x Abu Dhabi, UAEWednesday 26 July 2017

UAE cement companies dabble in stock market, but for how much longer?

Several years ago, the UAE Government capped cement prices. So cement companies decided it was a good time to sink money into their stock portfolios. That introduced a volatility to the stocks that is only now vanishing.

A concrete testing area on a construction site near The Greens in Dubai. Cement companies no longer need to dabble in equities in a serious way, as massive infrastructure projects ahead of Dubai Expo 2020 have created real demand. Sarah Dea / The National
A concrete testing area on a construction site near The Greens in Dubai. Cement companies no longer need to dabble in equities in a serious way, as massive infrastructure projects ahead of Dubai Expo 2020 have created real demand. Sarah Dea / The National

Local cement companies have become better known in recent years for investing in equities than for grinding clinker. And their stock picks in 2013 would undoubtedly have impressed benchmark-beating masters.

But this era might be ending, replacing years of boom and bust with a more stable footing.

Last year, cement stocks on the Abu Dhabi Securities Exchange, which is where they are concentrated, beat the ADX General Index by a full 5 percentage points.

They also outdid benchmark emerging-market and frontier-market indexes, with Union Cement and RAK Cement jumping 130 per cent and 79 per cent respectively.

And Sharjah Cement, among the first to report 2013 earnings week, said that its net profit for 2013 more than doubled on the back of a 1.4 per cent increase in sales – and an unspecified improvement in the value of its stock holdings. Gulf Cement said its net income shot up 1,118 per cent as the value of its investments in UAE stocks more than doubled to Dh110 million.

“A number of cement companies in the UAE have reasonably sized investment portfolios which are invested in UAE stocks generally,” noted Saleem Khokhar, the head of equities at NBAD’s asset management division. “So those companies that do have that on their books would have benefited significantly from the rise that we’ve seen last year.”

Several years ago, cement companies dove headfirst into equities to make money on the side when the government put a cap on the price of their cement. But when demand fell through the roof in the aftermath of the global financial crisis, the companies took a double hit – both their earnings and their portfolio investments were battered.

The industry though is now undergoing a renaissance, recovering from years of stock market stagnation and weak demand for building materials. Cement companies no longer need to dabble in equities in a serious way, as massive infrastructure projects ahead of Dubai Expo 2020 have created real demand, according to analysts.

“In the past few years domestic demand for cement has experienced tangible growth, allowing for an improvement in plant utilisation rates and margins,” said Mohammad Kamal, research director at Dubai-based investment bank Arqaam Capital. “Their operations are improving, and the investment books are less relevant now. The fortunes of the sector will primarily be dictated by the revival of operations.”

Mr Kamal added that not only is there a big construction pipeline in the UAE for the next five years but there are also a host of suspended projects that are being reactivated. All this bodes well for the future growth of the industry here, he said.

The country currently has around 20 cement factories producing more than 24 million tonnes of building materials a year, according to estimates from the Ministry of Economy. As much as 60 per cent of the output is currently exported.

mkassem@thenational.ae

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