JEDDAH: Corporate earnings in Saudi Arabia are likely to remain under pressure in the second quarter of 2016 on the back of a slowdown in government spending, lower disposable income and tight liquidity, according to a recent report from Al-Rajhi Capital (ARC).
The petrochemical sector would continue to be impacted by falling product prices (down 10 percent-40 percent year-on-year), though this will be partly offset by lower NGL feedstock prices, the ARC research team stated in its quarterly results review.
The report predicted that construction-related sectors (cement, building and construction, etc.) would be impacted by the cut in government spending. The consumer sector earnings would be hit by lower disposable income. Loan growth for the banking sector may be impacted by the prevailing tight liquidity conditions.
The domestic demand-driven sectors underperformed during the quarter, as consumer spending was impacted by lower disposable income due to energy/ utility price reforms as well as the high base of Q1 2015 (2-month bonus).
Food and agriculture sector’s earnings fell 34.1 percent y-o-y led by 80 percent year-on-year decline in Savola’s bottom-line.
The retail sector’s earnings fell 52 percent year-on-year, as major companies like Fawaz AlHokair (98.4 percent y-o-y) and Jarir (29.5 percent y-o-y) reported a sharp decline in profitability, said the ARC review.
Net profits of the TASI-listed companies, ex-insurance) fell 5.1 percent y-o-y during Q1 2016, as profitability of most sectors declined. The petrochemical sector’s net profit slipped by a moderate 5 percent y-o-y, and was 34 percent above estimates led by SABIC, Yansab and NIC. Real estate (83 percent y-o-y) and building and construction (22 percent y-o-y) sectors witnessed a decline in earnings, impacted by the slowdown in government spending. Retail (26.3 percent yo-y) and multi-investment (67.7 percent y-o-y) sectors were the other major laggards during the quarter.
On the other hand, banking (5 percent y-o-y) and transportation (20 percent y-o-y) were the only sectors to register an increase in profitability, supported by strong earnings growth in Al-Rajhi Bank and Bahri, respectively.
“Despite the anticipated setbacks in Q1, primarily from higher opex on the back of energy/utility price reforms and subdued demand environment, the companies under our coverage proved resilient posting aggregate earnings which were 6 percent above estimates,” said the ARC research team.
From a consensus perspective, the major sectors which beat estimates were banking and petrochemicals.
The sectors which underperformed were retail and food and agriculture, underscoring the impact on consumption.
Overall, the aggregate net income of the Tadawul-listed companies (ex-insurance sector) declined 5.1 percent y-o-y in Q1 2016, primarily led by real estate (earnings down 83 percent y-o-y), retail and food/agri sectors (earnings down 52 percent and 34 percent y-o-y respectively).
The heavyweight petrochemical sector’s profits slipped by a moderate 5 percent y-o-y, as the impact of lower product prices was largely offset by the decline in NGL feedstock costs.
Banking (5 percent y-o-y) and transportation (20.5 percent y-o-y) were the only sectors to post an improvement in earnings in Q1 2016, driven by Al-Rajhi Bank (+33 percent y-o-y) and Bahri (+54 percent y-o-y) respectively.
Building and construction (22 percent y-o-y) and cement sector (6.3 percent y-o-y) were impacted by lower government spending. Looking forward to Q2 2016, domestic sectors are likely to remain weak due to slowing consumption demand.
However, POS transactions (after posting a decline in February) and ATM withdrawals data for March 2016 which show early signs of stabilization, may reflect in the upcoming quarters.
Petrochemical sector earnings will remain sluggish, but are not expected to decline further due to the low base, and slight improvement in product prices, according to the report.
Crude prices remained under significant pressure in the first quarter of 2016, witnessing a sharp decline of 22 percent q-o-q (37 percent y-o-y).
Petrochemical product prices were comparatively stronger during the quarter, with major petrochemical product prices falling in single digits on a sequential basis.
Nevertheless, on a y-o-y basis, product prices are down 10-30 percent. This pressured Saudi petrochemical sector’s top-line, which declined 14 percent y-o-y, whereas net profit slipped 5 percent yo-y. For the companies under our coverage, revenues fell over 11.6 percent y-o-y coming mostly in line with our expectations.
However, profitability was much better than expected, as the impact of lower product prices and hike in gas feedstock prices was partly negated by sharper fall in NGL feedstock prices.
Operating and net income fell 17.6 percent y-o-y and 9.2 percent y-o-y, coming in ahead of our as well as the consensus expectations.
SABIC outperformed both our and the consensus estimates in Q1, as it reported a net income of SR3.4 billion (13.2 percent y-o-y), supported by higher than expected other income.
The operating income was also supported by the high naphtha-ethylene spread, which directly benefited the company’s European operations.
“However, the company’s revenues of SR31.15 billion closely matched our forecast of SR32.0 billion,” said the research team.
Yansab also positively surprised us with net profit surging 41 percent y-o-y to SR 402 million, beating our (SR261 million) as well as consensus estimates, on the back of a strong operating performance (30.2 percent y-o-y).
“The company’s operating profit jumped sharply despite a 13 percent y-o-y decline in revenues, missing our forecast,” the researchers added.
The petrochemical sector would continue to be impacted by falling product prices (down 10 percent-40 percent year-on-year), though this will be partly offset by lower NGL feedstock prices, the ARC research team stated in its quarterly results review.
The report predicted that construction-related sectors (cement, building and construction, etc.) would be impacted by the cut in government spending. The consumer sector earnings would be hit by lower disposable income. Loan growth for the banking sector may be impacted by the prevailing tight liquidity conditions.
The domestic demand-driven sectors underperformed during the quarter, as consumer spending was impacted by lower disposable income due to energy/ utility price reforms as well as the high base of Q1 2015 (2-month bonus).
Food and agriculture sector’s earnings fell 34.1 percent y-o-y led by 80 percent year-on-year decline in Savola’s bottom-line.
The retail sector’s earnings fell 52 percent year-on-year, as major companies like Fawaz AlHokair (98.4 percent y-o-y) and Jarir (29.5 percent y-o-y) reported a sharp decline in profitability, said the ARC review.
Net profits of the TASI-listed companies, ex-insurance) fell 5.1 percent y-o-y during Q1 2016, as profitability of most sectors declined. The petrochemical sector’s net profit slipped by a moderate 5 percent y-o-y, and was 34 percent above estimates led by SABIC, Yansab and NIC. Real estate (83 percent y-o-y) and building and construction (22 percent y-o-y) sectors witnessed a decline in earnings, impacted by the slowdown in government spending. Retail (26.3 percent yo-y) and multi-investment (67.7 percent y-o-y) sectors were the other major laggards during the quarter.
On the other hand, banking (5 percent y-o-y) and transportation (20 percent y-o-y) were the only sectors to register an increase in profitability, supported by strong earnings growth in Al-Rajhi Bank and Bahri, respectively.
“Despite the anticipated setbacks in Q1, primarily from higher opex on the back of energy/utility price reforms and subdued demand environment, the companies under our coverage proved resilient posting aggregate earnings which were 6 percent above estimates,” said the ARC research team.
From a consensus perspective, the major sectors which beat estimates were banking and petrochemicals.
The sectors which underperformed were retail and food and agriculture, underscoring the impact on consumption.
Overall, the aggregate net income of the Tadawul-listed companies (ex-insurance sector) declined 5.1 percent y-o-y in Q1 2016, primarily led by real estate (earnings down 83 percent y-o-y), retail and food/agri sectors (earnings down 52 percent and 34 percent y-o-y respectively).
The heavyweight petrochemical sector’s profits slipped by a moderate 5 percent y-o-y, as the impact of lower product prices was largely offset by the decline in NGL feedstock costs.
Banking (5 percent y-o-y) and transportation (20.5 percent y-o-y) were the only sectors to post an improvement in earnings in Q1 2016, driven by Al-Rajhi Bank (+33 percent y-o-y) and Bahri (+54 percent y-o-y) respectively.
Building and construction (22 percent y-o-y) and cement sector (6.3 percent y-o-y) were impacted by lower government spending. Looking forward to Q2 2016, domestic sectors are likely to remain weak due to slowing consumption demand.
However, POS transactions (after posting a decline in February) and ATM withdrawals data for March 2016 which show early signs of stabilization, may reflect in the upcoming quarters.
Petrochemical sector earnings will remain sluggish, but are not expected to decline further due to the low base, and slight improvement in product prices, according to the report.
Crude prices remained under significant pressure in the first quarter of 2016, witnessing a sharp decline of 22 percent q-o-q (37 percent y-o-y).
Petrochemical product prices were comparatively stronger during the quarter, with major petrochemical product prices falling in single digits on a sequential basis.
Nevertheless, on a y-o-y basis, product prices are down 10-30 percent. This pressured Saudi petrochemical sector’s top-line, which declined 14 percent y-o-y, whereas net profit slipped 5 percent yo-y. For the companies under our coverage, revenues fell over 11.6 percent y-o-y coming mostly in line with our expectations.
However, profitability was much better than expected, as the impact of lower product prices and hike in gas feedstock prices was partly negated by sharper fall in NGL feedstock prices.
Operating and net income fell 17.6 percent y-o-y and 9.2 percent y-o-y, coming in ahead of our as well as the consensus expectations.
SABIC outperformed both our and the consensus estimates in Q1, as it reported a net income of SR3.4 billion (13.2 percent y-o-y), supported by higher than expected other income.
The operating income was also supported by the high naphtha-ethylene spread, which directly benefited the company’s European operations.
“However, the company’s revenues of SR31.15 billion closely matched our forecast of SR32.0 billion,” said the research team.
Yansab also positively surprised us with net profit surging 41 percent y-o-y to SR 402 million, beating our (SR261 million) as well as consensus estimates, on the back of a strong operating performance (30.2 percent y-o-y).
“The company’s operating profit jumped sharply despite a 13 percent y-o-y decline in revenues, missing our forecast,” the researchers added.
