Riyadh-Mubasher: Saudi cement companies are well positioned to fill any supply gap. As oil prices continue to fall, a decision might be made to scale down the Saudi government’s expansionary spending programs, according to the report, MubasherTrade said in a recent report.
The kingdom will likely witness an upbeat construction sector, with the size of planned projects over the next 20 years estimated at nearly US $470 billion across infrastructure, residential, and commercial segments,
According to the US-Saudi Arabian Business Council, the kingdom had already allocated $16 billion to infrastructure projects and $16.8 billion to transportation-related infrastructure in the 2015 budget in order to reduce the impact of the fall in oil prices through more diversification into the non-oil sector.
Saudi cement companies continue to enjoy the lowest cost per tonne, not only in the GCC region but globally as well. Average cost per tonne is estimated at $29/tonne compared to 59/tonne in Kuwait, $48/ tonne in the UAE, and $46/ tonne in Egypt, the research firm said.
Such significantly high margins are attributed to the low cost of raw materials, such as limestone and subsidized natural gas provided by Saudi Aramco (estimated at $0.75/mmbtu).
With the anticipated construction boom from Expo 2020 in the UAE and FIFA World Cup 2022 in Qatar, the need might arise in these countries for importing cement.
The Saudi government had already announced that it will not embark on any new spending during 2015, a step that will probably be carried forward into 2016. Liberalizing energy prices would depress margins, especially given the presence of a selling price cap.
"On average, we anticipate a c.5.1% fall in EBITDA margins and c.4.9% fall in net margins for every $/mmbtu increase in feedstock cost," the research firm said.
Out of the seven Saudi cement companies that MubasherTrade initiated coverage on, the research firm rates five as Buy and two as Sell.
The research firm's three top picks (based on the highest expected total return then average free cash flow yield over 2017-20e) are: (1) Southern Province Cement Co. (price target: SAR 109.4, expected total return +46%, FCF yield 12.2%), backed by strong expansion plans, (2) Yamama Cement Co. (SAR 44.2, +28%, 12.2%), backed by its preferred location in the central region, and (3) Yanbu Cement Co. (SAR 54.2, +20%, 12.3%) on proximity to the Red Sea which will support it in case the export ban is lifted.
MubasherTrade recommended Buy on Umm Al-Qura Cement (SAR 33.6, +17%, 9.0%) and Saudi Cement Co. (SAR 77.3, +15%, 9.6%).
The think tank placed a Sell recommendation on Hail Cement Co. (SAR14.3, -3%, 11.6%) and Al Jouf Cement Co. (SAR10.3, -10%, 15%).
A key risk facing all Saudi cement producers is the removal of energy subsidies, which would hit hard profitability margins.
