The Saudi cement sector is forecast to continue witnessing strong demand in 2012, led primarily by government projects, NCB Capital said recently. However ongoing fuel issues with Aramco could delay the 4.5 million tons of new capacity expected in 2012. This potential supply constraint should provide strong pricing support. The new NCB Capital report analyzing the Saudi cement sector noted that there are concerns on supply due to an apparent inability by Yanbu and Southern Cement to receive increased quantities of subsidized fuel from Aramco for their new lines, leading to potential delays in the start of their operations. “If this is the case, this would lead to a strong pricing support in 2012,” said Farouk Miah, acting Head of Equity Research at NCB Capital. “The potential demand-supply imbalance could become particularly acute in the western region where demand is expected to be high, coupled with possible supply constraints at Yanbu Cement where its new 3 million tons/year line is expected to start commercial production in 1Q12.” NCB Capital downgraded Yamamah Cement to Neutral with a PT of SR75.6 due to its strong recent performance (up 33 percent since NCB Capital's overweight call vs. 8 percent fall in the TASI). At the same time, it has upgraded Yanbu to Neutral with a PT of SR61.4 due to a better pricing outlook. “Our fair value price targets for most companies have increased by an average of 8-9 percent due to a better demand and pricing outlook,” he said. Although NCB Capital remains neutral on all names in the sector, on a relative basis, the report favors Yamamah, Saudi and Southern. “The key reason for this is their spare capacity/ high stock levels which are key positives for a sector which may face supply constraints in the coming 12-24 months. Due to this, we believe these names should trade at a 10 percent premium to peers which are already near 100 percent utilization rates and have low stock,” he added. The report expects 4Q11 to show good profit growth from the cement stocks under coverage due to a combination of strong growth in sales volume and steady prices. For the six covered stocks, revenues are expected to total SR1,972 million, up 19 percent YoY, with gross profit at SR1,098 million, an increase of 25 percent YoY; net income is estimated to expand 30 percent YoY to SR1,003 million during 4Q11. An average price of SR240 per ton in 4Q11 - up 4 percent YoY but down 3 percent QoQ is expected. The average cost per ton is likely to decline 1 percent YoY. However, growth will slow in 2012. “We expect YoY growth of domestic sales at covered stocks of 5 percent against the 9 percent expected for 2011. For revenue and profitability, we expect the stocks under coverage to record growth of 4.6 percent and 5.3 percent respectively against the 13.8 percent and 18.7 percent expected in 2011,” Miah noted. The slowdown is due in part to the very strong numbers and a high base in 2011, as well as the larger companies using up their inventories of clinker which should stop any significant inflation in prices in 2012. One consequence of higher usage of clinker inventories will be higher cost per ton given the presence of fixed costs which will not be utilized in the production of clinker, but only for the conversion of clinker to cement. The report believes government demand should drive volumes in 2012. Construction contracts worth SR95 billion were awarded in Saudi Arabia during 3Q11, more than the combined value during 1H11 and a 104 percent increase over 3Q10. Also, the total value of contracts awarded during 9M11 was 125 percent higher than 9M10. Although delays in major projects are the norm, NCB Capital said 2012 should see good progress in major projects which will support demand. “Feedback from cement players indicates that demand in 2011 was largely private sector led, indicating that government demand is yet to come and should support the sector in the coming few years. On average, our sales volumes estimates for 2012 have increased for most companies under coverage by 1-2 percent, although for Saudi cement it has fallen by 2.8 percent as we believe it will focus on margins as opposed to volume driven growth,” Miah added.
