TASI performance suggests energy price hikes are “mostly priced in”
Mubasher: In its “Mena Strategy & Economics” report, MubasherTrade Research (MTR) said that Saudi Arabia’s new budget projection highlights three pillars of reforms: raising the efficiency of government spending, more economic diversification, and fiscal consolidation.
In spite of such unprecedented reforms, we believe that the oil sector will continue to play a leading role in the kingdom’s economy. In our view, non-oil private sector should be the biggest winner, while the public sector will feel the brunt of the new tightened policies. We expect the economy to go through a zone of turbulence in 2016 in terms of slower growth and higher inflation, following lower subsidies, it added.
MTR revised its recommendations for Saudi cement companies. The report followed Saudi Arabia’s decision to raise energy prices.
Saudi Arabian Cabinet endorsed on Monday changes to domestic energy prices, which included a rise in fuel prices.
Accordingly, the kingdom raised the price of natural gas to $1.25 per million British thermal units (mmbtu), ethane to $1.75 per mmbtu, kerosene to $25.70 per barrel. Diesel prices were also raised to $14.00 per barrel, light Arab crude to $6.35 per barrel, heavy crude 180 to $3.80 per barrel.
MTR reiterated its “Sell” recommendation on Al Jouf Cement Company, trimming its price target by 16% to SAR 8.7, saying that correlation with oil prices affects the company’s growth negatively.
“We expect no change in revenues. The natural gas component has historically captured c.10% of total COGS, with the new hike in prices (c.67%) we expect natural gas to capture c.16% of total COGS given that no further hikes are applied,” said MRT.
MTR also maintained its “Sell” recommendation on Hail Cement Company (HCC), slashing its price target by 9% to SAR 13.1 from SAR 14.3, with expected total return of -10.9%.
Meanwhile, MTR upgraded its recommendation for Saudi Arabian Fertilizer Co. (SAFCO) to “Buy” from “Hold”, raising the price target from SAR 103.8 to SAR 106.5, reflecting a 24% upside potential. “SAFCO has been a high-margin player in the global fertilizer industry, with its EBITDA margin hovering around 76% over the past three years. In our previous note, we had forecasted a sharp drop in margins to account for a hike in feedstock cost to USD1.5/mmbtu(MTRe EBITDA margin was to hit 64.7% in 2016, 66.5% in 2017). With a lower-than-expected cost increase, all other factors being equal, we now expect SAFCO’s EBITDA margin to decline to only 66.8% in 2016 and reach 68.4% in 2017. Over our forecast period, we expect EBITDA to be higher than our old forecast by 3% on average (EBITDA margin averaging 67.9% vs. 65.9% over 2016-2018, c.+200bps). We also expect net income to be 3% higher than our old forecasts (net margin averaging 63.6% vs. 61.6% in 2016-2018, c.+200bps),” said MTR.
The report issuer reiterated its “Buy” recommendation on Saudi Cement Co., trimming its price target by 3% to SAR75.1. It also maintained a “Buy” recommendation on Southern Province Cement, cutting its price target by 6% to SAR 102.7, and reiterated a “Buy” recommendation on Umm Al-Qura Cement Company, cutting its price target by 4% to SAR 32.3.
The “Buy” recommendation on Yamama Cement Company was maintained, while the price target was slashed by 5% to SAR 42.
MTR also maintained its “Buy” recommendation on Yanbu Cement Company, cutting its price target by 5% to SAR 51.6.
Meanwhile, MTR downgraded its recommendation on Yanbu National Petrochemical Company (Yansab) to “Sell” from “Buy”, trimming its price target by 37% to SAR 31.1.
“According to our estimates, Yansab will witness a surge in its production costs starting 2016, where the cost-to-revenues ratio would skyrocket from the expected 60% in 2015 to 77% in 2016. This will result in losses of SAR 82.5mn in 2016, however going forward, with an expected rebound in oil prices, we expect the company to return to making relatively low profits in 2017 to reach SAR 57.6mn. Accordingly, we eliminated any dividend distributions in 2016 and 2017; afterwards we maintained the previous payout ratios.,” said MTR.
Concerning the impact on the Saudi stock market and according to MTR report, “TASI witnessed a 6.1% decline in the last three months from September to December 2015, coinciding with an expected budget restructuring and higher energy prices. The decline in the main index TASI, in our view, was driven by the two major sectors, namely petrochemicals and cement (—5.9% and —10.3%, respectively, over the same period). Thus, we believe that the effect of energy price hikes is mostly priced in. But retail investors may be inclined to “sell on fact", thus exacerbating an otherwise weak sentiment in view of lower oil prices. That said, we believe that value investors will likely jump in to take advantage of this expected sell-off before the market realizes that the news may not be that bad at all. We believe a leaner government finances bode well for certain sectors, such as Banks, Consumer, and Health Care, while the most expected to be hurt are petrochemicals, cement, and industrials, although varying in magnitude on a stock-by-stock basis.”
