Net income: SAR13mn, -13% Y-o-Y, +167%  Q-o-Q, +46% vs. EFGe
Revenues: SAR83mn, -33% Y-o-Y, -6% Q-o-Q, -30% vs. EFGe
Gross profit: SAR76mn, +63% Y-o-Y, +168% Q-o-Q, +94% vs. EFGe
Net operating profit: SAR22mn, -22% Y-o-Y, +23% Q-o-Q, +11% vs. EFGe
 
Earnings 46% ahead of estimate: Northern Cement reported its 4Q18 headline results, showing sequential recovery in earnings to SAR13mn (-13% Y-o-Y, +167% Q-o-Q) and beating our estimate by 46%, despite a weak top-line. The beat was mainly driven by an extremely low-cost structure during the quarter, which we believe is unsustainable.
 
Cement volumes and prices were below estimate: The reported revenue came in at SAR83mn (-33% Y-o-Y, -6% Q-o-Q) and 30% below our estimates, mainly because of weakness across local and export sales volumes; local volumes fell to 0.12mn tonnes (-61% Y-o-Y, -13% Q-o-Q, -23% vs. EFGe) and export volumes at 0.27mn tonnes was below our estimate (+4% Q-o-Q, -8% vs. EFGe). Although the revenue breakdown is unavailable, our analysis suggests that selling prices at the company’s Saudi operations stands at SAR147/tonne (-14% Y-o-Y, +5% Q-o-Q, -2% vs. EFGe).
 
Cost structure at unsustainably low levels: Average cement cost dropped to an unsustainable level of SAR17/tonne (-91% Y-o-Y, -88% Q-o-Q, -91% vs. EFGe) during the quarter, which we believe could be because of a provision reversal and/or accounting adjustments. However, SG&A expenses spiked significantly to SAR54mn (+192% Y-o-Y, +410% Q-o-Q, +178% vs. EFGe), but did not compensate for the drop in COGS; hence, EBITDA margin expanded to 46% (+10pp Y-o-Y, +9pp Q-o-Q, +17pp vs. EFGe).
 
Our view: Although the results came in ahead of our estimate, we do not see gross margin sustaining at these levels, as we feel it is inflated by the unsustainable low-cost structure. Cement prices and volumes remain unexciting, and we do see limited recovery compared to the sector, as the i) cement demand recovery in the Northern region would be limited due to a lack of major investments in the region like other high demand regions; and ii) the plant is distant from the megaprojects. We currently have a Neutral rating on Northern Cement as its valuation seems full (2020e EV/EBITDA of 11x). (Sameer Kattiparambil, Dina Hicham, company)
 
Northern Region Cement Company: SAR8.85 as of 19 Aug. 2018, Rating: Sell, TP: SAR8.46/share, MCap: USD425mn, NORTHCEM AB/3004.SE