Saudi cement firms likely to post 24% drop in earnings: SICO

Saudi cement companies are expected to report a 24 percent decline in net earnings in Q3-2016 on the back of a drop in demand, slow economic growth and higher energy cost, Bahrain-based SICO Investment Bank said in a recent research note.

“Sector fundamentals remain fragile; clinker inventories (are) expanding, while demand continues to contract,” analysts at SICO noted in the report.

Demand for cement declined 10 percent in August year-on-year (YoY) as the construction sector in Saudi Arabia continued to suffer from a drop in government spending. SICO expects cement demand to decline one percent YoY in 2017, and recommends high double digit cuts in production to restore market balance.

“We expect coverage earnings to fall 11 percent YoY in 2017,” SICO said. “Hence, if the kingdom does not cut energy subsidies, our 2017 earnings estimates could see upside to the tune of 4 percent.”

However, a higher-than-expected increase in gas prices to $2/mmbtu in 2017 (from $1.25/mbtu currently), could drive a 5-9 percent downside to 2017 earnings.

Even with lifting the ban on cement exports, the move is unlikely to contribute greatly towards rebalancing the market.

Cement companies performance is expected to vary according to the region where they operate.

“We expect Saudi Cement and Southern Province Cement to fare relatively better with 13-15 percent earnings decline,” analysts at SICO wrote in the report. “Yanbu Cement & Yamama Cement are likely to report the worst (-37 percent YoY) followed by Arabian (-34 percent YoY).”

SICO maintained a “buy” recommendation on Arabian Cement, while upgrading Yamama Cement to “neutral“ from “sell” and maintained “neutral“ on Saudi Cement, Southern, Yanbu Cement, and Qassim.