Published: Sep 21, 2014
Source: Saudi Gazette

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Kingdom cement industry ‘not out of the woods yet’

Even with a number of big ticket infrastructure and real estate projects being slated for 2014, the Saudi cement sector “is not out of the woods yet with the labor shortage continuing to impact the construction sector,” Al Rajhi Capital said in its latest analysis on the Kingdom’s cement sector.

The Saudi cement sector is currently passing through a difficult patch as the labor issues continue to plague the construction industry. Sales volumes have declined, while inventory balances have hit a record high. High import volumes have hurt margins.  

Nevertheless, the report said, the sector is likely to recover gradually as construction activities pick up steam once again as new laborers enter the Kingdom via the legal route.

Though the Q2 figures for cement dispatches are not very strong, there are signs of some improvement on a q-o-q basis lately, with a lesser decline in y-o-y dispatches than in Q1. 

Though inventory balances continue to remain on the higher side owing to soaring imports, we can expect companies to rid themselves of this excess inventory going forward since they have now fulfilled their import requirements. However, companies could face falling margins and a slide in utilization rates in this bargain.

The Saudi cement sector is trading at a 2015E PE of 15.6x, slightly above TASI’s PE of 15.4x. SPCC is trading at a multiple of 17.2x, and appears to be marginally stretched at the moment. YCC, on the other hand, is trading at a multiple of 16.7x. 

Based on Al Rajhi Capital’s valuation methodology, YCC is given a fair value of SR88.5 per share, which offers an upside potential of about 11 percent, making it an attractive opportunity at the moment. 

For SPCC, it has a fair value of SR124.2 per share, which offers an upside potential of about 6.6 percent. Although the company is fundamentally strong, we have assigned it a Neutral rating due to the high stock price and limited upside from current levels. 

Finally, both companies offer a dividend yield of about 6 percent (which is one of the highest yields in the sector) and boast high margins given their strategic locations.

“We expect muted Q3 results for cement companies in the absence of near-term growth catalysts, although dividend yields will remain high. However, companies are likely to continue recovering from the labor crisis-related issues, although a full recovery is likely to take a few more quarters. Our new stock initiations will now expand our coverage universe to seven stocks, which will offer investors ample choices to pick from,” the report noted.

Despite a recent slowdown in sales, Yanbu Cement Company (YCC) presence in the high-demand western region of KSA coupled with adequate scope to improve its utilization rates could drive its growth over the medium-term. 

Southern Province Cement Company (SPCC), on the other hand, is expanding aggressively with a couple of major production lines in progress at Tihama and Bisha, which once completed, will make it the largest cement producer in KSA, overtaking Saudi Cement. “We anticipate an interest in the stock as news pertaining to the expansion rolls in, but caution investors to wait for more clarity on the proposed plans,” the report added.

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