Shuaa Capital has initiated coverage on eight Saudi cement producers. The Dubai-based financial services provider assigned a “sell” rating to all players under coverage, which account for over 70 percent of domestic sales, namely Northern Region Cement, Southern Province Cement, Qassim Cement, Arabian Cement, Yamama Cement, Yanbu Cement, Saudi Cement, and City Cement.
The valuation was based on Shuaa’s forecast for limited value in the sector due to an expected decline in cement demand until 2018 amid rising clinker capacities and sizable build-up in inventories. In addition, an expected increase of 40 percent in fuel oil costs during H2-2017 would also weigh negatively on the sector.
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Ratings on Cement Stocks |
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|
Stock |
Recommendation |
Target Price (SAR per share) |
|
Northern Region |
Sell |
8.2 |
|
Southern Province |
Sell |
52.9 |
|
Qassim Cement |
Sell |
48.0 |
|
Arabian Cement |
Sell |
37.0 |
|
Yamama Cement |
Sell |
17.5 |
|
Yanbu Cement |
Sell |
35.4 |
|
Saudi Cement |
Sell |
57.1 |
|
City Cement |
Sell |
13.9 |
Cement producers’ net income is projected to see a drop between 34 percent and 50 percent in 2017, hurt by higher operating leverage in the sector.
Revenue will likely see a double-digit decline on lower selling prices and volumes.
In addition, EBITDA is seen contracting between 18 percent and 38 percent this year, due to lower topline and higher costs.
“Our expectations of inventory rationalisation in 2017 and 2018 translate into exaggerated impact on margins, with 2017/18E average EBITDA margin at 48 percent/45 percent, respectively,” Shuaa added.
Saudi cement firms are expected to maintain high dividend payouts going forward on low capital expenditures and strong balance sheet. “However, significant earnings declines are anticipated to result in much lower dividends (2017 average: -33 percent YoY), translating into an unattractive 4.2 percent yield on average,” the financial services provider added.
“Looking ahead, we expect cement demand to taper down on lower government expenditure, and hence lower contract awards. However, our estimates still imply that the demand will remain elevated in a global context… backed by the Saudi government focus on residential projects under the National Transformation Program (NTP) which seeks to increase home ownership rates to 52 percent by 2020.”
Shuaa Capital added that the limited visibility on export regulations will not help the sector in the near term, forecasting export volumes to remain muted, impacted by geopolitical instability in many neighboring countries.
Cement prices will likely see more pressure in 2017 and 2018, declining 10 percent YoY and 2 percent YoY, respectively.
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Net Income Estimates 2017-18 (SAR mln) |
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2018E YoY Variation |
2017E YoY Variation |
2018E Net income |
2017E Net income |
Company |
|
-25% |
-45% |
166 |
222 |
Yamama Cement |
|
-8% |
-38% |
534 |
581 |
Saudi Cement |
|
-14% |
-34% |
223 |
259 |
Qassim Cement |
|
-20% |
-38% |
270 |
339 |
Yanbu Cement |
|
-32% |
-50% |
190 |
278 |
Arabian Cement |
|
-12% |
-44% |
416 |
473 |
Southern Province |
|
-22% |
-36% |
101 |
130 |
City Cement |
|
-36% |
-46% |
46 |
71 |
Northern Region |
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