Riyad Capital sees 25% drop in Q4 profit for Saudi cement sector

Saudi cement companies’ net income is expected to decline 25 percent in the fourth quarter to SAR 759 million as margins have weakened as the overall construction slowdown has affected the sector, according to an earnings preview by Riyad Capital.

“We expect the overall impact of energy and transportation costs is likely to squeeze margins across producers,’’ according to the research note. “The extended impact of low utilization with some producers could be more visible in the coming quarters.’’

Overall, operating margins are expected to fall to 48 percent for the fourth quarter of 2016 from 52 percent in the same period in 2015, while net margins are set to fall to 44 percent from 49 percent in Q4-2015.

Revenues are expected to decline 17 percent to SAR 1.7 billion from SAR 2.1 billion, while overall 2016’s revenue likely to drop 10 percent.

The sector rallied 24 percent in Q4, buoyed by positive news as the government started paying back contractors and sold foreign bonds. However, such news is yet to reflect on the listed companies’ earnings, the analysts added.

“We expect 2017 to be better as budget for the next year has brought in some cheer for an otherwise ailing sector. We believe spending patterns are likely to increase as deficit pressure eases in 2017 with deficit expected to be lower by 33 percent from 2016,” the brokerage said.

Cement production is expected to reach 12.9 million tons in Q4-2016, an increase of 17 percent quarter- on- quarter and a decline of 20 percent year-on-year.

The brokerage firm revised the ratings from ‘Buy’ to ‘Neutral’ for all stocks in its coverage as the 12-month target price has breached over the short term following the recent rally.

Yamama has a share target price of SAR 24, Yanbu SAR 39, Qassim SAR 72, Southern SAR 75 and Saudi Cement SAR 68.

Yamama is expected to witness a drop in margins because of changes in its depreciation cycle, while Southern cement also is likely to witness similar depreciation impact (already in 3Q) due to introduction of Tihama production line.