Western region mega projects to boost Al Yamamah Steel’s financials, says SICO

Al Yamamah Steel Industries Co. is set to see improved financial results ahead, as big ticket projects such as the Red Sea Tourism Project, new Jeddah Corniche, Makkah Metro, and the $500 billion NEOM city will be located in the Western region— home of most of the steel manufacturer’s production, SICO Investment Bank said in a review.

For Al Yamamah, these projects become with benefits on two fronts:

1) A boost in demand for early-in-the-cycle construction materials such as rebars

2) The large impending investments in renewables generation capacity that will necessitate investments in transmission and distribution infrastructure, which SICO estimates at SAR 44 billion over a five-year period.

Al Yamamah’s financial performance in 2017 was hit by a slump in volumes, as rebar volumes dropped 30 percent year-on-year, with utilizations at 50 percent. 

Business generated 15 Return on equity (RoE), despite an extremely tough year.

“On a normalized basis, we expect Al Yamamah to be an 18-20 percent RoE business,” the report said.

SICO has reduced the company’s revenue assumptions for fiscal years 2018 and 2019 by 18 percent and 14 percent, respectively. Prices will likely increase to $500 per ton of steel, but revenue is seen to be impacted by the rise in the cost of sales.

“We build in EBITDA growth of 5 percent and net income growth of 9 percent in FY18,” The report said.

The estimates include the impact of the proposed expat levies and a 50 percent increase in power and fuel costs in FY19.

The company is expected to announce a SAR 0.5 per share dividend for the second half of 2017 and SAR 1.5 per share for 2018, SICO said.

SICO recommended a “buy” upgraded rating on the stock with a target price of SAR 29 per share.