Saudi King’s Building Spree Helps Cement Producers Beat Tadawul Benchmark
Saudi Arabia’s cement makers are beating the benchmark stock index on speculation they will benefit from about $500 billion in government spending and projects including the world’s tallest tower in Jeddah.
The Tadawul All Share Cement Index, which includes nine stocks, has climbed 20 percent this year, the third-best performance after media and retail stocks, and compared with a drop of 7.4 percent for Saudi Arabia’s Tadawul All Share Index. (SASEIDX) Cement companies offer a dividend yield of 6.6 percent, second only to transport companies, among the 15 index groups in the Tadawul. The cement gauge rose 0.5 percent at the 3:30 p.m. close in Riyadh today.
“The sector will continue to benefit from large infrastructure spending under way in Saudi Arabia,” said Yong Wei Lee, who helps oversee about $1.2 billion as a senior fund manager at Emirates NBD Asset Management in Dubai.
King Abdullah announced a $130 billion plan this year to build homes and create jobs to stave off regional protests that toppled leaders in Tunisia and Egypt and sparked an armed rebellion in Libya, culminating in Muammar Qaddafi’s death. The rulings added to a commitment in 2010 to spend $384 billion over five years on housing, transport and education. Prince Alwaleed bin Talal is constructing the world’s tallest tower at a cost of $1.2 billion. The Jeddah skyscraper will be the centerpiece of Kingdom City, a 100 billion-riyal ($27 billion) development.
Lack of Upside
Southern Province Cement Co. (SOCCO), the biggest producer by market value, posted a 51 percent increase in third-quarter profit as sales rose. The Abha-based company paid a 2.75 riyal dividend for the first half of the year. Arabian Cement (ARCCO) Co., Yamamah Saudi Cement (SACCO) Co., Qassim Cement (QACCO) Co. and Yanbu Cement (YNCCO) Co. reported quarterly profit increases of as much as 33 percent.
Gains of 19 percent for Southern Province this year and 26 percent for Saudi Cement, the second-largest cement maker by market value, have pushed shares to 12.8 and 12.4 times estimated earnings. The cement index trades at 11.9 times estimated earnings, compared with 12 times for the Tadawul All Share Index, according to data compiled by Bloomberg.
“A lot of these cement companies are trading close to the higher end of the valuation range,” said Fadi Al Said, a Dubai- based senior investment manager at ING Investment Management, which oversees about $518 billion worldwide. “There is not much upside now.” Performance of the group will now rely on supply and the impact that will have on prices, according to al Said, whose fund isn’t presently investing in the industry.
The kingdom’s cement companies have an annual production capacity of about 51 million tons, NCB Capital said in a report last month. Restrictions on cement exports were implemented in June 2008, the peak of the Persian Gulf construction boom, causing producers’ profits to decline, and the cement index to slump 58 percent.
With a license, cement makers can export as much as 10 percent of their reserves and must abide by a 10-riyal-per-bag factory price. The restrictions won’t be lifted in the near future, Abdul Rahman Abdulrazzaq, Saudi Arabia’s deputy minister of commerce and industry for consumer affairs, said in an interview.
“Strong domestic demand is mitigating the impact of the cement export ban and increase in domestic cement capacity,” Global Investment House said in August. “Saudi companies kept pressuring the government to ease the export restrictions, but after the February and March royal decrees, these companies saw no need to” continue, Mohammed Al Amoudi, chief financial officer of Yamamah, the kingdom’s third-largest by market value, said in an interview Oct. 10.
Al Jouf Cement Co., whose plants are located in the northern Al Jouf region on the borders with Jordan, is currently the only listed company with a license for exporting cement.
“Cement shares are investment shares, not speculative stocks,” according to Yamamah’s Al Amoudi. “Investors hold the shares for a long time because dividends are high.”
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