Saudi companies results preview

Transcription

1 Quarterly results preview Q Key theme With Q2 approaching an end, we present revenue and bottom-line estimates for companies under our coverage in various sectors. Research Department Equity Research Team Tel , Saudi companies results preview Q2: Corporate profits to continue to decline Saudi corporate profits will remain under pressure in Q on the back of the fall in commodity prices, reduced government subsidies and lower spending. 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 Q 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 Q (due to the twin effects of last year s high base benefiting from the two month bonus and slowing consumer spending), Q 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 Q We expect Al Othaim to post strong results on the back of aggressive store roll-outs in the past few quarters. Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems EFA Platform

2 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 Q 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 Q 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 favouring 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 SAR1/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. We are Overweight on all four healthcare companies under our coverage. Disclosures Please refer to the important disclosures at the back of this report. 2

3 Saudi market: Q2 estimates of the companies we cover Revenues (SAR mn) Company 2015Q2A 2016Q1A 2016Q2E Petrochemical 2015Q2A 2016Q1A 2016Q2E SABIC 42,095 31,153 33, % 8.5% 6,171 3,406 3, % -5.2% Revenues will continue to fall on lower commodity prices across divisions on a y-o-y basis, though the recent uptrend in commodity prices will support sequential growth. Bottom line will remain under pressure on lower spreads. Sipchem 1, , % 20.9% % 78.6% Top line growth will be boosted by ramping up of production from the newly commissioned plants, as well as the uptick in product prices, though maintenance shutdown at some units will restrict total growth. SAFCO % -4.0% % -4.3% Earnings will fall sharply due to ~25-30% y-o-y fall in product prices and the upward revision in methane prices. The commercial operations of SAFCO V is unlikely to benefit the top line significantly. NIC 4,156 3,718 3, % 0.8% (108) (95) 21 NM NM NIC is likely to post a net profit supported by benefits from restructuring, though industrial business unit will continue to put pressure on the company's bottom line. Yansab 1,563 1,496 1, % 11.3% % -3.5% We expect revenues to rise on the back of higher utilization and increased product prices (q-o-q). A maintenance shutdown in Q resulted in low top line and bottom line. APC % 17.3% % 24.2% Strong sequential growth on the back of higher volumes, rising polypropylene prices and higher spreads, though on an annual basis prices are still down. Petrochemical Sector 50,441 38,437 41, % 8.0% 7,239 4,195 4, % -0.3% Cement Arabian Cement % -13.5% % -24.0% We expect a 6% growth in the bottom-line of the company as a result of using its own inventory and not consuming imported clinker. Yamama Cement % -19.2% % -10.0% We expect revenues to decline 11% y-o-y due to the expected slowdown in construction activities during Ramadan season. Y-o-Y bottom-line to be impacted by higher cost of sales and downward pressure on prices. Saudi Cement % -6.1% % -8.4% Saudi Cement increased its sales volume by 5% y-o-y in April & May. However, we expect the company to continue offering discounts on the sale price due to the increased competition. Qassim Cement % -18.7% % -21.7% Top line is likely to continue impacted by low sales prices given the increased competition and Ramadan period. Yanbu Cement % -7.9% % -8.7% We expect revenues to decline 16% y-o-y as downward pressure on prices and high competition in the Western region is likely to continue. Southern Cement % -9.9% % -13.5% We expect the company to continue its cost controls and stable selling prices. However, we estimate a 9% y-o-y decline in the company's bottom-line due to Ramadan effect during the quarter. Cement Sector 2,520 2,512 2, % -11.7% 1,291 1,244 1, % -14.1% Telecom Net Profit (SAR mn) STC 12,222 12,759 12, % -3.0% 2,558 2,375 2, % -6.3% Like other telecom operators, STC is expected to see a weak quarter, impacted by Ramadan seasonality and finger print exercise. Mobily 3,568 3,440 3, % -2.2% NM 38.4% We expect Mobily to continue reporting its third consecutive quarterly profit in Q but only slightly above the last quarter levels. Zain 1,666 1,765 1, % -1.4% NM NM Zain KSA is likely to show an improvement in its losses on q-o-q basis despite Ramadan seasonal effect but lower on y-o-y basis. Telecom Sector 17,456 17,964 17, % -2.7% 1,456 2,142 2, % NM Disclosures Please refer to the important disclosures at the back of this report. 3

4 Saudi market: Q2 estimates of the companies we cover Revenues (SAR mn) Company 2015Q2A 2016Q1A 2016Q2E Food & Agriculture 2015Q2A 2016Q1A 2016Q2E Almarai 3,650 3,450 4, % 16.8% % 79.5% Healthy revenue growth at 10% y-o-y due to Ramadan shifting to Q2 this year. Margin will contract y-o-y due to higher energy/ utility prices. Savola 7,421 6,023 7, % 28.5% % 232.3% We expect top-line to grow at mid single digit, led by the retail segment but will be offset by lower sales from food segment. Herfy % -1.0% % -9.3% We expect top-line growth to be driven by new restaurant additions. However, we expect same-store-sales to remain sluggish. Catering % 4.9% % 9.8% Airline revenues (+5% y-o-y) to benefit from the new contracts with Al Bayraq Airlines and new business lounges. Food & Agri. Sector 11,896 10,316 12, % 22.5% 1, , % 78.8% Retail Jarir 1,406 1,417 1, % 0.4% % -10.3% Retail revenue and margin will get impacted due to seasonally soft demand from books and stationary segment. Revenue will primarily be driven by two store additions this quarter. Alhokair 1,978 1,562 1, % 23.8% % % Revenue from Saudi market to benefit from majority of Ramadan month falling in June quarter this year vs. being spread in June and September quarters last year. However, this will be negated by weak LFL sales, resulting in flattish revenue YoY. Expect discounts to continue which will dent margin. Alothaim 1,726 1,640 1, % 17.8% % 48.8% Al Othaim will continue to witness strong revenue and profit growth aided by aggressive store roll-outs (~15% YoY increase in store count) and majority of Ramadan month falling in June quarter this year. Extra % 1.5% % -63.9% Expect weak consumer discretionary purchases and continuing discounts on products (to gain market share) to impact both revenue and margin. Retail Sector 5,989 5,361 6, % 12.7% % 60.5% Healthcare Net Profit (SAR mn) Dallah % -6.3% % -25.7% We expect Dallah to report a 9% growth in top-line helped by North Clinics. Mouwasat % -4.1% % -12.6% We believe that Mouwasat will report a high growth percentage in top-line compared to healthcare companies mainly because the new contract with Aramco and the recent opening of the expansion in Jubail hospital. NMCC % -2.0% % -8.4% NMCC is expected to report a 9% growth in revenues. However, we believe net profit will be hurt by higher provisions for bad debt. Al Hammadi % -28.7% % -53.6% We believe that Suweidi hospital is operating above expectations and has already started reporting profits. However, we expect a 73% decline in net profit as a result of the closure of Olaya hospital. Healthcare Sector 920 1, % -8.5% % -20.8% Other Ma'aden 3,012 2,273 2, % 12.3% % 17.5% Despite weaker commodity markets, we expect improvement from cost savings and improved efficiencies in q-o-q basis. Shaker % 92.3% % 232.7% Revenue growth of LG AC segment (approx 80% of revenue) expected to be strong at 20% in a seasonally strong quarter, further aided by consumers likely switching to branded and star-rated AC's due to rising electricity prices. Bahri 1,811 1,935 1, % -3.4% % -18.3% Revenue growth aided by 3 VLCC additions last quarter (full impact in current quarter) and 5 chemical tankers added in last two quarters. Downturn in day rates and rise in buker fuel prices will weigh on profitability. Disclosures Please refer to the important disclosures at the back of this report. 4

5 IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to major U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act ). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 20 Broad Street 26th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Al Rajhi. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority ( FINRA ) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Ownership and Material Conflicts of Interest Rosenblatt Securities Inc. or its affiliates does not beneficially own, as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is not aware of any material conflict of interest as of the date of this publication. Compensation and Investment Banking Activities Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the subject company in the next 3 months. Additional Disclosures This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report. Neither Al Rajhi nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report s preparation or publication, or any losses or damages which may arise from the use of this research report. Al Rajhi may rely on information barriers, such as Chinese Walls to control the flow of information within the areas, units, divisions, groups, or affiliates of Al Rajhi. Investing in any non-u.s. securities or related financial instruments (including ADRs) discussed in this research report may present certain risks. The securities of non-u.s. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-u.s. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States. The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments. Past performance is not necessarily a guide to future performance and no representation or warranty, express or implied, is made by Al Rajhi with respect to future performance. Income from investments may fluctuate. The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior consent of Al Rajhi and Al Rajhi accepts no liability whatsoever for the actions of third parties in this respect. This research document has been prepared by Al Rajhi Capital Company ( Al Rajhi Capital ) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction. Disclosures Please refer to the important disclosures at the back of this report. 5

6 Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company ( Al Rajhi Capital ) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction. Explanation of Al Rajhi Capital s rating system Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 10% above the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price on a 12 month time horizon. "Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Target price": We estimate target value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company s profits or operating performance exceed or fall short of our expectations. Contact us Jithesh Gopi, CFA Head of Research and Financial Institutions Tel : gopij@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh Kingdom of Saudi Arabia research@alrajhi-capital.com Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 37/ Disclosures Please refer to the important disclosures at the back of this report. 6