Saudi corporate profits will remain under pressure in Q2 2016 on the back of the fall in commodity prices, reduced government subsidies and lower spending according to a report from the Al Rajhi Capital’s Research Department. Petrochemical sector earnings will continue to post sharp double-digit declines on a y-o-y basis due to lower product prices.
However, on a sequential basis, the sector’s bottom line is expected to be comparatively stable, supported by the recent recovery in product prices.
Retail sector earnings will be supported by the Ramadan season, though overall growth will be limited by lower disposable income and sluggish consumer spending. Food sector is expected to witness moderate top line growth on the back of Ramadan season and continued expansion, while margins are likely to come under pressure on the back of lower government subsidies and Savola’s retail push.
Cement sector earnings are expected to fall due to lower activity during holy month of Ramadan and lower cement prices because of sluggish demand. Telecom companies are likely to see a tough quarter owing to the new finger print regulatory requirement and Ramadan. Healthcare companies performance will be mixed with Dallah and Mouwasat expected to post strong profit growth, while Al Hammadi is expected to post a sharp fall in earnings due to electrical connection incident.
Petrochemicals:
Average Brent crude prices are down 26% y-o-y, but on a sequential basis, prices have increased ~33% as the global oil supply gut eased in Q2 2016 on the back of supply disruptions and strong demand. As a result, most petrochemical product prices have also shown a rising trend on a sequential basis, though on an annual basis, prices are still down in the range of 10-40%. The petrochemical sector has reacted positively to the increase, with the sector index rising ~10% q-o-q. We expect the petrochemical companies under our coverage to post improved earnings on a sequential basis, though on a y-o-y comparison, revenues and profits are still expected to be down due to lower product prices and decreased spreads.
Companies such as SAFCO and Sipchem are likely to witness the biggest impact on their bottom line from the revision in feedstock prices and due to their largely fixed feedstock prices. On the other hand, companies such as APC and Yansab will benefit from the fall in their feedstock prices (Propane, butane etc.). SABIC’s performance is expected to be mostly stable as the fall in spreads at the Europe unit is likely to be offset by the increase in Saudi-based facilities. The recent increase in commodity prices will also benefit the company’s steel division.
Retail:
After slow growth in Q1 2016 (due to the twin effects of last year’s high base benefiting from the two month bonus and slowing consumer spending), Q2 2016 is also set to witness tepid headline growth from retailers. Like previous years, fashion retailers (Fawaz Al Hokair) and grocery retailers (Al Othaim) stand to benefit during the Ramadan month, with no significant impact on electronic retailers (Jarir and Extra). While majority of the holy month of Ramadan falling in June this year (which was split between June and July last year) should be beneficial, it will be negated by the sustained weakness in consumer spending as the government spending slows down and rise in utility/ energy prices slices disposable incomes. Overall, we expect flattish growth for aggregate revenue of retailers along with some margin dilution in Q2 2016. We expect Al Othaim to post strong results on the back of aggressive store rollouts in the past few quarters.
Food & Agriculture:
We expect food and agriculture companies to witness moderate growth in Q2 2016, despite lower disposable incomes. But the strengthening of the US dollar will impact the international operations of the food companies. Almarai’s revenue is expected to grow at approx. 10%, primarily supported by increasing contribution from the Bakery segment. However, margin will continue to remain under pressure due to high utility costs. Savola’s revenue growth will be driven by its retail segment, partly offset by the food segment, which will be impacted by lower product prices.
However, the company’s bottom line is expected to be negatively impacted by foreign currency fluctuations (especially Egyptian pound). Herfy’s revenue growth will be driven by its newly opened restaurants (45 in 2015), offset by lower LFL growth due to slower consumer spending. However, margin will continue to remain under pressure due to rising operating expenses related to the opening of new restaurants. Catering’s airline revenue growth will benefit from the new contracts with Al Bayraq Airlines and newly opened business lounges.
Cement:
We expect cement companies to witness lower growth in Q2 2016 as Ramadan falls in this quarter and high competition in the sector, which in our view has led companies to offer discounts on the selling prices. The underperformance of cement sector in Ramadan is attributed to the weaker construction activities given shorter working hours and fasting workers . Cement sales volumes declined 1% y-o-y during the first two months of Q2 2016. We estimate revenue of companies under our coverage to decline 12% y-o-y, whereas profit is likely to fall by ~17.2%. We are Overweight only on Yanbu among all cement stocks in our coverage.
Telecoms:
As most of the Ramadan month has shifted into Q2 and as observed in the past, Ramadan is a weak period for telecom business. This quarter will see an impact from not just Ramadan but also the finger print regulatory requirement. As observed in Q1, while costs are likely to increase, sales will also be slightly impacted due to allocation of sales force in helping with the finger print exercise. On the other hand, the cut in mobile termination rates will likely help improve overall margins of the telecom sector – slightly favoring the smaller players Mobily and Zain while mildly impacting STC, though it is likely to be insignificant overall as its business is well diversified. Impact of GCC roaming rate cuts will be insignificant as well for all the telecom companies. Among the three, we are overweight on STC, which we expect is likely to continue paying SR1/dividend this quarter.
Healthcare:
Healthcare companies are expected to report low revenue growth figures in this seasonally weak quarter Q2. In addition, net profit is expected to decrease around 15% (mainly owing to Al-Hammadi’s electrical connection incident). Moreover, we believe that two hospitals, Al Hammadi AlSweidi hospital and Mouwasat’s Riyadh hospital will break even in this quarter.
Al-Hammadi’s Al Olaya hospital has been closed for all of Q2 which will affect Al-Hammadi’s Q2 bottom line. We estimate the company to report revenue of SAR130mn and net profit of SAR10mn only. Mouwasat will continue to benefit from its new Aramco agreement and its relatively new Riyadh hospital. We believe that Riyadh hospital will start generating profits for the company from this quarter. For Dallah, North clinics will still be the main growth driver as we expect revenue growth of 9%. Lastly, we estimate NMCC to report 9% revenue growth. However, we believe net profit is likely to be lower owing to higher provisions for bad debt.
