Saudi cement stocks are what’s soaring

Dubai (Bloomberg): While Saudi Arabia’s massive initial public offering of oil producer Aramco has been dominating headlines, investors have been making a fortune in an obscure corner of the market: Cement producers.

Companies that make the building material account for six of the 10 best-performing stocks in the kingdom this year, delivering returns of at least 53 per cent while the main Saudi index was little changed. The stocks have gained on increasing demand for the product driven by several tourism and entertainment projects that are key parts of Crown Prince Mohammed bin Salman’s plan to diversify the economy away from oil.

Part of the money for those developments may come from the $25.6 billion that the government aims to raise from the sale of 1.5 per cent of Aramco this month.

The projects include a $17 billion tourism development at a site on the northwestern edge of Riyadh that’s considered the birthplace of Saudi Arabia; a 334 square kilometer entertainment city outside of the capital; a mega-project by the Red Sea that is about the size of Belgium; and a futuristic city called Neom.

Fully loaded

The shares now may fully reflect the good news: The valuations of the five biggest players now are higher than the Saudi index’s and all but one stock is trading above the average target price set by analysts.

Cement production in the kingdom has been rising in the past three months, with output in October the highest in the past year. Analysts covering the country’s five biggest cement producers have been raising their earnings expectations for the next 12 months, which contrasts with a decline in estimates for the broader Saudi market.

“We think that the sector overall is mostly pricing in the future growth except some outliers,” said Abdulmalik Alsalem, an analyst at Al Rajhi Capital. “There might be some room for gains in Arabian Cement and Qassim Cement, while for others it is hard.”