The Big Picture
Saudi Arabia’s Tadawul index is now part of major international benchmarks like FTSE and MSCI, the 166 companies’ part of the index now come under the radar of international investors. In the first quarter of 2019. Companies listed on the Tadawul showed an average sales growth of 2.99% but earnings fell 4.94%, due to macro factors like imposition of VAT, fiscal stance of the government and falling expatriate population in the country. However, performance has been varied across different sectors and it is not like all the sectors underperformed.
The DFM index has seen a similar growth in recent months, with sales growth up by 2.08% in the first half of the year. Earnings across the index remained static showing marginal increase from the year before. The top sectoral picks for the year have been Retail, Banks and Building Materials for Saudi markets, banking for Abu Dhabi markets and Insurance sector for the DFM.
The Tadawul index has seen banks and consumer services perform positively for the first half of the year. Banking sector on the Tadawul index has rallied by more than 20 percentage in the first half of the year. This was due to constituents such as Riyad Bank (RIBL) and Bank Albilad (ALBI) posting sales growth of 21.13% and 16.49% respectively. One of the region’s biggest banks, Al Rajhi Bank (RJHI) announced SAR 1.157 billion in earnings; a 21% increase over the prior year. The Tadawul rally was furthered supported by 15.91% upmove in consumer service sector.
Saudi retail sector companies posted strong sales growth of 11.27% with an average earnings growth of 19.65% in the first half of the year. United Electronics Co (EXTRA) led the pack growing its revenue 22.31% to SAR 1.058 billion and posting a whopping 52.36% earnings growth. Sasco (SACO) was not far behind increasing sales to SAR 560, million up 22% from 2018 with a healthy 11% earnings increase. Oil and Gas sectors continued to struggle due to subdued oil prices but could see a revival in the second half of the year as escalating geopolitical tensions between Iran and the US have pushed crude oil prices upward. Nevertheless, the government push on infrastructure meant that cement companies like Yamana Cement, Hail Cement and Eastern Province Cement posted 30 percentage plus sales growth during the first half of the year.
The ADX General Index has had a difficult start to the year, with sales growing marginally by 0.66% but earnings taking a tumble by 6.03% as the heavyweight banking sector profits declined by 16.36 percentage. The top performers on the index were National Bank of Fujairah posting a sales growth of 19% and National Bank of RAK which displayed a 34% increase in earnings.
The Dubai property market has been a key driver of growth for the economy in the last few years. However, Dubai property markets have experienced falling prices since 2014 due to an increase in the supply. The Index was driven upwards by strong performances of the banking and insurance sectors. The real estate sector has seen a decline in sales by 4% with earnings also shrinking by 12%. Damac properties has suffered the most with sales falling 52% and earnings plummeting by 87%. Developers across the region saw a fall in earnings, with Deyaar and Union Properties losing 53% and 99% respectively. Earnings growth in the Dubai Insurance sector was driven largely by National General Insurance, posting 17% sales growth and 33% earnings growth.
IPO markets could hot up
Baladna Food Industries, Kuwait stock exchange, Flynas, Emirates Global Aluminum, Abu Dhabi Ports, Senaat, and Al Shafar General Contracting looks like serious candidates for IPOs in the second half of 2019. The names of Etihad, and FlyDubai are also being talked about, nothing is confirmed and as of now their names just looks like speculation. The total amount proposed to be raised from the serious candidates is about $6-$7 billion with Emirates Global Aluminum, Abu Dhabi Ports and Senaat expected to issue shares worth $3 bn, $1 bn and $1 bn respectively. DFM, Tadawul and ADX are bourses expected to see the most activity.
Tadawul to benefit from rising inflows
The anticipated addition of Saudi Arabia into MSCI Emerging markets Index is a watershed moment for Saudi Arabian equities since it is the culmination of years of painstaking reforms. The country has worked closely with MSCI to introduce steps for T+2 settlement, securities borrowing and lending, adoption of the Global Industry Classification Standard (GICS) and improvement of corporate governance. The inclusion will provide an impetus for further integration of the Kingdom with global economy.
Saudi Arabian securities will have an aggregate weight of 1.42 percent in the $1.8 trilliom MSCI index and the addition will happen in two stages. The first stage will be completed by 28th May while the second stage will be done by August,2019. The total inflows expected in the first phase is $7.2 billion and another $10 billion by the end of the year.
Picks and Pans
Clearly the woes of Saudi insurance sector are far from over with fundamental factors like slowing economic activity, competitive pressures and declining expatriate population still playing a role. The conditions are likely to remain challenging for these companies throughout 2019. Dubai property shares are also better avoided as large influx of newly developed properties in the market has led to decline in the prices.Retail, Banks and Building Materials are the top picks in Saudi Arabia which will benefit from liquidity inflows, AbuDhabi based banks are also expected to perform well.