4203In its latest updated equity research report on the Saudi Cement sector, NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, believes that the Saudi Cement sector is now showing signs of recovery with demand beginning to return to its normal levels.

Commenting, Mohamed Tomalieh, equity research analyst at NCB Capital, said: “The average YoY decline in sales since November 2013 stood at 7.9% but sales in May 2014 increased 3.1% YoY, the first increase since the end of the amnesty period for expats in November 2013. The recent growth supports our view of demand normalizing in 3Q14, with expectations of full demand recovery in 4Q14. For companies in the Central region, demand from the Riyadh Metro project will play a pivotal role in 4Q14.

“However, the earlier slowdown in demand and increased costs from imports will have a negative impact on earnings growth this year. On an adjusted basis, we believe the YoY earnings growth for the companies under our coverage will be 1.1% in 2014E. The sector currently trades at a 2014E P/E of 16.0x vs. a historical average of 13.0x.”

NCB Capital’s top pick is Yanbu Cement, although the updated report remains neutral on the sector given that demand has not fully normalized yet and considering that imports have caused margin pressures recently. The 2014E P/E for the sector has expanded to 16.0x vs. 14.4x in March 2014. This multiple expansion has caused NCB Capital’s valuations to increase across all covered stocks.

Ratings Summary

Yanbu Cement

“YCC remains our top pick in the sector, although we remain neutral with a PT of SR78.2,” stated Mohamed Tomalieh. “The stock is our top pick based on 1) its favourable location, being in the Western region where demand is strong, 2) relatively high inventory, which will support earnings as demand normalises, 3) dividend yield of 6.1% for 2014E and 4) dividend payout of 77% vs. 89% for the sector, with our expectations of dividends increasing to SR4.5/share in 2014E.

Southern Cement

NCB Capital remains Neutral on SPCC with a revised PT of SR122.7. Expansions remain the main positive catalyst for the company. The expansion in the Tihama plant (1.65mn tons) is expected to become operational in 2H14 while the second expansion in Bisha (1.65mn tons), is forecasted to operate in 2016E. These expansions will make SPCC the largest producer in Saudi Arabia with a total capacity of 11mn tons, although fuel allocation and execution delays remain a concern. Moreover the company has an attractive dividend yield of 6.1% for 2014E.

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