Quarterly earnings for the petrochemicals sector as a whole, and for Saudi Basic Industries Corp. (SABIC), the largest company, were at an all-time high owing to a jump in product prices. Petrochemical prices have been pulled up by the rise in oil prices and were well above their levels of the first quarter of last year, the report added.
Most other companies in the sector posted strong results, except for those still at the pre-operating stage. Total petrochemical profits were up by 51 percent in year-on-year terms and by 33 percent on the previous quarter, the Jadwa report said.
Most other sectors were impacted negatively by the regional unrest. Earnings from six sectors were down in both year-on-year and quarter-on-quarter terms. Among those hardest hit were companies exposed to the unrest either by owning manufacturing facilities in affected countries, or by being major exporters to those countries, particularly Egypt. Several firms in the agriculture and food, building and construction and industrial investment sectors reported a shortfall in revenues and some noted that they were not anticipating a recovery in the short-term.
According to the Jadwa report, soaring raw material prices were cited by many companies as a key reason for elevated operating costs, which ate into profits. Global prices of many commodities have surged and some, such as copper, hit all-time highs during the first quarter. Higher prices of metals and petrochemical products squeezed the earnings of companies in the industrial investment and building and construction sectors. The two largest dairy and food processors reported that rising packaging costs hit earnings and they were also affected by the greater cost of imported fodder, which in part reflects the surge in global food prices to an all-time high in the first quarter. High oil prices raised the cost of transportation outside the Kingdom, which added to the price of imported inputs. Exchange rate movements are unlikely to have affected import prices as although the trade-weighted dollar is currently around a 31-month low, the average for the first quarter was in line with that for the same period of 2010.
The huge additional spending announced on Feb. 24 and March 18 did not have much impact on company performance. This is not surprising, as very little of the new spending occurred during the quarter.
The report said one area that probably benefited from the new government spending was retail, which recorded the second fastest growth in profits in the first quarter, as it is likely that much of the two month's salary bonus was immediately spent (shops were notably busier in the weeks following the announcement). "We think it will take several quarters for the real estate component of the new government spending to begin to be reflected in company performance. Although the bulk of the spending package was focused on the provision of real estate, listed real estate companies are generally focused on a few specific developments. Industrial investment, building and construction and cement companies are better placed to gain," Jadwa said in its report.
Results from the banking sector were generally disappointing. Profits were up for nine of the eleven listed banks, but in most cases the year-on-year growth was only in single digits and for the sector as a whole, profits were 8 percent higher. It is not yet possible to determine how much of the improvement was the result of reduced provisioning for bad loans, though we think this made a positive contribution for all banks. Lending rose, but low interest rates remain a drag on revenues from core banking activities.
For two of the sectors that recorded a quarterly fall in net income, the decline was in line with the seasonal trend. Earnings of telecoms and transport peak during the Haj owing to the large number of foreign pilgrims that are transported and that pay roaming rates on their phones. The fall in net income for the transport sector was exacerbated by one company realizing large investment losses that had built up over several years. As a result, the transport sector posted a loss in the first quarter, its first quarterly loss since at least 2004. The only other sector to record a loss was energy, which was again in line with the seasonal norm; Saudi Electricity Co., which dominates the sector, makes its profits during the second and third quarters, when air conditioning use is at its peak. Insurance posted the second largest fall in year-on-year terms owing to a regulatory change that necessitated companies setting aside funds against credit loss provisions, the Jadwa report said.
