Special Reports 2018
December2018
Kindly find attached MEFIC Capital’s Quarterly Report on Cement sector in Saudi Arabia, which analyses key demand-supply trends at the sector and company level and quarterly earnings performance of listed cement stocks.
The key highlights of Saudi Cement Sector are:
• Cement sales in Saudi Arabia dropped 11.4% YoY to 38.2 million tons during the first eleven months of 2018, compared to 43.2 million tons during the same period in 2017.
• Clinker production, fell 4.7% YoY to 43.9 million tons during the first eleven months of 2018, compared to 46.1 million tons during the same period in 2017, leading to an increase in inventories to a new all-time high of 42.0 million tons in November 2018 across cement producers in KSA.
• Cement prices in KSA have been continuously falling since the start of 2018, due to a decline in sales amid weak demand and build-up in inventories. The prices reached a new record low of SAR 11.81 per 50 kg bag in October 2018.
• Cement demand is weighed down by lower government spending on infrastructure sector during the first three quarters of 2018, coupled with lower credit exposure to construction activity amid rising interest rates as well as the downtrend in the real estate sector.
• Cement exports slowly started to pick up after the Saudi government scrapped export duties on cement in February 2018, after having reduced it by 50% in July 2017. Cement exports stood at 977,000 tons in YTD 2018. Saudi Cement was the single-largest exporter of cement with a share of 60.2%, accounting for 588,000 tons of export during the period.
• During the first eleven months of 2018, market share of cement companies from Eastern and Southern regions improved to17.3% (up 2.1% YoY) and 17.2% (up 1.8% YoY), respectively, during the year-earlier period.
• The quarterly earnings performance of cement companies continued to be under pressure in Q3 2018, although the aggregate net loss was reduced to SAR 3.3 million from SAR 54.2 million in the previous quarter. Aggregate revenue of cement companies declined 18.6% YoY in Q3 2018.
• We remain cautious on the sector, with weak demand weighing down on cement prices. Expected increase in government spending may marginally lift the demand going forward, but prices are unlikely to pick up significantly in the next year, owing to high level of excess inventory and stiff competition in the sector. Cement demand is expected to pick up by the end of 2019, when large-scale work on megaprojects such as the Red Sea and NEOM starts.
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Cement Sector Quarterly Review
December2018
We are pleased to present our analysis of KSA Budget 2019, which provides a clear indication of an expansionary fiscal policy to support economic growth in the near term.
The key highlights of the 2019 Budget statement are:
• Expenditure: Budget expenditure in 2019 is set to increase 7.3% year-on-year (YoY) to SAR 1,106 bn, the highest ever for Saudi Arabia, compared to SAR 1,030 bn in 2018.
• Revenues: Government estimates revenues to rise 9% YoY to SAR 975 bn in 2019, compared to SAR 895 bn in 2018. The estimated revenue for 2018 is 1.5% higher than SAR 882 bn previously estimated in the pre-budget statement released in October 2018.
• Fiscal Deficit: The fiscal deficit for 2019 is aimed at SAR 131 bn or 4.2% of GDP, which is 3.7% lower than the expected 2018 deficit of SAR 136 bn (4.6% of GDP). The expected deficit in 2018 is 8.1% lower than SAR 148 bn (5% of GDP) previously estimated in the pre-budget statement.
• GDP growth: The economy is expected to grow by 2.6% in 2019, as compared to 2.3% in 2018. The GDP growth estimate for 2018 is revised up from 2.1% previously estimated in the pre-budget statement.
• Public Debt: Total public debt is expected to rise to SAR 678 bn (21.7% of GDP) by the end of 2019, from SAR 560 bn (19.1% of GDP) by the end of 2018.
We expect the increased expenditure in 2019 to support the growth in non-oil sector. The extension of cost of living allowances for one year would support consumer spending as well. Credit growth has returned to has returned to positive territory since May 2018. With the US Fed indicating that it would slow the pace of monetary tightening for next year, this augurs well for the Saudi economy as SAMA follows the Fed in monetary policy. Despite this, we see lower than expected oil prices in 2019 as being the key risk to the budget. However, we also believe that even in case of oil revenue shortfall, the government has scope to fund the targeted expenditure through borrowing, as the debt-to-GDP ratio is still well below its emerging market peers. Overall, the budget appears to be supportive for economic growth in 2019.
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December2018
We are pleased to present MEFIC Capital’s Quarterly Report on banking sector in Saudi Arabia, which analyses key trends in the sector and quarterly earnings performance of listed banks.
The key highlights are:
• Total bank credit recorded its highest rate of growth (+1.5% YoY) this year so far in Q3 2018, reaching SAR 1.43tn by the end of September 2018.
• In terms of sectoral breakup of credit, banks increased their exposure to Manufacturing and processing sector by 2.9% QoQ in Q3 2018, while Building and Construction sector witnessed a growth of 3.3% QoQ.
• In Q3 2018, total bank deposits have rose 2.1% YoY and 1.4% QoQ to SAR 1.636tn. Loans-to-deposits ratio has increased to 87.4% from 85.6% at the end of 2017.
• Interest rates in Saudi Arabia have risen steadily in the recent past, with 3-month Saudi Interbank rate (SAIBOR) rising to 2.84% at the end of November 2018, from 1.33% in December 2015. The rising interest rate environment is especially beneficial for Saudi banks, expanding their Net Interest Margins (NIMs).
• As loan growth has been limited due to subdued economy, much of the investments have moved into government bonds. In Q3 2018, Saudi banks’ investment in government securities has increased 26% YoY. Overall, the banks’ investment in government securities has risen to SAR 296.6 bn by the end of Q3 2018, compared to SAR 86.2 bn by the end of 2015.
• Q3 2018 was another robust quarter for Saudi banking sector, as the aggregate net profit of Saudi banks increased 10.7% YoY in Q3 2018, after clocking 7.4% YoY and 11.8% YoY growth during Q1 2018 and Q2 2018 respectively. The earnings growth was mainly supported by higher operating revenue and higher fees for banking services.
• Alinma Bank, Bank AlBilad and NCB were the top performers in the sector in Q3 earnings, with earnings growth of 20.5% YoY, 15.7% YoY and 15.4% YoY respectively.
• Slowly but gradually deteriorating quality of its assets could be a cause of concern for Saudi banks, with the non-performing loans (NPL) to total loans ratio increasing to 1.8% by the end of Q2 2018 from 1.2% at the end of 2015. However, banks are well capitalized.
• Saudi Banking sector is on track to witness its first merger in nearly two decades, as on October 4 2018, Saudi British Bank and Alawwal Bank have approved the binding agreement to merge the two institutions, creating Saudi’s third largest bank in the process.
• We believe the sector appears strong currently, given the level of capitalization, strong liquidity position, consistent profitability, and robust quarterly earnings growth for the last three quarters.
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November2018
We are pleased to present our summary and analysis of Q3 2018 quarterly earnings of Tadawul listed stocks.
The key highlights of the Q3 2018 earnings season are
• TASI listed companies continued to register steady incremental growth in earnings in Q3 2018. Earnings grew 5% on QoQ basis, increasing incrementally for the third straight quarter.
• Aggregate earnings rose 1.7% YoY to SAR 32.8 bn, after falling 16.5% YoY in Q2 2018.
• Aggregate revenue increased 10.5% YoY to SAR 186.2 bn, registering the highest quarterly YoY revenue growth since Q4 2016.
• Net profit margin declined to 17.6% in Q3 2018, compared to 19.8% during the previous quarter and 19.5% during the year-earlier period.
• Real Estate sector recorded highest positive change on a YoY basis, turning to aggregate profit of SAR 457.2 mn, compared to loss of SAR 304.5 mn during the year-earlier period.
• The top three sectors by market capitalization, i.e. Materials, Banks and Telecom; recorded healthy year-on-year growth during the quarter, with aggregate earnings growing 12.2%, 10.7% and 11% respectively on YoY basis.
• Performance of Food & Beverages, Energy and Insurance sectors was among the weakest, with aggregate earnings falling 56.6% YoY, 55.4% YoY and 53.6% YoY respectively.
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November2018
We are pleased to present our analysis of KSA Budget Q3 2018, which indicates the fiscal deficit was under control during the quarter and the government has ability to spend more to further support the economy in Q4 2018, if required
The key highlights are:
• Saudi Arabia reduced its budget deficit in Q3 2018 to SAR 7.29 bn compared to SAR 7.36 bn in Q2 2018 and SAR 48.73 bn in Q3 2017.
• The overall deficit by the end of Q3 2018 (first nine months of 2018) amounted to SAR 48.98 bn, which accounts for just 33% of the revised deficit target of SAR 148 bn for FY 2018.
• The deficit in Q3 reduced 85% on YoY basis and 1% on QoQ basis. Overall deficit reduced 60% YoY during the first nine months of 2018.
• The Saudi Finance Ministry stated “The reduction in the budget deficit is a result of significant growth in oil and non-oil revenues, reflecting the effectiveness of economic reforms and fiscal measures targeting fiscal sustainability as well as the effective management of public finances.“
• Total revenue rose 57% YoY to SAR 223.3 bn in Q3, with oil revenue increasing 63% YoY to SAR 154 bn.
• Total expenditure increased 21% YoY to SAR 230.5 bn in Q3, mainly due increased expenditure on financing, subsidies, goods and services and social benefits.
• In terms of budget allocation, Infrastructure & Transportation remains the most underspent sector, with only 37% of the total annual budgeted expenditure utilized by the end of Q3 2018.
• The deficit for Q3 was financed through the debt borrowed in previous quarters. The Kingdom’s public debt rose to SAR 549.5 bn by the end of Q3 2018 compared to SAR 537 bn at the end of Q2 2018 and SAR 443.3 bn at the end of 2017.
• We believe Saudi Arabia is on track to meet its revised full-year deficit target of SAR 148 bn (5% of the GDP). The government has considerable room to increase expenditure in the fourth quarter to support the economic growth.
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October2018
Saudi Arabia’s Ministry of Finance recently issued its first ever preliminary statement for the general budget for FY 2019. This pre-budget statement included key fiscal and economic developments for past few years and estimates and forecasts of key macroeconomic indicators over the medium term.
Following are the key highlights of the pre-budget statement:
• The fiscal deficit estimate for FY 2018 is reduced to SAR 148 bn, or 5.0% of the GDP, from the initial target of SAR 195 bn (7.3% of the GDP). The estimated deficit is a remarkable improvement in just one year compared to 2017 budget deficit of SAR 230 bn (8.9% of GDP).
• The fiscal deficit is forecasted to reduce further to 4.1%, 4.3% and 3.7% of the GDP in 2019, 2020 and 2021 respectively. The overall aim is to be fiscally balanced by 2023.
• Partly due to favorable oil prices and partly due to revenue related reforms (new taxes), total revenue for FY 2018 is estimated to be SAR 882 bn, 13% higher than the initial estimates.
• Expenditure for FY 2018 is estimated to be SAR 1,030 bn, 5% higher than the budgeted expenditure.
• Real GDP growth rate estimate for FY 2018 has been revised down to 2.1% from 2.7% estimated earlier. This is more in line with the GDP growth estimates by the IMF (1.9%) and the World Bank (1.8%). However, considering that the 1H 2018 GDP growth has been 1.4%, the implied GDP growth rate for 2H 2018 is 2.8%.
• Total debt as a percentage of GDP is schedule to increase gradually from 17% in 2017 to 20% in 2018 and 25% in 2021. This is still well below the cap of 30% the government has put according to fiscal rebalancing program. It also implies issuance of SAR 272 bn of debt issuance between 2019 and 2021.
The Ministry of Finance’s approach to increase transparency in the overall fiscal management program is commendable and helps capital markets to be better informed of the forward path. We continue to believe in the Saudi economic and fiscal turnaround (refer to our ‘MEFIC Capital KSA 2018 Outlook Mid-year Review’ released in August 2018) and have a positive outlook on the Saudi economy and capital market performance.
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October2018
We are pleased to present our analysis of KSA’s GDP in Q2 2018, which indicated that the economy continued to expand during the second quarter of the year.
The key highlights are
• The KSA Q2 2018 GDP rose 1.6% YoY to SAR 639.2 bn compared to SAR 629.1 bn in Q2 2017. On a sequential basis (compared to Q1 2018), the GDP declined 1.3%.
• Oil sector GDP increased 1.3% YoY to SAR 279.0 bn. The sector contributed around 43.7% to the total GDP in Q2 2018, slightly down from 43.8% in Q2 2017, but higher than 42.2% in Q1 2018.
• The non-oil sector GDP came in at SAR 356.9 bn, up 2.4% YoY. The government sector grew sharply by 4.0% YoY to SAR 104.9 bn vis-à-vis SAR 100.8 bn in Q2 2017.
• The private sector grew 1.8% YoY to SAR 252.0 bn as compared to SAR 247.6 bn in Q2 2017.
• Sectors including Government Services (+4.8% YoY), Finance, Insurance, Real Estate & Business Services (+4.3% YoY) and Manufacturing (+3.2% YoY) experienced strong growth during the second quarter.
• However, the Construction and Retail & Hospitality sectors contracted 3.2% and 0.5%, respectively.
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September2018
We at MEFIC Capital research are aiming to introduce quarterly Sector monitors. We initiate the periodic quarterly sector monitors with the cement sector. These analyses provide key demand-supply trends at the sector and company level and quarterly earnings performance of listed cement stocks.
The key highlights of Saudi Cement Sector as per latest information are:
• Cement sales in Saudi Arabia dropped 12.8% YoY during the first eight months of 2018. Clinker production, on the other hand, fell only 6.1% YoY. This has led to build-up in inventories to record levels across cement producers in KSA, which stood at an all-time high of 39.7 million tons in August 2018.
• Cement prices fell to SAR 12.24 per 50 kg bag in July 2018, the second-lowest monthly figure since January 2007.
• One of the major dampeners of cement demand was lower spending on infrastructure sector during the first half of 2018, coupled with lower credit exposure to construction activity amid rising interest rates.
• Cement exports slowly started to pick up after the Saudi government ended export duties on cement in February 2018, after having reduced it by 50% in July 2017. During the first eight months of 2018, exports volume increased 249% YoY to 568 thousand tons.
• Cement companies from Northern and Eastern region have improved their volumes this year, helped by the start of the initial stages of the NEOM megacity project and scrapping of export duties respectively.
• In terms of company-wise market share, the top three companies were Southern Cement, Saudi Cement and Yanbu Cement, which commanded a market share of 12.8%, 12.3% and 11.2% respectively in the first eight months of 2018.
• In terms of operational efficiency, the average capacity utilization rate across the sector was 77% during the last 12 months (September 2017 to August 2018). City Cement had the highest capacity utilization of 125%, followed by Hail Cement at 103%.
• After a difficult Q1 2018, cement companies continued their subdued performance with even weaker earnings in Q2 2018, posting an aggregate net loss of SAR 54.2 million (-112.2% YoY), with significant decline in operating margins as well.
• We remain cautious on the sector, with weak demand weighing down on cement prices and clinker inventory at all-time high. However, we expect a moderate recovery during the second half of 2018, backed by higher government spending on infrastructure, exports picking up and new construction work starting in USD 500 billion NEOM Mega City project.
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August2018
We are pleased to present our analysis of KSA Budget Q2 2018, which indicates the fiscal deficit was under control during the quarter and the government has ability to spend more to further support the economy, if required
The key highlights are
• Saudi Arabia narrowed its budget deficit in Q2 2018 to SAR 7.36 bn, compared to SAR 34.33 bn in Q1 2018 and SAR 46.52 bn in Q2 2017. The overall deficit in H1 2018 (SAR 41.69 bn) accounts for just 21% of the total budgeted deficit for FY 2018.
• The deficit in Q2 reduced 84% on YoY basis and 79% on QoQ basis, mainly due to increase in oil revenue.
• Total revenue rose 67% YoY to SAR 273.6 bn, while oil revenue rose 82% YoY to SAR 184.2 bn.
• Total expenditure increased 34% YoY to SAR 280.9 bn, mainly due increased expenditure on employee compensation, goods and services and social benefits.
• In terms of budget allocation, Economic Resources and Infrastructure & Transportation remain the most underspent sectors, with only 15% and 22% of the total annual budgeted expenditure utilized in H1 2018.
• The deficit for Q2 was mainly financed through borrowing amounting to SAR 12.1 bn. The Kingdom’s public debt rose to SAR 536.9 bn (USD 143 bn) in H1 2018 compared to SAR 443.3 bn (USD 118 bn) at the end of 2017.
• Total debt issuance in H1 2018 increased to USD 25.0 bn, compared to USD 21.5 bn raised in FY 2017 and USD 17.5 bn raised in FY 2016.
• Debt to GDP ratio stands at 21% currently, which is on the lower side considering other GCC nations and Emerging Markets peers, and also well below the cap of 30% the government has put according to fiscal rebalancing program.
• We believe Saudi Arabia is on track to meet its full-year deficit target of SAR 195 bn, provided there are no major deviations in expenditure from the current trend. The fiscal deficit target equals 7.3% of 2018E GDP.
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August2018
We at MEFIC Capital had released the Saudi Arabia 2018 Outlook report in January. This mid-year review report is an effort to review our forecasts and attempt a course correction in places where required. We had reviewed the report from various asset class dimensions, which would include economy, equity markets and real estate. The events, which have panned out so far in 2018, have been in line with our expectations, such as revival in GDP growth, increased government spending fueling improvement in consumption, rise in oil prices and output, increase in key interest rates and stock market on the rise.
Some of the key developments so far in 2018 and reviewed in the report are
• Saudi Arabia’s economy started to recover in Q1 2018 (+1.2% YoY), after contracting 0.7% during 2017, backed by accelerated growth in especially the non-oil sector.
• In line with the announced budget for 2018, government expenditure in the first quarter of 2018 increased 17.8% YoY.
• Global oil prices rose during the first half of 2018, while Saudi Arabia has started to increase its oil production as well.
• We viewed that Saudi Arabia has a sizable room for debt issuance in 2018. The Saudi government announced plans to raise a total of USD 31 bn through bonds this year, and raised USD 11 bn in April issuance.
• We had anticipated Saudi domestic consumer spending to improve during 2018, supported by higher government spending. This has largely been the case, with both POS transactions and ATM withdrawals rising on a YoY basis for every month in 2018.
• Saudi Arabia’s stock market is significantly on the rise in 2018, with TASI up 15.8% YTD in 2018, on back of MSCI EM Index inclusion as expected.
• During early July, the Saudi government released a draft law for PPPs for public comments, thus marking an important milestone in private participation towards infrastructure building
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July2018
We are pleased to present our analysis of KSA Q1 2018 GDP, which indicates revival in growth during the quarter after a decline in last year. We at MEFIC Capital are enthused by the numbers as the growth has been primarily driven by the non-oil sector.
The key highlights are
• The Saudi Arabian economy expanded by +1.2% on YoY basis in 1Q 2018. This marks a robust turnaround from a deceleration witnessed for the past two years. In value terms, the GDP grew to reach SAR 647.8 bn compared to SAR 640.4 Bn in Q1 2017.
• The non-oil sector GDP expanded by +1.6% on a YoY basis to SAR 371 Bn.
• Sectors including Manufacturing (+3.3% YoY), Finance, Insurance, Real Estate & Business Services (+2.1% YoY) and Electricity, Gas and Water (+1.1% YoY) experienced relatively strong growth during the first quarter.
• Oil sector GDP increased 0.6% YoY to SAR 273.3 bn. The sector contributed around 42.2% to the total GDP in Q1 2018, marginally down from 42.4% in Q1 2017.
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Q1 2018 Budget Estimates Release – Reading Between the Lines
June2018
MSCI has announced inclusion of Saudi Arabia in its Emerging Markets Index, entailing potentially billions of dollars in foreign portfolio investments, and marking an important milestone in Saudi Arabia’s Vision 2030 program.
We are pleased to present key facts and analysis regarding this historic development.
The key highlights are
• In a widely anticipated move, MSCI has upgraded Saudi Arabia to ‘Emerging Market’ status from its previous ‘Standalone Market’ status in its Annual Market Classification Review. MSCI had added Saudi Arabia to its Emerging Market Index Watch list in June 2017.
• MSCI will include MSCI Saudi Arabia Index, a standalone index with 32 large and mid-cap Saudi stocks covering approximately 85% of the total free float market capitalization in Saudi Stock Exchange Tadawul, in the MSCI Emerging Markets (EM) Index.
• The inclusion will result in Saudi Arabia commanding approximately 2.6% weightage in the MSCI EM index, following a two‐phase process: first in May 2019 Semi‐Annual Index Review, while the next in August 2019 Quarterly Index Review.
• The MSCI upgrade comes after series of market reforms undertaken by Tadawul and Saudi Capital Market Authority (CMA), the most important being increase in ownership limits for foreign investment firms to invest in Saudi companies.
• MSCI EM Index is tracked by a total of around USD 2 trillion active and passive funds across the globe. Saudi Arabia’s inclusion in the index is expected to attract around USD 45 billion in additional foreign inflows.
• Partly in anticipation of MSCI’s decision, Tadawul All Share Index (TASI) has risen 13% in 2018 to date, compared to 6% decline in MSCI Emerging Markets Index during the same period.
• S&P Dow Jones Indices has stated that it has started consulting with investors regarding a potential upgrade of Saudi Arabia to emerging market status.
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May2018
We are pleased to present our analysis of KSA Budget Q1 2018, which indicates deficit was under control during the quarter
The key highlights are
• The Q1 2018 deficit stood at SAR 34.33 bn. This is in comparison to SAR 26.21 bn in Q1 2017 and SAR 108.5 bn in Q4 2017. The deficit in Q1 accounts for 18% of the total budgeted deficit for FY 2018.
• The sequential deficit reduction is attributed to government reducing the spending to SAR 200.6 bn after record spending of SAR 354.4 bn in Q4 2017.
• Revenue increased 15% on YoY basis, mainly on account of increase in tax due to introduction of Value Added Tax (VAT) from January 2018.
• Expenditure increased 18% on a YoY basis, mainly due to an increase in subsidies and social benefits.
• Deficit financing was mainly through borrowing, with the Kingdom’s public debt rising to SAR 483.66 bn in Q1 2018 compared to SAR 443.25 bn at the end of 2017. We expect further debt issuances for deficit financing in future.
•We expect Saudi Arabia to honor its full-year deficit target of SAR 195 bn if there are no major deviations in expenditure from the current trend. This would mean a fiscal deficit of 7.3% of 2018E GDP
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January2018
We are pleased to present our Saudi Arabia 2018 Outlook report, which articulates our view on Saudi Arabian economy, equity markets, real estate and private equity space for the year.
We are cautiously optimistic on the macroeconomic turnaround, which is showing early signs of recovery in terms of strong PMI numbers, end in the trend of negative inflation, non-oil gdp growth trend. Relatively higher oil prices and large government spending on both capital and current accounts will help increase economic activity on both consumer and corporate sides.
We are more optimistic on equity market performance, partly due to government spending benefiting listed corporates, and partly due to anticipated inclusion of Saudi Arabia in FTSE and MSCI indices, which will lead to inflows from global passive and active funds. Strong indications of Saudi Aramco IPO in 2H 2018 will also be a landmark event for Saudi equity market. Meanwhile, the trend of REITs listing, started in 2017, continues into 2018 as well, giving diversification opportunities to investors.
We see current challenges for Saudi real estate market, especially office and retail segments, which are intricately linked with economic activity. For residential segment, there is considerable government push towards affordable housing which could increase both supply and demand for housing in the near term, while long term demand due to demographic profile forms the base.
We expect private equity space to have strong long term prospects, on back of government’s long term vision of a more vibrant private sector. The private equity funds can provide a stable, relatively long term source of capital for budding private enterprises. We expect private equity segment to continue to grow in 2018, at the same pace as in 2017, in terms of number of funds and deal activity. There is now a new avenue available for private equity funds to exit their investments, in the form of NOMU, the parallel market started in 2017. However, the performance of companies listed on NOMU has been unattractive, thus posing hurdles for future listings.
Read more about our views on each of the above segments in the separate sections of the report, which also highlights our framework for analysing the factors affecting each market, supported by an exhaustive chart pack encompassing indicators and statistical graphs on Saudi economic indicators, oil markets, capital markets, corporate earnings and key statistics about Saudi Arabia.
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