Cut TPs on weak outlook; expect share price volatility…
We cut our target prices (TP) for our coverage to reflect i) lower levels of sales volumes /pricing in the ST; and ii) potential hike in energy costs in a few years as there is more clarity on energy reforms. We are still negative on 2017 outlook and expect share price volatility as volumes are set to fall severely and earnings contract likely in 1H17, in our view. We have Sell ratings on Jouf, Northern (New) & Tabuk due to rich valuation and lower profitability, and Neutral ratings on Yamama, Qassim, Eastern & Southern.
 
…but we still see value in City, Saudi, Yanbu & Arabian
We have Buy ratings on names with strong balance sheets, higher profitability than peers, strong FCF generation and div. yields like City (initiate with Buy, TP: SAR15.8, upside 20%), Saudi (SAR75, 21%), Yanbu (SAR43.2, 17%) & Arabian (SAR46.5, 20%).
 
Weak volumes and low ASPs to persist in 2017
We expect cement volumes to drop in 2017 (local sales -10% Y-o-Y, -10% in 2016) on weak demand due to the slowdown in construction and projects awards. We forecast utilisation to slip to c68% on added capacity in the market (80% in 2016 & 90% in 2015). We assume ASPs will remain pressured and plunge 14% in 2017 (-10% 2016), as companies continue discounts to defend market share and offload high inventories – balance of c29mn tonnes by end Jan-17 that might lead companies to halt production lines. We assume volumes and prices will gradually recover starting from 2018. We expect combined revenue for our coverage to drop 15% Y-o-Y in 2017 (-15% in 2016).
 
Expect further plunge in 2017 earnings and dividends
We expect combined recurring earnings to plunge 24% Y-o-Y in 2017 (-24% in 2016) on lower revenues. We expect a slight EBITDA margin softening of 1pp to 53% on average in 2017 for our covered names (-2pp in 2016). Potential energy cost hikes by 2019-20 would further erode the avg. EBITDA margin by c5pp to an average of 48% by 2020, a level that is still high vs. regional and global peers. We expect a drop in DPS in absolute value in 2017, with yields coming down to 4% in 2017 vs. 6% in 2016.
 
Export is a catalyst, but challenges remain
The Saudi govt. issued a few cement export licences and received other requests (news sources). Political stability, especially in Yemen, would be the main upside to volume growth and lower pressure on pricing locally. But challenges remain: i) competition from regional players with excess capacity; ii) political tension in target markets; and iii) loss of competitive export edge if fuel subsidy is cut; high export fees could curb exports. We believe beneficiaries are producers in the North, South, followed by those in the East.

Tarek El-Shawarby