The ongoing housing programs driven by Saudi Arabia, a pick-up in the giga projects and the Public Investment Fund’s (PIF) 2021-2025 strategy are expected to be the key growth drivers for Saudi Arabia’s cement sector, said NCB Capital, adding that it maintains “a positive outlook for the sector”.
The Riyadh-based investment bank estimates local cement sales to grow by 3.5 percent year-on-year (y-o-y) in 2021f to 52.8 million tons, following a strong growth of 20.7 percent y-o-y in 2020 to 51.1 million tons.
“This is expected to result in an attractive 2021f dividend yield of 5.1 percent, which is the sector’s major attractiveness,” it said in a note.
Demand from the housing sector remains strong with the value of new mortgages reaching a record high of 32.8 billion riyals ($8.7 billion) in January 2021. Work on the giga projects is expected to accelerate in 2021 as multiple contracts were awarded recently. Additionally, PIF 2021-2025 strategy, Riyadh and Soudah development projects are expected to support demand over the medium term, the note said.
However, cement price volatility is a concern as selling price weakness remains a key risk, NCB Capital said.
Local cement prices averaged 174 riyals per ton in Q4 20, down 16.1 percent and 8 percent from 2019 and Q3 20 levels, respectively.
“We expect this was largely due to strong competition (particularly in Central Region), restricting the sector’s ability to pass on the impact of VAT hike. As demand improves across Saudi in 2021f, we expect prices to average 183 riyals per ton,” it noted.
However, dividend yields are likely to be attractive as the investment bank believes the cement producers are well positioned to further improve their payouts in 2021f, (pay-out ratios 106.3 percent for the sector), reflecting in an attractive 2021f dividend yield of 5.1 percent. This will be mainly driven by strong sales growth, limited capex, declining inventory and low leverage ratios, the note said.
NCB Capital said it upgraded ratings on Eastern Cement to “Overweight due to its attractive dividend yield (6.3 percent) and an unjustified valuation discount.
“We downgrade Yanbu Cement to “Neutral” as we believe the stock is fairly valued at the current levels, after a strong price rally since our last update.”
(Reporting by Brinda Darasha; editing by Seban Scaria)
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