A Ras Al Khaimah Cement Company report from The National Investor (TNI). Apparently the management of RAKCC doesn't have a solution to the problem of rising energy costs. That doesn't say much for management then. Isn't it the job of management to find solutions to problems? See also ...
RAK Cement continues to struggle in the face of rising energy costs, which have squeezed the company’s margins. Gross profit margin for the first quarter stood at 16% compared to 33% in the same period last year. This is purely due to the shortage of gas, which compels such companies to switch to diesel. Energy cost accounts for nearly 50% of CGS for RAK Cement.
Revenues were higher than expectations and this is a consequence of higher cement prices. YoY, revenues dropped by 10% to AED 81.2m while gross profit dropped by 57%. The primary reason for the drop in revenues was a plant shutdown for 21 days. This was the first plant shutdown for RAK Cement in eighteen months.
Energy problems to continue
We expect RAK Cement to continue suffering due to the rising energy prices as there is no solution in sight. The management also shares this point of view and foresees dwindling margins in the immediate future. Higher realized cement prices did not offset the impact of rising energy costs. The rise in prices has, however improved gross profit margin on a QoQ basis from 7.7% to 10.8%. We expect margins to stay low in 2008 and have assumed that they will start improving in 2010.
Target price adjusted to AED 2.22
After the incorporation of 1Q/08 results in our model, we have revised our estimates. Revenues have been adjusted positively for the rise in cement prices while margins have been squeezed further due to the gas shortage. Resultantly, our target price has been adjusted to AED 2.22 from AED 2.26 and offers just 9.8% upside to the current market price of AED 2.02. Our Fairly Priced rating therefore still holds. Since our last publication, the stock has been range-bound and has traded in a band of AED 1.97 and AED 2.08. During the second half of 2007, it was much more volatile with a trading range of AED 2.00 – AED 2.60.
It is beyond the control of management because the problem is due to an energy shortage which threatens all companies in this business. Margins have dropped significantly and being small, RAKCC is impacted more than its larger peers, some of whom have multi-fuel plants. RAK Cement is just a 1.2m tons/annum plant in a 30m ton industry.
Cheers.
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