Wireless Transmission And Geopolitical Risks Will Undermine Cable Demand

Key Takeaways

• Shifting technologies and digital transformation threaten core demand for traditional cables, risking future capacity, pricing power, and long-term profitability.
  
• Dependence on volatile commodities, megaprojects, and geopolitical stability leaves revenues and margins exposed to disruption and unpredictable cycles.
  
• Strong infrastructure-driven demand, high order backlogs, margin expansion, export growth, and prudent financial management reinforce earnings stability and long-term profitability.

Catalysts

Manufactures and supplies various types of wires and cables to the power transmission and communication sectors in the Kingdom of Saudi Arabia.

• Accelerated adoption of wireless energy transmission technologies and increasing demand-side efficiency measures in developed and emerging markets may reduce long-term appetite for traditional copper and aluminum cabling, threatening Riyadh Cables Group's core sales growth and rendering significant future capacity expansions at risk of underutilization, ultimately putting pressure on top-line revenue and asset turnover ratios.
  
• Geopolitical instability and the potential for protectionist measures across the broader Middle East could create heightened volatility in commodity supply chains-especially for copper and aluminum-driving unpredictable cost inflation and exposing margins to substantial compression in future periods, despite the company's current hedging strategies.
  
• The company's heavy reliance on large, government-sponsored regional megaprojects and ongoing oil-funded infrastructure cycles exposes future revenues to sharp cyclical swings and possible secular decline should spending slow or projects be delayed, which could trigger long-term declines or volatility in both top-line growth and order backlog visibility.
  
• Ongoing industry innovation, such as the introduction of advanced composite or superconducting materials, could erode long-standing demand for conventional cabling, leaving Riyadh Cables with a product portfolio at risk of becoming obsolete and forcing the company into price competition and margin deterioration.
  
• As the energy sector and construction industries accelerate digital transformation, moving toward smart grids, automation, and wireless connectivity, capital allocation could permanently shift away from traditional cable systems, leading to weakening gross profit per ton over time and creating headwinds for both net profit and return on invested capital.

Riyadh Cables Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Riyadh Cables Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Riyadh Cables Group's revenue will grow by 3.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 10.1% today to 8.3% in 3 years time.
• The bearish analysts expect earnings to reach SAR 932.6 million (and earnings per share of SAR 6.22) by about August 2028, down from SAR 1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 25.8x on those 2028 earnings, up from 20.0x today. This future PE is greater than the current PE for the SA Electrical industry at 20.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.1%, as per the Simply Wall St company report.

Riyadh Cables Group Future Earnings Per Share Growth

Risks

• Sustained investment in large-scale infrastructure, utilities, housing, and renewable energy projects across Saudi Arabia and GCC countries is driving robust, diversified demand for cables and wiring, which underpins Riyadh Cables Group's revenue visibility and reduces the risk of a long-term sales decline.
  
• The company maintains record-high order backlogs, composed of secured and advanced-payment-backed projects with strong customer diversification, which supports stable cash flows and reduces the risk of near-term revenue or earnings volatility.
  
• Upgraded profit guidance and consistent gross profit per ton improvement, owing to strategic focus on higher-margin transmission and specialty cables, as well as continued capacity expansion and efficiency upgrades, indicate that net margins and overall profitability may continue to trend upward.
  
• Riyadh Cables Group's ongoing expansion into export markets, diversification into value-added products and services, and digital transformation initiatives collectively enhance its competitive positioning and earnings durability over the long term.
  
• Management's prudent financial strategy, including low net debt-to-equity, strong free cash flow generation, and high dividend payout ratios, provides resilience against industry or economic downturns and supports consistent shareholder returns through dividends and improving earnings.

Valuation

• The assumed bearish price target for Riyadh Cables Group is SAR91.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Riyadh Cables Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SAR149.0, and the most bearish reporting a price target of just SAR91.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SAR11.2 billion, earnings will come to SAR932.6 million, and it would be trading on a PE ratio of 25.8x, assuming you use a discount rate of 21.1%.
• Given the current share price of SAR136.7, the bearish analyst price target of SAR91.0 is 50.2% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.