Equity Analysis /
Saudi Arabia

Saudi Cement Sector: Mega projects to drive long-term outlook

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    19 June 2019
    Published bySNB Capital

    We believe the long-term outlook for the Saudi cement sector is positive, due to the mega projects and higher capital expenditure by the government. Given the geographic location of the mega projects, we believe companies in the West and North West areas of Saudi will benefit. Overall sales of cement and clinker are expected to increase 9-13% in 2019f, supported by higher exports. However, we expect domestic cement sales to decline 5-10% in 2019f. We expect growth in domestic sales as of 2020f, driven primarily by mega projects. We upgrade Southern Cement to Overweight, but downgrade Saudi Cement to Underweight.

    Domestic sales to bottom-out in 2019f; Mega projects to drive growth: Domestic cement sales declined by 9.4% yoy in Q1 19, with expectations of a 5-10% decline in domestic cement sales by year-end. We expect demand from mega projects to begin as of Q1 20 and drive growth thereafter, with key beneficiaries being players in the West and North West areas of Saudi. This is reflected through the strong pipeline of expected contract award in 2019, driven primarily by NEOM. Moreover, we expect higher capital expenditure by the government to increase as the fiscal deficit declines.

    Selling price revival expected to continue: Having reached a low of SAR131/ton in Q3 18 due to heavy discounting, cement domestic selling prices revived to SAR200/ton in Q1 19 albeit no improvement in demand levels. We forecast selling prices of SAR187/ton in 2019f and SAR192/ton in 2020, thereby supporting overall top-line growth.

    Export sales low in profitability, however support liquidity levels: Clinker export levels increased significantly in 2018, with the removal of export tariffs. We believe total exports will exceed 8mn tons in 2019f vs 4.2mn tons in 2018. Companies exported at FoB prices of SAR100-110/ton vs domestic cement selling prices of SAR153/ton in 2018, which we believe is driven by liquidity needs and the ample availability of clinker. In the long-run, we believe companies benefiting from mega projects will reduce exports.

    Upgrade Southern Cement to OW; Downgrade Saudi Cement to UW: We upgrade Southern Cement to Overweight. We remain OW on Yanbu Cement. We believe companies trade at attractive valuations and will benefit from mega projects. Saudi Cement has rallied 38.8% ytd due to the EM indices inclusion. We downgrade it to Underweight due to its rich relative valuations.