Saudi cement sector outlook remains positive

NCB Capital, Saudi Arabia’s largest investment bank and leading GCC wealth manager, expects the outlook for the Saudi cement industry to remains strong for the remainder of 2011 with good demand growth and stable prices, despite the normal seasonal slowdown seen in July and August. NCBC continues to believe that a key positive of the sector remains the high dividends, with expected yields for 2011 around the 6-7% mark. 

In a new report issued by NCB Capital analyzing the cement sector in Saudi Arabia, Yamamah Cement remains the bank’s only overweight in the sector with a price target of SR72.5. The company benefits from its high capacity and stock levels which should enable it to take advantage of the strong demand environment present in Saudi Arabia. NCB Capital believes that its low cost base adds to its competitive strength. In addition, with its location in Riyadh, the company is ideally positioned to benefit from the 40% of total KSA cement demand expected in the central region. 

“Our fair value price targets for most companies have decreased slightly due to the higher costs seen in 2Q11. The price target of Eastern and Yanbu have increased; for Eastern this is due to higher than expected non-operating income and for Yanbu due to higher prices and sales volumes than expected,” said Farouk Miah, Acting Head of Equity Research at NCB Capital. “We believe the outlook for the listed companies remains positive and in line with our last sector update in June 2011. 

The cement sector experienced strong growth during 2Q11 with the revenue and net income of the nine listed companies increasing by 23% and 21% YoY. This was due to a combination of strong sales volume growth (15% for the listed companies) and a 6% increase in cement prices. 

“The revenues of KSA’s nine listed cement companies increased by 23% YoY in 2Q11 to SR2,627mn with Arabian Cement reporting the strongest growth from the major listed companies at 56% YoY and Eastern cement reporting the weakest with revenues declining by 7% YoY,” added Mr. Miah. “Gross income of the KSA listed cement sector saw a growth of 21% YoY to SR1,369 mn in 2Q11 with Arabian Cement again reporting the best growth at 46%, while Eastern cement again reporting the weakest growth with gross income increasing by 3% YoY. However, the gross margin for the sector declined 1% YoY to 52% in 2Q11.” 

Total sales volume reported a 13% YoY growth in 2Q11 to 13,559 mn tons. The total sales volume for the nine listed stock increased by 15% YoY to 10,757 mn tons, while for the four private cement companies volumes increased by 5% to 2,802 mn tons in 2Q11. From the listed companies, Arabian Cement reported the best growth at 39% and Eastern Cement reported the weakest with volumes declining by 9% YoY. 

The average price of cement per ton for KSA’s nine listed companies increased by 6% YoY and 5% QoQ to SR241 in 2Q11. The average cost of cement per ton increased 9% YoY and 6% QoQ to SR115 in 2Q11. Among the nine listed companies, Arabian Cement reported the highest growth in both the average price and cost of cement per ton at 27% and 34% respectively. Tabuk Cement reported the weakest price of cement per ton with it declining 1% YoY, while Southern Cement reported the biggest decline in the cost of cement per ton by 5% YoY in 2Q11. 

“The higher prices were largely due to a short term lack of supply in the western region due to fuel issues with Yanbu Cement. This, combined with a strong demand environment, led to the price increase. For cost per ton, this increased significantly QoQ due to the increased reliance on inventory which led to fixed costs not being efficiently utilized,” explained Mr. Miah. 

On a YoY basis, NCB Capital believes 3Q11 will be another strong quarter for the cement sector, although relatively weaker than 1H11 due to the seasonal slowdown. 

“For the six covered stocks, we expect revenues to be come in at SR1,533 mn, up 7% YoY, with gross profit at SR828 mn, up 10% YoY and net income is expected to come in at SR745 mn, up 12% YoY. On a QoQ basis revenues are likely to be 28% lower due to weaker sales during July and August owing to the summer slowdown and Ramadan,” commented Mr. Miah. 

According to the report, for July and August 2011, total sales volume at the listed companies is up only 4.7% YoY, largely due to the 10% drop in August since all of Ramadan fell in August 2011, as against only a part of it in 2010. Additionally, the start of November will also see a dip in activity due to the Hajj festival. Nevertheless, on a YoY basis, NCB Capital expects total domestic cement sales volumes to grow by 9% in 2H11 driven by continued good progress in the construction sector. 

NCB Capital’s 2011 sales volumes estimates are broadly unchanged except for Yamamah where the new estimate is 6% lower due to higher prices which will hamper sales. Longer term, the bank’s sales volume estimates for most of the listed companies have increased by 2-5% due to the stronger demand outlook, as well as the increased market share being taken by the listed companies. 

Cement prices grew significantly in 2Q11 to SR241 per ton from SR227 per ton in 2Q10 (up from SR229 per ton in 1Q11). NCB Capital believes this increase was focused on bagged cement in the western region. The price increase was due to a temporary production shutdown at Yanbu Cement due to fuel issues, combined with strong demand. The bank believes average prices in 2H11 will come in at SR238, 1% down on 1H11, but 3% higher YoY.