Saudi cement sector demand outlook remains strong
Saudi cement sector demand outlook remains strong
“In the long term, the ability of the local firms to meet demand remains unclear due to the uncertainty over fuel supply to planned expansions,” stated Abdulelah Babgi, equity research analyst at NCB Capital. “We remain neutral on the sector due to capacity constraints and concerns over margins compressing. Our top picks are Yanbu and Southern Cement.”
Babgi added: “We maintain our neutral rating on the Saudi cement stocks under our coverage, despite improvements in the outlook of some of the companies. We expect cement sales to grow by 8.2 percent YoY in 2013 to reach 56 million tons and continue to grow at a CAGR of 6.3 percent until 2015. Since our last update, we have increased our 2013 estimates for most of the companies (excluding Eastern and Saudi Cement) by an average of 2.8 percent due to the better than expected H1 2013 results. This has led to an average increase of 3 percent in our price targets with the increase for Yanbu Cement the highest at 6 percent.”
NCB Capital’s main short-term concerns for the sector are the expected compression of margins due to imports, as well as the uncertainty of fuel supply to planned expansions. “Imports could lead to margin pressure due to insufficient government subsidies,” added Babgi. “On average, we have reduced our 2014 net margins by 63 bps due to the expected margin pressure as a result of cement imports.”
“Although we are neutral on all cement stocks under coverage, on a relative basis, Yanbu and Southern Cement are our top picks,” stated Babgi. “For Yanbu Cement, we believe the high inventory level (135 percent above the sector’s average) positions it well to meet the demand needs in the Western Region. As for Southern Cement, we believe the increasing construction activity in the south, the ability to sell in the west and the potential for increased capacity are its key positives.”
NCB Capital believes overall earnings growth potential for most companies remains limited due to high utilization rates and restrictions on prices. Companies with high inventory levels are better positioned to benefit from the increase in demand. However, for the whole sector, NCB Capital believes only multiple expansion could provide additional upside. The sector currently trades at 14.3x 2013 P/E compared to 12.6x at the beginning of the year. Dividends remain the sector’s key strength with an average yield of 5.5 percent.
“We continue to expect a strong demand outlook for cement in Saudi Arabia in the coming few years. This is mainly due to the ongoing and new mega projects announced by the government, coupled with an increase in private sector activity,” said Babgi.
“Recently the Ministry of Interior awarded three contracts worth a total of SR10.4 billion for the construction of security compounds and other facilities around the Kingdom. These three contracts are expected to be completed by 2016.
Moreover, the Ministry of Finance awarded a contract worth SR13 billion to Saudi Binladen Group for the construction of Abraj Kudai, a mixed-use real estate development in Makkah.
Other mega projects that are expected to consume cement for the coming years include the metro projects in the Central and Western regions, the expansion of Riyadh and Jeddah airports and the expansion of the two holy mosques. Additionally, the need for more than 2 million housing units is expected to support demand over the longer term,” noted Babgi.
World Bank shareholders approve $13 billion capital increase
- Capital increase follows three years of negotiations
- Increase of $7.5 billion for main institution and $5.5 billion for IFC
World Bank shareholders approved a “historic” increase in the bank’s lending capacity late on Saturday after the United States backed a reform package that curbs loans and charges more for higher income countries like China.
World Bank President Jim Yong Kim said neither China nor any middle income countries was happy about the prospect of paying more for loans, but they agreed because of the overall increase in funds available.
The agreement, which also increase shares and voting power to large emerging market countries like China, was “a tremendous vote of confidence” in the institution that came after three years of tough negotiations, Kim said.
“World Bank Group bureaucrats don’t often jump around and high-five and hug each other,” Kim told a small group of reporters following the Spring meeting.
He said the increase was needed because even with the end of the global financial crisis, the bank has been called on to provide funding to address a new series of challenges facing poor countries, like climate change, refugees, pandemics, “all new things for us.”
The increase provides an additional $13 billion in “paid in” capital: $7.5 billion to the main institution and $5.5 billion to the bank’s private financing arm, the International Finance Corporation.
Kim said the increase will allow the bank to ramp up lending to an average of $100 billion a year through 2030, from $60 billion in 2017 and an expected $80 billion in 2018.
Countries will have five years to provide the funds, but can ask for a three-year extension. The last increase occurred in 2010 and added $5 billion to the bank’s capital and $200 million for the IFC.
The United States, the institution’s biggest shareholder, rejected the World Bank request in October and the administration of US President Donald Trump has argued that multilateral lending institutions should graduate countries that have grown enough to finance their own development, like China.
But US Treasury Secretary Steven Mnuchin on Saturday said Washington supports the increase because of the reforms to lending rules.
“I look at this as a package transaction... we support a capital increase on the World Bank, along with the associated reforms that they’re talking about making,” Mnuchin told reporters.
The increase requires legislative approval, but Mnuchin said he was hopeful Congress would back the plan. Kim also said he has had contact with representatives from both parties and received strong support.
In a statement to the World Bank’s governing committee, Mnuchin applauded the plan to “significantly shift lending to poorer clients.”
While he did not mention China by name, Mnuchin applauded the shift to a “new income-based lending allocation target and the re-introduction of differentiated pricing” for loans — meaning wealthier countries would pay higher interest rates.
“The latter will incentivize better-off, more creditworthy borrowers to seek market financing to meet their needs for development,” he said.
Mnuchin said the new arrangement, including for the IFC, “frees resources for countries that don’t have sustainable access to private capital markets.”P
China’s Vice Finance Minister Zhu Guangyao said Beijing supported increasing World Bank resources but had reservations about the agreement for changes in lending policies.
“We are concerned about some of the policy commitments in the capital package, such as those on graduation, maturity premium increase for loans and differentiated loan pricing based on national income per capita,” he said in a statement.
“We hope that the management take different national circumstances into full account in the implementation of the graduation policies... to ensure that these policies will not impede cooperation between the (bank) and upper middle income countries.”
Kim acknowledged that lending to China would decline, but only gradually. That means “whatever borrowing they do has to be as impactful as possible.”
And he noted that because of the capital increase, “we will be able to maintain volumes for middle income countries as a whole.”
Zhu said the capital increase is “a concrete measure to support multilateralism” at a time when “anti-globalization sentiments, unilateralism, protectionism in trade” were creating uncertainties in the global economy.