Wednesday 20 February 2019

Saudi cement sector likely to see revenue drop in Q2

RIYADH, July 3, 2018

Saudi Arabia’s cement sector is expected to witness a drop in revenue in the second quarter (Q2) of the year, according to a report released by Al Rajhi Capital, a leading financial services provider in the kingdom.

The companies under Al Rajhi’s coverage are expected to report a ~6 per cent year-on-year (y-o-y) decline in revenue, whereas earnings are likely to fall by ~10 per cent y-o-y, said Al Rajhi’s Q2 2018 earnings estimates report.

The cement sector’s sales volume declined 16.7 per cent y-o-y in the first two months of Q2, which we believe is due to restructuring in the industry and the seasonality effect (summer, Ramadan month and Eid holidays).

On a quarterly basis, sales volumes are expected to be lower than the previous quarter, due to the seasonality effect. In the first two months of Q2 2018, 15 cement companies have reported y-o-y decline in sales volume, led by Riyadh Cement (-44.1 per cent y-o-y) and Cement City (-37.5 per cent), while only two companies have reported an increase viz Tabuk Cement (+82.4 per cent y-o-y) and Hail Cement (+28.7 per cent).

However, the total inventory for the sector has increased slightly by 1.2 per cent q-o-q (~36.2mn tons by the end of May) as account of increased production and declining sales.


Al Rajhi expects the aggregate earnings of Saudi petrochemical sector (ex-Sabic) to improve on a quarterly basis in Q2 2018, primarily due to higher sales volume, supported by stable polymer products prices amid lower NGL costs.

In Q2, average Brent crude price is up by more than 11 per cent, on expectations of more balanced oil market. Despite Opec along with its allies including Russia agreed to increase production from July 1, the rise in production won’t lead to supply glut and unlikely to halt the oil market recovery due to persistent decline in Venezuelan production and US sanction on Iran amid strong oil demand, keeping oil price firm during the quarter. However, prices of most polymer products remained largely stable with a positive bias during the quarter. PE (+1-2 per cent q-o-q) and PP (<+1 per cent q-o-q) prices rose marginally, while prices of key intermediate products such as VAM (+8 per cent q-o-q) and Acrylic Acid (+6 per cent q-o-q) advanced moderately.

Meanwhile MEG prices broadly remained unchanged during the quarter amid stable upstream Ethylene cost. On the cost front, average key feedstock prices (-4 per cent q-o-q for Propane and -1 per cent for Butane) continued to decline in Q2, signalling better NGL-based product spreads amid stable product prices. However, the companies, which primarily use Naphtha as a feedstock, are likely to witness a lower spread, owing to higher Naphtha price (+10 per cent q-o-q).

•    APCC’s profitability is likely to improve significantly on a quarterly basis, driven by higher sales volume following the plants shutdown in Q1, coupled with lower propane price.
•    Yansab, which also witnessed shutdowns at its HDPE and LLDPE plants in February, is expected to post healthy earnings growth in Q2, supported by higher revenue, lower propane price and better operating efficiencies.
•    For Sipchem, higher sales volume and improved Acetic acid & VAM prices could boost its bottom-line in Q2.
•    Healthy average Tio2 prices, which have been continuously rising over the past nine quarters, coupled with higher equity income would help Tasnee to improve its earnings sequentially in Q2.
•    While, Safco’s top-line is likely to inch down, largely due to weak fertilizer prices and planned shutdowns at Safco II (7 days) and III (9 days) plants, its earnings might remain largely flat sequentially.
•    Sabic’s earnings is expected to come under pressure, weighted down by higher Naphtha price (accounts ~60 per cent of total feedstock costs for the petchem segment), the likely maintenance shutdown (~30 days) of its PP plant in Netherland (source: PolymerUpdate) and weak operating performance of its metal segment.

Retail sector

Companies in the retail sector are expected to perform well, according to the report. Extra and Jarir will continue to benefit from market share gains in electronics, computing and mobility segments. Extra is expected to post 6.5 per cent y-o-y revenue growth, while Jarir is likely to report 2 per cent y-o-y revenue growth.

Margins for both Extra and Jarir are expected to remain stable or witness marginal expansion. Al Othaim will continue to clock healthy revenue growth (8 per cent yoy expected in Q2), driven by store roll-outs.

However, higher SG&A costs for Al Othaim will weigh on its earnings growth. We do not estimate earnings for Fawaz Al Hokair as the company has not released detailed financials for Q4FY18 (March 2018 quarter). However, investors should note that June quarter will be the best quarter for Fawaz Al Hokair as Ramadan and holidays completely fell in Q2.

Telecom sector

The second quarter results could benefit from the hike in prices, implemented by all players from January 2018, which was not fully reflected in Q1 numbers due to pre-purchases before VAT towards the end of Q4.

Football world cup also could have increased the data consumption, leading to better performance. On the other hand, some weakness in subscribers is expected as some expats could have left before the increase in expat fee in July takes effect. Also, Q2 coincides with the end of academic year for some schools.

Further uptake in VoIP also could offset revenue. All these negative factors continue to weigh more on the smaller players than on STC. Given the high debt for Zain and Mobily, an increase in SAIBOR could also result in increase in financing expenses.

For Mobily, Al Rajhi expects a similar performance exhibited in Q1. We expect provisions to be lower on a y-o-y basis. The MSCI inclusion has buoyed STC’s stock price significantly but the fundamentals are only moderately up. Mobily’s stock has rallied as well post the optimism surrounding last quarter’s results despite remaining in losses.

Food sector

Revenue growth is expected to be muted for all the food companies under Al Rajhi’s coverage, mainly due to slowdown in consumer spending and exit of some foreigners, which will weigh on volumes. However, margins are expected to be resilient due to benign commodity prices.

Healthcare sector

The second quarter results will be affected by seasonality effect as Ramadan, Eid and summer vacation were all in Q2, which will cause the utilization rate to go down. Total revenue for the healthcare companies under our coverage is expected to rise ~11 per cent y-o-y, while the net profit is likely to witness a decent increase due to the lower base of last year, which was impacted by relatively higher provisions.

Hammadi is expected to lead the growth in the sector this quarter with ~20 per cent y-o-y rise in top line, driven by improving utilization of Nuzha hospital as the first full quarter of operation, while the net profit is estimated to be around SAR30mn. Care is expected to witness a slight decline of ~5 per cent y-o-y in revenue, whereas the net profit is likely to improve by ~21.5 per cent y-o-y, due to lower base last year effect and better utilization rates.

For Dallah, Al Rajhi expects the company to report ~8.8 per cent y-o-y growth in the top-line as Namar Hospital started operations in April. Al Mouwasat is expected to report 17.4 per cent y-o-y rise in revenue on better utilization rates. On the other hand, net profit margin is expected to come under pressure due to higher employee expenses, related to Khobar hospital (expected to open in Q3 2018). – TradeArabia News Service

Tags: cement | petrochemical | Healthcare | Al Rajhi |

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