NCB Capital initiates coverage on Arabian Cement with ‘neutral’ rating

NCB Capital has initiated coverage on Arabian Cement Co. with a ‘neutral’ rating and target price of SAR 41.7, the brokerage said in a report on Thursday.

The cement sector posted its first decline in demand on record last year, falling 9.5 percent year-on-year (YoY). Arabian Cement saw the highest decline in sales quantities on record, at 17.2 percent YoY.

The slowdown in demand has increased competition between players, NCB Capital said, adding that it expects price discounts to continue.

The brokerage forecasts a 6 percent YoY drop in prices for Arabian Cement in 2017, following a 13.5 percent YoY decline in 2016.

“We believe this will impact gross margins. We forecast gross margins of Arabian Cement to decline from 43.9 percent in 2016 to 34.8 percent in 2021E,” the report said.

Arabian Cement is expected to post a net profit of SAR 59.2 million for Q1 2017, a 72 percent year-on-year (YoY) decline, according to research estimates compiled by Argaam.

The overall outlook for the cement sector remains subdued, with sales quantities expected to decline 12-20 percent year-on-year (YoY) in 2017, NCB Capital said, adding that cement export terms are also unfavorable.

“Despite export markets such as East Africa and Qatar being attractive, we believe the export tariff (SAR 83 – SAR 133/ton) makes the exporting option largely unfeasible,” the report said.

Moreover, plans to reduce fuel subsidies by 2020 will weigh on the sector, leading to higher costs.

Meanwhile, potential positive catalysts include initiatives by the Ministry of Housing and any increase in residential development projects as a result of the white land fees imposed in the kingdom.