Al Rajhi Capital Releases a New Report on The Cement Sector Titled “Banking on Government Support”
• Large-scale government investments will ensure cement companies remain profitable over the longer term
• Projects, worth US$385bn, are in the pipeline and are expected to boost cement consumption in the Kingdom

Al Rajhi Capital, the investment banking subsidiary of Saudi Arabia’s Al Rajhi Bank, has announced in a comprehensive research report its positive outlook for the Saudi cement sector which has benefited from cheap raw materials and fuel subsidies. Al Rajhi forecasts continued strong growth and increasing level of consumption in the near future. The report has increased the number of companies under coverage by Al Rajhi Capital Research to 26 companies.

The report entitled: “Banking on Government Support”, notes that the positive outlook on the Kingdom’s cement sector is underpinned by the massive $385bn planned infrastructure projects until 2014; the government spending remains the major catalyst for the cement sector in the medium term.

Cement stocks
The report estimates a CAGR of 9% during 2011-2015 period in revenues of the five picked cement stocks. The report rates Arabian Cement, Yamama Cement and Al Jouf Cement companies as “Overweight” with a target price of SAR78, SAR61 and SAR21 respectively. These companies benefit from high growth prospects, robust revenues, proximity to demand centres and relative transparency. Saudi Cement and Qassim Cement Company were rated “neutral” with target price of SAR98 and SAR84 respectively as the report believed that the positives of these companies have already been reflected in the share price.

Robust Demand
Local cement demand is estimated to increase at a CAGR of 6% until 2015. This increase will be mainly driven by the priority of the government in building infrastructure and scaling up education, healthcare and public utilities. The Government has further announced constructing 500 thousand residential units as part of a country wide plan boosting real estate investments to accommodate the increase in young population. This would create a continuous demand over the coming three years for cement consumption which has increased by 14% y-o-y in 2011 compared to 10% y-o-y in 2008. Al Rajhi Capital’s Head of Research Dr. Saleh Alsuhaibani said:
"This pace of growth in Saudi Arabia is the highest in the GCC and the strong increase in net profits is purely organic due to higher cement dispatches, strong demand and effort by the Government to stabilize cement prices in the Kingdom.”

Sustainable Profitability Boosts Sector Attractiveness
The net profit margins (aggregate 47%) enjoyed by the cement sector are considered the highest among major Saudi Arabian industries. This, in addition to subsidized fuel which constitutes 35% of the total cost of production at almost SAR114/ton, has attracted many new players to ramp up operations. The sector has maintained a high standard in ROE and ROA with average profitability for the five picked companies standing at 20%; Qassim Cement Company enjoyed the highest net profit margin in 2011.

Industry Challenges
According to the report, eleven out of fourteen cement factories in Saudi Arabia have applied for an increase in fuel supply to expand their production lines and ramp-up capacities to meet rising demand particularly from the central and western regions.
Applicants are still waiting for approvals on increases in fuel supply from Aramco, the sole allocator of fuel to the sector. While the arrival of new players, the government ban on exports, and setting a ceiling on cement prices at SAR280/ton create a recipe for overcapacity, the supply will remain neck-to-neck with demand through 2015 at least. The projected growth in production capacity will reach 66mn tons by 2015.
The report also revealed that the majority of Saudi Arabian cement companies lack transparency and disclosure which could negatively affect their ability to attract a premium and makes access to information by potential shareholders & investors difficult.

The Road Ahead
Al Rajhi estimates oil prices to hover around $112 with oil export earning driving a 4.4% expansion of the Saudi economy. While oil price volatility may place pressure on the government’s investment plans in infrastructure projects, Al Rajhi forecasts continued strong growth and increasing levels of cement demand in the near future, making the sector outstandingly profitable.

to read the the Cement sector report, please
click here

Al Rajhi Capital Releases a New Report on The Cement Sector

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