First y-o-y growth in a year ?dividend yield looks attractive

Regional Supply and Demand: In the first 7 months of 2017, cement sales volume declined 19% y-o-y to 28.3mn tons, while clinker production fell 10% on an yearly basis to 29.3mn tons and inventories stood at 33.6mn tons. Looking at capacities, inventories and potential demand of each region, we believe that theNorthern region remains the weakest as current inventories represent 118% of region producers’ dispatches in the last 12-months. Weak demand within the region has led companies to reach out to far away regions which have negatively impacted companies’ profit/ton due to the high transportation costs. The increase in competition has also, no doubt, reduced realized prices. For Western and Southern regions, recent capacity additions have added to existing over supply. For the Central region, Q2 selling prices were lower than in the Western region as it is most accessible to producers despite favorable location and low inventories compared to other regions. Eastern region’s producers were impacted after implementing export fees on Bahrain exports, however, these exports are likely to re-start after the 50% discount on fees. In the near term, volatility and stiff competition on selling prices are likely to continue in the sector given the slowdown in construction activities and limited demand from mega projects. (Figure2)
2H 2017 Dividends: The decline in 1H 2017 dividends was expected due to the current weak market condition, however, current dividend yield in the sector is ~6% as compared to the market average of 3.3%. Going forward, we believe there is limited downside (~10-15% on average) for dividends, even if we assume this decline, the dividend yield will remain attractive at 5%. The below table shows the 1H distributed dividends and expected payments in the second half of the year for companies under our coverage. (Figure1)

Monthly sales for July at 3.5mn: According to the latest monthly data released by Yamama Cement, total cement dispatches in the Kingdom rose 11.5% y-o-y and 68% m-o-m to 3.5mn tons in July, mainly due to Ramadan and Eid- alfitr seasons last year. Total inventory rose 36% y-o-y to a new record of 33.6mn tons, representing 69% of the last 12 months’ sales. Clinker production in the Kingdom fell 9% y-o-y to 4.4mn tons during July. Najran and Saudi cement were the most affected in July dispatches by -30% and -19% y-o-y, respectively.

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