GCC Market Outlook 2013

Transcription

1 GCC Market Outlook 2013 July 3, 2013

2 Table of Contents 1. Executive Summary GCC: Market Performance Saudi Arabia UAE Qatar Kuwait Oman Bahrain GCC Market Outlook Themes to Watchout Liquidity to improve; volatilty expected to decline Stabilization in oil prices and rising government spending Recovery in the real estate sector Attractive earnings growth; valuation remains fair Potential risks to the economy and market Select Sectors in Focus Glossary

3 1. Executive Summary Morgan Stanley Capital International (MSCI) recently upgraded Qatar and the UAE to emerging market status from frontier market; this has made the two regional markets highly attractive to foreign institutional investors. As a result, the rally witnessed by GCC equity markets year-to-date in 2013 is expected to strengthen further. The year-to-date 2013 rally has been primarily driven by revival in macroeconomic fundamentals of Gulf heavyweights such as Saudi Arabia and UAE coupled with accommodative fiscal policies of developed markets, on the global front. The GCC equity markets also benefited from stabilization in oil price during 2012 which has carried on in Healthy corporate earnings, positive cues from global economy and stable oil prices have all positively impacted the GCC markets in the recent past and reinforced their position as one of the best performing markets in the world. The broad macro environment for 2013 remains encouraging as end of fiscal cliff in the US and quantitative easing in emerging markets as well Europe would provide much needed impetus. The government s commitment toward building the non-oil sector through continuous investment in developing the infrastructure sector and expansionary budget policies would be key region-specific triggers for sustained improvement in economic performance. According to the IMF, real GDP growth in GCC is expected to slow down to 3.2% from 5.7% in This is primarily due to the scaling back of the growth rate in hydrocarbon production. The economic growth, however, remains contingent on several factors such as stable oil prices and continuous improvement in socio-political situation in the region. Key catalysts: Amongst others, continued momentum on reforms, healthy economic growth, investment in non-oil sectors, stabilization of oil prices, recovery in real estate sector, better corporate earnings and compelling valuations are likely to be the key positive triggers for the GCC equity markets. According to Bloomberg consensus estimates, earnings of equities constituting the MSCI GCC index are expected grow a healthy 10.3% YoY in CY2013. Major risks: Any unanticipated downturn in the US and Europe at the global front, unfavorable movement in oil prices (which could dent the expansionary fiscal stance of the governments), and regional political instability could negatively impact investor risk perception, triggering global flight to safer asset classes. Furthermore, markets like UAE (Both Dubai and Abu Dhabi) and Kuwait have seen aggressive bull-run in H and valuations look a bit stretched especially in case of the big names. Preferred investment strategy: Recovery in global economy and healthy macro fundamentals domestically, one would expect a shift in investment strategy away from defensives to cyclical and rate sensitive sectors. These sectors offer stronger earnings growth expectation in 2013 on account of healthy volumes gain and are currently trading at lower valuations. We have identified five stocks from each of our 2013 focus sectors (a total of 25) that look attractive based on their earnings growth outlook and lower valuation multiples. Refer to sector section for companies that should be in focus in H GCC markets to remain on upward curve in H GCC equity markets are likely to remain on an upward trajectory in H2 2013, building momentum on the strong rally witnessed during H Increased interest of foreign investors in the UAE and Qatari markets following the MSCI upgrade is also expected to contribute to the up-move. The overall GCC market, however, remains exposed to spells of volatility that could arise from lack of institutional participation, high dependence on oil, and any impediment to global economic revival. Global markets are witnessing a rather volatile session, especially since the last week of May the S&P index declined 3.4% from its peak in May (May 21, 2013), while FTSE-London plunged 7.7% (May 22, 2013). While positive news on macro indicators in the US encouraged market movement, news that central bank (Japan) would not provide additional economic stimulus coupled with concerns over tapering of quantitative easing (the US) dragged global indices lower. 3

4 2. GCC: Market Performance Growth in most GCC markets gathered momentum on YTD basis, driven by stable hydrocarbon prices, healthy corporate earnings and strong dividend payouts. Furthermore, positive cues from global economy also supported the YTD gains in the GCC indices. While the economic indicators in the US have improved, concerns over Euro Zone debt crisis continue to persist. During April, US unemployment rate declined to 7.5%, the lowest since December 2008; the US consumer confidence, rising to 76.2, strengthened to the highest level in more than five years during May. Additionally, the recent release of reports on advancement in home prices (S&P/Case-Shiller index) by 10.9% y-o-y, the highest since April 2006, boosted investor confidence. The MSCI GCC Index outperformed the MSCI Emerging Markets Index gaining 12.4% YTD while MSCI Emerging Markets Index is expected to take effect around May 2014, with the UAE and Qatar weighing 0.4% and 0.45%, respectively. The positive news lifted the regional indices on June 12, 2013, DFM advanced 1.6%, ADX 2.7% and Qatar 1.8%. Volumes traded in these markets surged 118.5%, 159.3% and 62.8%, respectively on June 12, Saudi Arabia Saudi Arabia s benchmark Tadawul All Share Index (TASI), the largest bourse in the GCC region with market capitalization of around US$ billion, surged 6.0% during TASI commenced 2013 on a strong note, driven by an influx of foreign investments amid robust macroeconomic fundamentals. Also, movement of real estate investments in equities coupled with an improvement in global sentiment and Exhibit 1: GCC market performance v/s Emerging markets Exhibit 2: GCC market performance Jun-12 Sep-12 Nov-12 Jan-13 Mar-13 Jun-13 Source: Bloomberg, Index re-based to 100 MSCI - GCC MSCI - Emerging Markets Markets declined 9.6% YTD. Concerns over slowdown in the economic growth in China and contraction in manufacturing, coupled with declining gold prices, have majorly impacted MSCI Emerging Markets Index performance. Among regional indices, UAE s DFM index remained the best performer, advancing 47.6% YTD, followed by Abu Dhabi s ADX (gained 39.2% YTD). The robust performance could be ascribed to growth in the real estate and banking sectors. Saudi Arabia s TASI, the largest index in GCC, gained 12.1% YTD. Recently (on June 12, 2013), MSCI upgraded Qatar and the UAE to Emerging Market status from Frontier Market. The upgrade is based on improving economic conditions, rising trading volumes and market accessibility. The move is expected to enhance institutional investors interest in the Qatari and UAE equity markets, leading to higher capital inflow. The upgrade to membership in the MSCI Emerging Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Saudi Arabia Bahrain Oman Qatar Kuwait UAE oil prices supported the index s growth. Government s strong balance sheet, robust external position, liquid, well capitalized and well regulated banking sector are the factors that have contributed towards the performance of the Saudi market. Improved earnings of the heavyweight Banking sector (rose 11.9% y-o-y), Cement, and Telecommunication sectors, coupled with positive cues from global economy has driven the market sentiment. The index continued its upward trend and is currently up 12.1% YTD. All sectoral indices barring Energy & Utilities, Insurance, Media & Publishing and Multi- Investment have maintained a positive momentum on a YTD basis. Furthermore, the announcement by the Capital Market Authority in May regarding tightening regulation for the TASI to reduce the volatility of shares is expected to increase market attractiveness for domestic and foreign investors. 4

5 2.2. UAE UAE has emerged as one of the top performers not only within GCC but also in the whole world in The Emirates two stock indices DFM and Abu Dhabi s ADX have surged 47.6% and 39.2%, respectively. The market s strong performance was supported by an improvement in economic fundamentals on successful restructuring of debt-strapped government related entities. The UAE market has also been buoyed by an increase in foreign investments, improvement in the real estate market and investors expectation of higher dividends. The heavyweights, Banking and Real Estate, led the performance of both the indices. Performance of the Banking sector has been supported by strong growth in earnings, with the provisioning cycle bottoming out. Recent news of upgrade to the MSCI Emerging Market status is likely to help in maintaining the market momentum Qatar Qatar s stock exchange index, the fourth-largest in terms of market capitalization in the GCC region, has been on an upswing in 2013 and is currently 13.9% up YTD. All sectoral indices have registered YTD gains with small cap stocks witnessing the largest gain of 16.0% YTD. The market has witnessed an improvement in trading activity with better-thanexpected corporate earnings and dividend announcements. The recent upgrade of the index by MSCI to Emerging Market status from Frontier Market is expected to boost investor confidence Kuwait Kuwait has emerged as the second best performing market in the GCC region after reaching a seven-and-a-half-year-low at the beginning of However, positive comments from His Highness the Amir of Kuwait regarding the economy and financial markets, coupled with better-than-expected earnings, has led to a regain in investor confidence. With improving political and economic environment in the country, the stock market has been on a rise since the beginning of It breached the 8,000 mark in May 2013 and is up 34.3% YTD. All sectoral indices have witnessed a gain during the same period. Recently, the government announced its plan to spend US$ billion on development projects in the next 12 months. However, a delay in implementation of infrastructure projects could negatively impact the market s performance Oman Oman s MSM 30 Index is currently up 14.9% YTD, with all sectoral indices registering gains. The overall cash dividend announced by large companies in 2012 is up 9.7% y-o-y (OMR 263 million), and a portion of this is anticipated to be reinvested into the markets. Trading activity has also improved significantly in the first five months of 2013 vis-à-vis Recent news that Oman government is in advanced stages of negotiations with international oil giants for awarding six onshore oil and gas blocks for development on production sharing basis, has further bolstered confidence Bahrain The Bahraini stock market was the worst performer among GCC indices in 2012, extending losses to 6.8% y-o-y. However, the trend reversed in 2013, with the index closing positive in all five months of 2013, registering 12.9% YTD gains. Of the six sectoral indices, Banking gained 27.4% YTD followed by Industrial up 22.1% YTD. 5

6 (% YoY) GCC Market Outlook 2013 July 3, GCC Market Outlook The outlook for GCC economies is expected to remain robust in 2013 with IMF growth forecast of 3.2% supported by accommodative monetary and fiscal conditions amid improvement in the macroeconomic conditions in the US and other emerging markets. An end to the uncertainty related to the US fiscal cliff coupled with monetary easing measures in Europe and emerging markets could help sustain global growth. IMF expects world GDP to grow 3.3% in 2013, with advanced economies projected to expand 1.2%. Despite a slowdown in BRICS economies, the outlook for emerging Growth in the non-hydrocarbon sector would be primarily led by the services sector (accounted for 39% of the GCC economy in 2011), particularly public services, as government spending is a function of strong hydrocarbon revenues. In addition to growth in the services sector, non-oil industrial growth is expected to be driven largely by the construction and manufacturing sectors. Individual governments may continue to invest a significant portion of their oil revenues for developing and modernizing the construction and infrastructure sectors and thereby create jobs. Government spending on infrastructure development, primarily on housing and Exhibit 3: GCC real GDP growth vs. other economies Exhibit 4: GCC-Proportion of oil and non-oil GDP in % % 5 60% f 2013f GCC World Advanced economies Emerging market and developing economies 40% 20% 0% f 2013f Oil Non Oil Source: IMF markets remains healthy as young and rising population, and increasing income levels are likely to support domestic consumption. Improvement in the global economic outlook is likely to have a positive impact on GCC economies given their increasing integration with other markets. The hydrocarbon sector has been the traditional economic growth engine in the region and is expected to continue its reign in Higher oil reserves, stable oil prices and a recovery in the global economy are expected to boost GCC economies performance. Stable performance of the oil and gas sector has had a spillover effect on the non-oil sector. Revenue earned through hydrocarbons and its by-products have been channelized effectively to boost the rest of the economy, thus contributing largely toward GCC s economic diversification. In 2013, besides incessant support from the hydrocarbon sector, contribution from non-hydrocarbon sectors is also expected to boost economic growth in the region. Non-hydrocarbon sectors are expected to fare better vis-à-vis the previous three years, and contribute nearly 75% to overall GDP growth in education, surged 8.0% in As part of modernizing infrastructure and social services, GCC governments are projected to invest around US$ 700 billion in the coming years. GCC Governments however face rising break-even oil production costs as a result of the increasing fiscal expenditure in the non-hydrocarbon sector. Stabilization of oil prices due to Eurozone crisis and soft growth in emerging markets could pressurize the GCC Governments in Despite huge government expenditure, GCC budget surplus rose to ~11% of GDP in This was primarily supported by its oil revenues, which accounted for more than 45% of the GDP. With stable oil prices and burgeoning demand for hydrocarbon by-products, the region would continue enjoying healthy fiscal and current account surpluses in Fiscal surplus is forecasted at US$ 124 billion in 2013, equivalent to 8.2% of GDP. Besides the hydrocarbon sector s contribution, rising domestic demand could play an important role in economic growth in GCC. With more than 50% of the population below 25 years of age, domestic consumption would continue increasing with 6

7 higher per capita income. In addition, strong economic performance is attracting foreign workers to the region; consequently, population growth is estimated to be almost threefold the global rate at 50 million by This has led to investment opportunities in demand-driven sectors such as retail, health and education. Additionally, the tourism sector in GCC continues to thrive on more entertainment and sports venues, man-made islands (in Dubai), Haj pilgrims (in Saudi Arabia), and growing fleet and airline network (to improve connectivity with major cities around the world). 7

8 4. Themes to Watchout Stock market performance is largely tied to the economic growth prospects of a country. Overall sentiment in the GCC region appears positive, driven by the strengthening of the US and European economies coupled with sustained demand from China. GCC stock markets are expected to capitalize on the robust macroeconomic outlook for the region in Stabilization in oil prices and government spending are set to attract additional investments in GCC stock markets. In our opinion, existence of certain key themes would be favorable for these markets in The themes are mentioned below Liquidity to improve; volatilty expected to decline In 2012, most GCC bourses witnessed increased liquidity amid an improvement in investor sentiment. According to Bloomberg, total value traded across the six GCC bourses grew 65.6% (source of information to be mentioned) y-o-y to US$ 2.0 billion during the same period. Historically, GCC markets have been characterized by high volatility due to the absence of foreign investors and lack of market breadth. However, we expect an expansion in market breadth and depth due to increasing foreign participation, especially in the UAE. Moreover, the region has evolved as a regional hub for IPO activity GCC, primarily Saudi Arabia and the UAE, accounted for 97% of the total capital raised in the MENA region in In 2012, Saudi Arabia led the country standings by raising US$ 1.4 billion through seven IPO followed by UAE with US$ 277 million. Dallah Healthcare Holding Company led regional IPO deal sizes with its US$ 143 million listing on the Saudi Stock Exchange. We expect the Kingdom and UAE to continue being the largest regional hubs for IPO activity in 2013 amid economic developments. Saudi Arabia s IPO market has remained active with the listing of two IPOs comprising the Northern Region Cement Company which raised US$ 240 million and National Medical Care Company which raised US$ 97 million. Many companies in UAE are also considering an initial public offering. Senaat, the industrial conglomerate, is among a group of UAE companies considering an initial public offering. The company holds stakes in companies including Emirates Steel Industries and National Petroleum Construction Company. In a recent interview with Bloomberg, Shaikh Ahmed bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee, President of the Dubai Civil Aviation Authority, Chairman of Emirates airline and Chief Executive of the Emirates Group also mentioned that many companies that fall under the umbrella of the Investment Corporation of Dubai would be candidates for IPOs. An increase in IPO activities is indicative of lower stock market volatility and upbeat economic growth, and further supports the optimistic outlook for the GCC stock market Stabilization in oil prices and rising government spending Despite shifting focus to the development of non-oil sectors, GCC economies continue to depend on the oil sector. Oil contributes ~50.0% to the GDP. Hence, the region s economic performance continues to be largely dependent on the movement in international oil prices. Recent stabilization in oil prices is likely to improve the fiscal position of GCC governments and encourage investments in non-oil sectors. Refining and infrastructure projects worth US$ 700 billion are likely to be undertaken in the region. According to MEED, projects totaling US$ 4.1 Trillion are under various stages of development across GCC. Rising government spending would augur well for the region s economic performance in Recovery in the real estate sector The real estate sector assists construction-related industries and is also an indicator of the overall business activity. The sector was a key contributor to the economic downturn of However, the real estate sector in GCC is on a gradual recovery path. The property sale prices in Dubai, complied by Jones Lang LaSalle, increased 18.0% y-o-y during 1Q13. Consolidation among large developers, such as Aldar and Sorouh, bodes well for investor sentiment. The real estate sector in Saudi Arabia also remains strong with the approval of the much awaited mortgage law, which is likely to propel demand Attractive earnings growth; valuation remains fair In our opinion, the GCC market is well positioned to grow in both short- and medium-to-long term. We expect healthy earnings growth across major cyclical sectors in the region due to an improvement in macroeconomic conditions. An attractive valuation, coupled with expectation of healthy earnings growth, would continue to boost confidence in the region s stock market. According to Bloomberg consensus estimates, net income per share of equities constituting the MSCI GCC index are expected grow a healthy 10.3% YoY in CY Potential risks to the economy and market Our outlook for GCC economies and markets is subject to major uncertainties and risks. GCC countries face a plethora of challenges such as excessive reliance on oil, political instability and global slowdown. These economies also face other 8

9 potential risks, particularly external credit risk, as GCC is one of the major creditors in global financial markets. Lack of diversification renders GCC vulnerable to lower oil prices Although GCC countries are diversifying, driven by rapid expansion in non-hydrocarbon sectors, hydrocarbon sectors (particularly oil) still dominates the economy on an aggregate basis, the sector accounts for about 45% of nominal GDP and more than 70% of total exports. Thus, we believe GCC is vulnerable to a sharp drop in oil prices due to its high dependence on the hydrocarbon segment. Political instability The Arab Spring, which commenced in Tunisia in January 2011, spread to the GCC economies, particularly Bahrain. Political tension in Bahrain, which began in 2011 demanding a political reformation, has not significantly improved, thus continuing to pose a threat. Additionally, the situation in Syria remains a cause for concern.. Prolonged global economic recovery Slowdown in global economic growth, following an aggravation of the Eurozone debt crisis, could adversely impact GCC through lower oil export revenues as these countries are highly dependent on hydrocarbon exports. Furthermore, it could decrease the region s access to foreign funding and lead to shortage of liquidity. Moreover, GCC countries lending to global and European banks are exposed to the risk of the European debt crisis. In 1Q12, GCC s total foreign bank claims stood at US$ 328 billion, while funds provided to global banks aggregated US$ 462 billion. Lending exposure to Europe was as high as US$ 220 billion during the same period. 9

10 P/E (x) P/E (x) GCC Market Outlook 2013 July 3, Select Sectors in Focus Given the reduced uncertainty at the global front coupled with robust macro tailwinds domestically, one would expect a shift in investment strategy away from defensive stocks and towards cyclical and rate sensitive stocks. Empirical evidence reflects that cyclical sectors in general witness re-rating of multiples when macro indicators trough and begin their upward trend. Consequently, we remain focused on Retail, Banking, Real Estate & Construction, Transport & Logistics and Telecommunication as we believe there still lies immense growth potential. GCC also presents a unique opportunity in terms of stocks offering high dividend yield along with robust returns. For example, in 2012, Dubai s stock index offered a dividend yield of 3.76% compared with 2.67% for MSCI Emerging Markets Index. We further identify few stocks that should be in focus in the coming months, as they demonstrate good growth prospects and are trading at lower valuations.. Exhibit 5: Select sectors in focus (Overlay each country s chart with GCC as a whole) Sector likely to outperform in H Industry avg. P/E charts 18.0 Retail: Earnings expected to grow by 16.7% in Favorable demographics supported by rising disposable income to support growth. Increased internet penetration and shifting lifestyle to propel online retail sales. Sector trading at a current P/E of 15.6x in line with its historic average ( ) of 15.2x, however much lower than the emerging market average of 24.3x Current 2013f 2014f Saudi Arabia GCC 37.0 Banking: Credit growth to be driven by strong macro-economic fundamentals. Expansionary government policy fuelling funding needs especially in non-hydrocarbon sectors. Real Estate boom with growing private consumption should improve private sector lending Current 2013f 2014f Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates GCC 10

11 P/E (x) P/E (x) P/E (x) GCC Market Outlook 2013 July 3, Real Estate & Construction: Earnings expected to grow by 14.6% in Demand for affordable housing fuelled by encouraging lending rates and favorable policy environment. Spillover effect on construction and related sectors from robust infrastructure project pipeline in the GCC. Sector trading at a discount of 19.8% vis-à-vis emerging economies Current 2013f 2014f Oman Qatar Saudi Arabia United Arab Emirates GCC Transport & Logistics: Earnings expected to grow by more than 100% in Absorbing majority of governments infrastructure spending. Tourism and trade to demand better air, road and sea infrastructure. Sector trading at a current P/E of 13.0x a discount of 15.4% vis-à-vis emerging economies. Telecommunication: Favorable demographics and young tech savvy population to drive demand for data services. Rising demand for smart devices would further propel demand for data services. The sector s earnings are expected to grow by 6.5% y-o-y during 2013 and average dividend yield is forecasted to increase to 5.3% in In terms of current valuation, the sector is trading at a current P/E and P/B of 11.8x and 1.9x, respectively. Source: Bloomberg, Alpen Asset Advisors P/E: Price-to-Earnings ratio, P/B: Price-to-Book ratio Current 2013f 2014f Kuwait Qatar Saudi Arabia United Arab Emirates GCC Current 2013f 2014f Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates GCC 11

12 SECTOR: RETAIL Rapidly expanding population and a large urbanized consumer base represent an attractive market for retailers. Moreover, factors such as a young demographic profile, rising income levels and shifting lifestyle preferences are likely to propel consumer spending. IMF forecasts GCC s population to expand at a CAGR of 2.4% during GCC is among the world s most urbanized region more than 75% of the total population resides in cities. Over 40% of the population is below 25 years of age, reflecting an attractive demographic structure. The proportion of expatriate population is significantly higher in the GCC expatriates constitute more than 75% of the total population in countries such as Qatar, the UAE and Kuwait. Increasing brand consciousness among Locals and Expatriates is driving demand for international brands. Disposable incomes are rising due to strong macroeconomic fundamentals in GCC, in light of increasing global demand for oil and stabilization in long-term oil prices. Improvement in tourism and hospitality infrastructure is attracting international travelers, shoppers and religious tourists. For e.g. Leisure travelers to UAE have significantly contributed to the economy as well. As per estimates by Mastercard International, travelers visiting Dubai are anticipated to spend some US$ 10.4 billion in 2013, the eighth highest expenditure in the world. Increased Internet penetration is boosting online retail sales. GCC witnessed around 30% annual growth in the number of Internet users between 2000 and Supportive expansionary government policies and favorable taxation to raise the disposable income of consumers. This creates an attractive environment for the retail industry. GCC s retail sector is expected to witness strong growth in revenues and earnings in 2013, growing by an average rate of 18.7% y-o-y and 16.7% y-o-y, respectively. Currently the sector is trading at a current P/E of 15.6x close to its historic average of 15.2x and emerging market average of 24.3x. Exhibit 6: GCC Retail sector Key metrics and ratios Company Country CMP* M.cap (US$ million) Sales Growth (%) Net income Growth (%) Operating Margin (%) D/E ROE (%) D.yield (%) 2013e 2014e 2013e 2014e 2013e 2014e LFY LFY LFY BMMI Bahrain NA NA NA NA NA NA Bahrain duty free Bahrain NA NA NA NA NA NA Jarir Marketing KSA , Fawaz Al Hokair KSA , United Electronics KSA Al-Hassan GI Shaker KSA Al Othaim Holding KSA (2.8) Fitaihi Holding KSA NA NA NA NA NA NA 0.0 NM 0.0 Magrabi Optical KSA NA NA NA NA NA NA Sultan Centre Food Products Co Kuwait NA NA NA NA NA NA NM 0.0 AlEid Food Co. Kuwait NA NA NA NA NA NA Foodco Holding UAE NA NA NA NA NA NA Source: Bloomberg, Alpen Asset Advisors NA denotes Not Available, NM denotes Not Meaningful, *Local Currency; D/E: Debt to equity, ROE: Return on equity; 12

13 P/B (x) GCC Market Outlook 2013 July 3, 2013 Exhibit 7: GCC Retail sector valuation landscape (Current) Jarir extra Shaker Alhokair 4.3 Othaim BMMI BSC FoodCo Holding P/E (x) Source: Bloomberg Size of the bubble represents market capitalization local currency 13

14 RETAIL SECTOR SELECT COMPANIES IN FOCUS Fawaz Abdulaziz Al-Hokair (Al Hokair) (KSA) The company s top-line and bottom line are expected to witness strong growth in 2013 rising by 37.5% y-o-y and 36.6% y-o-y, respectively. This would be majorly driven by new store expansion plans and acquisition of NESK. Al Hokair s focus on the fast growing value fashion segment continues to remain a key catalyst for top-line growth. United Electronics Company (extra) (KSA) extra s earnings are estimated to grow 16.6% y-o-y in Factors such as focus on private-label brands, sourcing products directly from manufacturers and ability to gain discounts from suppliers are likely to support earnings growth. Jarir Marketing Company (Jarir) (KSA) Jarir is the largest listed retailer in Saudi Arabia, with presence in the high-growth electronics, and office and school supplies segments. The company s earnings are projected to grow 12.0% y-o-y in 2013 as it plans to open six new stores. Also, Jarir aims to generate significant earnings from the upcoming 4G technology and devices compatible with it, mainly iphone 5, which was launched in 4Q12. The company is likely to deliver high dividend yield of 4.6% in Abdullah Al Othaim (Othaim) (KSA) Same-store sales expansion is expected to boost the top line Othaim plans to add new stores in At a current PE of 12.6x, Othaim is trading below the industry average of 15.6x. Al-Hassan G.I. Shaker (Shaker) (KSA) The company is the leader in the high-growth air conditioning market in Saudi Arabia. Ramp-up of capacity could enable Shaker to meet the rising demand and potential export demand. Earnings are expected to surge 20.9% y-o-y in Dividend yield is estimated to be 5.0% during the same period. Exhibit 8: GCC Retail sector select companies in focus Key metrics and ratios Company P/E EPS growth ROE (%) P/B Technical indicators* Current 2013e 2014e 2014e 2014e 2014e R1 R2 S1 S2 Al Hokair extra Jarir Othaim Shaker Source: Bloomberg, Alpen Asset Advisors Support 1, S2: Support 2; R1: Resistance 1; R2: Resistance 2 14

15 SECTOR: BANKING The banking sector in GCC is set to capitalize on opportunities due to the healthy economic outlook for With regional governments increasingly focusing on developing non-oil sectors, credit growth is expected to remain strong. The sector has been resilient to the global financial turmoil. The Eurozone debt crisis is unlikely to have an adverse impact on GCC banks as their net funding dependence on European banks, and external funding, in general, are largely limited and manageable. GCC banks are well capitalized capital adequacy ratio in the UAE was as high as 20.8% in 2011, followed by Bahrain (19.5%), Kuwait (18.5%), Saudi Arabia (17.1%), Qatar (16.1%) and Oman (15.5%). Recovery in the real estate sector and growing private consumption, sustained by rising middle-class income, could spur demand for banking services. Government spending continues to remain the key driver for banking activity in the GCC region. Spending is estimated to grow at an annual rate of 8.5% in 2013 and thereby support banking activity. GCC Banks have seen robust growth in Net profits of GCC banks increased 7.1% YoY to USD 4.6 billion in Q1 13. Net profits of banks in the UAE surged 18.7% YoY, while that for banks in Qatar, KSA and Kuwait rose 7.4%, 2.6% and 2.4% YoY, respectively. In terms of valuation, GCC banks are currently trading at an average P/B of 1.5x close to the historical average of 1.4x over Exhibit 9: GCC banking sector Key metrics and ratios Company Country CMP* M.cap (US$ million) Sales Growth (%) Net income Growth (%) Operating Margin (%) D/E ROE (%) D.yield (%) 2013e 2014e 2013e 2014e 2013e 2014e LFY LFY LFY Al Rajhi Bank KSA , Samba KSA ,015.4 (0.1) Riyad Bank KSA ,599.5 (9.0) Saudi British Bank KSA ,332.6 (6.0) Banque Saudi KSA ,207.6 (8.2) Arab Natl Bank KSA ,346.3 (6.2) Alinma Bank KSA , Natl. Bank Kuwait Kuwait ,493.9 (20.4) 8.2 (1.6) Kuwait Finance Kuwait ,818.6 (27.2) Qatar National Bank Qatar ,500.3 (9.2) Masraf Al Rayan Qatar , (2.6) Commercial Bank Qatar ,689.2 (24.0) Qatar Islamic Bank Natl Bk of Abu Dhabi Qatar , UAE ,125.2 (18.5) First Gulf Bank UAE ,761.5 (17.0) Emirates NBD UAE 5.6 8,473.6 (25.5) Abu Dhabi Comm UAE 4.9 7,525.8 (28.9) Source: Bloomberg, Alpen Asset Advisors NA denotes Not Available, * Local Currency; D/E: Debt to equity, ROE: Return on equity; 15

16 P/B (x) GCC Market Outlook 2013 July 3, 2013 Exhibit 10: GCC banking sector valuation landscape (Current) 3.5 Al Rajhi 3.0 Qatar Natl Bk 2.5 Masraf Natl Bk Kuwait 2.0 Saudi British First Gulf SAMBA Natl Bk of AbuDhabi 1.5 Arab Natl Bk Qatar Islamic 1.0 Commercial Bk AbuDhabi Comm Banque Francis Riyad Bk Emirates P/E (x) Source: Bloomberg Size of the bubble represents market capitalization local currency 16

17 BANKING SECTOR SELECT COMPANIES IN FOCUS Bank Al Rajhi (Al Rajhi) (KSA) Al Rajhi, the largest Islamic and retail bank in Saudi Arabia, maintains leadership position with ~17.0% share in credit as of A strong network of retail franchise would continue to be the key differentiator as the bank benefits from growth in consumer lending in the Kingdom. Earnings are estimated to increase 9.8% in 2013, driven by growth in the loan book and access to low-cost funding. Commercial Bank of Qatar (Commercial Bank) (Qatar) Growth in loan book is expected to benefit from shifting focus to infrastructure lending as the Qatari government continues to incur higher spending on infrastructure. Though exposure to consumer finance is likely to be lower, strong demand for credit could raise lending yields. Emirates NBD (Emirates NBD) (UAE) The company has strong presence in the UAE retail banking sector. Growth in the loan book would be supported by revival in consumer spending and recovery in the UAE real estate sector in Improvement in operating efficiency due to cost-cutting measures is expected to support earnings growth. The net income is estimated to grow 11.1% y-o-y in Emirates NBD trades at a current P/B of 0.9x, a significant discount to the industry average of 1.5x. Samba Financial Group (Samba) (KSA) Samba is the most liquid and conservative among Saudi banks, with a loan-to-deposit ratio as low as 70.2% (as of 1Q13). Focus on cross-selling to corporate clients would enable the Group to offset margin contraction. Also, diversified interests in other businesses, primarily brokerage, asset management and trade finance, improve earnings quality. Samba s earnings are projected to rise 7.4% y-o-y in Samba trades at a current P/B of 1.3x, at a discount to the industry average of 1.5x. Saudi British Bank (Saudi British) (KSA) The bank s strong presence in the premium business for high-end retail clients would help in sustaining growth in the loan book. Saudi British s earnings are projected to increase 10.4% y-o-y in Access to HSBC s branches and brand could continue to be the key differentiator in terms of attracting high net worth clients. Exhibit 11: GCC Banking sector select companies in focus Key metrics and ratios Company P/E EPS growth ROE (%) P/B Technical indicators* Current 2013e 2014e 2014e 2014e 2014e R1 R2 S1 S2 Al Rajhi Commercial Bk NA Emirates NBD Samba Saudi British Source: Bloomberg, Alpen Asset Advisors Support 1, S2: Support 2; R1: Resistance 1; R2: Resistance 2 17

18 SECTOR: REAL ESTATE & CONSTRUCTION The real estate and construction sector in GCC is expected to recover in 2013 as economic growth is projected to be robust that, in turn, would translate into higher government expenditure. UAE, the epicenter of the region s real estate sector meltdown in 2008, is expected to lead the recovery with a gradual improvement in investment demand. GCC has been experiencing demand supply gap in the affordable housing segment. This is likely to be resolved by encouraging stable lending rates and supportive government policies promoting affordable housing. Increasing expatriate population and a shift to nuclear families would translate into significant demand for housing in the coming months. More than 20 million expatriates reside in the GCC region. A strong pipeline of construction projects is ascribed to the government s continuous investments for the development of infrastructure as part of its diversification efforts. According to MEED, construction projects worth US$ 1.8 Trillion are in various stages of execution across GCC. This is likely to benefit sub-sectors such as cement and building materials within the construction sector. Saudi Arabia is the clear leader when it comes to infrastructure spending with more than US$ 136 billion worth of projects being awarded in Abu Dhabi also announced that it plans to spend US$ 90 billion on development projects over the next five years. Kuwait announced recently that the government would spend US$ billion on development projects in the next 12 months. The sector is expected to witness an average earnings growth of 14.6% and is currently trading at a P/B multiple of 1.6x vis-à-vis historical average ( ) of 1.4x. The average dividend yield for the sector stood at 5.0% during the last financial year. Exhibit 12: GCC Real Estate & Construction sector Key metrics and ratios Company Country CMP* M.cap (US$ million) Sales Growth (%) Net income Growth (%) Operating Margin (%) D/E ROE (%) D.yiel d (%) 2013e 2014e 2013e 2014e 2013e 2014e LFY LFY LFY Saudi Cement KSA , Southern Province KSA , NA NA Yanbu Cement KSA , Yamamah Cement KSA , (1.3) DarAl Arkan RE KSA 9.1 2, Qassim Cement KSA , Arabian Cement KSA , Eastern Cement KSA , (5.2) 4.9 NA NA Taiba Holding Co KSA ,311.9 (5.4) 17.2 (41.4) 2.9 NA NA Saudi Ceramic KSA , Saudi Real Estate KSA ,001.5 (16.6) 11.5 (9.2) Tabuk Cement KSA NA NA Raysut Cement Co Oman Qatar National Qatar , Emaar Prop Pjsc UAE 5.8 9,635.2 (0.5) Aldar Properties UAE 1.9 2,318.3 (61.6) (42.5) 3.9 (31.9) Sorouh RE UAE 2.3 1, (24.0) 45.1 (12.0) Arabtec Holding UAE 2.4 1, Source: Bloomberg, Alpen Asset Advisors NA denotes Not Available, *Local currency; D/E: Debt to equity, ROE: Return on equity; 18

19 P/B (x) GCC Market Outlook 2013 July 3, 2013 Exhibit 13: GCC Real Estate & Construction sector valuation landscape (Current) Saudi Cement Southern Province Qassim cement Yanbu Cement Yamamah Qatar Natl City Cement Raysut Cement Saudi Ceramic Aldar Eastern Cement United Devlpt Dar Alarkan Arabian Cement Barwa Sorouh RE P/E (x) Source: Bloomberg Size of the bubble represents market capitalization local currency 19

20 REAL ESTATE & CONSTRUCTION SECTOR SELECT COMPANIES IN FOCUS Dar Al Arkan (Dar) (KSA) It is the largest real estate company in Saudi Arabia, with a strong presence in the fast growing low-cost housing segment. Dar is expected to benefit from the implementation of the mortgage law. Dar has a strong presence in the affordable housing segment, which is currently undersupplied. In terms of valuation, the company trades at a significant discount of more than 60.0% to the industry average of 1.6x on current P/B basis. Emaar Properties (Emaar) (UAE) Emaar has a diversified business model with a unique portfolio covering segments and geographies. The company has increased focus on the rental business to ensure stable cash flows and stabilize overall revenues through a recurring revenue stream. Emaar s hospitality and retail rental business in Dubai is expected to benefit from the strong outlook for tourism. In terms of valuation, Emaar trades at a significant discount of ~33.1% to the industry average of 1.6x on current P/B basis. Raysut Cement Company (Raysut) (Oman) The government s plan to execute the proposed infrastructure and construction projects in Oman has increased demand for cement in the domestic market. Development of Duqm Industrial Estate has generated significant demand, thereby increasing the company s revenue and earnings. Raysut s earnings are projected to grow 8.8% in Saudi Ceramic Company (Saudi Ceramic) (KSA) Saudi Ceramic is the largest producer of ceramic tiles (52 million sq m) and sanitary ware in Saudi Arabia. The company is likely to capitalize on the strong construction pipeline in the Kingdom. Saudi Ceramic is a volume-driven play on population growth and infrastructure spending, given its strong local distribution network, and access to government and corporate clients. Also, it enjoys a relatively favorable cost advantage. Southern Province Cement (Southern Cement) (KSA) The company is set to benefit from its plant locations placed at the key demand points of Saudi Arabia. Easy access to feedstock and cheap transportation advantage could lead to the generation of high profits and support Southern Cement s margins. Exhibit 14: GCC Real Estate & Construction sector select companies in focus Key metrics and ratios Company P/E EPS growth ROE (%) P/B Technical indicators* Current 2013e 2014e 2014e 2014e 2014e R1 R2 S1 S2 Dar Al Arkan Emaar Raysut Saudi Ceramic Southern Cem Source: Bloomberg, Alpen Asset Advisors Support 1, S2: Support 2; R1: Resistance 1; R2: Resistance 2 20

21 SECTOR: TRANSPORT & LOGISTICS The transportation sector in GCC has been at the forefront of public spending plans as the government earmarks a major portion of infrastructure spending for building and improving airports, railways, ports and roadways. Road and bridge projects worth nearly US$ 121 billion are underway or in the planning phase. GCC benefits from a strategic location. It is halfway between the East and West. Notably, on the back of higher trade volumes from India, China and other manufacturing hubs in Asia and the Far East, UAE s transportation sector (considered as the trading hub in the Middle East region) would witness large investments. Underscoring GCC region's importance as a key global travel hub, a study released by International Civil Aviation Organisation (ICAO) said that GCC airports are expected to handle as much as 250 million passengers by 2020.The Middle East s air transport industry contributed US$ 129 billion to the region s GDP. The region s significant dependence on imported goods could further increase the freight volume. In addition, strong tourism potential is likely to propel growth in the aviation and road transport sectors. The transportation sector continues to trade at a discount to its historical average. In terms of P/E multiple, transport and logistics companies in the region are trading at a 16.4% discount to their historical average ( ). Exhibit 15: GCC Transport and Logistics sector Key metrics and ratios Company Country CMP* M.cap (US$ mn) Sales Growth (%) Net income Growth (%) Operating Margin (%) D/E ROE (%) D.yield (%) 2013e 2014e 2013e 2014e 2013e 2014e LFY LFY LFY National Shipping KSA , Saudi Transport KSA NA NA NA NA NA NA Agility Kuwait , Aviation Lease Kuwait NA NA NA NA NA NA KGL Logistics Co Kuwait NA NA NA NA NA NA City Group Kuwait NA NA NA NA NA NA Salalah Port Oman NA NA NA NA NA NA Qatar Gas Trnsprt Qatar , NM Qatar Navigation Qatar , (3.6) Gulf Warehousing Qatar DP World Ltd UAE , (26.2) Aramex PJSC UAE Polarcus Ltd UAE Waha Capital UAE NA NA NA NA NA NA Source: Bloomberg, Alpen Asset Advisors NA denotes Not Available, NM denotes Not Meaningful *Local Currency; D/E: Debt to equity, ROE: Return on equity; 21

22 P/B (x) GCC Market Outlook 2013 July 3, 2013 Exhibit 16: GCC Transport & Logistics valuation landscape (Current) Salalah Port City Group Aviation Lease Aramex Port Service Refrigeration Agility Waha Capital Qatar Navigation Polarcus Ltd. DP World Ltd P/E (x) Source: Bloomberg Size of the bubble represents market capitalization local currency 22

23 TRANSPORT & LOGISTICS SECTOR SELECT COMPANIES IN FOCUS Public Warehousing Company (Agility) (Kuwait) Winning of new contracts from companies in Western Australia, Spain, Kazakhstan, and expansion in existing portfolio could diversify Agility s geographic revenue stream. Strong network and expanding presence in emerging markets. Aramex (UAE) An asset-light model provides flexibility during a change in the economic environment as it requires limited investments and reduces fixed cost. Aramex is well positioned to capitalize on the high economic growth in emerging markets. The company has entered into a series of joint ventures and acquisitions in Africa, Asia and Turkey. The company is poised to leverage on its strong and established position (domestic express market share of 70.0% in the UAE, 20.0% in Saudi Arabia and 50.0% in Egypt) in MENA markets. National Shipping Company of Saudi Arabia (Bahri) (KSA) The company is well positioned to benefit from rising demand in Asian markets and stabilization in Very Large Crude Carrier (VLCC) prices in the GCC region. Bahri would have an exclusive 10-year right to provide VLCC crude oil shipping services to Saudi Aramco. This is likely to further support the expected earnings growth of 40.7% in The company is currently trading at a P/E of 12.8 vis-à-vis the industry average of 13.0x. DP World Limited (DP World) (UAE) DP World is the third-largest marine terminal operator in the world, with more than 60 terminals and 11 new developments across six continents. The company is a play on global trade volumes, particularly emerging markets-revival in emerging economies in 2013 to boost volume growth. Capacity expansion plans are on track. Expansions in Jebel Ali and London Gateway are on schedule and would add 1mn TEU by mid Also, the Indian government has approved shipments from Vallarpadum which would boost the company s volumes in Qatar Gas Transport (Nakilat) (Qatar) Revival in the Qatari economy is likely to spur LNG exports that, in turn, would be the key driver for Nakilat s growth. The company s vessels are on long-term charter (25 years, with a 10-year extension option) take-or-pay contracts to Rasgas and Qatargas; this provides earnings stability. Ancillary revenues, primarily shipbuilding, repair and maintenance, are expected to support top-line growth. 23

24 Exhibit 17: GCC Transport and Logistics select companies in focus Key metrics and ratios Company P/E EPS growth ROE (%) P/B Technical indicators* Current 2013e 2014e 2014e 2014e 2014e R1 R2 S1 S2 Agility NA Aramex Bahri DP World Nakilat Source: Bloomberg, Alpen Asset Advisors NA denotes Not Available, Support 1, S2: Support 2; R1: Resistance 1; R2: Resistance 2 24

25 SECTOR: TELECOMMUNICATION The telecom industry in GCC is poised to reap the benefits of a liberalized environment, an expanding tech-savvy younger population, increased government spending for supporting infrastructure and higher disposable income. The Data segment holds tremendous growth potential given the Internet is fast achieving mass market exposure in Saudi Arabia. Rising demand for smart devices would further propel demand for data services in the coming years. Growth in expatriate and local population in the GCC region offers new telecom operators an opportunity to garner market share by introducing lower tariffs and bundled offers. The voice segment is set to expand geographically given the saturation in home markets. Pricing pressure remains high that, in turn, could dent margins; however, in terms of valuation the telecom sector is trading at 10.3x 2013 P/E, 44.0% below that in emerging economies. The sector s earnings are expected to grow by 6.5% y-o-y during 2013 and average dividend yield is forecasted to increase to 5.3% in Exhibit 18: GCC Telecommunication sector Key metrics and ratios Company Country CMP* M.cap (US$ mn) Sales Growth (%) Net income Growth (%) Operating Margin (%) D/E ROE (%) D.yield (%) 2013e 2014e 2013e 2014e 2013e 2014e LFY LFY LFY Bahrain Telecom Bahrain 0.4 1,563.1 (1.7) 0.5 (4.9) Saudi Telecom Co KSA , Etihad Etisalat KSA , Mobile Tele Saudi Mobile Tele Kuwait KSA 8.9 2, (23.5) (34.0) NM NM NM 0.0 Kuwait ,555.2 (2.6) 4.0 (3.5) National Mobile Kuwait , Hits Telecom Kuwait NA NA NA NA NA NA 40.8 NM 0.0 Oman Tele Oman 1.5 2, Nawras Oman Qatar Telecom Qatar , Vodafone Qatar Qatar 9.4 2, (15.7) (30.3) NM NM 18.5 NM 0.0 Etisalat UAE , Du UAE 5.9 7, (6.1) Source: Bloomberg, Alpen Asset Advisors NA denotes Not Available, NM denotes Not Meaningful, *Local Currency; D/E: Debt to equity, ROE: Return on equity; 25

26 P/B (x) GCC Market Outlook 2013 July 3, 2013 Exhibit 19: GCC Telecommunication sector valuation landscape (Current) Mobily Emirates Oman Telecomm Mobile Tele Kuwait Etisalat Nawras Batelco National Mobile STCO Qtel P/E (x) Source: Bloomberg Size of the bubble represents market capitalization local currency 26

27 TELECOMMUNICATION SECTOR SELECT COMPANIES IN FOCUS Emirates Integrated Telecommunication Company (Du) (UAE) Targeting new phase of efficiency since the beginning of 2012 with shifting focus towards EBITDA margin improvement amid maturing telecom market in UAE. In our opinion, expansion outside the UAE would prove beneficial for the company. Du plans to target mobile virtual network operator (MVNO) opportunities in Saudi Arabia and Egypt. Etihad Etisalat (Mobily) (KSA) Mobily is the market leader in the fast growing data segment in Saudi Arabia; revenue from mobile data segment rose 41% y-o-y in 2012 comprising of 27% of total revenues. Under the new dividend policy (introduced in FY2011), Mobily paid dividends amounting to SAR 5.0/ share in The company has increased focus on achieving operational efficiency by managing costs. Oman Qatari Telecommunication Company (Nawras) (Oman) The company s strong balance sheet and ability to effectively manage cost would support margins, given the underlying competitive telecommunication landscape. Revenues are expected to increase due to Nawras sea cable agreement with Tata Group, driven by a rise in international capacity and lower international transmission costs. Earnings are expected to grow 14.7% y-o-y in Considering the company s ability to generate strong free cash flows, dividend yield is expected to be 8.5% in Qatar Telecommunication (Qtel) (Qatar) With a diversified service portfolio, Qtel is set to benefit from tremendous demand potential for 3G services in Indonesia, Iraq, Algeria, Qatar, Kuwait and Tunisia. The company enjoys significant support from Government of Qatar (55% direct stake). Saudi Telecom Company (STC) (KSA) With the domestic voice market approaching maturity at a faster pace, STC is diversifying operations in highgrowth international markets Malaysia, Turkey and South Africa have started to yield returns. STC s significance presence in the fast growing enterprise segment might diversify the revenue stream. A strong balance sheet with ample liquidity is expected to support dividend yield. Exhibit 20: GCC Telecommunication sector select companies in focus Key metrics and ratios Company P/E EPS growth ROE (%) P/B Technical indicators* Current 2013e 2014e 2014e 2014e 2014e R1 R2 S1 S2 Du (0.9) Mobily Nawras Qtel STC Source: Bloomberg, Alpen Asset Advisors Support 1, S2: Support 2; R1: Resistance 1; R2: Resistance 2 27

28 Glossary Terms / Abbreviations Meaning CMP Debt to equity (D/E) DFM Dividend yield (D.yield) GCC IPO LFY Loan-to-deposit Market breadth Market depth MEED MENA MSCI Emerging Markets MSCI Frontier Markets MSCI GCC Index P/B P/E Return on Equity (RoE) TASI Closing Market Price The ratio is a measure of company's financial leverage calculated by dividing its total liabilities by stockholders' equity Dubai Financial Market A financial ratio that shows how much a company pays out in dividends each year relative to its share price Gulf Cooperation Council Initial Public Offering Last Financial Year The ratio is calculated by dividing the banks total loans by its total deposits, commonly used to asses bank's liquidity This technique gauges the direction of the overall market by analyzing the number of companies advancing relative to the number declining The market's ability to sustain relatively large market orders without impacting the price of the security. It is closely related to liquidity and volume within a security Middle East Economic Digest - business intelligence tool for the MENA, providing analysis and commentary on Middle Eastern markets, companies, people and data on the regional projects market Middle East and North Africa The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The index currently consists of the 21 emerging market country indices The MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of frontier markets. The MSCI Frontier Markets Index currently consists of the 25 frontier market country indices This represent the universe of companies in 6 Gulf Cooperation Council equity markets: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates Price to book - A ratio comparing a stock's market value to its book value calculated by dividing the current closing price of the stock by the latest quarter's book value per share Price to earnings - A ratio of a company's current share price compared to its per-share earnings The amount of net income as a percentage of shareholders equity Tadawul All Share Index YTD YTD refers to Year To Date returns considering closing prices as of June 12,

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