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Arabian - Al Safwa merger valued at SAR5-6bn - Report

Arabian - Al Safwa merger valued at SAR5-6bn - Report
Enterprise value of Al Safwa estimated to exceed SAR 1.9 billion
ACC
3010
2.06% 32.15 0.65
ACC
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1.23% 11.54 0.14

Riyadh - Mubasher: Aljazira Capital said that the expected valuation after the potential merger between Arabian Cement and Al Safwa Cement can range between SAR 5.02 billion and 6.10 billion, according to a recent report.

Arabian Cement recently initiated preliminary talks with Al Safwa Cement for a potential merger.

Aljazira said that there are two scenario models on pricing power, the first is if the merged entity continues with current capacity of 8.2 million tonnes, pricing power is not expected to take effect in the short term.

“Despite the expected increase in cement demand for the upcoming years, the market wouldn’t absorb the full capacity of the new merged entity, which limits its pricing power,” it added.

The second scenario would be if the company decided to close its old production lines and replace them with Al Safwa’s current capacity, saying that “this would reduce the supply in the market and increase the utilization rate for the company. At lower supply and higher utilization rate the company will be able to increase its price realization and reduce its production cost, due to higher efficiency from newer plants,” the report explained.

The research company said that it is estimates are at an expected utilization rate of 70% to 85%, according to the note issued on Tuesday.

The report noted that the announced projects in the western region will create opportunities for larger market share.

The enterprise value of Al Safwa is estimated to exceed SAR 1.9 billion. The company has started a new production line in late 2016 with cement capacity of 2.2 million tonnes, taking total cement capacity to 4.4 million tonnes.

Al Safwa showed a decline of 4.7% year-on-year cement dispatches in the last 12 months, while Arabian cement showed a decline of 27.7%, the report noted,

 “Once the merger is completed and successful, we expect the company to have a production capacity of around 8.2MT. We believe that the high excess capacity with current market conditions and high competition could result in low utilization rate and lower return on assets, which is our main concern.”

“We expect cement sector to pick up in FY2018, with five mega projects located in the western region, are expected to start in the next two years, namely the Red Sea project, Jeddah Downtown project, Al Taif City development project and the expansions of Holy Mosques, located in the western region.

The company is expected to gain market share from these new projects due to our expectation of quick recovery in western region. This might result in lower competition in the region.