Weak Q2 projected for Saudi petrochemical sector - Al Rajhi Capital

The top three companies that contributed the most to TASI’s rally were SABIC, Saudi Aramco and Saudi Telecom Company, Al Rajhi Capital said in a report

  
A Saudi man stands in front of a screen as another inspects stock prices at ANB Bank in Riyadh, Saudi Arabia September 16, 2019. Image for illustrative purposes.

A Saudi man stands in front of a screen as another inspects stock prices at ANB Bank in Riyadh, Saudi Arabia September 16, 2019. Image for illustrative purposes.

REUTERS/Ahmed Yosri

Riyadh – The inclusion of Saudi stocks in FTSE global indices in June has backed the benchmark index of the Saudi Stock Exchange (Tadawul), the Tadawul All Share Index (TASI), to recover by 11% after it had declined by 22% in the first quarter (Q1) of 2020.

The top three companies that contributed the most to TASI’s rally were the Saudi Basic Industries Corporation (SABIC), Saudi Arabian Oil Company (Saudi Aramco), and Saudi Telecom Company (stc), Al Rajhi Capital said in a report on Sunday.

Several factors played out during Q2-20. To name a few, strong consumer discretionary sales, increased telecoms consumption, and improved petrochemical prices. This came despite a drop in oil prices and widening fiscal budget.

The second half of the year begins with the implementation of the new 15% value-added tax (VAT), which tripled from 5%, concerns of increasing provisions for banks, and possibly weaker discretionary consumer spending. The research company expects the recovery to be gradual and believes that large companies will be getting larger at the behest of the smaller ones.

The combined earnings of the Saudi petrochemical sector is expected to decline during Q2-20, driven by weak petrochemical prices and lower sales volume, Al Rajhi expected in its latest report.

Most of the retail companies are expected to partially compensate the sales losses incurred during lockdown by pre-VAT buying observed especially during June. The overall sector is expected to report 3.5% year-on-year (YoY) and 2.3% quarter-on-quarter (QoQ) growth. The net profit growth is projected at -15% on an annual basis.

Regarding the cement industry, the Q2 sales are likely to witness an annual decline, given reduced demand during the curfew and project delays during the lockdown. Based on Al Rajhi’s estimates, the companies under coverage are projected to report a 20.9% YoY plunge in revenue during Q2.

The telecom stocks have rallied as they are one of the main beneficiaries of the new environment.

The report noted that as consumers continue impulsive buying in April, consumer staple companies are likely to deliver yet another strong quarter. The top-line (ex-Almarai) for the sector could decline by 2.2% YoY and 1.9% QoQ, while the net profit is expected to fall by 79% YoY and by 74% QoQ

Concerning the healthcare sector, the Q2 results are likely to get affected due to the decreasing number of patient traffic. The top-line growth will fall, owing to the drop in the overall utilisation rate of the hospitals. Total revenue and net profit for the healthcare companies under Al Rajhi’s coverage are seen to slide by 15.2% YoY and 11.7% YoY, respectively.

In addition, the underlying business operations of domestic insurers are projected to be supported by a significant improvement in loss ratio due to curfew in the kingdom throughout most of the second quarter. However, investment income is seen to remain a drag for the sector, hence, will keep the sector’s profitability during Q2 under pressure. The outlook for the sector in H2-20 looks grim.

Referring to Saudi Ceramic Company, the research firm expected modest top-line growth, driven by increasing sales for construction materials ahead of VAT levy. The Saudi Industrial Services Company (SISCO) is likely to deliver a drop on top-line for Q2, while Leejam Sports Company is expected to report a net loss due to shutdown of gyms for most of Q2.

Source: Mubasher

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