near to 100%
73% 77.4 77.4
78.0 80% 60 53 53 101%
68% 47
47 44 53 54 52 53
76.0 59% 62% 70% 50 42 44
69% 42 101%
68% 60%
72.8
Mn tonnes
74.0 40
100%
Mn tonnes
70.9 71.1 50%

72.0 30 100%
69.7 40% 100% 100% 100% 100%
70.0 20
30% 100% 99%
68.0 10 99%
20%
66.0 10% 0 99%
64.0 0% FY17 FY18 FY19 FY20 FY21 FY22
FY17 FY18 FY19 FY20 FY21 FY22
Cement production volume Cement sales volume
Sector's cement production capacity Utilization rate (%)
Sales to production (%)
Source: Argaam, U Capital Research Source: Argaam, U Capital Research
Average realization price likely to increase in future

The Saudi Arabian cement sector has experienced a marginal increase in the average realization price of cement, with prices rising
from SAR 13.69 per 50 kg bag in 1Q22 to SAR 13.93 per 50 kg bag in 1Q23. However, the current price remains below the peak of SAR
14.24 per 50 kg bag achieved in 3Q20. The decline in the price can be attributed to a surplus of inventory held by cement producers
due to higher supply than demand. However, as the demand for cement is expected to increase in the future, we anticipate a decline
in inventory levels. This, in turn, should result in an increase in the average realization price of cement over the medium term.
Fig. 15: Quarterly cement prices trend in KSA Fig. 16: Annual cement prices trend in KSA
14.2
14.5 14 14
14.2
14 14
14.0
14
13.9
13.9
13.9
13.8
13.8
13.8
14
13.7
13.7
14.0
13
SAR /50kg
13.4
13.4
13
SAR /50kg
13.5 13
13
13
13
13.0
13
12
12.5
12
12
FY18 FY19 FY20 FY21 FY22
Source: General Authority for Statistics, Saudi Arabia, U Capital Research Source: General Authority for Statistics, Saudi Arabia, U Capital Research
Inventory levels to go down led by a recovery in demand

During FY19, total clinker inventories in Saudi Arabia reached an all-time high of 42.5 million tons. The rise in inventory levels was
due to reduced demand caused by the Saudi government's fiscal deficit resulting from low oil prices, which led to lower spending on
construction activities. However, in FY21 and FY22, the economy improved with the rise in oil prices and increased government
spending on construction activities, causing inventory levels to ease (FY22: 35.1 million tons). With the construction of megaprojects
expected to drive demand for cement, we anticipate further decreases in inventory levels. This could lead to better realizations in
the coming years for the local cement industry.
Page 14 of 39
Fig. 17: Trend of Clinker inventory levels in Saudi Arabia
45 43
39
40 37
36 35 35
35
30 28
23
Mn tons
25 22
20
15
15
10 6
5
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Argaam, U Capital Research
Saudi cement sector: An attractive dividend play

The cement companies in Saudi Arabia have historically paid steady dividends. We anticipate that these companies are strongly
positioned to maintain dividend payments in the future driven by expected decent cash flow from operations, low leverage levels and
limited capital expenditure requirements given the surplus capacity availability. Accordingly, we expect sector average dividend yield
to be ~6% (based on companies shown in below chart) for 2023.
Fig. 18: High Dividend Yield Expected in 2023E
9% 8%
8% 7%
7% 7%
6%
6% 5%
5% 4%
4%
4%
3%
2%
1%
0%
City Cement Saudi Cement Arabian Cement Eastern Cement Southern Cement Yamama Cement Qassim Cement
Source: Company report, U Capital Research
Consolidation in the sector to lower competition pressure

The Saudi cement sector has been highly fragmented, but there have been discussions about consolidation in the industry in recent
times. This is evidenced by the memorandum of understanding (MoU) signed between Umm Al-Qura Cement and City Cement in
April 2023, wherein City Cement will acquire all 55 million issued shares of Umm Al-Qura Cement. Similarly, in September 2022,
Qassim Cement and Hail Cement signed an MoU, with Qassim acquiring all the issued shares of Hail Cement. Such consolidation can
aid companies in gaining market share and easing pricing pressure due to reduced competition.
Page 15 of 39
Saudi Cement (SACCO AB) Target Price: SAR 63.0/share
Upside: 10.7%
• Given the underutilized capacity, company is well placed to benefit from likely recovery
Recommendation Accumulate in the domestic construction sector
Bloomberg Ticker SACCO AB • Likely better average realizations along with expected higher sales volume to drive
Current Market Price (SAR) 56.90 revenues as well as margins in the coming years.
52wk High / Low (SAR) 58.600/48.800 • Solid balance sheet characterized by low leverage along with improving cash conversion
12m Average Vol. (000) 147.5
cycle, to strengthen further amid higher cash flows and low capex
Mkt. Cap. (USD/SAR Mn) 22,635/8,706
• Solid dividend yield an attractive investment proposition for income seeking investors
Shares Outstanding (mn) 153.0 We re-initiate coverage on Saudi Cement (SACCO AB) and assign Accumulate rating
Free Float (%) 92% with a target price of SAR 63 per share, offering an upside of 10.7% on the current
3m Avg Daily Turnover (SAR'000) 8,118.8
stock price of SAR 56.90. We hold an optimistic view on the Saudi cement sector as
we expect the faster execution of mega construction projects to drive sales volume
P/E'23e (x) 20.8
and improve price realizations in the KSA over the coming years. As a leading cement
EV/EBITDA'23e (x) 13.7
producer with a 12% market share in sales volume and 18% in sales value as of FY22,
Dividend Yield '23e (%) 6.2%
Saudi Cement is well positioned to cater to the expected huge domestic cement
demand in the coming years, with available underutilized capacity that could be
Price Performance:
utilized to meet the increased demand. The stock is currently trading at a P/E of 20.8x
1 month (%) 1.2
and EV/EBITDA of 13.7x based on our FY23 estimates.
3 month (%) 8.4
12 month (%) 3.5 Investment Thesis
Source: Bloomberg, valued as of 18 May 2023
Valuation and risks: Our target price is based on blended valuation methodologies –
(i) Discounted Cash Flow (DCF), (ii) Relative Valuation (using P/E and EV/EBITDA
multiple) and (iii) DDM.
Price-Volume Performance Key downside risks to our valuation include i) a fall in demand might impact cement
realizations ii) concentration risk as the company mainly operates in Saudi Arabia, iii)
65.00 800
60.00
slow pick-up of construction activities led by weak economic growth which might
700
55.00 impact demand for cement. Key upside risks to our valuation include i) commissioning
600
50.00 of megaprojects near the company’s production plant, ii) M&As can help increase
500
45.00 production volume and market share, and iii) Higher utilization led by growth in
400
40.00 cement demand.
300
35.00
30.00 200 Organic growth story: i) Expected rise in construction activities led by mega projects
25.00 100 will increase demand for cement, Saudi Cement being a leading player stands to
20.00 - benefit, ii) Utilization rate of Saudi Cement is likely to improve as the company will
May-22
Jul-22
Apr-23
Nov-22
Mar-23
Aug-22
Oct-22
Jun-22
Jan-23
Sep-22
Dec-22
Feb-23
produce more to cater to growing demand. iii) Higher volumes coupled with
improvement in average cement realization to drive revenues as well as margins,
Vol, '000 (RHS) Px, SAR (LHS)
resulting in higher net income in the coming years, iv) Consistent dividend paying
Source: Bloomberg history with attractive dividend yield
Financial and valuation summary:
FY18 FY19 FY20 FY21 FY22 FY23e
Revenues (SAR mn) 1,119.6 1,441.6 1,569.6 1,409.6 1,419.8 1,482.0
Net income (SAR mn) 400.5 451.4 456.0 331.9 398.8 419.0
Gross margin 48.1% 45.1% 42.5% 37.6% 40.1% 41.0%
Net profit margin 35.8% 31.3% 29.0% 23.5% 28.1% 28.3%
RoE 14.1% 16.4% 16.9% 13.1% 16.9% 18.8%
FCF (SAR/share) 2.62 3.99 3.92 3.56 3.70 2.79
DPS (SAR/share) 3.25 3.25 3.50 3.50 3.25 3.50
P/E (x) 18.5x 23.8x 20.6x 25.3x 19.9x 20.8x
P/B (x) 2.7x 3.9x 3.5x 3.4x 3.5x 4.0x
Source: Company Reports, U Capital Research
Page 16 of 39
Strategically located plants to help utilization
Saudi Cement, a prominent cement producer in Saudi Arabia, has established a significant foothold in the market, boasting a 12%
market share in terms of sales volume and 18% market share in terms of sales value as of FY22. The company’s plant is situated in the
Eastern Province, specifically in the city of Al-Hasa, which is approximately 120 km away from Dammam. The Saudi government
inaugurated 24 water and other development projects worth USD 560mn in 2021, which are set to be implemented in areas like
Dammam, Al-Ahsa, Qatif, and other neighboring regions. Given the proximity of Saudi Cement's plant to these mega projects and its
current underutilized capacity (76% plant utilization level in 2022), the company is well-positioned to benefit from the expected rise
in demand for cement in the region. As a result, we anticipate that Saudi Cement's utilization rate will increase to 86% by 2027,
resulting in sales volume growth at a CAGR of 3% over FY22-27e.
Fig. 19: Cement sales volume to increase Fig. 20: Utilization to Improve consistently
8 10% 10% 7 12% 100%

7 7 7 86%
7 6 6 6 90% 82% 84%
10% 79% 80%
6 6 77% 76%
6 8% 80% 69% 68%
5 70%
Mn Tons
6%
4 60%
3% 3% 3% 4%
3 2% 2% 50%
2 1% 2% 40%
1 0% 0% 30%
0 -2% 20%
2019 2020 2021 2022 2023E 2024E 2025E 2026E 2027E 10%
0%
Cement Sales Volume Y-oY Growth 2019 2020 2021 2022 2023E 2024E 2025E 2026E 2027E
Source: Company Reports, U Capital Research Source: Company Reports, U Capital Research
Price realizations expected to recover in the future

Saudi Cement's cement realization has been under pressure from FY17 to FY22, experiencing highs of SAR 233/ton in FY17 and lows
of SAR 201.83/ton in FY22. The average realization has been adversely affected by lower demand, increased inventory, and market
competition. However, going forward, we expect that cement prices have reached their bottom and will improve due to the
anticipated recovery in demand amid likely faster execution of construction projects in the coming years supported by improving
government finances. That said, we anticipate that the company’s cement price realizations to grow at a CAGR of 3% from FY23E to
FY27E
Fig. 21: Company’s realization to improve moderately Fig. 22: Revenue to pick-up on the back of growing demand
250 13% 15% 2 40%
7% 10% 29% 30%
200
2
3% 3% 3% 3% 5% 20%
SAR/ton
150
SAR Bn
1% 5% 5% 6%
-5% 0% 1 9% 4% 6% 10%
100 -10%
-5% 1% 0%
-12%
1
50 -10% -10%
227
216
189
202
205
211
217
224
230
1 2 1 1 1 2 2 2 2
0 -15% 0 -20%
2019 2020 2021 2022 2023E 2024E 2025E 2026E 2027E 2019 2020 2021 2022 2023E 2024E 2025E 2026E 2027E
Realization per ton Y-oY Growth Revenue Y-oY Growth
Page 17 of 39
Accordingly, with the anticipated increase in sales volume and cement prices, Saudi Cement is expected to experience higher
revenues going forward. We anticipate a total revenue CAGR of 5%, with revenue increasing from SAR 1.41bn in FY22 to SAR 1.81bn
in FY27E.
Higher sales volume and average realization expected to drive margin expansion
Historically, Saudi Cement has faced margin pressures due to lower average realization and cement volume. This resulted in a
contraction of gross margins from a high of 48% in FY17 to 40.1% in FY22. Going forward, we expect margins to improve gradually
from current levels as expected higher utilization is likely to lower fixed costs per ton, leading to improved efficiency and cost
savings. In addition, projected better realizations to further aid the margins. Accordingly, we have forecasted gross margins to
improve to 45% in FY27E from 40.1% in FY22, while operating margins are expected to improve to 33.8% by FY27E from 28.4% in
FY22.
Fig. 23: Gross margin expected to recover gradually Fig. 24: Operating margin to improve post-FY22
45%
1000 45% 44% 46% 700 34% 40%
33% 34%
43% 43%
44% 600 31% 31% 32% 35%
800 42% 28% 29%
41% 24% 30%
40% 42% 500
600 38% 25%
SAR Mn
SAR Mn
40% 400
20%
400 38% 300
15%
36% 200 10%
200
756
650
666
530
569
608
651
697
818
491
479
344
404
436
473
512
561
614
34% 100 5%
0 32% 0 0%
2019 2020 2021 2022 2023E2024E2025E2026E2027E 2019 2020 2021 2022 2023E 2024E 2025E 2026E 2027E
Gross profit Gross Margin Operating Income Operating Margin
Net income recovery expected driven by revenue and margin improvement

Despite higher revenues, Saudi Cement's net income declined at a CAGR of 3% during FY17-22, with net margins dropping from 38.3%
in FY17 to 28.1% in FY22. This was largely due to lower cement price realizations (-3% CAGR), coupled with relatively higher increases
in cost of sales (+7% CAGR) and selling and distribution costs (+26% CAGR). Going forward, we anticipate a turnaround in the
company's net income, driven by projected improvements in gross and operating margins. Accordingly, we expect net income to grow
at a CAGR of 8.8% from FY22 to FY23E while corresponding margins to improve to 34% by FY27. Similarly, ROA is also expected to
expand to 22% in FY27E from 12% in FY22, while ROE will expand to 31% in FY27E from 16.9% in FY22.
Fig. 25: Net profit to improve led by higher revenue Fig. 26: Return ratios to improve from FY24e onwards
700 40% 25% 31% 35%
34%
31% 31% 32% 35% 27%
600 29% 28% 28% 30% 20% 24%
30%
500 30% 21% 22% 25%
24%
25% 19% 19%
15% 17% 17%
SAR Mn
400 16% 20%

20% 13% 17%
300 15% 15%
15% 10%
12% 12% 12%
200 10% 9% 10%
5%
399
451
456
332
419
458
501
554
609
100 5% 5%
0 0% 0% 3% 0%
2019 2020 2021 2022 2023E 2024E 2025E 2026E 2027E 2019 2020 2021 2022 2023E 2024E 2025E 2026E 2027E
Net profit Net Profit Margin ROA ROE
Page 18 of 39
Maintaining a strong balance sheet
The company has consistently maintained a healthy debt-to-equity (D/E) ratio, which has remained below 0.25x. Looking ahead,
we anticipate this ratio to further decrease to 0.1x by FY27E, primarily due to lower strong cash flow from operations, limited
capital expenditure requirements and subsequently reduced debt levels. In terms of working capital management, the company
has successfully reduced its high inventory levels, resulting in an improved cash conversion cycle of 288 days in FY22 as compared
to 458 days in FY17. Going forward, we expect CCC to improve further, albeit marginally, driven by expected better business
conditions which should further strengthen the company’s financial position in the medium term.
Fig. 27: Debt/Equity ratio trend Fig. 28: Decent sustainable cash flows
900 811 821 820

0.3x 0.2x 0.2x 100.0x 800 721 730
0.2x 82.9x 708
0.2x 700 643 642
0.2x 0.2x 0.2x 0.2x 80.0x
0.1x 0.1x 600
0.2x 60.0x 514
41.0x
SAR Mn
35.7x 38.2x 0.1x 500
0.1x
20.2x 19.2x 24.8x 22.3x 28.8x 40.0x
400
56.6x
0.1x 20.0x 300
0.0x 0.0x 200
FY18 FY19 FY20 FY21 FY22eFY23eFY24eFY25eFY26eFY27e 100
0
Debt-Equity Ratio Interest Coverage Ratio
2019 2020 2021 2022 2023E 2024E 2025E 2026E 2027E
Consistent dividend payer

Saudi Cement has maintained a consistent track record of paying dividends, with an average payout ratio of approximately 134%
during FY17-22. This resulted in an attractive dividend yield of 5-6% for shareholders. Looking ahead, we anticipate the company
to continue prioritizing dividend payments, supported by a healthy level of free cash flows and low capital expenditure
requirements. For FY23E, we expect the company to pay a dividend of SAR 3.50 per share, with a payout ratio of approximately
128%. At current prices, this translates to a dividend yield of 6.3%, which should appeal to income-seeking investors.
Fig. 29: Dividend expected to increase going forward
5.0 10%
7.9%
4.0 7% 8%
5.7% 6.4% 6.3% 6.2% 6.2% 6.2%
4.6%
3.0 6%
SAR
2.0 4%
1.0 2%
4.0
3.3
3.5
3.5
3.3
3.5
3.5
3.5
4.5
0.0 0%
2019 2020 2021 2022 2023E 2024E 2025E 2026E 2027E
DPS Dividend Yield
Page 19 of 39
Assigning an Accumulate rating
We are assigning an Accumulate rating to the stock, with a target price of SAR 63, indicating an upside potential of 10.7%. We
anticipate an increase in cement demand due to expected higher construction activities amid government’s increased focus on faster
execution of mega projects in a bid to diversify its economy away from oil. Saudi Cement, being a leading player, is likely to benefit
greatly from this trend. We expect the growing demand to result in increased cement volume and better pricing, leading to higher
total revenue and improved margins for the company. Overall, we remain optimistic about the company's prospects and recommend
accumulating the stock as we feel that the company has huge room to grow.
About Saudi Cement

Saudi Cement was established in the year 1955. The company manufactures clinker and cement. The company is a leader in the Saudi
cement industry and have a strategic location in the Eastern Province of Saudi Arabia where high-quality raw materials are available.
In 2008, the company expanded its production capacity by installing two new production lines, which could produce 24,000 tons of
clinker per day. This was a significant expansion at that time and increased their annual clinker production capacity to an average of
8 million tons per year, thereby increasing the company’s economies of scale and production efficiency.
Fig. 30: SACCO’s Shareholding Structure
6.88% 1.83%
0.94% Al Rajhi Khalid Bin
Abdul Rahman Bin
Saleh
Vanguard Group
Blackrock Inc
90.35%
Others
Source: Bloomberg, 18 May 2023
Page 20 of 39
Key financials
In SAR mn, except stated otherwise FY20 FY21 FY22 FY23e FY24e FY25e
Income Statement
Sales 1570 1410 1420 1,482 1,550 1,621
Cost of sales (903) (879) (851) (874) (899) (924)
Gross profit 666 530 569 608 651 697
Depreciation and amortization 214 216 220 229 233 235
General and administrative expenses (70) (68) (76) (79) (82) (86)
Operating profit 479 344 404 436 473 512
Other Income 12 14 14 14 15 15
Finance costs -13 -8 -16 (20) (16) (13)
Income before tax 476 354 411 441 483 527
Income tax (24) (24) (12) (22) (24) (26)
Net income for equity shareholders 456 332 399 419 458 501
Balance Sheet
Inventories 632 517 552 592 566 557
Trade and other receivables 0 0 0 - - -
Cash and bank balances 125 81 91 85 98 128
Property and equipment 2434 2283 2138 1,986 1,831 1,677
Right-of-use assets 28 20 19 18 17 14
Total assets 3,678 3,392 3,278 3,234 3,063 2,961
Loans and borrowings 401 351 325 425 350 275
Trade and other payables 65 59 134 81 74 76
Lease liabilities 31 24 23 23 23 23
Total liabilities 1,001 959 985 1,058 963 896
Share capital 1530 1530 1530 1,530 1,530 1,530
Retained earnings 663 444 304 187 110 76
Equity Attributable to Shareholders 2,652 2,433 2,293 2,176 2,099 2,065
Cash Flow Statement
Net cash generated from operating activities 811 643 642 514 708 730
Net cash generated from investing activities -75 -92 -75 (85) (85) (89)
Net cash (used in) provided by financing activities (739) (594) (557) (436) (611) (611)
Cash and cash equivalents at the end of the period 125 81 91 85 98 128
Key Ratios
Gross margin (%) 42.5% 37.6% 40.1% 41.0% 42.0% 43.0%
EBITDA margin (%) 44.2% 39.8% 43.9% 44.9% 45.5% 46.1%
Operating margin (%) 30.5% 24.4% 28.4% 29.4% 30.5% 31.6%
Net margin (%) 29.0% 23.5% 28.1% 28.3% 29.6% 30.9%
ROA 12.0% 9.4% 12.0% 3.3% 14.6% 16.6%
ROE 16.9% 13.1% 16.9% 18.8% 21.4% 24.1%
Current Ratio (x) 1.3 1.2 1.2 1.2 1.3 1.5
Capex/Sales 13.0% 4.6% 5.7% 5.8% 5.5% 5.5%
Debt-Equity Ratio (x) 0.16 0.15 0.15 0.21 0.18 0.14
EPS 2.98 2.17 2.61 2.74 3.00 3.27
BVPS 17.33 15.90 14.99 14.23 13.72 13.50
DPS 3.5 3.5 3.25 3.50 3.50 3.50
Dividend Payout Ratio 117.4% 161.3% 124.7% 127.8% 116.8% 106.9%
Dividend Yield (%) 5.7% 6.4% 6.3% 6.2% 6.2% 6.2%
P/E (x) 20.6 25.3 19.9 20.8 19.0 17.4
P/BV (x) 3.5 3.4 3.5 4.0 4.1 4.2
EV/EBITDA (x) 14.1 15.6 13.2 13.7 12.8 11.9
Price as at period end* 61.500 54.800 51.900 56.900 56.900 56.900
Page 21 of 39
City Cement Target Price: SAR 26.5/share
Upside: 20.0%
• Strategically located cement plant to help the company benefit from rising
Recommendation Buy demand led by megaprojects
Bloomberg Ticker CITYC AB • Revenue to grow at a higher rate driven by increased sales volume and better
Current Market Price (SAR) 22.10 sales price realizations
52wk High / Low (SAR) 26.000/18.580 • Profitability expected to rise supported by higher top-line and likely improving
12m Average Vol. (000) 282.5 margins
Mkt. Cap. (USD/SAR Mn) 8,044/3,094 • Acquisition of Umm Al-Qura Cement can help in gaining market share
Shares Outstanding (mn) 140.0
Free Float (%) 74% We re-initiate coverage on City Cement Company and assign a Buy rating to the stock
3m Avg Daily Turnover (SAR'000) 3,588.1 with a target price of SAR 26.5/share, offering an upside of 20%. Currently, the stock
6m Avg Daily Turnover (SAR'000) 3,335.0 trades at P/E of 19.3x, based on our FY23 estimates. We are optimistic about the
P/E'23e (x) 19.3 growth prospects of the company as construction activities in KSA are expected to
EV/EBITDA'23e (x) 12.1 pick up, driven by investments in mega projects. The strategic location of the
Dividend Yield '23e (%) 6.3% company's plants near these projects is expected to boost sales volume and utilization
in the coming years. We anticipate strong revenue growth (10% CAGR) during FY23-
Price Performance: 27E, driven by higher sales volumes and moderate increases in realizations.
1 month (%) 1.7 Additionally, we expect double-digit growth in profitability supported by higher
3 month (%) 9.2 revenues and improved margins. The company’s solid financial health aided by net
12 month (%) (11.5) cash position and minimal capex requirements, reinforces our positive outlook on the
stock. Therefore, we assign a Buy rating on the stock.
Investment Thesis
Price-Volume Performance (i) Discounted Cash Flow (DCF), (ii) Relative Valuation (using P/E and EV/EBITDA
30.00 2,500 multiple) and (iii)DDM. Key downside risks to our valuation include i) A Fall in
realization prices due to lack of demand ii) slow pick-up of construction activities
25.00
2,000 impacted by economic slowdown, can impact cement demand, iii) rise in production
20.00 costs. Key upside risks to our valuation include i) Higher utilization led by growing
1,500
15.00
demand due to proximity to megaprojects, ii) better-than-estimated realization prices
1,000 of cement due to spike in demand, and iii) Better than expected synergy from the
10.00 acquisitions.
500
5.00
Acquisition can help in gaining market share: i) company well positioned to benefit
0.00 -
from the expected rise in construction activities given its plants proximity to
Nov-22
Mar-23
May-22
Apr-23
Aug-22
Jul-22
Dec-22
Sep-22
Feb-23
Oct-22
Jun-22
Jan-23
megaprojects, resulting in higher sales volumes ii) acquisition can help the company
gain market share. iii) margins to improve led by higher revenue and costs
normalization from higher levels, iv) solid balance sheet with net cash position and
Source: Bloomberg steady cash conversion cycle, v) continue to pay higher dividends in the future.
FY19 FY20 FY21 FY22 FY23E FY24E
Revenues (SAR mn) 531.4 572.7 496.7 431.4 525.3 579.9
Net income (SAR mn) 190.1 220.5 160.3 115.0 160.2 189.8
Gross margin 43.5% 44.9% 41.8% 33.7% 39.0% 41.0%
RoE NA 12.0% 8.8% 6.3% 8.9% 10.8%
FCF (SAR/share) 1.62 1.90 1.83 1.05 1.36 1.90
DPS (SAR/share) 0.40 0.74 1.25 0.90 1.40 1.70
P/E 24.1x 22.0x 19.7x 24.3x 19.3x 16.3x
EV/EBITDA 16.3x 15.9x 12.1x 14.3x 12.1x 10.6x
Page 22 of 39
Leveraging mega projects proximity to drive utilization and sales volume
City Cement is a prominent cement producer in Saudi Arabia, with a total cement production capacity of 3.6 MTPA as of FY22. While
the company derives 100% of its revenue from Saudi Arabia, cement capacity utilization decreased to 73% in FY22 compared to 81%
in FY21 as the company lost some market share to competition amid muted demand conditions. However, we expect the demand for
cement to grow in the future led by increased spending on construction activities by the government. City Cement is likely to benefit
from this growing demand as its plant is strategically located in Marat, approximately 200km from Riyadh. There are many
megaprojects near Riyadh under construction, and with the spare capacity, the company can cater to the rising demand. For instance,
the Qiddiya entertainment megaproject, which spans more than 334 sq km on the outskirts of Riyadh, is worth USD8bn, with the first
phase slated to open in 2023. Another major project located near Riyadh is Ad Diriyah, known as the pearl of Saudi Arabia, and is set
to become a major tourist destination. This project is worth USD17bn and will include luxury resorts, major international hotel brands,
and over 100 dining and entertainment options. With spare capacity and strategically positioned plants near megaprojects, City
Cement is likely to benefit from growing demand which will help increase its utilization rate. Hence, we forecast the utilization rate
to increase to 86% in FY27 from 73% in FY22, with cement volume growing to 3.13 MTPA in FY27 from 2.65 MTPA in FY22.
Fig. 31: Utilization rate is expected to increase Fig. 32: Mega projects to drive cement volumes in coming years
4 90%
9%
4 3 7% 2% 10%
84% 86%85% 4% 4%
3
80% 81% 81% 80% 3
0% 1% 0%
5%
Mn tonnes
3 78% mn tonnes
2 75% 3 0%
74% 73% 73%
2 70% 3 -5%
-10%
1
65% 2 -10%
1 4 4 4 4 4 4 4 4 4 3 3 3 3 3 3 3 3 3
0 60% 2 -15%
FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E
Cement production capacity Cement capacity utilisation Cement Volume Y-o-Y growth
Cement sales price to improve with growing demand

City Cement has been facing challenges in maintaining its average cement realization over the past few years, with a -6% CAGR
over FY19-FY22. Factors such as lower demand, higher inventory, and increased competition contributed to this decline.
Additionally, the construction sector faced labor shortages due to COVID-19, leading to lower cement volumes and further
impacting the average realization. However, the company is expected to see improvement in its average realization going forward,
with the recovery of demand. That said, we have projected the company’s average price realization to grow at a CAGR of 7%,
reaching SAR 223/ton in FY23 from SAR 162/ton in FY22.
Page 23 of 39
Fig. 33: Average realization is expected to grow from FY23 Fig. 34: Strong revenue growth led by higher volume and realization
250 198 223 25% 800 699 30%

210 216 663
225 197 195 204 20% 700 620
573 580 20%
200 22% 15% 600 531 497 525
168 162 10% 431 10% 7%
SARmn
SAR / tonne
175 500 22% 7%

5% 8% 5% 10%
150 400
0% 0% 0%
125 3% 3% 3% 3% -5% 300
100 0% -1% 200
-3% -10% -10%
75 -15% 100 -13% -13%
-14%
50 -20% 0 -20%
Realization per tonne Revenue Y-o-Y growth
Correspondingly, with strong growth expectations in both volume and average realization, the company's revenue is expected to
have a CAGR of 10% over FY22-FY27E.
Acquiring local companies to gain market share

City Cement announced on April 26, 2023, that it has extended a non-binding memorandum of understanding (MOU) with Umm
Al-Qura Cement Company (UACC), a Saudi-based company, for another six months to acquire all 55 million issued shares in UACC.
UACC produced 1.76 million tonnes of clinker and 1.33 million tonnes of cement, with 66% of its revenue coming from the Western
region due to its plant being located in Taif city of Makkah region. This plant holds a strategic advantage given its proximity to the
USD 15 billion AlUla heritage site development project, which is just over 100 km away. As of FY22, City Cement had a market
share of 6% in terms of sales value and 5% in terms of sales volume in Saudi Arabia. With the acquisition of Umm Al-Qura, we
expect the company to gain market share, particularly in the Western region, which is expected to experience increased demand
for cement due to several big-ticket construction projects in the nearby area.
Margins to improve going forward, however, but not to reach historical highs
City cement’s gross margins contracted from 43.5% in FY19 to 33.7% in FY22 mainly due to soaring energy prices and lower
revenue, caused by a decline in price realizations (-7% CAGR during FY19-22). In Saudi Arabia, energy cost, which represent 30-
40% of total production cost, was on the rise in the recent past. We believe margins have bottomed out as expected higher
revenues led by better price utilizations along with recovery in sales volume to improve gross profit per tonne, resulting in higher
gross margins in the coming years. We expect indirect costs as % of total revenues to decline also from FY22 levels reflecting
operating leverage benefit amid higher revenues. Accordingly, we have projected gross margins to increase from 33.7% in FY22 to
44.0% in FY27E while operating margins to improve from 25.7% in FY22 to 38% in FY27E. Given the negligible financial costs, the
expected improvement at the operating level would flow to the net income level, resulting in an increase in net margins to 36%
by FY27E from 26.7% in FY22.
Page 24 of 39
Fig. 35: Gross margins expected to expand from FY23E Fig. 36: Operating profit margin expected to improve
350 43% 45% 43% 44% 50% 300 50%

42% 41% 42% 38% 38%
300 39% 250 37% 35% 34% 36% 37%
40% 32% 40%
250 34%
200 26%
SAR mn
SAR Mn
200 30%
30% 150
150 20%
100 100
20% 10%
307
220
231
257
208
145
205
238
261
285
195
174
111
168
200
221
244
266
50 50
0 10% 0 0%
Gross Profit Gross Margin Operating profit Operating Margin
Healthy financial profile with net cash position

The company maintains a strong balance sheet with no debt in its books supported by decent cash flows and low capex requirements
(~3% of revenues in FY22). With no growth capex plans in the pipeline due to spare capacity, the company is projected to maintain its
reinvestment rate of 2.5% of its revenues in fixed assets as maintenance capex. Moreover, a steady cash conversion cycle, along with
anticipated improved profitability, is expected to boost the company's cash flows to higher levels in the coming years. Average annual
cash flow from operations is forecasted to be over SAR 250mn during FY23-27E. As a result, we anticipate the company's financial
position to strengthen even further in the coming years, with ROA expected to rise from 5.9% in FY22 to 15% in FY27E and ROE from
6.3% in FY22 to 16% in FY27E.
Fig. 37: Strong cash flow from operations Fig. 38: ROA and ROE expected to grow from FY23E
500 3% 4%
2% 3% 3% 3% 20%
400 2% 16%
2% 2% 2% 14%
3%
2% 15% 12% 12%
SARmn
300 2% 11%
9% 9% 15%
2% 10% 6% 13%
200 11%
10% 10%
1% 8% 8%
100 5%
331
382
268
164
210
289
290
313
362
1% 6%
- 0% 0%
FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E
Cash Flow from Operations Capex/Sales (RHS) ROA ROE
Strong dividend growth to continue

City Cement has a strong track record of paying dividends, with a DPS CAGR of 22.5% from FY19 to FY22, reaching SAR 0.90/share.
This has been supported by the company's low capex requirements and healthy cash flows. With no major reinvestment plans in the
pipeline, and expectations of higher cash flow from operations driven by improving profitability, we anticipate a continued trend of
high dividends. As such, we expect the dividend to increase at a CAGR of 19.6%, reaching SAR 2.20/share by FY27E, up from SAR
0.90/share in FY22. Based on FY23 estimates, the company's solid dividend yield of 6% should attract shareholders seeking regular
cash flows.
Fig. 39: Dividend will continue to grow in coming years
Page 25 of 39
2.7 10% 12%
9% 10%
2.2 8% 10%
6%
2.2
8%
2.1
1.7 6%
2
SAR
5% 6%
1.7
1.2 2% 3%
1.4
4%
1.25
0.74
0.7
0.4
2%
0.9
0.2 0%
FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E
DPS Dividend Payout Ratio
Assign Buy rating
We believe that City Cement is poised for good growth in the coming years, benefiting from increase in construction activities in the
country. The strategic location of the company's plants near these projects is expected to boost sales volume and utilization, leading
to strong revenue growth (10% CAGR) from FY23-27E, driven by higher sales volumes and moderate increases in realizations.
Moreover, we anticipate double-digit growth in profitability, supported by higher revenues and improved margins. Furthermore, the
company's solid financial health, aided by its net cash position and minimal capex requirements, along with the expected
improvement in its financial performance, reinforce our positive outlook on the stock. Therefore, we value the stock by assigning a
Buy rating, with a target price of SAR 26.5, representing an upside potential of 20% from the current market price.
About City Cement

City Cement Company, is a Saudi Joined Stock Company and was established in Riyadh. The company manufactures ordinary Portland
cement and Sulphate resistance cement. It derives all of its revenue from Saudi Arabia and had a market share of 6% in terms of sales
value and 5% in terms of sales volume in Saudi Arabia.
Fig. 40: Shareholding Structure
Abdullatif Group
Holding
24.53%
Almoajil Trading
company
2% Vanguard Group
1.86%
70.3% Blackrock
1.31%
Others
Page 26 of 39
Key financials
Income Statement
Sales 573 497 431 525 580 620
Cost of sales (316) (289) (286) (320) (342) (360)
Gross profit 257 208 145 205 238 261
Operating profit 220 174 111 168 200 221
Other Income 6 -4 6 6 7 7
Finance costs -1 -1 -1 (1) (1) (1)
Profit before Zakat 230 173 125 173 205 227
Income tax (10) (12) (10) (13) (15) (17)
Balance Sheet
Inventories 145 143 154 184 178 187
Trade and other receivables 12 17 29 32 29 29
Right-of-use assets 3 3 3 3 3 3
Total assets 1,948 1,956 1,941 1,915 1,874 1,812

Lease liabilities 16 20 19 19 19 20
Total liabilities 103 126 122 131 138 147
Share capital 1400 1400 1400 1,400 1,400 1,400

Cash Flow Statement
Net cash generated from investing activities 235 -84 -43 (13) (15) (16)
Key Ratios
Gross margin (%) 44.9% 41.8% 33.7% 39.0% 41.0% 42.0%
EBITDA margin (%) 52.7% 51.7% 44.6% 47.8% 48.8% 49.1%
Net margin (%) 38.5% 32.3% 26.7% 30.5% 32.7% 33.8%
ROA 10.3% 8.2% 5.9% 8.3% 10.0% 11.4%
ROE 12.0% 8.8% 6.3% 8.9% 10.8% 12.3%
Current Ratio (x) 6.1 5.8 6.6 6.5 6.5 6.2
Capex/Sales 2.5% 1.8% 2.6% 2.5% 2.4% 2.3%
EPS 1.165 1.145 0.822 1.144 1.356 1.499
BVPS 9.752 13.072 12.993 12.738 12.394 11.893
DPS 0.740 1.250 0.900 1.400 1.700 2.000
Dividend Yield (%) 2.9% 5.5% 4.5% 6.3% 7.7% 9.0%
P/E (x) 22.0 19.7 24.3 19.3 16.3 14.7
P/BV (x) 2.6 1.7 1.5 1.7 1.8 1.9
EV/EBITDA (x) 15.9 12.1 14.3 12.1 10.6 9.9
Page 27 of 39
Qassim Cement Target Price: SAR 64.3/share
Downside: 5.1%
• ~100% capacity utilization limits volume growth

Recommendation Hold • Expected higher cement sales prices on improving demand conditions to
Bloomberg Ticker QACCO AB support the company revenue growth in the coming years
Current Market Price (SAR) 67.80 • Profitability to rise driven by higher revenues and likely better margins
52wk High / Low (SAR) 85.500/55.600 • Solid financial position backed by strong cash flows; dividend yield expected to
12m Average Vol. (000) 59.0 remain healthy going forward
Mkt. Cap. (USD/SAR Mn) 15,865/6,102
Shares Outstanding (mn) 90.0 We initiate coverage on Qassim Cement (QACCO) and assign a Hold rating to the stock
Free Float (%) 99% with a target price of SAR 64.3/share, offering a downside of 5.1%. The company is
3m Avg Daily Turnover (SAR'000) 2,585.6 presently operating at full capacity, which implies stable volumes despite the
6m Avg Daily Turnover (SAR'000) 3,831.7 expected strong pick up in construction activities in the Kingdom. The company is
P/E'23e (x) 25.1 building a new mill at its current factory in Buraydah with a production capacity of
EV/EBITDA'23e (x) 18.0 10,000 tonnes per day. However, it remains unclear whether this new mill will add
Dividend Yield '23e (%) 4.4% incremental capacity or simply replace existing older mills. Therefore, any potential
revenue growth is expected to be driven by better realizations amid improving
Price Performance: demand conditions. On the profitability side, we anticipate the company's earnings to
1 month (%) (0.6) grow strongly on better margins in the coming years. The stock offers a solid dividend
3 month (%) 1.6 yield, which is likely to continue. However, the stock is currently trading at a P/E of
12 month (%) (15.1) 25.1x and EV/EBITDA of 18x, based on our FY23 estimates, which we consider to be
Source: Bloomberg, valued as of 18 May 2023 on the higher side. Therefore, we see a downside in the stock from current levels.
Investment Thesis
Price-Volume Performance
90.00 350 multiple) and (iii) DDM. Key downside risks to our valuation include i) Fall in realization
80.00 300 prices due to lack of demand and ii) slow pick-up of construction activities, led by an
70.00 250 economic slowdown. Key upside risks to our valuation include i) Better than expected
60.00 200
synergy from M&As, ii) Any capacity expansion in the future can also help the
company in tapping expected growth in demand for cement in the region, thereby
50.00 150
giving growth to cement volume.
40.00 100
30.00 50 Strong Fundamentals: We hold positive view on the company primarily on account of
20.00 -
i) operating at 100% utilization rate ii) Expected higher revenues driven by higher
realization amid strong demand outlook iii) Margins to recover from current levels
May-22
Apr-23
Nov-22
Mar-23
Jul-22
Aug-22
Oct-22
Jun-22
Sep-22
Dec-22
Feb-23
Jan-23
given our expectations of better price realizations led by improving demand, iv)
Vol, '000 (RHS) Px, SAR (LHS) Acquisition of Hail cement can help the company to increase its market share, v) The
combination of strong cash flows and a healthy balance sheet has allowed the
Source: Bloomberg
company to consistently pay dividends to its shareholders.
FY19 FY20 FY21 FY22 FY23E FY24E
Revenues (SAR mn) 791.8 898.4 722.8 678.5 806.6 840.7
Net income (SAR mn) 360.7 419.8 291.9 130.5 243.2 258.9
Gross margin 53.9% 52.7% 39.6% 27.8% 36.3% 37.0%
RoE 0.0% 23.2% 16.9% 7.8% 14.7% 16.1%
FCF (SAR/share) 4.72 5.27 4.81 1.09 3.27 3.64
DPS (SAR/share) 0.24 0.44 3.50 2.20 3.00 3.50
P/E (x) 16.5x 17.4x 23.4x 42.1x 25.1x 23.6x
EV/EBITDA (x) 13.0x 14.6x 20.4x 25.5x 18.0x 17.0x
Page 28 of 39
Full capacity utilization constrains volume growth
With a cement plant production capacity of 4.4mtpa, the company has been operating at near-full utilization over the past three
years, with production utilization ranging from 98% to 106%. We expect the company to continue operating at maximum utilization
levels of 100%, resulting in flat volumes for FY23-27E. The company is currently building a new mill at its current factory in Buraydah
with a production capacity of 10,000 tonnes per day, with construction already underway. The total cost of the project is estimated
to be SAR 152mn, with over SAR 90mn already spent as of FY22. However, it is unclear whether this new mill will add incremental
capacity or simply replace existing older mills. Therefore, we have not factored in any capacity additions from this project in our
estimates until we receive more updates from the company.
Higher realization amid stable volumes to drive top-line
Saudi Arabia's push towards non-oil sectors has resulted in significant investments in infrastructure, with several mega projects
commissioned over the last few years. While the pandemic led to delays and postponements, the post-pandemic era is expected to
see a pick-up in construction activity, driving demand for cement in the coming years. Despite operating at almost full capacity, the
company's average realization suffered (which fell to SAR 155.1/ton in FY22 from SAR 229.2/ton in FY19) due to lower demand, higher
inventory, and increased competition. However, with strong demand expected in the future, driven by increased construction activity,
the average realization is expected to grow at a CAGR of 6% to reach SAR 209/ton in FY27E, up from SAR 155.1/ton in FY22. Overall,
higher realization amid stable volumes is expected to drive the company’s revenues in the short to medium term.
Fig. 41: Average realization to improve… Fig. 42: Growth in revenue led by improved realization
250 229 1000 13% 3% 30%

203 209 19% 4% 3% 3%
194 191 197 0%
186 -20% 20%
200 800 -6%
159 155 10%
SAR/tonne
SARmn
150 600
0%
100 400
-10%
50 200
898
792
723
678
807
841
866
892
919
-20%
0 0 -30%
Realization per tonne Revenue Y-o-Y growth
That said, given the stable cement volume as the company is operating at ~100% utilization coupled with decent growth in average
realization will lead to revenue CAGR of 6% from FY22 to FY27E.
Profitability to grow on higher revenues and better margins

In recent years, the company has experienced a significant decline in gross margins, dropping from 54% in FY19 to 28% in FY22, largely
due to a decrease in average cement sales prices. Meanwhile, direct costs remained relatively stable, with the cost of sales per tonne
rising from SAR 106/tonne in FY19 to SAR 112/tonne in FY22. Going forward, we expect margins to recover from current levels
factoring into our expectations of better price realizations amid improving demand conditions. Consequently, we estimate that gross
margins will improve from 28% in FY22 to 43% by FY27, while operating margins are projected to rise from 21% in FY22 to 38% by
FY27. Although net margins are unlikely to reach pre-pandemic levels of 45%-47%, we expect them to reach 36% by FY27, up from
19% in FY22. Overall, the company's net income is forecast to grow at a CAGR of 21% during FY22-27E, driven by stronger revenues
and margins.
Page 29 of 39
Fig. 43: Better pricing to drive improvement in margins Fig. 44: Net income to grow strongly on higher revenues and margins
46% 47%
500 60% 500 40% 50%
48% 47%
50% 34% 36%
400 38% 400 31% 33% 40%
35% 34% 36% 30%
32% 32% 40%
SAR mn
SAR mn
300 300 30%
21% 30% 19%
200 200 20%
20%
100 100 10%
352
420
380
422
256
142
255
272
297
324
361
292
131
243
259
282
307
332
10%
0 0% 0 0%
Operating Profit Operating Profit Margin Net Profit Net Profit Margin
Potential acquisition of Hail Cement to increase market share and cement production capacity
Qassim Cement, a leading cement producer in Saudi Arabia with a sales volume market share of 8% and a sales value market share of
9%, is set to acquire Hail Cement, a cement manufacturer located approximately 360km away from Riyadh. Qassim Cement has a
production capacity of 4.4mt and was operating at nearly full capacity utilization rate of 98.6% in FY22. The acquisition discussions
were initiated through a MOU signed by the two companies in September 2022. Hail Cement produced 1.69mt of cement in 2022 and
generated around 62% of its revenue from the central region of Saudi Arabia. This is a significant advantage since the central region
has many large-scale megaprojects under construction, such as Qiddiya, Ad Diriyah, and the Riyadh metro, among others. The
acquisition of Hail Cement by Qassim Cement is expected to boost cement demand and increase production capacity, providing the
company with a strategic edge over its competitors. Through the acquisition of Hail Cement, Qassim Cement is expected to further
increase its market share and cement production capacity, enabling it to better cater to the growing demand for cement in the region.
This strategic move is likely to have a positive impact on the company's revenue and profitability, strengthening its position as a
leading cement producer in Saudi Arabia. However, there has been no update on the deal since Sep 2022. Thus, we haven’t factored
this acquisition in our model yet. Once we receive more details on this deal, we will make changes to our model accordingly.
Rewarding the shareholders with high dividends backed by strong FCFs

The company has consistently generated strong free cash flows in the past, supported by healthy profitability and low capital
expenditure requirements, and this trend is expected to continue in the coming years with no major expansion plans. Additionally,
the company maintains a solid credit profile with a net cash position and an improving cash conversion cycle. The combination of
strong cash flows and a healthy balance sheet has allowed the company to consistently pay dividends to its shareholders. In FY22, the
company paid a dividend per share (DPS) of SAR 2.20, resulting in a payout ratio of 152%. Going forward, we expect the DPS to increase
significantly at a CAGR of 18% to reach SAR 5.00 per share by FY27, driven by the anticipated improvement in profitability from higher
revenues and better margins, and with no major reinvestment requirements. With an attractive dividend yield of approximately 5%
based on FY23E DPS, the stock offers a good investment opportunity for income-seeking investors.
Page 30 of 39
Fig. 45: Dividend likely to continue to grow Fig. 46: ROA and ROE expected to improve going forward
152% 147% 149%

6.00 160% 30% 26%
122% 128% 140% 23%
21%
5.00 111% 25%
108% 120% 17% 18%
4.00 20% 15% 16%
100%
21%
SAR
3.00 80% 15% 20%

9% 8% 18%
0.24
2.00 60% 10% 15%

6% 14% 13% 14%
40%
0.44
1.00 5%
3.5
2.2
3.5
5.0
20%
3
6
7%
0.00 0% 0%
FY19 FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E
DPS Dividend Payout Ratio ROA ROE
Assign a Hold rating

QACCO is currently operating at full capacity, indicating stable volumes, despite an anticipated increase in construction activities
in the Kingdom. A new mill is being constructed at the company's Buraydah factory, with a production capacity of 10,000 tonnes
per day. However, it remains unclear if this new mill will add to existing capacity or replace older mills. Any potential revenue
growth is therefore expected to come from improved realizations amid better demand conditions. On the profitability side, the
company's earnings are expected to grow strongly due to better margins in the coming years. Additionally, the stock offers a solid
dividend yield, which is expected to continue. However, the stock is currently trading at a P/E of 25.1x and EV/EBITDA of 18x, based
on FY23 estimates, which is on the higher side. As a result, we expect downside in the stock at current levels and assign a Hold
rating.
About Qassim Cement

Qassim Cement was founded in 1976 in Qassim Region 330 Km north-west of Riyadh. The company produces more than 4mn
metric tons of cement. The company's key products include Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC),
Sulphate Resistant Cement (SRC), and Finishing Cement. Qassim cement has its production plant in Buraydah, Saudi Arabia.
Fig. 47: Shareholding Structure
1.88%
23.36%
Public investment fund

Vanguard Group
1.06% Blackrock Group
Others
73.70%
Page 31 of 39
Key financials
Income Statement
Sales 898 723 678 807 841 866
Cost of sales (425) (437) (490) (514) (530) (528)
Gross profit 473 286 188 293 311 338
Operating profit 4 20 -21 0 0 0
Other Income 4 20 -21 - - -
Finance costs -30 -30 -25 -27 -29 -31
Balance Sheet
Inventories 42 35 52 58 58 59
Trade and other receivables 86 15 23 46 46 47
Property and equipment 668 606 548 492 436 380
Projects in Progress 10 26 94 94 94 94
Total assets 2,115 2,020 1,926 1,915 1,862 1,787
Total liabilities 306 288 262 277 280 283
Share capital 900 900 900 900 900 900
Cash Flow Statement
Net cash generated from investing activities -112 -9 57 134 (17) (17)
Key Ratios
Gross margin (%) 52.7% 39.6% 27.8% 36.3% 37.0% 39.0%
EBITDA margin (%) 55.3% 45.6% 31.5% 40.6% 41.0% 42.8%
Net margin (%) 46.7% 40.4% 19.2% 30.1% 30.8% 32.6%
ROA 20.1% 14.1% 6.6% 12.7% 13.7% 15.5%
ROE 23.2% 16.9% 7.8% 14.7% 16.1% 18.3%
Current Ratio (x) 5.0 5.2 5.5 5.4 5.4 5.4
Capex/Sales 0.6% 1.1% 1.7% 2.0% 2.0% 2.0%
EPS 4.66 3.24 1.45 2.70 2.88 3.14
BVPS 20.10 19.25 18.50 18.20 17.58 16.71
DPS 0.44 3.50 2.20 3.00 3.50 4.00
Dividend Yield (%) 0.5% 4.6% 3.6% 4.4% 5.2% 5.9%
P/E (x) 17.4 23.4 42.1 25.1 23.6 21.6
P/BV (x) 4.0 3.9 3.3 3.7 3.9 4.1
EV/EBITDA (x) 14.6 20.4 25.5 18.0 17.0 15.9
Page 32 of 39
Yamama Cement Target Price: SAR 38/share
Upside: 14.7%
• Company well placed to benefit from likely recovery in the domestic construction sector
Recommendation Accumulate • Expected additional production capacity and better utilization amid steadily improving
Bloomberg Ticker YACCO AB realizations to support top-line growth and earnings
Current Market Price (SAR) 33.10 • High input costs to weigh on margins in near term, however, likely to improve on better
52wk High / Low (SAR) 33.900/24.480 efficiencies in the medium term
12m Average Vol. (000) 256.4 • Debt to remain at comfortable level providing further room for future growth projects
Mkt. Cap. (USD/SAR Mn) 17,427/6,703 We re-initiate coverage on Yamama Cement (YACCO) and assign an Accumulate rating
Shares Outstanding (mn) 202.5
with a target price of SAR 38 per share, offering a upside of 14.7% on the current stock
Free Float (%) 89%
price of SAR 33.10. Currently, the stock trades at a P/E of 17.4x and EV/EBITDA of
12.8x, based on our FY23 estimates. We expect strong pick up in domestic
construction sector activities, however, the company’s volume to remain flat at least
P/E'23e (x) 17.4
for the next 2-3 years as the company’s current capacity is being fully utilized.
EV/EBITDA'23e (x) 12.8
However, post 2025, we see the company to be a key beneficiary from the
Dividend Yield '23e (%) 3.0%
construction boom in the Kingdom due to expected 50% rise in the company’s product
capacity from 2026. Despite stable volumes, we expect the company’s revenues to
Price Performance:
grow led by better prices while profitability to rise supported by improvement in
1 month (%) (1.6)
3 month (%) 11.1
margins. The company holds strong balance sheet supported by good cash flows
12 month (%) 10.3
which should continue in the coming years.
Investment Thesis
Price-Volume Performance multiple) and (iii) DDM. Key downside risks to our valuation include i) Fall in realization
36.00 1,600 prices due to lower demand ii) concentration risks-as the company mainly operates
34.00 1,400 in Saudi Arabia, iii) slow pick-up of construction activities, leading to lack of cement
32.00 1,200
demand. Key upside risks to our valuation include i) better-than-estimated realization
30.00 1,000
prices of cement due to increased demand led by strong economic growth, ii) M&As
of plants strategically located near megaprojects can boost volume.
28.00 800
26.00 600
Organic growth story: i) YACCO to increase its growth pace by increasing capacity
24.00 400
from 6.7mt in FY22 to 10.08mt in FY26e, ii) Company has been working at maximum
22.00 200 capacity utilization, iii) Revenue estimated to grow ~16% during FY22-27e, led by
20.00 - increase in volumes sold, iv) Realization prices to support the growth story going
Nov-22
May-22
Mar-23
Apr-23
Jul-22
Aug-22
Dec-22
Sep-22
Feb-23
Oct-22
Jun-22
Jan-23
ahead due to recovery in demand, v) debt burden forecasted is not a concern for the
company vii) expected to continue paying dividend
Source: Bloomberg
FY20 FY21 FY22 FY23E FY24E FY25E
Revenues (SAR mn) 956.0 735.8 1,022.7 1,235.0 1,288.0 1,326.6
Net income (SAR mn) 405.5 153.7 355.8 363.2 409.7 436.8
Gross margin 46.0% 30.0% 41.4% 41.0% 43.0% 44.0%
RoE NA 4.0% 8.1% 8.2% 8.9% 9.1%
DPS (SAR/share) 0.50 - 1.00 1.00 1.00 1.50
P/E (x) 14.3x 30.6x 14.5x 17.4x 15.4x 14.5x
EV/EBITDA (x) 19.6x 38.4x 17.2x 12.8x 12.0x 11.4x
Page 33 of 39
The company implements changes to boost efficiency and drive growth
The company has recently undergone significant changes to improve its operations and drive growth. In 2019, it announced the
intention to sell off the old production lines 1 to 5, with a production capacity of 1.8MTPA, as these production lines were completely
consumed by book. In January 2022, the company decided to sell the sixth production line, which had a capacity of 2.8MTPA, while
shifting the seventh production line, with a capacity of 3.2MTPA, to its new plant later. The new factory, which began operations in
Q4 2022 with two clinker lines and a combined capacity of 6.4MTPA, is expected to bring efficiencies through the use of the latest
equipment and technology.
The company's plants are currently operating at near full capacity, with many mega projects ongoing in the Riyadh area, where the
plants are located. As a result, the company is expected to continue operating at full capacity in the coming years.
In November 2022, the company announced its plan to shift the seventh production line from its old factory to the new one, with an
expected cost of SAR 830mn. This project is expected to start in Q1 2023 and complete in 2025. After completion, the new factory's
clinker capacity will increase to 9.6MTPA, while cement capacity will reach 10.1MTPA. With no spare capacity currently, this shift of
the seventh line is expected to drive volume growth for the company post-2025. Overall, we expect the company’ sales volume to
grow at a CAGR of 8% during FY22-27E with most growth companies in the later years due to capacity addition.
Fig. 48: Capacity to increase post 2025E Fig. 49: Cement Volume likely to grow on increased capacity
12 103% 99% 100% 100% 100% 120% 12,000
80%
10,080
10 100% 10,000
79%
73% 8,064
8 80%
Mn tons
8,000 6,974 6,637 6,720 6,720

'000 Tonnes
6 60%
6,000 5,218
4 40% 4,580
2 20% 4,000
10
10
6
0 0% 2,000
FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E
0
Capacity Utilization Rate FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E
Average realization expected to recover in the coming years on better demand outlook
From 2020 to 2022, Yamama Cement experienced a significant decline in average realization, from SAR 209/ton to SAR 147/ton,
primarily due to lower demand, competitive pressures and elevated inventory levels across the industry. However, with an anticipated
uptick in demand for cement in the coming years, we expect to see a recovery in average realization at a CAGR of 7% to reach SAR
209/ton by FY27E. This growth in realization is expected to be a key driver of a 16% CAGR in the company's revenue over FY22-FY27E,
alongside a robust increase in sales volume and a favorable demand outlook.
Page 34 of 39
Fig. 50: Realization to improve from FY23E Fig. 51: Revenue growth led by high volume and realization
250 27% 30% 2500 39% 50%
3% 3% 3% 20% 29% 40%
200 3% 2000 21% 24%
4% 10% 30%
4%
SAR/tonne
150 1500 20%
SAR mn
0%
3% 10%
100 -10% 1000 0%
-20% -10%
50 -32% 500 -23%
1023
1235
1288
1327
1640
2111
736
209
141
147
186
192
197
203
209
956
-30% -20%
0 -40% 0 -30%
FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E
Realization Y-o-Y growth Revenue Y-o-Y growth
Margins improvement to drive profitability in years to come

Despite 7% rise in revenues, the company’s gross profit declined by 4% in FY22 from FY20 levels with gross margins declining to 41%
in FY22 from 46% in FY20. This was largely impacted by sharp decline in cement sales price which caused gross profit per ton to drop
to SAR 61/ton in FY22 from SAR 96/tonne in FY19. Going forward, we expect gross margins to improve to 45% by 2027 led by better
sales price realization projections as well as supported by efficiencies from new plant. Operating profit is expected to grow at a CAGR
of 16% during FY22-27E with margins improving from 33% in FY22 to 38% in FY27 reflecting operating leverage benefit amid higher
revenues. Net profit is expected to have a CAGR of 13% over FY22-FY27E despite higher financial costs impact.
Fig. 52: Operating profit expected to grow at a good pace Fig. 53: Net profit expected to grow at a good pace
1000 50%
38%
1000 40% 50% 42% 35%
39% 39% 800 35% 33% 40%
36% 37% 32%
800 33% 33% 40% 29%
600 21% 30%
SAR Mn
SARmn
600 21% 30%

400 20% 400 20%
157
200 10% 200 10%

371
333
412
458
486
633
854
406
154
356
363
410
437
579
793
0 0% 0 0%
FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E
Operating Profit Operating Profit Margin Net profit Net profit Margin
Strong Balance sheet

Currently, the company holds debt worth SAR 1bn in its books with debt-to-equity ratio of 0.25x. Most of the debt was raised to fund
the new cement factory which started operations in Q4 22. Despite additional capex of SAR 830mn to shift 7 th production line from
old factory to new factory by 2025, the company’s debt is expected to decline to SAR 0.7bn by FY27 driven by strong cash flow
operations and supported by improving cash conversion cycle. The company paid DPS 1.00 per share in FY22 which we expect to
increase to SAR 3.75 by FY27 supported by strong cash flows and no major capex requirements from FY26 onwards. ROE is likely to
improve to 16% in FY27E from 8.1% in FY22, while ROA is expected to improve to 12% in FY27E from 6.2% in FY22.
Page 35 of 39
Fig. 54: Expectations of Strong growth in Free Cash Flow Fig. 55: Improving ROA and ROE over the period
1,200
958 20% 16%
1,000
15% 12%
800 672
8% 8% 9% 9%
SAR Mn
10% 12%
600 474 4% 9%
5%
400 6% 6% 6% 7%
234
150 0% 3%
200
FY21 FY22 FY23E FY24E FY25E FY26E FY27E
0
ROA ROE
FY23E FY24E FY25E FY26E FY27E
Fig. 56: High Dividend yield
4 120%
96% 96%
3.5 100%
3 70%
2.5 57% 80%
56%
49%
SAR
2 60%
1.5 25% 40%
1 0%
0.5 20%
0.5 0 1 1 1 1.5 2.75 3.75
0 0%
FY20 FY21 FY22 FY23E FY24E FY25E FY26E FY27E
DPS Dividend Payout Ratio
Assigning a Accumulate rating

While we anticipate a strong increase in domestic construction sector activities, we expect the company's volume to remain stagnant
for the next 2-3 years due to full utilization of its current capacity. However, we believe that the company will benefit significantly
from the construction boom in the Kingdom post-2025, with a projected 50% increase in its product capacity from 2026. In short to
medium term, despite stable volumes, we expect the company's revenues to rise due to better prices, while profitability will improve
as margins increase. Additionally, the company maintains a strong balance sheet with good cash flows that are expected to continue
in the coming years. Therefore, we recommend an Accumulate rating at the current level.
Page 36 of 39
About YACCO
Yamama Cement was established in1956 to manufacture and trade in cement in Riyadh, Saudi Arabia. Yamama which is a shareholding
company, is regarded as the oldest cement company in the central region and the third in Saudi Arabia.
Fig. 57: YACCO’s Shareholding Structure

5.93%
5.28%
1.85%
Al-Saud Sultan
Mohamed
Al-Salem Saleh
abdulaziz Mohammed
Vanguard Group
86.94%
Others
Page 37 of 39
Key financials
Income Statement
Sales 956 736 1023 1,235 1,288 1,327
Cost of sales (516) (515) (599) (729) (734) (743)
Gross profit 440 220 423 506 554 584
Operating profit 0 0 -7 -39 -35 -34
Other Income 0 0 -7 (39) (35) (34)
Finance costs 0 0 -7 (39) (35) (34)
Balance Sheet
Inventories 211 74 76 75 92 171
Trade and other receivables 387 0 0 - - -
Assets subject to finance lease 0 0 5 5 5 5
Total assets 6,120 5,923 6,351 6,588 6,802 6,865
Total liabilities 2,376 1,643 1,700 1,776 1,783 1,712
Share capital 2025 2025 2025 2,025 2,025 2,025
Retained earnings -9 193 207 207 207 207
Cash Flow Statement
Net cash generated from investing activities -269 -336 -441 (326) (322) (146)
Key Ratios
Gross margin (%) 46.0% 30.0% 41.4% 41.0% 43.0% 44.0%
EBITDA margin (%) 39.6% 22.4% 36.1% 48.0% 49.1% 49.8%
Net margin (%) 42.4% 20.9% 34.8% 29.4% 31.8% 32.9%
ROA NA 2.9% 6.2% 6.0% 6.5% 6.8%
ROE NA 4.0% 8.1% 8.2% 8.9% 9.1%
Current Ratio (x) 2.3 4.2 5.8 5.7 5.9 6.2
Capex/Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
EPS 2.07 0.85 1.87 1.90 2.15 2.29
BVPS 18.49 21.14 22.97 23.76 24.79 25.44
DPS 0.50 0.00 1.00 1.00 1.00 1.50
Dividend Yield (%) 1.7% 0.0% 3.7% 3.0% 3.0% 4.5%
P/E (x) 14.3 30.6 14.5 17.4 15.4 14.5
P/BV (x) 1.6 1.2 1.2 1.4 1.3 1.3
EV/EBITDA (x) 19.6 38.4 17.2 12.8 12.0 11.4
Page 38 of 39
Disclaimer
Recommendation
BUY Greater than 20%
ACCUMULATE Between +10% and +20%
HOLD Between +10% and -10%

REDUCE Between -10% and -20%
SELL Lower than -20%
Ubhar Capital SAOC (UCapital)
Website: www.u-capital.net
PO Box 1137
PC 111, Sultanate of Oman
Tel: +968 2494 9000
Fax: +968 2494 9099
Email: [email protected]
Disclaimer: This report has been prepared by Ubhar Capital (U Capital) Research and is provided for information purposes only. Under no circumstances is it
to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information
contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be
relied upon as such. The company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its
contents. All opinions and estimates included in this document constitute U Capital Research team's judgment as at the date of production of this report and
are subject to change without notice. This report may not be reproduced, distributed or published by any recipient for any other purpose.
Page 39 of 39

Saudi Cement Sector - Cementing The Future - 2023 Report

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Saudi Cement Sector, cementing the future… 21 May 2023

Sensitivity Analysis .................................................................................................................................... 5

Peer Group Valuation ............................................................................................................................... 7

Macro-economic & Sector Overview ....................................................................................................... 8

Saudi Cement .......................................................................................................................................... 16

City Cement ............................................................................................................................................. 22

Qassim Cement ....................................................................................................................................... 28

Yamama Cement ..................................................................................................................................... 33

DDM (20% Weight)

P/E Based Relative Valuation (15% weight)

EV/EBITDA Based Relative Valuation (15% weight)

Weighted Average Target Price 63.0 26.5 64.3 38

Current Market Price 56.9 22.1 67.8 33.1

Upside/(Downside), % 10.7% 20.0% -5.1% 14.7%

Recommendation Accumulate Buy Hold Accumulate

Source: Company Filings, Bloomberg, U Capital Research

2.0% 2.0% Yamama Saudi Cement

14.0% 12.2% 10.0% 8.7%

Improving fiscal balance to boost government spending

Fig. 7: Improving Saudi Arabia Fiscal Budget (SAR bn)

800 -133 -73

Revenue Expenditure Surplus/Deficit

Source: General Authority for Statistics, Saudi Arabia, U Capital Research

Major projects in Saudi Arabia

Qiddiyah City Development Project is a megaproject that focuses on entertainment and is

Source: Media articles, U capital Research

Source: Media Articles, Company website, U Capital Research

Rising population and rapid urbanization to increase housing demand

Fig. 12: Market share by sales volume in 2022

United Cement, 3.39% Arabian Cement, 6.51%

Qassim Cement, 8.31%

Najran Cement, 5.64%

Saudi Cement, 12.06%

Hail Cement, 3.22%

Southern province, 11.06%

Yamama Cement, 13.26% Tabuk cement, 3.04%

Source: Argaam, U Capital Research

70.9 71.1 50%

Average realization price likely to increase in future

Inventory levels to go down led by a recovery in demand

Source: Argaam, U Capital Research

Saudi cement sector: An attractive dividend play

Source: Company report, U Capital Research

Consolidation in the sector to lower competition pressure

8 10% 10% 7 12% 100%

Price realizations expected to recover in the future

Realization per ton Y-oY Growth Revenue Y-oY Growth

Gross profit Gross Margin Operating Income Operating Margin

Net income recovery expected driven by revenue and margin improvement

400 16% 20%

Net profit Net Profit Margin ROA ROE

900 811 821 820

Consistent dividend payer

DPS Dividend Yield

Source: Company Reports, U Capital Research

About Saudi Cement

Source: Bloomberg, 18 May 2023

Cement sales price to improve with growing demand

250 198 223 25% 800 699 30%