Saudi cement sector outlook remains strongest since ’07

Saudi cement sector outlook remains strongest since ’07
Published: 04 July 2011

Cement prices in Saudi Arabia should remain robust, NCB Capital said in a new sectoral report, noting that the recent spike "is temporary and focused on the western region."

It said growth demand remains strong, but there is sufficient supply to meet this in the short-to-medium term.

The price targets of most cement companies have increased by around 5-15% on the back of an improved demand outlook coupled with an excess capacity level enabling them to meet any potentially higher demand easily. This is coupled with reduced costs for many cement companies, the report further said.

NCB Capital noted that a key positive of the sector remains the high dividend, with expected yields for 2011 around the 6-7% mark.

Updating the bank’s six covered cement stocks based on the latest monthly data and recent financial results, Farouk Miah, acting head of Equity Research at NCB Capital, said "we believe the outlook for the listed companies is stronger than in our last sector update in March 2011, largely due to a strong pickup in construction activities which in turn is supporting demand/pricing of cement."

"However, in part, we believe the strong pick-up in demand and prices in April/May 2011 is due to one-off reasons and will not be sustained through to the end of 2011. Additionally, we believe the recent stock outperformance of most companies has already priced in the stronger outlook scenario," he added. The outlook for the cement sector remains the strongest since 2007, with "much of this is priced in with the cement sector outperforming the TASI by 26% YTD."

Total sales volumes in the kingdom’s cement sector increased by 8% YoY to 12,596Mt in 1Q11. For the nine listed stocks, total volumes increased by 9% to 9.967Mt. Sales volumes increased by 6% to 2.629Mt for the four private cement companies in Saudi Arabia. From the listed companies, Southern recorded the best growth at 27% and Qassim reporting the weakest, down by 6%.

Yamamah Cement remains the bank’s only overweight in the sector. "Although we also like Saudi and Southern, we believe their current prices factor in their positive outlook. Prospects for Eastern and Qassim remain muted, and thus we remain Neutral on these stocks. We downgrade Yanbu to Underweight off the back of an unjustified premium in valuation against peers," added Miah.

NCB Capital said 2Q2011 will be another strong quarter for the cement sector. For the six covered stocks, the bank expects revenues to come in at SAR2095m (US$558m), up 12.9% YoY, with gross profit at SAR1165m, up 17.7% YoY with net income expected to come in at SR1057m, up 14.8% YoY.

Prices are set to remain stable YoY at SAR240/t, but up 4% QoQ. The slower growth in net income is due to volatility in the other income, and hence we should ideally look at gross/operating income to have a better understanding of core earnings."In the backdrop of increasing construction activities, we expect KSA cement sales volumes to increase by around 16 percent YoY in 2Q10 and 13% for 2011," added Farouk Miah.

"Overall sales (local and export sales of cement and clinker) are expected to increase by 8% in 2Q11 and 7% in 2011. Looking at the rest of 2011, July and August are expected to be slower due to the impact of summer and Ramadan when construction activity slows in Saudi Arabia. Additionally, the start of November will also see a dip down in activity due to the Hajj festival. Thus, we believe the sales volumes in April/May will not be repeated for the next few months."

In terms of the spike in cement prices, NCB Capital said the sharp increase was focused on bagged cement in the western region. "The temporary production shutdown at Yanbu due to fuel issues was largely behind the spike in prices seen in the western region," said Miah. "In other areas, we believe prices increases have been more moderate (1-2% higher QoQ) due to cement players limiting discounts. Over the long term, given the stronger demand outlook and lower levels of excess supply, our estimates for the price of cement have increased by SAR1-3/t."