AlJazira Capital expects corporate profits to grow 5% in Q1 2024, sees banking sector as top driver

Jassim AlJubran, AlJazira Capital's Head of Sell-Side Research

AlJazira Capital’s Head of Sell-Side Research Jassim AlJubran expects earnings of companies under coverage to rise 5% in Q1 2024, despite the global economic performance and the unparalleled conditions facing the petrochemical sector, thanks to the support and expected growth of other sectors, which may partially offset the impact of some negative sectors.

In an interview with Argaam, AlJubran added that the bottom-line of companies under coverage may start witnessing stability after several consecutive quarters of a downtrend in consolidated profits (excluding Saudi Aramco).

For more exclusive interviews

He also pointed out that the telecom sector is one of the supportive sectors that is expected to witness growth in Q1 2024, compared to posting operating income for the same period of the previous year before one-off profits.

The health sector will likely continue to achieve remarkable growth in light of the increased operating rates as well as higher pricing and demand, with some new sector expansions set to kick off soon, according to AlJubran.

He expected Saudi Arabian Mining Co.’s (Maaden) profits to further grow by about SAR 300 million in Q1 2024, lifted by the rise in gold prices and its impact on margins and the commercial operation of new mines. This is despite the sharp decline in the prices of some products such as ammonia.

Banking sector

The banking sector, according to AlJubran, is seen to remain the top driver of profit growth. Earnings of banks under coverage are poised to climb by more than 12% in Q1 2024. This is due to the expansion of their loan portfolios, specifically those of the corporate sector and small and medium-sized enterprises (SMEs), given the slowdown in the retail sector.

However, the decline in the ratio of time deposits to the banking sector’s total deposits is bound to reflect positively on profit margins, the research head added.

He pointed to an uptick in the local banking sector’s net interest margin amid fluctuations in interest and loan rates.

Cement sector

AlJubran said sales of local cement companies declined in March by more than 14%, partly due to the seasonal effect of Ramadan, as 21 days of this year’s holy month took place in March, compared to only nine days last year.

He added that cement producers’ sales volumes improved during the first two months of 2024, with growth exceeding 5%. This reaffirmed expectations of a hike in the cement sector's combined profit of more than 30%.

Furthermore, cement selling prices, according to market surveys, surged to SAR 208-210 per ton in Q1 2024, compared to SAR 160 and SAR 175 per ton in Q4 2023 and Q1 2023, respectively. This is considered an upside for improving margins and mitigating the impact of rising energy prices.

He pointed out that the elevated energy prices are expected to negatively affect the sector. However, the impact will vary based on the nature of the inputs and feedstock used. It may be minimal on some companies, such as Eastern Province Cement Co., which depend entirely on natural gas.

The sector bears a huge inventory of 42 million tons of discounted cement. Thus, the direct and full impact of the rise in energy prices may not be tangible during the first quarter, but may gradually arise in the coming period, AlJubran stated.

He indicated that most local cement companies ceased exports in a bid to reduce inventory, which contributes to improving margins and boosting profitability.

Petrochemical sector

According to AlJubran, pressures on the petrochemical sector are likely to persist, with an estimated decline of 20% in Q1 2024 versus last year.

He anticipated the petrochemical sector to witness a potential turn to profits of SAR 935 million in Q1 2024, against losses of SAR 1.3 billion in Q4 2023.

The research head added that the sector companies' financial performance in Q4 2023 was hurt by one-off provisions worth more than SAR 2.2 billion, most of which were by Saudi Basic Industries Corp. (SABIC).

On the other hand, the sector continued to be squeezed after the announcement of scheduled maintenance works by several companies, including Advanced Petrochemical Co., Sahara International Petrochemical Co. (Sipchem), SABIC Agri-Nutrients Co., and some of the National Industrialization Co.’s (Tasnee) subsidiaries.

Feedstock prices are still rising, which negatively affects margins. Despite the rise in energy prices, the impact will not be completely felt as companies’ inventories are priced low.

AlJubran also stressed that the Red Sea crisis and high shipping costs are putting more pressure on sector companies.