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Non-Petchem Saudi Listed Companies Face Tough Q1

02 May 2011
Saudi listed companies have not seen much of the benefits of the King's spending spree yet, but have already seen their bottom-lines suffer on bonus payouts in a tough quarter.

Non-oil related Saudi listed companies saw their combined earnings down 2.3% in the first quarter of the year, compared to the fourth quarter of 2010 suggesting a tough quarter for the private sector.

Saudi-based Jadwa Investment research shows total listed companies' earnings were up 13% compared to the last quarter of 2010, with petrochemicals driving growth on the back of higher energy prices and generally greater international sales and did not reflect local or regional conditions, says Jadwa .

Sabic, by far the largest listed company in the region and a Tadawul bellwether, posted its highest profit ever as energy prices rose.

But others sector did not enjoy the same results.

"Earnings from six sectors were down in both year-on-year and quarter-on-quarter terms," said Jadwa in a note. "Among those hardest hit were companies exposed to the unrest either by owning manufacturing facilities in affected countries, or by being major exporters to 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."

Food and beverage company Savola, for example, saw its net profit in the first quarter of 2011 decline 58% primarily on the back of a one-off gain in the comparable period in 2010 but also on high sugar prices.

Savola results:

Similarly, Al Marai, the region's largest dairy producer, also missed analyst forecast and posted a meagre 0.5% rise in net profit, also lowering its growth forecast for the year.

The company blamed increase in the price of packaging materials, dairy commodities, juice concentrate and feed costs for the anaemic growth.

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

The Saudi King's massive spending outlay of more than a $100-billion to appease citizens has also not trickled into the economy yet. If anything, it has impacted some of the companies negatively at least in the short-term.

"The huge additional spending announced in a series of Royal decrees issued on February 24 and March 18 did not have much impact on company performance. This is not surprising, as very little of the new spending occurred during the quarter," says Jadwa .

In fact, many 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.

Saudi Telecom, for example, saw net profits fall 11% in the first quarter due to bonus payouts.

"In spite of the double digit increase in operating income for the quarter comparing with the corresponding quarter last year, the net income decrease is attributed to the two-month salary payment to all employees amounted to SAR375 million," the telecom operator said.

Jadwa has identified 27 companies that paid out bonuses, which no doubt impacted on their bottom-lines.

However, not only companies suffered.

Retail 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, with Jadwa citing that shops were notably busier in the weeks following the announcement.

"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."

Results from the banking sector were generally disappointing too. 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, according to Jadwa .

Samba Financial Group (Samba) reported a net profit of SAR 1.12 billion in 1Q2011, 7% below 1Q2010 but 25% above the weak net profit achieved in 4Q2010. Total operating income stood at SAR 1.7 billion in 1Q2011, 8% below 1Q2010, 9% above 4Q2010, and 3% above NBK Capital's forecast.

Bonus payout could pinch profits in the next quarter as well. "While the bank did announce two-month salary bonuses for its employees, we believe that these have not been completely booked in 1Q2011," says EFG-Hermes.

Saudi Hollandi Bank saw net profit rise to 3.5% in the quarter, but fell short of analyst expectation, for a similar reason. "We estimate that the one-off costs related to the two-month salary bonuses paid to employees added about SAR20 million to SHB's 1Q2011 operating costs," says EFG-Hermes in a comment.

Riyad Bank saw an 8% increase in net profit for the year, also below forecast. Saudi British Bank, however, saw profits rise 21%, beating all expectations.

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

Insurance posted the second largest fall in year-on-year terms owing to a regulatory change that necessitated companies setting aside funds against credit loss provisions, said Jadwa .



Also Read: Q1 Bonanza

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