Saudi state budget, PIF spending to drive cement sector growth

Saudi Arabia’s expansionary budget unveiled for 2018 and spending outlays by the Public Investment Fund (PIF) and National Development Fund are likely to drive the growth of cement sector in the years ahead, analysts say.

Saudi Arabia announced last month its biggest ever budget for 2018, despite lower crude prices, with revenue at SAR 783 billion, public spending at SAR 978 billion, and a projected deficit of SAR 195 billion.

The 2018 budget marks “the end of curtailed spending seen during 2014-17,” Riyad Capital said in a note to investors.

“An increase in capital spending with an outlay of SAR 205 billion is noteworthy, while the key highlight has been the allocation of SAR 133 billion (SAR 83 billion from PIF and SAR 50 billion from NDF),” the research firm said.

“These factors sound positive for 2018, not ignoring the impact of VAT, utility hikes, transportation cost and higher expat levy.”

Cement stocks rallied in the last quarter of 2017, outperforming Tadawul All Share Index (TASI) by 10.6 percent, on the back of positive announcements that brought cheer to the construction industry.

Most stocks rose with the exception of Southern Cement, which lost 3 percent in Q4, while Jouf Cement surged the most by 40 percent.

Key reasons triggering the rally were Crown Prince Mohammed bin Salman’s announcement of the $500 billion NEOM mega-city project, as well as increased spending announcements in Budget 2018 along with the spending plans of PIF and NDF, Riyad Capital said.

In terms of fourth-quarter earnings, declines are expected across the board for Tadawul-listed cement producers amid weak demand and high inventories.

Cement sales reached 7.9 million tons in October and November, falling 8.2 percent year-on-year (YoY) on lower demand compared to 2016, despite the addition of sales of Umm Al-Qura Cement and United Cement during the current period, Albilad Capital said.

“Therefore, we expect cement sales to fall below 12 million tons in Q4 2017,” the firm said, forecasting annual sales to hit 47 million tons.

According to a recent earnings forecast by Al Rajhi Capital, the decline in sales volumes is a result of continuous slowdown in construction activities.

A continuous rise in inventories (~36.6 million tons by end of November), coupled with oversupply across the regions, may lead cement companies to continue selling at current discounts.

“Based on our estimates, the revenue of companies under our coverage is expected to drop by 30 percent YoY, whereas earnings are likely to fall by 49 percent YoY,” Al Rajhi Capital added. 

Write to Jerusha Sequeira at jerusha.s@argaamnews.com