RIYADH: Profitability for the Saudi market in 2011 showed strong growth with market net income up 22 percent to SR94.8 billion from SR78.1 billion in 2010, NCB Capital, Saudi Arabia's leading wealth manager, has said in a new report. However, growth slowed significantly in Q4, 2011 with net income increasing by only 11 percent against 25 percent for the first nine months of 2011. The Q4, 2011 net income was significantly impacted by a YoY net income decline from the petrochemical sector.
Commenting on the report, Farouk Miah, head of equity research at NCB Capital, said: "The petrochemical sector accounted for 43 percent of the total market net income in 2011 (up from 38 percent in 2010) and was 38 percent higher YoY. At the same time, SABIC accounted for 31 percent of total market net income in 2011 (up from 28 percent in 2010) and saw YoY net income growth of 36 percent YoY. In addition, the banking sector reported net income growth of 17 percent in 2011 and accounted for 27 percent of total market net income in 2011, down from 28 percent in 2010.
The petrochemical sector's 2011 net income came in at SR40.8 billion, up 38 percent due to increased volumes and higher petrochemical prices. The start up of Sahara's Al-Waha facility and the full year contribution from Yansab and Sipchem's Phase II fueled volumes growth in 2011. The sector reported a Q4, 2011 net income of SR7.8 billion, down 6.7 percent due to lower selling prices.
SABIC alone accounted for 71.5 percent of the petrochemical sector's total net income in 2011 compared to 72.8 percent a year ago. SABIC's Q4, 2011 net income came in at SR5.2 billion (down 9.9 percent and 35.7 percent QoQ) as lower selling prices dented earnings, despite higher sales volumes.
"We believe KSA petrochemical producers are likely to witness weaker demand and prices in the near term due to strained economic conditions in Europe and the US," commented Miah. "However, we believe the prevailing cost advantage, proximity to Asian markets and the full year contribution from Saudi Kayan and Sahara's Al-Waha plants to be key positives for the KSA petrochemical sector in 2012."
Banks
The Saudi banking sector (including NCB) posted a healthy performance in 2011, with the sector's net income growing 18.4 percent to SR31.6 billion. Net profits for the 11 listed banks grew 16.5 percent to SR25.6 billion; while the 10 banks under NCB Capital coverage reported a 16.5 percent growth in net income to SR25.2 billion. "The net income of 10 banks under our coverage came in slightly below our estimate of SR25.6 billion," noted Miah.
Customer deposits and loan book of the 10 banks under our coverage grew significantly by 11.3 percent and 11.0 percent respectively. Healthy lending growth was partly contributed by the government's spending spree earlier in 2011 buoying economic activity and boosting investor sentiment. The majority of the growth in loan book came from the "core sectors" such as the manufacturing, retail and commerce sectors which should support medium-term growth.
Despite the growth in top-line, NCB Capital estimate banks' pre-provision profits grew by a mere 0.9 percent as operating costs relating to higher salaries, branch expansions and other promotional expenses grew 7.6 percent. However, the banks' bottom-line showed a significant growth of 14.6 percent.
Based on the preliminary results, NCB Capital calculations suggest that provision charges for 2011 declined 38.8 percent. NCB Capital estimates an 8.2% decline in provisions in Q4, 2011, which resulted in 13.9 percent growth in Q4, 2011 net income.
Cement
2011 was a strong year for the cement sector with net income up 25 percent for the sector as a whole. As the year progressed, net income growth picked up; in Q1, 2011, YoY net income growth was 13 percent, which increased to 20 percent in Q2, 2011, 27 percent in Q3, 2011 and 43 percent in Q4, 2011.
For 2011, Southern Cement witnessed the highest growth in net income at 36 percent, followed by Saudi Cement's 26 percent. Yanbu Cement had the strongest results in Q4, 2011 with net income rising by 54 percent, followed by Southern Cement at 52 percent and Saudi Cement at 40 percent.
"We are Neutral on the sector as we believe the current valuation fairly factors in growth prospects of the sector," explained Miah.
Telecoms
For 2011, reported net income for the sector was down 0.4 percent. This was largely due to the significant one-off losses from Saudi Telecom Co. (STC) in Q3, 2011 which led to sector net income in that quarter to fall 41 percent. For 2011, net income fell by 19 percent at STC, with Mobily reporting net income growth of 21 percent and Zain reducing its losses by 18 percent. The Saudi telecoms sector reported a 21 percent increase in net income in Q4, 2011, due largely to a 16 percent growth in net income at Mobily.
For 2011, revenue for the covered stocks grew by 13 percent to SR83 billion, driven mainly by an increased subscriber base, as well as expansion of broadband. In Q4, 2011, for the stocks under coverage, revenue increased by 16 percent to SR22.8 billion. Sales growth was driven largely by Mobily and STC, with Zain reporting a 1 percent decline in its sales attributable to lower ARPU.
Driven by the YoY growth in revenue, gross profit for the stocks under coverage grew by 8 percent to SR45 billion in 2011. Gross margin shrunk by 226 bps to 54.2 percent during the year due largely to increased interconnection expenses amid growing competition in the international call segment, and higher access charges. Furthermore, increasing proportion of revenue coming from low-margin smartphone sales also pressurized margins, the NCB Capital report highlighted."
Consumer retail
Revenue for the covered stocks (Jarir, Al-Othaim and Alhokair) increased by 26 percent in 2011 with gross income and net income up 27 percent. For the sector as a whole, net income grew by 20 percent in 2011, although given the seasonality in sales and weak numbers from Al-Othaim, Q4, 2011 was relatively weak with net income growth of only 5 percent. Jarir and Alhokair accounted for 65 percent of the sector net income.
"Driven by the strong underlying fundamentals, the outlook for the KSA retail sector in general and the three stocks we cover in particular remains strong," commented Miah. "All three stocks under coverage should continue to benefit from ongoing store expansion, as well as continued expansion in consumer spending. Al-Othaim may be under pressure due to high food costs, as well as its low absolute profit numbers which leave minimal room for error."
Food/Agriculture
For 2011, revenue for the stocks under coverage in the sector increased by 19 percent to SR33.3 billion driven by Savola's food division and aided by market share gains as well as robust growth at Almarai's Fruit Juice and Poultry divisions.
For 2011, gross margin declined by 105 bps YoY to 20.9 percent for these stocks, due largely to an increase in the price of food items, coupled with an inability to pass on the increased cost burden to consumers. Gross margin for the stocks under coverage declined by 25 bps YoY to 21.9 percent in Q4, 2011.
Real Estate
For the sector as a whole, 2011 net income increased by 36.4 percent with Dar Al-Arkan accounting for 55.3 percent of the total sector income. Dar Al-Arkan's earnings fell significantly during 2011 by 25.3 percent due to lower sales from the company's residential complexes.
Taiba's earnings increased significantly during 2011 (up 162 percent) mainly due to improved average daily rates as well as land compensations which the company received (SR59.8 million received in Q3, 2011). On the other hand, Dar Al-Arkan's earnings declined 25 percent generally due to lower sales volume.
"We believe the long-term outlook for the Saudi Real Estate sector is strong, given the number of promising fundamental drivers," commented Miah.
© Arab News 2012
