Saudi Arabia's cement sector remains strong, and will continue the trend for the remainder of 2011 with good demand growth and stable prices, despite the normal seasonal slowdown seen in July and August, NCB Capital said in its new report analyzing the cement sector in Saudi Arabia. NCBC continues to believe that a key positive of the sector remains the high dividends, with expected yields for 2011 around the 6-7 percent mark. On a YoY basis, the third quarter will be another strong quarter for the cement sector, although relatively weaker than the first half due to the seasonal slowdown, it said. The report said Yamamah Cement remains the only overweight in the sector with a price target of SR72.5. The company benefits from its high capacity and stock levels which should enable it to take advantage of the strong demand environment present in Saudi Arabia. Its low cost base adds to its competitive strength, it added, noting that with its location in Riyadh, the company is ideally positioned to benefit from the 40 percent of total Saudi cement demand expected in the central region. "Our fair value price targets for most companies have decreased slightly due to the higher costs seen in 2Q11. The price target of Eastern and Yanbu have increased; for Eastern this is due to higher than expected non-operating income and for Yanbu due to higher prices and sales volumes than expected," said Farouk Miah, acting Head of Equity Research at NCB Capital. "We believe the outlook for the listed companies remains positive and in line with our last sector update." "For the six covered stocks, we expect revenues to be come in at SR1.53 billion, up 7 percent YoY, with gross profit at SR828 million, up 10 percent YoY and net income is expected to come in at SR745 million, up 12 percent YoY. On a QoQ basis revenues are likely to be 28 percent lower due to weaker sales during July and August owing to the summer and Ramadan." For July and August 2011, total sales volume at the listed companies is up only 4.7 percent YoY, largely due to the 10 percent drop in August since all of Ramadan fell in August 2011, as against only a part of it in 2010. The cement sector experienced strong growth during 2Q11 with the revenue and net income of the nine listed companies increasing by 23 percent and 21 percent YoY. This was due to a combination of strong sales volume growth (15 percent for the listed companies) and a 6 percent increase in cement prices. "The revenues of KSA's nine listed cement companies increased by 23 percent YoY in 2Q11 to SR2.63 billion with Arabian Cement reporting the strongest growth from the major listed companies at 56 percent YoY and Eastern cement reporting the weakest with revenues declining by 7 percent YoY," Miah further said. "Gross income of the KSA-listed cement sector saw a growth of 21 percent YoY to SR1.37 billion in 2Q11 with Arabian Cement again reporting the best growth at 46 percent, while Eastern cement again reporting the weakest growth with gross income increasing by 3 percent YoY. However, the gross margin for the sector declined 1 percent YoY to 52 percent in 2Q11." Total sales volume reported a 13 percent YoY growth in 2Q11 to 13,559 million tons. The total sales volume for the nine listed stock increased by 15 percent YoY to 10,757 million tons, while for the four private cement companies volumes increased by 5 percent to 2,802 million tons in 2Q11. From the listed companies, Arabian Cement reported the best growth at 39 percent and Eastern Cement reported the weakest with volumes declining by 9 percent YoY. The average price of cement per ton for KSA's nine listed companies increased by 6 percent YoY and 5 percent QoQ to SR241 in 2Q11. The average cost of cement per ton increased 9 percent YoY and 6 percent QoQ to SR115 in 2Q11. Among the nine listed companies, Arabian Cement reported the highest growth in both the average price and cost of cement per ton at 27 and 34 percent respectively.
