Saudi Arabia: Equity market opens to direct foreign investment

Transcription

1 Saudi Arabia: Equity market opens to direct foreign investment Saudi Arabia is opening its stock market to direct investment by foreigners on 15 June As the largest and most liquid market in MENA, there is understandably significant interest in and excitement about this event, and for economic reasons the decision is also timely. Equity 14 June 2015 Saudi Arabia is the biggest economy in the GCC, and the 19th largest economy in the world, with a nominal GDP of USD 753bn in. It is also the most populous nation in the GCC with 30.8 people, more than half of which are under the age of 30. With the second largest proven oil reserves in the world, oil remains a key driver of economic growth in Saudi Arabia, with the hydrocarbons sector accounting for over 40% of GDP last year, up from 33% of GDP in Moreover, hydrocarbon revenues account for around 90% of total budget revenues and have thus been the main driver behind the substantial fiscal surpluses that have been accumulated over the last decade. Saudi budget in deficit for the first time in 12 years in The sharp decline in oil prices since last summer have had an immediate and significant impact on the fiscal position. The budget recorded the first deficit in 12 years, at SAR65.5bn (-2.3% of GDP), and the deficit is likely to have widened this year to around 12%. In addition to further weakness in oil prices in Q1 2015, government spending has likely been higher than budgeted year-to-date as a result of one-off bonuses and disbursements on the accession of King Salman in February and the escalation of military activity in Yemen and against ISIS. Given the increased spending on defence, and the difficulty in reducing public sector wages, some budget cuts are likely to be made on the capital spending front. However, the government has ring-fenced funding for major infrastructure projects and we expect those projects already underway to continue. The emphasis in recent years has been on developing transport, housing, education and healthcare infrastructure, including the construction of thousands of kilometers of roads, new schools, universities, hospitals as well as expansion of ports, airports and railways. The 2015 budget allocated substantial funds for education, healthcare and social services infrastructure. Tadawul has outperformed its peers so far this year Khatija Haque Head of MENA Research khatijah@emiratesnbd.com Aditya Pugalia Analyst adityap@emiratesnbd.com Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Tadawul S&P Pan Arab Composite Index MSCI EM Index Source: Bloomberg, Emirates NBD Research

2 but spending can be maintained for some time So far, the government appears to have been drawing down accumulated reserves in order to fund the budget shortfalls, with SAMA s Net Foreign Assets (NFAs) declining by -USD 45.5bn in the year to April. However, the stock of NFAs remains substantial, at about USD 678bn, or 90% of GDP, which provides a substantial cushion against low oil prices and should allow the government to avoid an immediate, sharp fiscal consolidation, which would have a negative impact on economic growth. Furthermore, Saudi Arabia has no external public debt, and the stock of domestic debt is low at just 1.6% of GDP (). We expect the government to increase domestic debt issuance and rely less on drawing down accumulated reserves in order to finance budget shortfalls in Current account expected to move into deficit in 2015 It is from an external balance perspective that the decision to open the Saudi equity market to direct foreign investment is timely. The Kingdom has run a current account surplus since at least 2006, mainly due to oil revenues. The current account surplus narrowed to USD 75.6bn in from USD 134.2bn in 2013, both on the back of lower oil revenues and a higher deficit on the services balance. In 2015, we forecast a current account deficit of -USD 13.7bn (-2.0% of GDP). An increase in portfolio investment following the opening of the equity market, while by no means necessary, would help to offset the current account deficit, which in the absence of other inward investment in the Kingdom would have put additional pressure on official FX reserves and reduce maneuverability in terms of running the budget deficit. Why is Saudi Arabia an attractive prospect for foreign investment? Although growth is expected to be slower in 2015 we conservatively forecast growth of 2.5% - the Kingdom has strong fundamentals including low debt, substantial accumulated reserves and a young and growing population. The Tadawul is the largest stock market in MENA, and the seventh largest in the global emerging market (GEM) universe, with a market capitalization of USD 570bn. With an average daily value traded of c. USD 2.5bn, it is the fourth most liquid market among its GEM peers. However, Tadawul has not been included in the MSCI Emerging Markets Index because of the restrictions on foreign ownership. Opening the market to direct investment by foreigners removes the last hurdle towards being included in the MSCI Emerging Markets index. According to market estimates, if included, Saudi Arabia could hold a weight of as much as 4.4% in the MSCI Emerging Market index, which could translate into c. USD5bn of inflows into the Tadawul. Foreigners currently own an estimated 1% of the market. If the total foreign ownership in Saudi Arabia were to increase to 5%, the equivalent of the average foreign ownership level in the UAE and Qatar, then that could translates into inflows of c. USD 25bn. How will it work? Broad Regulations In order to qualify as a Qualified Financial Institution (QFI), the applicant or any of its affiliates must have a minimum of five years of related experience and have at least SAR 18.75bn worth of assets under management (AUM). The CMA reserves the right to reduce the minimum threshold for AUM to SAR 11.25bn. Each QFI will be able to hold up to 5% at an individual company level and the aggregate position in the market level (including any SWAP position) has been capped at 10% of total market value. Page 2

3 The Fine Print The CMA has explicitly mentioned that strategic investors will be accounted for in the maximum allowed foreign ownership limit of 49%. The regulator also said that it will consider allowing foreigners to participate in IPOs on a case-by-case basis. The regulator has also approved the Independent Custody Model which in effect separates the role of the custodian and the broker and allows QFIs to place orders with multiple brokers without the need to maintain separate cash accounts with each broker. The QFIs will be subject to the 5% withholding tax on dividends which will be collected by the company. The current settlement cycle of T+0 will continue and hence all transactions by QFIs will need to be pre-funded. Individual Stock Limits The aggregate QFI limit for all stocks listed on the Tadawul is 49%. However QFIs are barred from investing in Makkah Construction & Development, Jabal Omar Development, Taiba Holding, Knowledge Economic City and National Shipping Co. As per latest available data, the following stocks have limited foreign ownership limits: Stock Allowed Ownership Limit Current Saudi Hollandi Bank 49% 41.81% Saudi British Bank 49% 41.60% Arab National Bank 49% 40.87% ANB Insurance 49% 40.29% Petro Rabigh 49% 38.59% The valuation conundrum The Tadawul is currently trading on a 12-month forward P/E of 16.5x, a 30% premium to the MSCI Emerging Markets index which is trading at 12.7x 12-month forward P/E. Similarly on a P/B ratio basis, the Tadawul is currently trading at 38% premium to the MSCI Emerging Markets index at 2.07x. The premium in valuation looks exaggerated when net earnings downgrade of 13% and a very weak earnings revision ratio of below 1.0 at 0.3 are taken into account. Page 3

4 ROE 2015 ROE 2015 Tadawul in Charts Tadawul Foreign Fund Flows (SAR bn) 2,500 Tadawul & Oil ,000 1,500 1, (500) (1,000) (1,500) Nov Dec Jan Feb March April May Jun-14 Sep-14 Dec-14 Mar-15 SASEIDX Index (R1) OPECDALY Index (R2) Tadawul Relative to MENA peers (PE) MSM ADSMI ISE 100 DFMGI y = x R² = PE 2015 MADEX DSM Tadawul Tadawul Relative to EM peers (PE) Karachi Taiwan Vietnam Kospi y = x R² = Jakarta Jo'burg Bovespa Micex PE 2015 Nifty Tadawul Shanghai Tadawul - PE Bands Tadawul - Relative Strength Index (RSI) Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Actual Price SAR Px = p/e of Px = p/e of Px = p/e of Px = p/e of Px = p/e of Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Source: Bloomberg, Emirates NBD Research Page 4

5 % GDP USD bn % y/y mn bpd USD Saudi Arabia in Charts GDP growth Oil production and OPEC price 10.4 Saudi Arabia (lhs) OPEC oil price (rhs) GDP growth Oil sector Non-oil sector f 2016f 9.0 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr Purchasing Managers Index Inflation Headline CPI Food Housing Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Current Account and Fiscal balance SAMA s Net Foreign Assets f 2015f 2016f 640 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Source: Bloomberg, Haver Analytics, Emirates NBD Research Page 5

6 Key Indicators Top Dividend Yielding Stocks Stock Price (SAR) M. Cap (SAR) Dvd Yld P/E P/B Eastern Cement b 7.30% Saudi Cement b 7.03% Arabian Cement b 6.94% Etihad Etisalat b 6.57% Southern Province Cement b 6.54% Yamama Cement b 6.48% Yanbu Cement b 6.27% Saudi Telecom b 6.22% Red Sea Housing b 6.22% Qassim Cement b 6.17% Source: Bloomberg, Emirates NBD Only stocks with T12 revenues of more than SAR 250mn have been included. Stocks with lowest foreign ownership limit room Stock Allowed Ownership Limit (%) Current Foreign Ownership (%) Saudi Hollandi Bank 49% 41.81% Saudi British Bank 49% 41.60% Arab National Bank 49% 40.87% ANB Insurance 49% 40.29% Petro Rabigh 49% 38.59% Source: Tadawul, Emirates NBD Page 6

7 Key Economic Forecasts National Income f 2016f Nominal GDP (SAR bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth (% y/y) Hydrocarbon Non- hydrocarbon Monetary Indicators (% y/y) M Private sector credit CPI (average) External Accounts (USD bn) Exports Of which: hydrocarbons Imports Trade balance % GDP Current account balance % GDP SAMA's Net foreign Assets Fiscal Indicators (% GDP) Budget balance Revenue Expenditure Public debt Source: Haver Analytics, Emirates NBD Research Page 7

8 Stocks Avg Value Dvd Traded Price Market Cap PE PE ROE ROE PB ROA Yld DvdYl 3m (USD Company LLC (USD mn) d 2015 RSI mn) Telecom Sector Saudi Telecom Etihad Etisalat Zain KSA Average Petrochemical Sector Sabic Safco NIC Saudi Kayan Saudi International Petrochemical Yanbu National Co Petrochemical Saudi Industrial Co Investment Advanced Petrochem Group Sahara Petrochem Co Rabigh Refining trochemical Average Co Retail Sector Jarir Marketing Co Fawaz Abdulaziz Al Hokair Abdullah & Co Al Othaim Markets Mouwasat Co Medical Services Dallah Healthcare Co Holding Co Aldrees Petroleum antransport Average Services Industrials Sector Saudi Arabian Mining Co Saudi Chemical Co Saudi Pharmaceutical Indust Average & Med Applia Page 8

9 Stocks Avg Value Dvd Traded Price Market Cap PE PE ROE ROE PB ROA Yld DvdYl 3m (USD Company LLC (USD mn) d 2015 RSI mn) Real Estate Sector Jabal Omar Development Makkah Construction & Dar Al Arkan Real Estate Emaar Economic City Taiba Holding Co Arriyadh Development Co Knowledge Economic City Average Banking Sector Al Rajhi Bank National Commercial Bank Samba Financial Group Riyad Bank Banque Saudi Fransi Alinma Bank Saudi British Bank/The Arab National Bank Bank AlJazira Bank AlBilad Saudi Investment Bank/The Saudi Hollandi Bank Average Transportation Sector National Shipping Co of Saudi Arabia/The Public Transport Co Average Agriculture Sector Savola Almarai Saudi Airline Catering Average Page 9

10 Stocks Avg Value Dvd Traded Price Market Cap PE PE ROE ROE PB ROA Yld DvdYl 3m (USD Company LLC (USD mn) d 2015 RSI mn) Cement Sector Saudi Cement Yamama Cement Co Yanbu Cement Co Arabian Cement Co/Saudi Southern Province Qassim Cement Co/The Northern Region Cement Najran Cement Co Eastern Province Cement Co City Cement Co Average Construction & Building Materials Sector Zamil Ind Investment Co Saudi Ceramic Average Insurance Sector Bupa Arabia for Cooperative for Cooperative Insurance Co Insurance/The Average Energy Sector Saudi Electricity Co Hotels Sector Al Tayyar Travel Group M Investments Sector Kingdom Holdings Source: Bloomberg, Bloomberg Estimate Page 10

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