17-Aug-2017
Saudi Cement Sector - 2Q17: Sustained demand slowdown to weigh on earnings
Steeper Y-o-Y fall in 2Q earnings; margin softening further
Aggregate 2Q17 recurring earnings for our Saudi Cement coverage fell 66% Y-o-Y (missed estimate) due to i) a 40% Y-o-Y slide in revenue driven by lower volumes and ASPs negatively hit by demand slowdown and seasonality; and ii) 51% Y-o-Y drop in aggregate EBITDA leading to a 8pp contraction in EBITDA margin. For 1H17, we believe all the companies have bottomed out with i) aggregate earnings -55% Y-o-Y, ii) EBITDA down 46% Y-o-Y, and iii) sales volumes and prices dropping 25% and 17%, respectively, due to stronger deliveries in 1H16. In our view 2H17 should normalise Y-o-Y as the ongoing slowdown started in 2H16.
Sustained demand slowdown hit sales volumes and prices
Saudi local sales volumes fell 22% Y-o-Y in 2Q17 to c.11.2mn tons due to the prolonged demand slowdown in the construction sector, tight government spending on infrastructure, and seasonality (Ramadan in June), causing monthly sales in June to drop c54% M-o-M (-39% Y-o-Y). Local sales volumes for our covered stocks fell c27% Y-o-Y and ASPs slumped 21% Y-o-Y to SAR175/ton in 2Q17 as companies offered discounts to defend market share given the fierce competition. Additionally, clinker inventory reached its highest levels of 31mn tons by the end of June (vs. 22mn in Jun-16) despite that the majority of the companies have cut production.
50% cut in export fees; still not attractive
The government has lately reduced export fees for cement by 50%; this decision came after the imposed export fees of SAR85-135/ton in mid-Mar 2017 halted all export activities (from 254mn tons in 2Q16 to nil in 2Q17). In addition, companies that have obtained export licences over the past period have refrained from using them given the high export fees. We believe any export fees will still hinder export activities given that the companies are suffering from lower ASPs locally as well as the challenges facing exports (regional oversupply, fierce competition and geopolitical tension).
Share prices reach new lows on further sell-off
The share prices for our covered companies fell an avg. 6% over the past month (before 2Q17 results), reaching new lows, in line with Tadawul (-5%), but they are down 14% since Apr-17 (1Q17 results), which means that the market has been pricing-in the weakness in the sector since the 1Q17 results. We highlighted in our previous note that we expected share price volatility in 1H17 due to expected weak results. We believe normalisation in Y-o-Y volumes and in turn revenue growth in 2H17 (base effect) will create some stability/momentum to share prices. We will revisit our forecast/valuation for the sector post weak 2Q17 results.
Tarek El-Shawarby
Dina Hicham
Aggregate 2Q17 recurring earnings for our Saudi Cement coverage fell 66% Y-o-Y (missed estimate) due to i) a 40% Y-o-Y slide in revenue driven by lower volumes and ASPs negatively hit by demand slowdown and seasonality; and ii) 51% Y-o-Y drop in aggregate EBITDA leading to a 8pp contraction in EBITDA margin. For 1H17, we believe all the companies have bottomed out with i) aggregate earnings -55% Y-o-Y, ii) EBITDA down 46% Y-o-Y, and iii) sales volumes and prices dropping 25% and 17%, respectively, due to stronger deliveries in 1H16. In our view 2H17 should normalise Y-o-Y as the ongoing slowdown started in 2H16.
Sustained demand slowdown hit sales volumes and prices
Saudi local sales volumes fell 22% Y-o-Y in 2Q17 to c.11.2mn tons due to the prolonged demand slowdown in the construction sector, tight government spending on infrastructure, and seasonality (Ramadan in June), causing monthly sales in June to drop c54% M-o-M (-39% Y-o-Y). Local sales volumes for our covered stocks fell c27% Y-o-Y and ASPs slumped 21% Y-o-Y to SAR175/ton in 2Q17 as companies offered discounts to defend market share given the fierce competition. Additionally, clinker inventory reached its highest levels of 31mn tons by the end of June (vs. 22mn in Jun-16) despite that the majority of the companies have cut production.
50% cut in export fees; still not attractive
The government has lately reduced export fees for cement by 50%; this decision came after the imposed export fees of SAR85-135/ton in mid-Mar 2017 halted all export activities (from 254mn tons in 2Q16 to nil in 2Q17). In addition, companies that have obtained export licences over the past period have refrained from using them given the high export fees. We believe any export fees will still hinder export activities given that the companies are suffering from lower ASPs locally as well as the challenges facing exports (regional oversupply, fierce competition and geopolitical tension).
Share prices reach new lows on further sell-off
The share prices for our covered companies fell an avg. 6% over the past month (before 2Q17 results), reaching new lows, in line with Tadawul (-5%), but they are down 14% since Apr-17 (1Q17 results), which means that the market has been pricing-in the weakness in the sector since the 1Q17 results. We highlighted in our previous note that we expected share price volatility in 1H17 due to expected weak results. We believe normalisation in Y-o-Y volumes and in turn revenue growth in 2H17 (base effect) will create some stability/momentum to share prices. We will revisit our forecast/valuation for the sector post weak 2Q17 results.
Tarek El-Shawarby
Dina Hicham