Saudi cement sector to recover in 2018: Aljazira Cap

The outlook for Saudi Arabia’s cement sector is negative in the short/mid-term, but the industry will recover next year as construction activity picks up, Aljazira Capital said in a report on Wednesday.

An expected recovery in oil prices, the initiatives of the housing ministry, and the Kingdom’s National Transformation Plan are expected to be the main drivers of increased construction activity and improving cement demand.

While fuel subsidies will be lifted completely in 2019, which will increase production cost, fuel cost hikes are expected to push cement producers to increase selling prices in order to maintain margins.

Saudi cement dispatches declined 19.2 percent year-to-date, due to the continued slowdown in construction activity on the back of government austerity measures.

For fiscal year 2017, cement dispatches are expected to fall 12-15 percent year-on-year (YoY), before recovering in FY2018 on the back of housing ministry initiatives and general improvement in construction activity following a likely increase in oil prices.

Dividend payment is expected to decline further this year, but in the long run, the cement sector’s dividend yield remains attractive compared to the companies’ low market prices, the report said.

Companies with strong balance sheets and low debt/equity ratio like Saudi Cement are expected to maintain their attractive dividend yield, while the high debt/equity ratio companies will struggle. 

Aljazira Capital said that it expects inventory level to remain high for the upcoming quarters, given the current downtrend in cement sales and high competition in the sector.

In addition to the construction slowdown and high inventory levels, a key risk cement firms face is higher interest expenses, following an increase in the Saudi Arabian Interbank Offered Rate (SAIBOR).

The brokerage revised its rating to “overweight” from “neutral” on Arabian Cement and Eastern Cement, and to “neutral” from “underweight” on City Cement.