JEDDAH: Despite a strong performance by banks, Saudi Arabia’s first-quarter corporate earnings were generally weaker than expected, a sign that foreign investors should be cautious as the stock market opens up to them this year.

The Capital Market Authority has said the $552 billion market will open to direct foreign investment on June 15. Currently, foreigners can only invest through swaps and exchange-traded funds, which can be inconvenient and expensive.

Potential foreign interest in the market is intense. But despite huge long-term potential, Saudi corporate earnings currently face headwinds that had a big impact on first-quarter results, a Reuters analysis shows.

Total first-quarter profit of 12 listed petrochemicals firms more than halved year-on-year because of the plunge of oil prices since last June, which has dragged down petrochemical product prices and hurt margins.

Combined profit was 16.8 percent below the average forecast of analysts surveyed by Thomson Reuters, even though Saudi Basic Industries, the biggest firm in the sector and in the entire bourse, beat estimates with a 38.9 percent profit drop.

Shrinking earnings at petrochemical firms were the main reason for a drop of total profits at all listed Saudi companies combined in the first quarter. They fell 22 percent year-on-year to 21.9 billion riyals ($5.8 billion), according to calculations by local news website Argaam.com.

Since the end of last month, analysts surveyed by Thomson Reuters have cut their outlook for the petrochemical sector’s profit in all of 2015 by 3.4 percent — though that mostly reflects adjustments for the first-quarter misses, while expectations for the rest of the year are intact.

Combined petrochemical profits are now expected to drop 12.5 percent in 2015, implying a recovery later this year — though that will depend very much on the uncertain direction of oil prices.

“We believe that the petrochemical product prices, in general, have bottomed out, unless pressured by a further decline in oil prices from the current levels,” NBK Capital said in a research note this week.

“Over the past month, polyethylene and polypropylene prices increased by 8 and 10 percent respectively, while the mono ethylene glycol price has increased by 6 percent.”

Telecoms, retail

The telecommunications sector illustrates another form of risk in Saudi Arabia. Saudi Telecom and Zain Saudi beat expectations in the first quarter, but Mobily posted a shock loss as a scandal over its misstatement of earnings continued to reverberate.

This caused the sector’s overall profit to tumble 41 percent. Since March, analysts have cut their 2015 outlook for the sector by 2.1 percent.

They now expect profits to increase 63.6 percent for the full year, but that is based on hopes that Mobily will turn profitable; more cuts to forecasts may follow as some analysts are still reviewing their Mobily models.

In the consumer sector, profits at retailers surged during the first quarter because of the payment of two months’ salary as a bonus to public sector workers to mark King Salman’s accession in January. For example, Jarir Marketing reported an estimate-beating 23 percent rise in profit and raised its quarterly dividend.

But as the special factor of the bonus payment fades, the rest of the year may not be quite as strong. Analysts expect 20 percent growth for Jarir’s full-year profit.

Meanwhile, analysts have cut their average forecast for the full-year profit of leading food maker Savola after it posted a sharp drop in first-quarter earnings, excluding one-off gains, and said profits in the second-quarter would also fall year-on-year.

The company said exchange rate movements were one of the reasons for weaker overseas sales — a factor which looks likely to affect other Saudi exporters this year. The Saudi riyal is pegged to the strengthening US dollar.

Cement, banks

Saudi cement makers posted a 3.5 percent increase in combined first-quarter profits, which was in line with expectations and indicated that government spending, which underpins demand for construction materials, remains strong.

However, while the government has pledged to keep spending high and has ample fiscal reserves to do so, many analysts still expect a moderate decrease in new construction projects in Saudi Arabia this year as cheap oil makes planners more cautious.

The value of new projects awarded in Saudi Arabia during the first quarter of this year fell 10 percent from the previous quarter, analysts at Abu Dhabi Commercial Bank said in a report.

This may mean a little less business for cement firms later in the year; analysts surveyed by Thomson Reuters expect a 4.0 decrease in combined profits for all of 2015.

Banks, which accounted for about half of total stock market earnings in the first quarter because of petrochemicals’ weakness, posted a 5.4 percent increase in profits and were 8.2 percent ahead of estimates.

But analysts have remained cautious with full-year forecasts and have downgraded them for several lenders, most notably for leading retail bank Al Rajhi which, unlike all other names in the sector, posted a drop in first-quarter profit because of new regulations limiting consumer finance fees.

For all of 2015, analysts expect an increase of just 1.6 percent in combined bank earnings.

“The Saudi economy expanded by 3.6 percent during 2014, outperforming 2013’s 2.7 percent, based on 2010 prices. This constituted the framework for the stellar performance recorded by the domestic banking system,” National Commercial Bank, the kingdom’s top lender, said in a report last week.

“However, given the current developments in the domestic economy, we expect the banking system to moderate this year and register smaller growth rates...In our opinion, the banking system will continue to rise on growing volumes, yet competition on diminishing margins will intensify.”