Quarterly results preview Q2 2016 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 +966 11 211 9332, research@alrajhi-capital.com Saudi companies results preview Q2: Corporate profits to continue to decline 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. 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 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
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 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
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 33,802-19.7% 8.5% 6,171 3,406 3,229-47.7% -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 1,007 892 1,078 7.1% 20.9% 110 51 91-17.7% 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 884 691 663-24.9% -4.0% 596 286 274-54.1% -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 3,746-9.9% 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 1,665 6.5% 11.3% 227 402 388 70.5% -3.5% We expect revenues to rise on the back of higher utilization and increased product prices (q-o-q). A maintenance shutdown in Q2 2015 resulted in low top line and bottom line. APC 735 488 573-22.1% 17.3% 243 146 181-25.6% 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 41,528-17.7% 8.0% 7,239 4,195 4,183-42.2% -0.3% Cement Arabian Cement 447 405 350-21.6% -13.5% 162 226 171 5.8% -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 339 376 304-10.5% -19.2% 191 150 135-29.3% -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 500 507 476-4.7% -6.1% 254 265 243-4.3% -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 264 275 224-15.2% -18.7% 168 135 106-36.9% -21.7% Top line is likely to continue impacted by low sales prices given the increased competition and Ramadan period. Yanbu Cement 439 400 368-16.1% -7.9% 246 184 168-31.6% -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 532 549 495-6.9% -9.9% 270 283 245-9.4% -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 2,217-12.0% -11.7% 1,291 1,244 1,069-17.2% -14.1% Telecom Net Profit (SAR mn) STC 12,222 12,759 12,379 1.3% -3.0% 2,558 2,375 2,226-13.0% -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 3,365-5.7% -2.2% -901 17 23 NM 38.4% We expect Mobily to continue reporting its third consecutive quarterly profit in Q2 2016 but only slightly above the last quarter levels. Zain 1,666 1,765 1,740 4.4% -1.4% -201-250 -220 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 17,483 0.2% -2.7% 1,456 2,142 2,029 39.3% NM Disclosures Please refer to the important disclosures at the back of this report. 3
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 4,029 10.4% 16.8% 530 305 547 3.2% 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 7,737 4.2% 28.5% 434 93 309-28.9% 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 259 284 281 8.2% -1.0% 46 54 49 5.1% -9.3% We expect top-line growth to be driven by new restaurant additions. However, we expect same-store-sales to remain sluggish. Catering 565 559 586 3.7% 4.9% 176 142 156-11.5% 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 12,632 6.2% 22.5% 1,187 593 1,060-10.6% 78.8% Retail Jarir 1,406 1,417 1,424 1.3% 0.4% 155 174 156 0.8% -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 1,933-2.2% 23.8% 211 3 78-62.9% 2368.1% 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 1,933 12.0% 17.8% 56 47 70 25.7% 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 880 742 753-14.4% 1.5% 12-45 -16-236.7% -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 6,043 0.9% 12.7% 433 179 288-33.5% 60.5% Healthcare Net Profit (SAR mn) Dallah 245 285 267 8.9% -6.3% 36 58 43 20.9% -25.7% We expect Dallah to report a 9% growth in top-line helped by North Clinics. Mouwasat 273 307 294 8.0% -4.1% 56 71 62 10.8% -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 228 254 249 9.2% -2.0% 42 33 30-28.5% -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 174 182 130-25.5% -28.7% 37 22 10-72.9% -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 1,028 940 2.2% -8.5% 171 184 146-14.8% -20.8% Other Ma'aden 3,012 2,273 2,553-15.2% 12.3% 270 167 196-27.3% 17.5% Despite weaker commodity markets, we expect improvement from cost savings and improved efficiencies in q-o-q basis. Shaker 643 395 760 18.1% 92.3% 82 27 91 11.0% 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 1,869 3.2% -3.4% 342 612 500 45.9% -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
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"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 : +966 1 211 9332 Email: gopij@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh 11432 Kingdom of Saudi Arabia Email: research@alrajhi-capital.com Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 37/07068. Disclosures Please refer to the important disclosures at the back of this report. 6