Saudi cement sector takes stock

Government-led infrastructure development will boost the Saudi cement sector in 2012.

RELATED ARTICLES: General manager Mike Richardson departs RAK Cement | Hail Cement announces $31.5m housing project | Saudi cement sector faces capacity constraints

NCB Capital, Saudi Arabia’s largest asset manager, expects the Saudi cement sector to continue witnessing strong demand in 2012, led mainly by government projects.

The new NCB Capital report analysing the Saudi cement sector noted that there are concerns on supply due to an apparent inability by Yanbu and Southern Cement to receive increased quantities of subsidised fuel from Aramco for their new lines, leading to potential delays in the start of their operations.

“There have been ongoing concerns that Yanbu and Southern Cement have been unable to receive assurance from Aramco that they will receive the subsidised fuel to run their new lines. This puts into doubt whether or not these new lines, and the additional 4.5m tons of capacity will be able to commence commercial production on time in 2012,” stated the report.

Story continues below

Advertisement

FEATURED COMMENT Please click here to comment on this article

On 30 October 2011, Yanbu announced it had halted production at its first, second and third lines in order to save fuel for trial operations at its new fifth line.

Subsequently, on 1 November 2011, Aramco stated it would continue to fulfill its fuel-supply agreement with Yanbu, and that the latter did not notify it in advance for extra fuel for its fifth line.

“Based on our discussion with Aramco, we believe the area of debate is the supply of crude for new lines from existing companies, as well as new companies. If this is the case, this would lead to a strong pricing support in 2012,” said Farouk Miah, acting head of equity research at NCB Capital.

“The potential demand-supply imbalance could become particularly acute in the western region, where demand is expected to be high, coupled with possible supply constraints at Yanbu Cement, where its new 3m t/y line is expected to start commercial production in Q1 2012.”

NCB Capital downgraded Yamamah Cement to neutral with a PT of SR75.6 due to its strong recent performance (up 33% since NCB Capital’s overweight call vs. 8% fall in the TASI).

At the same time, it has upgraded Yanbu to neutral with a PT of SR61.4 due to a better pricing outlook. “Our fair-value price targets for most companies have increased by an average of 8% to 9% due to a better demand and pricing outlook,” explained Miah.

Although NCB Capital remained neutral on all names in the sector, on a relative basis, the report favoured Yamamah, Saudi and Southern.

“The key reason for this is their spare capacity/high stock levels, which are key positives for a sector which may face supply constraints in the coming 12 to 24 months. Due to this, we believe these names should trade at a 10% premium to peers, which are already near 100% utilisation rates, and have low stock,” added Miah.

NCB Capital expected Q4 2011 to show good profit growth from the cement stocks under coverage, due to a combination of strong growth in sales volume and steady prices.

For the six covered stocks, revenues are expected to total SR1,972m, up 19% year-on-year, with gross profit at SR1,098m, an increase of 25% year-on-year. Net income is estimated to expand 30% year-on-year to SR1,003m during Q4 2011. It also anticipated an average price of SR240/t in Q4 2011 – up 4% year-on-year, but down 3% quarter-on-quarter. The average cost per ton is likely to decline 1% year-on-year.

However, in terms of 2012, NCB Capital expected year-on-year growth to slow. “We expect year-onyear growth of domestic sales at covered stocks of 5% against the 9% expected for 2011. For revenue and profitability, we expect the stocks under coverage to record growth of 4.6% and 5.3% respectively against the 13.8% and 18.7% expected in 2011,” highlighted Miah.