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Saudi corporate income soars 23% in first quarter

Increase was mainly due to sharp rise in petrochemicals earnings
Strong performance by the petrochemical sector because of higher global prices boosted the combined income of listed companies in Saudi Arabia by nearly 23 per cent in the first quarter of 2011, according to a Saudi investment firm.

Despite the sharp fall in the profits of some firms, the combined earnings of the more than 120 companies trading their shares in Saudi Arabia's Tadawul stock exchange were also up by 13 per cent above the last quarter of 2010.

In a study sent to Emirates 24/7, the Riyadh-based Jadwa Investments described the first quarter of 2011 as a tough period for much of the private sector which is still struggling to recover from the 2008 global fiscal distress and a severe debt default problem that hit two family businesses in the Gulf Kingdom.

"In total, listed company net income was 23 per cent up on the first quarter of 2010 and 13 per cent above the final quarter of last year. Petrochemicals was by far the best performing sector.... however, this was driven by higher prices and generally greater international sales and did not reflect local or regional conditions," the study said.

Excluding petrochemicals, total earnings were up by just 3.7 per cent in year-on-year terms and were down by 2.3 per cent compared to the previous quarter, the first quarterly decline since the final quarter of 2009, the report showed.

Quarterly earnings for the petrochemicals sector as a whole, and for the Saudi Arabian Basic Industries Co. (Sabic), the largest company, were at an all-time high owing to a jump in product prices.

Petrochemical prices have been pulled up by the rise in oil prices and were well above their levels of the first quarter of last year, Jadwa said.

For example, ethylene prices averaged 14 per cent higher in the first quarter and those of naphtha were up by 28 per cent.

"Most other companies in the sector posted strong results, except for those still at the pre-operating stage. Total petrochemical profits were up by 51 per cent in year-on-year terms and by 33 per cent on the previous quarter."

The study showed most other sectors were impacted negatively by the regional unrest as earnings from six sectors were down in both year-on-year and quarter-on-quarter terms. Among those hardest hit were companies exposed to the unrest either by owning manufacturing facilities in affected countries, or by being major exporters those countries, particularly Egypt.

Several firms in the agriculture and food, building and construction and industrial investment sectors reported a shortfall in revenues and some noted that they were not anticipating a recovery in the short-term.

"Soaring raw material prices were cited by many companies as a key reason for elevated operating costs, which ate into profits," the report said.

"Global prices of many commodities have surged and some, such as copper, hit all-time highs during the first quarter. Higher prices of metals and petrochemical products squeezed the earnings of companies in the industrial investment and building and construction sectors."

It said the two largest dairy and food processors reported that rising packaging costs hit earnings and that they were also affected by the greater cost of imported fodder, which in part reflects the surge in global food prices to an all-time high in the first quarter.

According to the study, high oil prices raised the cost of transportation outside the Kingdom, which added to the price of imported inputs.

"Exchange rate movements are unlikely to have affected import prices as although the trade-weighted dollar is currently around a 31-month low, the average for the first quarter was in line with that for the same period of 2010."

Referring to the massive financial handouts announced by King Abdullah over the past few weeks, Jadwa said the additional spending did not have much impact on company performance in the Kingdom.

"This is not surprising, as very little of the new spending occurred during the quarter. Indeed, it seems that companies were hit by the cost of paying a bonus of two-month's salary to their employees, to replicate the award to public sector workers contained in the Royal decrees," it said.

"We have identified 27 listed companies that paid the bonus, though it is not clear in several cases whether this was done in the first or second quarter."

It said the one area that probably benefitted from the new government spending was retail, which recorded the second fastest growth in profits in the first quarter, as it is likely that much of the two month's salary bonus was immediately spent.

"We think it will take several quarters for the real estate component of the new government spending to begin to be reflected in company performance. Although the bulk of the spending package was focused on the provision of real estate, listed real estate companies are generally focused on a few specific developments. Industrial investment, building and construction and cement companies are better placed to gain."

Turning to banks, Jadwa said results from this sector were generally disappointing, noting that profits were up for nine of the eleven listed banks, but in most cases the year-on-year growth was only in single digits and for the sector as a whole, profits were eight per cent higher.

"It is not yet possible to determine how much of the improvement was the result of reduced provisioning for bad loans, though we think this made a positive contribution for all banks. Lending rose, but low interest rates remain a drag on revenues from core banking activities."

A breakdown showed quarterly profit growth stood at 51.1 and 33.7 per cent Y-on-Y and Q-on-Q respectively in the petrochemicals sector, eight and 19.2 per cent in the banking sector, 13 and 37.8 per cent for cement firms, 23.8 and 23.1 per cent in the retail sector, -0.1 and 198.7 per cent for energy, -36.4 and 36.6 per cent for agriculture, 16.1 and -37.8 per cent for telecom, -38.6 and -68.3 per cent for insurance, 13.4 and 30.9 per cent for industry, 6.2 and 30.9 per cent for construction, -18.9 and 7.3 per cent for real estate, -149.5 and -157.2 per cent for transport, -15.4 and -37 per cent for media and 18.8 and 11.7 per cent for hotels.

© Emirates 24|7 2011