Equity Market Report
Saudi Arabia Market
All Sectors - All Industries
14 March 2012
7,521.6
17.2%
421.4
Closing price
YTD performance
Avg. daily volume (YTD mn)
Key themes
Since the beginning of 2012, the Saudi market index
has rallied by 17% on robust volumes, especially in
the smaller sectors. Speculation remains the principal
reason for this rally, supported by higher oil prices and
fund flow from the real estate sector coupled with
favourable news flow from Europe and the US.
Implications
We expect volumes on the Saudi market to continue
increasing over the next few months on the back of
retail investor confidence. We expect large sectors
such as banking and petrochmeicals to benefit over
the near-term as liquidity is likely to shift from small
sectors to large ones.
Sector performance
50%
44.4%
40%
31.8% 30.0%
28.1%
30%
20%
22.6% 21.3%
10%
15.6% 13.2%
12.5% 10.9%
0%
P/E comparison
16
15.2
12
13.1 12.9 12.8
10.8 10.8 10.8 10.7 10.7 10.5 10.5
8
4
0
Saudi Arabia market index
RS I1 0
Price Clo se
MAV10
MAV50
Saudi Stock Market:
Speculation is the key driver
Saudi equity market has staged a remarkable rally (+17%) since the beginning
of 2012 along with a marked improvement in volumes. Though the
macroeconomic picture has improved slightly over the last few months and oil
prices have surged due to the Iran-US standoff, we do not believe that they are
the only reasons behind the market optimism. We strongly believe that
speculation is triggering this market rally along with additional funds injected
from real estate investments and increased investor confidence.
Notwithstanding the recent rally, Saudi stock market remains one of the
attractive stock markets in the region. We believe that TASI will continue to be
northbound amid high volumes and volatility over the next 2-3 quarters,
assuming no major negative macroeconomic or geopolitical news flow.
Retail participation driving volumes: The recent rally in the TASI index is
mainly driven by improved participation by retail investors. Unlike 2011, retail
investors are joining the rally, which has resulted in a sharp growth in volumes
for small sectors such as real estate, insurance and transport. Though there are
no specific reasons for the increase in retail participation, we believe that
speculation coupled with rumours on opening up the market to foreign investors
is the key attraction for retail investors. Nowadays, we see people talking about
the equity investments again and there is renewed interest all around in early
2012. We believe that this uptick in volumes will continue over the next 6-9
months and will further boost the market.
Liquidity shifting from real estate markets:. In 2011, spiralling property
prices have resulted in weak real estate volumes, which forced investors to scout
for better investment opportunities. With no major options available to absorb
the large amount of money, investors turned to stock markets. We expect this
trend to continue over the next few months, infusing more liquidity to the stock
markets.
Favourable macroeconomic factors: The positive news flow emanating from
the Eurozone and improved industrial production in the US are also supporting
the stock market rally in 2012, in line with other equity markets. Further, the
spike in oil prices due to the Iran-US stand-off is expected to boost domestic
growth in Saudi Arabia. Though these are the supporting factors spurring the
rally, we strongly believe that speculation remains the prime rally driver.
Attractive valuation for TASI: Despite a solid performance in early 2012, TASI
remains one of the attractive stock markets globally. It is currently trading
marginally above the major GCC markets such as Dubai and Qatar and at a
considerable discount to large global markets such as the US and India.
7,700
7,500
7,300
7,100
6,900
6,700
6,500
6,300
6,100
5,900
5,700
70
30
-10
So urce: Blo omberg 06/11
03/11
9.0
Research Department
Equity Research Team
Tel 966 1 211 9310, [email protected]
09/11
12/11
Conclusion: The strong 2012 YTD performance can be principally attributed to
retail participation, resulting in a sharp rise in volumes. Retail investors will
continue to prefer small cap stocks and the ones with low absolute value. We
believe that the volumes can see further upside on additional fund inflows from
retail investors as the street sentiments are quite positive. Overall, we are
positive on the Saudi market and believe that large sectors such as banking and
petrochemicals will benefit over the near-term. However, we also do not rule out
profit booking and potential correction in some sectors in the near term.
Disclosures Please refer to the important disclosures at the back of this report.
Powered by Enhanced Datasystems’ EFA Platform
Equity Market Report
Saudi Arabia Market
14 March 2012
Saudi Stock Market:
Speculation attracting retail investors
Strong 17% rally in TASI since
the start of the year
The Saudi stock market has rallied by 17% since the start of 2012. Despite the improvement
in the global macroeconomic environment as well as corporate profits, we believe that
speculation has been the driving force behind the rally and record volumes make it more
substantive. Further, the divergence between the Saudi market and S&P 500 during the last
month (TASI +10.4% while S&P500 was just +1.4%) supports our view that retail investors
and speculation are driving the market as they seem to have overlooked the global
macroeconomic developments.
We believe that retail investors prefer speculation and are willing to participate on such
activity, given the scenario of a market rally and positive news flow. Though retail investors
haven’t responded to strong profits and cheap valuations in 2011, they have started joining
the speculation bandwagon in late 2011. We see people talking about the equity investments
and the interest has increased manifold, which will trigger even a further increase in retail
participation over the next few months.
Figure 1: TASI Index price and volume data
mn
14,000
800
700
12,000
600
10,000
500
8,000
400
6,000
300
4,000
200
2,000
Trading Volume (RHS)
Jan 12
Aug 11
Ap r 11
Dec 10
Jul 10
Ma r 10
No v 09
Jun 09
Feb 09
Oc t 08
Ma y 08
Jan 08
Sep 07
Ma y 07
100
Jan 07
0
0
Index Value
Source: Bloomberg
Since the start of 2012, we have seen a huge jump in traded volumes and value for TASI,
especially for the smaller sectors like real estate, transport, and insurance. Smaller sectors
have reported a 100-300% increase in volumes while the large sectors such as petrochemicals
and banking sectors reported a rise of 40% and 74% respectively. Value traded also showed a
similar trend with smaller sectors accounting for a sharp rise. This clearly shows retail
investors’ preference considering that these small sectors represent 8.4% of total market cap,
while they have comprised 32.9% of total value traded YTD.
Disclosures Please refer to the important disclosures at the back of this report.
2
Equity Market Report
Saudi Arabia Market
14 March 2012
Figure 2: Volume increase for the small and large sectors in TASI
Sharp increase in volumes and
value for smaller sectors
supports our view that
speculation activity is driving
the market
mn
70 274%
40%
60
138%
50
114%
40
30
20
127%
74%
98%
211%
10
31%
68%
130%
84%
42%
39%
14%
0
H1 2011
H2 2011
YTD
Source: Bloomberg, Note: figures indicate y-o-y growth in volume
Figure 3: Sharp rise in value traded for smaller sectors
%
50
40
30
20
10
0
Mkt. Cap. (%)
% of Value Traded YTD
YTD Perf ormance (%)
Source: Bloomberg
2011 market performance was
hampered by macroeconomic
and geopolitical events, despite
strong domestic growth
Investor confidence boosted by
positive macroeconomic news
flow since the start of the year
Arab spring and global uncertainties overshadowed 2011: The year 2011 was extremely
strong in terms of macro (Saudi GDP growth of 6.8%) and micro levels (record corporate
profits). However, the equity market never responded (-3.6% in 2011). At the beginning of the
year, the Arab spring impacted the performance but the market absorbed the negative news
flow and started staging a recovery in Q2 2011. However, the H2 performance was again
overshadowed by the lingering uncertainties in the global macroeconomic environment and
slowing growth from the emerging markets. We believe that the positive factors were present
in the markets during 2011; the slight improvement in the global economy and strong oil
prices served as catalysts for the recent rally.
Positive macroeconomic news flow in 2012 boosted equity markets: Positive news flow
regarding the debt crisis in Greece and the US industrial data has resulted in improved
investor optimism during the last 2-3 months. Though the situation has improved a tad, we
believe that the markets are following “no news is good news” strategy over the last few
months. All the major equity indices are rallying across the globe (see the chart below). The
MSCI world and emerging market indices have also registered double-digit growth YTD,
pointing towards a global equity market rally.
Disclosures Please refer to the important disclosures at the back of this report.
3
Equity Market Report
Saudi Arabia Market
14 March 2012
Figure 4: YTD performance of major global stock markets
%
25
20
19.8
15.3
15
14.2
13.2
9.3
10
7.1
6.8
6.5
5.9
5
1.6
-2.1
FTSE 100
Qatar
0
-5
Dubai
Tadawul
Bovespa MSCI Em. Hang Seng
MSCI
Global
Kuwait
Abu Dhabi S&P500
Source: Bloomberg
Value traded was at a multiyear high in 2012, boosted by
retail investments
Volumes increased significantly on the back of retail participation: Over the last 2-3
months, the volumes in Saudi Arabian market increased considerably making the rally more
substantive and credible. The volumes were up 260.4% since the start of the year and
touched 781mn on March 12, 2012, while in value terms it was at a multi-year high with value
of SAR16tn, up 193.5% since the start of the year. Retail investors have a dominating
presence and now account for more than 92% of the overall volumes, which is also a multiyear record. We believe that rising volumes indicate increased speculation amid upbeat news
flow.
Figure 5: Retail participation increased since June 2011
100
90
80
70
60
Jan-11
Apr-11
Jul-11
Saudi Individuals
Saudi Corporates
Oct-11
Jan-12
Others
Source: Tadawul
High prices and lower volumes
in the real estate business,
resulted in a shift in liquidity to
stock market
Liquidity shifting to stock market from real-estate: In late 2008, the Saudi Ministry of
Justice started publishing weekly data on the real-estate market in Saudi Arabia. Published
data includes among other things: 1) value traded, 2) number of transactions, and 3) the
province of transaction. Despite the fact that the ministry only provides data of four cities Madinah, Riyadh, Dammam and recently Al-Qatif - we believe this data provides sufficient
overview of the real estate market in Saudi Arabia.
We have found out that in 2011, the trading was extremely dry, especially in the residential
sector where number of transactions declined by almost 20% from 2010 levels. That said, the
total value traded only declined by 4%, which can be attributed to inflating prices. This view
is further supported by our discussion with many real-estate investors, who confirmed that
2011 wasn’t very active as most people found current real estate prices too high and
Disclosures Please refer to the important disclosures at the back of this report.
4
Equity Market Report
Saudi Arabia Market
14 March 2012
unaffordable, while the owners were waiting for a further rise. This led to a mismatch
between bid and demand prices, which in turn resulted in a few transactions compared to
previous years.
Therefore, with few investment channels available in the kingdom, we strongly believe that
many investors have shifted their focus to the stock market, which is relatively undervalued
and can absorb huge cash inflow.
Figure 6: Real estate transactions declined in 2011
Real estate volumes declined in
2011 despite a rise in property
prices
in '000
SAR bn
140
120
110
100
100
90
80
80
60
70
40
60
20
0
2009
2010
Value
50
2011
Volume
Source: Saudi Arabian Ministry of Justice
Rumours regarding foreign investments are boosting the investor confidence: Swaps
activity has increased sharply in the last few months with net purchases through the swap
agreement reaching SAR1.5bn in February 2012, which is a record. This coupled with
rumours regarding the opening up of the stock market to foreign investors has attracted retail
investors to the market with increased confidence.
Figure 7: Swaps net purchases highest in February 2012
Strong uptick in swaps net
purchases since the start of the
year
SAR mn
2,000
1,500
1,000
500
0
-500
-1,000
-1,500
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Source: Tadawul
Smaller sectors such as
insurance and real estate are
driving the overall index
performance
Smaller sectors performing better than larger ones: We have seen that the small sectors
in the index such as insurance, real estate, and cement have delivered a decent performance
as compared to large sectors such as petrochemicals and banking since the start of 2012,
boosting the overall Saudi market performance. In a sense, the smaller sectors are currently
driving the index performance unlike in the past few years. Further, volumes have risen
sharply in the smaller sectors of the index. This supports our view that speculation activity is
the key attraction for retail investors as we see more trading in companies with low absolute
value or small caps.
Disclosures Please refer to the important disclosures at the back of this report.
5
Equity Market Report
Saudi Arabia Market
14 March 2012
Figure 8: Saudi sector performance (YTD)
Large sectors like
petrochemicals and banking
underperformed the overall
index in early 2012
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
YTD Perf ormance (%)
Volume traded (%)
Source: Tadawul
Lower credit costs boosting liquidity in the market: With low credit costs currently
prevailing across the kingdom, private credits have grown sharply resulting in more liquidity
in the markets. This is a favourable development for the equity markets in two ways: 1) many
investors have been borrowing and investing in the stock market fuelling liquidity and 2) it is
helping the companies to clock better profits due to lower interest costs. . It is worth noting
that the Fed pledged to keep its benchmark interest rate at a record low close to zero at least
through mid-2013.
The following chart shows that bank credits have declined slightly in 2009 owing to the
economic crisis and then gradually increased since then to reach a record of more than
SAR800 bn in 2011, which is also a reason for the strong liquidity.
Figure 9: Banking credit in Saudi Arabia
SAR bn
Strong growth in bank credits is
another driver for stock market
liquidity
%
900
6.0
800
5.0
700
600
4.0
500
3.0
400
300
2.0
200
1.0
100
0
2007
2008
2009
Bank credits
2010
2011
0.0
Saudi LIBOR
Source: Bloomberg
Rising oil prices will boost Saudi economy in 2012: Rising oil prices owing to the US-Iran
stand-off, have boosted the economic growth prospects in Saudi Arabia. Many analysts
believe that the 2012 GDP growth can exceed 4% as against the current estimates of 3-3.5%, if
the oil prices remain strong. Further, we believe that the additional petrodollars will pave the
way for the Saudi government to pump in heavy investments in public sectors such as
infrastructure and housing, boosting the liquidity in the economy. Historically, higher oil
prices have resulted in favourable stock market reactions. However, despite higher oil prices,
the stock market has remained under pressure in 2011, which also supports our view that the
current rally is mainly driven by speculation activity.
Disclosures Please refer to the important disclosures at the back of this report.
6
Equity Market Report
Saudi Arabia Market
14 March 2012
Figure 10: Brent crude vs. TASI (indexed to 100)
180
160
Higher oil prices to boost
investments in the kingdom
140
120
100
80
60
Jan 2010
Jan 2011
Brent Crude
Jan 2012
Tadawul Index
Source: Bloomberg
Valuations still remain attractive
Saudi still remains relatively
cheap to large markets such as
the US and India
Despite the current rally in the stock markets, TASI’s valuations remain attractive as
compared to other GCC markets as well as major emerging markets globally. TASI currently
trades at 12.8x 2012E, at a marginal premium to major markets across the region such as
Qatar (10.5x) and Dubai (10.8x). Other global markets such as India (15.2x) and the US
(13.1x) are trading at a significant premium to TASI despite lower domestic growth forecasts
in those countries.
Figure 11: Forward PE comparison of TASI vs. major global markets
16
15.2
13.1
12.9
12.8
12
10.8
10.8
10.8
10.7
10.7
10.5
10.5
9.0
8
4
0
India
US
MSCI
World
Saudi
Brazil
Dubai
MSCI Em. Germany
Markets
China
Qatar
UK
Abu Dhabi
Source: Bloomberg
The sector P/Es for the major sectors such as petrochemicals, telecom and food & agriculture
remain lower as compared to global peers. Based on our discussions with many analysts and
investors, banking remains the most attractive sector in Saudi Arabia (especially for foreign
investors) despite valuation premium on a forward P/E basis as compared to other regions.
We believe that the P/E ratio is skewed for the Saudi banking sector mainly on account of
new unprofitable banks like Alinma.
Though the forward P/E multiple has been used for valuation comparison amongst the
sectors in different geographies, it is not an accurate indicator as these multiples are often
skewed due to loss making and early start-up companies.
Disclosures Please refer to the important disclosures at the back of this report.
7
Equity Market Report
Saudi Arabia Market
14 March 2012
PE of different sectors compared to their peers in other markets:
Figure 12: Petrochemicals
Figure 13: Banking
16
16
12
12
8
8
4
4
0
0
MSCI World
Saudi Arabia MSCI Emerging
Market
Saudi
Arabia
S&P 500
Figure 14: Industrial
Qatar
S&P 500
MSCI
World
MSCI
Emerging
Market
Abhu
Dhabi
Figure 15: Telecom
20
20
16
16
12
12
8
8
4
4
0
0
Saudi Arabia MSCI World
S&P 500
MSCI
Emerging
Market
Qatar
S&P 500
Figure 16: Cement & Materials
MSCI World
MSCI
Saudi Arabia Abhu Dhabi
Emerging
Market
Figure 17: Food & Agriculture
16
24
20
12
16
12
8
8
4
4
0
0
Saudi Arabia
S&P 500
MSCI World
MSCI Emerging
Market
MSCI Emerging Saudi Arabia
Market
MSCI World
S&P 500
Source: Bloomberg
Strong volume growth to continue with high volatility
We expect the upward
momentum in volumes to
continue in the near term
The recent rally in the Saudi market is fuelled by investor optimism and a strong
performance outlook in 2012. Though the recent sharp increase in trading volume and value
appears confusing considering only a slight improvement in most of the factors such as
macroeconomic concerns and corporate outlook, we continue to believe that the markets are
forward looking and hence have already discounted the potential negative news flow.
Disclosures Please refer to the important disclosures at the back of this report.
8
Equity Market Report
Saudi Arabia Market
14 March 2012
Retail participation in the speculation activity remains the primary rally driver coupled with
positive news flow. Bankers and brokers have confirmed that a lot of transfers were
completed from current and saving accounts to brokerage accounts. So, we expect the
turnover to remain high for at least 9-12 months as pulling such liquidity will take time even
in case of a negative news flow. Despite lower earnings expectations from major companies
(especially petrochemicals), the stock market is buoyant on the back of 1)lifting of major
concerns like Arab spring, 2) strong oil prices, 3) bullish news flow from Europe and the US,
and 4) increased liquidity. We believe that solid volumes make this rally credible.
We expect the trading volumes to increase further over the near-term coupled with high
volatility, especially in stocks with low absolute price and small cap stocks. Further, we
believe that the liquidity will eventually move to large cap stocks when small caps become
extremely inflated. Speculation remains the key market driver and hence, fundamental
analysis will be less important over the next few months. In other words, it wouldn’t be a
surprise to see many major stocks exceeding our as well as consensus target price.
Nevertheless, the Saudi market still remains relatively undervalued as compared to some
major markets globally, despite a strong domestic economy. We believe that banking,
petrochemical, and telecom sectors have a healthy upside from the current levels.
Overall, we believe that this rally is likely to continue over the near-term on the back of high
liquidity as well as relatively low valuations, assuming no major negative geopolitical or
economic news flow.
Disclosures Please refer to the important disclosures at the back of this report.
9
Equity Market Report
Saudi Arabia Market
14 March 2012
Disclaimer and additional disclosures for Equity Research
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Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except
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on a 6-9 month time horizon.
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Contact us
Dr. Saleh Alsuhaibani
Head of Research
Tel : +966 1 2119434
[email protected]
Khalid Alruwaigh
Acting Head of Equity Research
Tel : +966 1 2119310
[email protected]
Al Rajhi Capital
Research Department
Head Office, King Fahad Road
P.O. Box 5561, Riyadh 11432
Kingdom of Saudi Arabia
Email: [email protected]
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Authority, License No. 07068/37.
Disclosures Please refer to the important disclosures at the back of this report.
10