Watheeqa Stock Report
Sinai Cement, Egypt
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Update – Results in line; headroom for further appreciation intact
Sinai Cement (SCEM) declared its nine months results ended September-09. Results were broadly in line with our estimates. Gross margins for 9M-09 stood at 55.5% compared to our FY-09 estimate of 54.5%. Benefits of economies of scale were clearly visible with selling, general and administrative expenses declining by an impressive 180bps year-on-year to 5.8% of total revenues in 9M-09. SCEM’s consistency in operating performance continued with healthy operating margins of 44.1%. Return on invested capital stood at 48% at the end of 9M-09 – this is considerably higher than its past three average of 35%.Cash flow conversion remained high with SCEM converting 37% of its revenues into free cash flow in 9M-09.
We maintain our full year estimates for 2009 and stick to our base case (EGP 48) and best case (EGP 57) intrinsic value estimates. We initiated coverage on Sinai Cement on 14th June, 2009 while the stock was at EGP 31.9 (adjusted for 100% stock dividend). We had rated SCEM with four stars and our opinion was 'fairly undervalued' with a 'High' margin of safety rating.
In between SCEM declared a special dividend of EGP 8.5 per share. Post 1H-09 results, we had ascribed three stars to SCEM and our opinion was 'Undervalued' with a 'Medium' margin of safety rating. The most recent stock price is EGP 40.3. Hence, SCEM delivered a handsome 40% return (including dividends) over a period of five months. However, it is pertinent to note that the stock remained pretty much flat over the past three months following the sharp rally since our initiation (39% over a period of just two months).
We believe SCEM's consistent operating performance would reinforce investors confidence in the stock paving the path for gradual appreciation towards our base case value. We would, therefore, continue to hold on to our position considering a reasonable 19% upside from here, based on our base case intrinsic value of EGP 48. However, we would further add on to our position if the stock reaches EGP 39 and below.
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Update – Superb 1H-09 results; Stock returns 39% - What Next?
Sinai Cement (SCEM) declared its first half results ended June-09. Though limited information is available at this point on the sales volume and the average cement prices, our initial assessment suggests better than expected performance compared to our estimates. Revenues were broadly in line with our estimates, with gross profit margin of 55.1% as compared to our FY-09 estimate of 54.2%. However, the operating margins surprised us positively with a huge variance of 460bps, explaining the better than expected performance. Much of the benefit has emanated from superior economies of scale, in our view. Selling, general and administrative expenses declined to 5.2% of total revenues in 1H-09, lower by 240bps from FY-08 and lower by 420bps compared to our FY-09 estimate. SCEM’s consistency in profitability is worth highlighting with its 1H-09 operating margin at 44.6%, very close to its five year average. SCEM has converted 42.5% of its sales into free cash flow in 1H-09 as envisaged in our initiation report; this is twice that of FY-08. We continue to expect that SCEM will convert sales in excess of 40% into free cash flows over the next two years as well.
Considering the robust results (see attachment) we upgrade our earnings forecasts to incorporate 5% improvement in our price realization assumption for FY-09 (in the backdrop of the buoyancy in domestic demand) and 300bps improvement in operating margins, factoring the benefits of superior economies of scale. Cumulative results of the above and higher non-operating income (owing to higher than expected interest income) would lead to 14% upgrade in our net income forecasts for FY-09 and 17% for FY-10.
We initiated coverage on Sinai Cement on 14th June, 2009 while the stock was at EGP 63.8. We had rated SCEM with four stars and our opinion was 'fairly undervalued' with a 'High' margin of safety rating. In the meantime, SCEM declared a special dividend of EGP 8.5 per share. Subsequently, the stock went ex-dividend on 20th July, 2009. The most recent stock price is EGP 80. That's a splendid total return of 39% (including dividends) over a period of just two months.
Based on our upgraded earnings forecasts for FY-10, we now upgrade SCEM's intrinsic worth between EGP 96 (in our base case scenario) to EGP 114 (best case). The recent stock price is at a 16.7% discount to our base case intrinsic value. We now ascribe three stars to SCEM and our opinion is 'Undervalued' with a 'Medium' margin of safety rating.
Assuming we bought the stock at EGP 63.8 (while initiating coverage); our investment would have earned a handsome return of 39%. What next? We would still continue to hold on to our position considering a reasonable 19% upside from here, based on our revised base case intrinsic value of EGP 96. However, we would further add on to our position if the stock reaches EGP 77 and below.
Please click the link to view or download in PDF format. (14-June-2009)
Company Overview
Sinai Cement - SCEM was established in 1977 and was listed on the Egyptian Stock Exchange in July 2000. SCEM currently enjoys a market share of 8% in the domestic market and would reach 8.5% by end of 2009.
SCEM has two lines of production with a capacity of 3 mt p.a. The first line started operations 9 years ago, while its second facility became operational in August, 2008. The first line has a designed capacity of 4,200 tpd and is currently operating at 5,100 tpd. Similarly, the second line is operating at a much higher 5,400 tpd against a designed capacity of 4,200 tpd. SCEM has produced 1.5 mt of cement in the first five months of 2009 and the management is confident of reaching the 3 mt in the remaining period of the current fiscal.
Daily production stands at 10,000 tpd and 1,500-2,000 tpd of bulk cement currently, with daily sales hovering in the range of 11,500-12,000 tpd. The management expects a further pickup in daily sales to 13,000 tpd after four months with 2 additional cement mills (currently 2) becoming operational. SCEM has 6 packaging machines with a capacity of 100 tons/hr, out of which 4 caters to the old facility and the balance to the new line of production.
SCEM owns 25.4% stake in Sinai White Cement and has established a wholly owned subsidiary (99.9%) in the form of Sinai Cement for Services for providing after sales services to its domestic clientele.