• Steeper earnings fall in 2Q, but better than expected for some Aggregate clean earnings for 2Q16 fell 20% Y-o-Y for covered companies, driven by: i) 13% drop in revenue, affected by lower volumes and prices; and ii) 2.2 pp contraction in EBITDA margin on average. Half-year aggregate earnings fell 13% Y-o-Y, 10% ahead of our forecast for almost all covered companies (except for Yamama), driven mainly by better-than-expected margins; we will revisit our forecasts to reflect 1H results. Few companies witnessed improvement in cost/tonne, and, in turn, EBITDA margin, which could be due to one or more of the following: i) lower usage of costly imported clinker; ii) more efficient usage of energy; and iii) consuming cheaper clinker inventory produced pre-fuel price rise.
• Demand slowdown, seasonality lead to further pressure on prices The sector's local sales volume inched down 3% Y-o-Y in 1H16, with a large fall of 10% Y-o-Y in 2Q16, driven largely by weak volume in June (-27% Y-o-Y, vs. - 3% in April, May) due to the shift in Ramadan. In our last update, we forecast sector’s volume to inch down 2% Y-o-Y in 2016 (post 7% growth in 2015) on demand slowdown, affected by a cut in government spending as a result of weak oil prices. We assume gradual recovery in volumes starting 2017 (+2%). Average selling price in 2Q16 fell 5% Y-o-Y to a level (SAR225/tonne on average) below cap (SAR240/tonne) as companies offered further discounts to defend their market shares or sold far from its region. Al Jouf showed the highest drop in selling price of 18%, followed by 11% cut for Arabian cement. 1H16 average selling price stood at SAR225/tonne vs. our full-year average price of SAR233/tonne.
• Share price volatility to stay; Saudi, Arabian & Eastern our picks Share prices for covered names retreated 7% on average, with 2Q16 results announcements, vs. 4% drop for TASI in the same period. We believe share prices will likely continue to fluctuate, given this challenging year. Although we are not enthusiastic about the sector as a whole, given demand challenges and uncertainty regarding further ease in energy subsidies, we highlight Saudi Cement, Arabian and Eastern as our top picks that offer upside to our 2016 earnings and dividend forecasts, given their better 1H16 results. We have buys on Yanbu and Yamama, but expect some downside pressure on earnings and dividends.
• No export activity post ban lift and setting export criteria No export activities were witnessed since removal of export ban and setting criteria for companies to be allowed to export. Also, no guidance was announced on the mechanism regarding energy cost/pricing for exporters. According to market intelligence, companies did not yet apply for export licence as they believe exporting is not economical after studying the criteria and due to low clinker inventory for some companies and competition in the region. Companies with idle capacity and located far from higher demand areas are main beneficiary of the lifting of export ban, in our view.

Tarek El-Shawarby
Adham El Badrawy