Total cement sales in the Kingdom fell 27% y-o-y and 39.6% m-o-m to 4.1mn tons in June, the latest data released by Yamama Cement said. Total inventory stood at 21.4 million tons, representing 36% of last 12 months sales, and grew 7% y-o-y and 5% m-o-m. Cement production in the Kingdom was 3.66 million tons during June, down 25% y-o-y and 34.6% m-o-m. All cement producers reported decline in sales during this month. Al Jouf, Saudi, and City cement witnessed the lowest declines in sales by -5%,-7% and -8% y-o-y respectively, while Najran, Yanbu and Arabian cement reported the highest decline in June dispatches by -53.5% ,-39% and -36% y-o-y respectively. Yanbu Cement is our top pick in the cement sector. June's sales volume declined primarily due to Ramadan season which fell in June this year, unlike last year, when it was split between the month of June and July. Saudi Arabia was among the worst performing regional construction markets in the first half of 2016, with the kingdom awarding $4.5 billion worth of contracts – down from $19.9 billion in the same period last year, Middle East Economic Digest (MEED) reported. "We expect the continued slowdown in construction activities to impact cement sales volume in H2 2016, which will likely lead to companies offering more discounts on selling prices." According to a local news report, some cement companies are already using tire derived fuel (TDF) as an alternative fuel in the operation of new production lines to reduce the use of conventional fuel. Some of the advantages of using TDF are (a) slight improvement in margin, and (b) reduction in industry's dependence on government allocation of fuel. Regarding the lifting of ban on cement exports, cement companies are awaiting detailed regulations to be released by the Ministry of Commerce to determine the difference in energy costs between the local and international markets. Transportation costs, lifting of full subsidy and excess supply in the region may negatively impact the advantages of lifting the ban. According to the monthly data, Arabian and Southern cement have the lowest inventory levels, representing 8% and 12% of last 12-month sales. Till now, five cement companies announced Q2 2016 results, namely Yamama, Qassim, City, Arabian and Umm Al-Qura cement, whose aggregate net profits declined 24% y-o-y and -26% q-o-q. Arabian cement maintained its dividend for H1 2016 at SR2 per share. This implies a 9% dividend yield, which is above the industry average of 7.3%. yamama Cement reported a weak set of results for Q2 2016, missing our as well as consensus estimates. Net profit slipped 39% y-o-y and 22.7% q-o-q to SR116.3 million compared to our SR135 million forecast (consensus: SR147 million). While lower sales volume and increase in cost of goods led to margin contraction and weighed on earnings, the net profit decline was amplified due to unrealized losses during the quarter from investment portfolio (as against profits last year). "We believe the company's operational performance was impacted due to lower than estimated average realized price on the back of stiff competition in the central region coupled with falling demand due to slowdown in construction activities. As expected, Yamama cut Q2 dividend to SR0.25 per share (from SR0.75 in Q4 2015 and SR0.50 in Q1 2016) to finance the relocation of its plant. The new plant will roughly cost SR4.2 billion and will be partially financed through internal resources. Yamama has not disclosed its Q2 2016 revenue figures yet. However, the company is forecast to post lower revenue than our estimate of SR300 million (-11% y-o-y). The company sold 1.38 million tons of cement during this quarter (-10% y-o-y). Gross profit fell 40% y-o-y to SR113 million on the back of lifting of subsidy and increase in depreciation due to revision of useful life of plant. Tracking the decline in gross profit, operating profit declined 43% y-o-y to SR97 million. Yamama reported a net profit of SR116.3 million (-39% y-o-y, -22.7% q-o-q). There was a slight improvement in the net profit margin as compared to the operating profit margin, which we believe is due to higher other income. " We maintain our Neutral rating on Yamama cement with a target price of SR26.5. We will revisit our estimates and target price after the release of detailed financials. Given the relocation plans and challenging operating environment, we do not see any major triggers for the stock in the short-term."
