Kuwait Financial Centre “Markaz” R E S E A R C H
GCC Outlook 2H11 Semi-annual Review
Of 2010, we said that it “simply lacked any triggers”... well, in that case 2011
seems set to be nothing but triggers (mostly negative). From natural disasters to ongoing financial ones (e.g. Greece, US debt, GCC corporate and sovereign
debt) in addition to political turmoil; the first half of 2011 has not lacked in
terms of headlines, highs or lows.
In our previous note we upgraded our outlook to a mostly Positive view on the region. This was due to many factors including; healthy economic growth,
expected recovery in key sectors like Banking and Real Estate in addition to
healthy valuations. We had adopted a Neutral stance on Dubai (due to persisting debt overhang and a struggling Real Estate sector), Bahrain (due to
lesser corporate recovery), and Saudi Arabia (due to muted banking performance and investor sentiment).
We were wrong on all counts. The political turmoil which swept the region at
the beginning of the year brought down all markets and proved a drag on
earnings. Additionally, various corporate issues (in terms of M&A, debt restructuring etc) in addition to some regulatory and market developments
(Kuwait CMA, MSCI not upgrading of UAE and Qatari markets etc) has dampened investor sentiment across the board.
Previous Recommendations & Market performance
Saudi Arabia Kuwait
Abu Dhabi Dubai Qatar Oman Bahrain
January 2011 Neutral Positive Positive Neutral Positive Positive Neutral
2011 Return (YTD %) -2.25 -12.8,
- 14%* -3.01 -6.39 -3.10 -13.66 -9.93
*Kuwait Weighted Index return
Source: Markaz Research, Stock Exchanges: Tadawul, Kuwait Price & Weighted Indices, ADX, DFM, DSM, MSM, BAX
Note: All indices use a market cap weighted methodology except Kuwait which also uses a Price index. Hence, we have shown both for Kuwait.
For the rest of 2011, we have adopted a rather Neutral view of the markets due mainly to muted earnings growth and lackluster market liquidity and
activity. We remain Positive on Abu Dhabi and Qatar due to positive economic
growth and earnings potential.
Table 1: Current Recommendations
August 2011
Research Highlights: Reviewing the first half of 2011
and projecting the remainder of the year based on an
assessment of various drivers
that specifically affect the performance of GCC stock
markets.
Markaz Research is
available on Bloomberg Type “MRKZ” <Go>
M.R. Raghu CFA, FRM
Head of Research
+965 2224 8280 [email protected]
Layla Al-Ammar
Assistant Manager
+965 2224 8000 Ext: 1205 [email protected]
Kuwait Financial Centre
“Markaz”
P.O. Box 23444, Safat 13095,
Kuwait Tel: +965 2224 8000
Fax: +965 2242 5828 markaz.com
R E S E A R C H August 2011
Kuwait Financial Centre “Markaz”
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A. So what happened in 1H11?
The first half of 2011 saw markets reacting to a myriad of news, mostly local
but also regional and international in origin. Perhaps the most significant trigger during the period was the high political turmoil seen in Q1, beginning
with Egypt in late January and extending to Bahrain and Oman later in the
quarter.
The effects of the unrest on the markets were immediately evident; crude oil prices shot up about 25% from the beginning of the year, CDS rates jumped,
markets declined across the region and various sovereigns and entities saw their credit ratings cut.
An almost instantaneous reaction was seen in the CDS market where rates surged in a matter of days. Saudi 5 Yr CDS rates jumped 80% while Bahrain
almost doubled. MVX levels (a Volatility indicator designed by Markaz Research) saw extraordinary surges in January/February; MVX Egypt shot up
5x while MVX Saudi surged 4x its pre-crisis level.
Figure 1: Volatility Spikes – Pre and Post Crisis
Source: Reuters, Markaz Research
Oil prices jumped 26% in the first quarter of 2011, specifically following the eruption of the Libyan crisis which supplies about 1.8mn bbls/day (mainly to
Europe). Consequently oil prices have remained high, despite Saudi Arabia upping production to an average of 9.5mn bbls/day (June 2011) to
compensate for lost production.
Furthermore, the International Energy Agency (IEA) has approved the
release of 60 mn barrels of reserve to compensate for lost oil production, which should keep oil prices in the $90-$100/bbl range for the rest of the
year.
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Figure 2: S&P Pan Arab Vs Oil Price
Source: Thomson Datastream
Other factors negatively affecting the markets were:
- The Etisalat/Zain deal in which the former was looking to acquire a 46% stake in the latter for around USD 12bn. The saga played out over several
months of negotiations. The due diligence deadline passed in February and
was followed by Etisalat officially walking away from the deal in March. The failed deal has negatively affected the Blue Chips; Etisalat is flat for the year
while Zain has lost 33%.
- The Kuwait Capital Market Authority Law came into effect in March, with
compliance deadlines set for September 2011. The enacting of the Law has caused contention and implementation woes in the investment sector.
Consequently, the market has been trading down on the uncertainty.
- Uncertainty has prevailed in the UAE and Qatar as well as investors awaited
judgment from MSCI as to whether it would upgrade the markets to Emerging status. In June, the Index provider decided to delay judgment to
the end of the year pending further review. Qatar is currently in talks with firms to raise Foreign Ownership Limits (FOL), which is seen as a
prerequisite to MSCI Emerging Market inclusion while the UAE is dealing with system requirements. Upgrading the markets would be a positive for
the two countries but is unlikely to materialize until sometime in 2012.
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B. Looking back
The overall GCC markets as measured by the S&P GCC index have lost 6%
in the YTD period for 2011 after gaining 13% in 2010. All six GCC markets are down for the year; the largest decline is in Kuwait’s Weighted Index,
down 14%, followed by Oman with a loss of 13.6% thus far in 2011.
At the beginning of the year we were Neutral on Saudi Arabia. This was
mainly due to a slowing of economic growth, fueled by stagnant private sector lending. Although earnings growth showed some signs of recovery,
these were not translated to the market which remained skittish and sideways bound.
We turned Positive on Kuwait at the start of 2011 as economic activity picked up while corporate earnings stabilized somewhat, especially in the
financial services arena. Negative implications on our assessment came from valuations which remained stretched in 2010 and early into 2011
coupled with low liquidity and negative corporate news.
We had a mixed view on the UAE at the start of the year; Positive on Abu
Dhabi while Neutral on Dubai. Downside risks came mainly from Dubai, which continues to grapple with a debt overhang of about $30bn over the
next two years while the Real Estate sector and broader economy continue to struggle. We had a positive view on corporate earnings but these did not
materialize as a significant loss was seen in the Real Estate segment (AlDar
Properties) while Telecoms showed weakness.
We were Positive on Qatar due to high economic growth fueled by large-scale government projects to build and enhance all manner of
infrastructure; from Power & Water to IT to Roads and Real Estate as
evidenced by its USD 125 bn National Development Strategy (2011-2016).
We had turned Positive on Oman at the start of the year owing to attractive valuations and strong earnings growth. These failed to materialize
as the Sultanate was negatively impacted by political turmoil. We
maintained a Neutral view on Bahrain (although it is verging on Negative) due to economic forecasts which are holding up for the time being and
neutral earnings growth. Negatives in our forecast center on low market liquidity and geopolitical risks which are denting investor sentiment.
According to Moody’s, the political situation is likely to have damaged economic growth significantly, especially in service sectors such as tourism,
trade and financial services1, although IMF maintains an adequate GDP
growth forecast of 3.1% in 2011 and 5.1.% in 2012. In May, Bahrain’s sovereign credit rating was cut by Moody’s to Baa1 (from A3) with a
Negative outlook due to continued political unrest.
1 GCC Fixed Income Update – 29 May 2011, Markaz
The overall GCC markets as
measured by the S&P GCC index have lost 6% in the YTD
period for 2011 after gaining
13% in 2010
We had a mixed view on the
UAE at the start of the year; Positive on Abu Dhabi while
Neutral on Dubai
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C. What to expect for the rest of 2011 The most important question is what to expect for the remainder of 2011.
We believe that there are host of factors that influence the markets. We have identified six such factors that we feel will directly impact market
performance. Based on its importance, we provide subjective weights to
each of these seven factors (Figure 3). An explanatory description for all the six factors can be found in Appendix 1.
Figure 3: 6-Force Framework
Source: Markaz Research
1. Economic Parameters The overall economic scenario is Neutral for all GCC nations except Abu
Dhabi and Qatar which remain Positive in our view owing to healthy economics and earnings growth potential.
i. Real GDP Growth Forecast
Real GDP across the GCC is likely to show a growth of about 5% in 2011 followed by a growth of between 5%-7% in 2012. Growth in 2011 has been
driven by spiking crude oil prices at the beginning of the year coupled with
some return in private credit and broad money growth in addition to increased government spending.
Growth in Saudi Arabia is expected to show a surge of 7.5% in 2011 due to
high oil revenues, however, this is expected to fall to about 3% in 2012.
Kuwait GDP growth is expected to remain stable at about 5% for 2011/2012. Qatar, which has had the world’s highest growth rates over the
last few years is expected to show another year of double digit growth at 20% for 2011 before dropping to the more sustainable 7% in 2012.
The overall economic scenario is Neutral for all GCC nations
except Abu Dhabi and Qatar
which remain Positive
Real GDP across the GCC is likely to show a growth of
about 5% in 2011 followed by
a growth of between 5%-7% in 2012
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ii. Inflation Both Saudi Arabia and Kuwait saw jumps in inflation during 2011 due to
government grants and subsidies; according to the IMF, CPI is expected to
show an increase of 6% for each country in 2011. This should moderate in 2012 as economic growth slows; coming in at 5.6% for Saudi Arabia and
3% for Kuwait. The remaining GCC countries should see inflation stay in the 3%-4% range.
iii. Fiscal Balance Fiscal balances are expected to show a jump in 2011 due to high oil prices
at the beginning of the year (crude oil was up about 25% in the first quarter) which boosted coffers before declining in 2012 as governments
engage in increased public spending as per development plans.
Saudi fiscal balance is expected to decline from 13% of GDP in 2011 to 9%
in 2012. Kuwait’s fiscal balance as a % of GDP is expected to stay in the 20%-25% range in 2012.
iv. Current Account Balance
According to the IIF, the consolidated current account balance of the GCC is
estimated to reach over $150 bn in 2011 (from $124 bn in 2010) on account of a positive commodities environment. As a % of GDP, Kuwait
continues to maintain the highest ratio, at 30% expected for 2012 while Saudi Arabia would see its Current Account Balance fall from 20% of GDP in
2011 to 14% in 2012.
v. Broad money growth
Money supply growth remained sorely below average in 2010, except in the case of Qatar which saw M2 grow at 23% for the year while other GCC
countries saw growth as low as 3% (Kuwait) to 11% (Oman and Bahrain).
However, some signs of pick up are being seen as of 1Q11; on a YoY basis
Saudi Arabia and Qatar M2 has grown 15%, followed by UAE at 12%. There is still a bit of a lag in the case of Kuwait with 1Q11 M2 growth at 5% YoY.
Table: 2 – Economic Parameters Summary
Overall Scores - Economic
Weights Saudi Arabia
Kuwait UAE Qatar Oman Bahrain
Economic Growth
40% Neutral Positive Positive Positive Positive Positive
Inflation 20% Neutral Positive Positive Positive Positive Positive
Fiscal Balance
20% Neutral Positive Neutral Neutral Positive Negative
Current Acc. Balance
10% Neutral Positive Neutral Positive Neutral Neutral
Broad Money Growth
10% Positive Neutral Positive Positive Neutral Neutral
Assessment Neutral Positive Positive Positive Positive Neutral
Source: Markaz research
Both Saudi Arabia and Kuwait saw jumps in inflation during
2011 due to government grants and subsidies
On a YoY basis Saudi Arabia
and Qatar M2 has grown 15%, followed by UAE at 12%
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2. Valuation Attraction
Normalizing earnings growth coupled with poor market performance is stretching valuations in some cases. GCC corporate earnings came in at
USD 13.78 bn in 1Q11, a 19% YoY growth. The highest growth is expected from the UAE, recovering from losses sustained in the Real Estate sector in
2010.
We expect full year net profit of around USD 48 bn, a 15% annual growth.
Consequently, the GCC-wide PE should stay in the 14x-15x range, on par with 14x for MSCI EM and 15x for the S&P 500.
Kuwait is likely to remain stretched at about 20x as earnings normalize
while market conditions remain lackluster.
Table 3: Valuation Factors
P/E Saudi Arabia Kuwait UAE Qatar Oman Bahrain
2010 16 20 11 12 12 12
2011e 16 21 13 11 9 16
P/B Saudi Arabia Kuwait UAE Qatar Oman Bahrain
2011 1.9 1.5 1.1 2.1 1.7 1.1
Dividend Yield
Saudi Arabia Kuwait UAE Qatar Oman Bahrain
2010 2.4 3.5 3.1 2.9 5.1 2.4
2011 3.2 4.3 3.4 3.3 4.7 4.1
Assessment Neutral Neutral Positive Positive Positive Positive
Source: Markaz Research
3. Earnings Growth Potential
In our January 2011 report, we expected to see an overall growth of 23%
in GCC corporate earnings in 2011, fueled by a turnaround in Kuwait and a
return to positive growth in Oman and the UAE.
In 1Q11, GCC earnings came in at USD 13.78 bn, a 19% YoY growth. Using an adjusted average of the last four quarters, we expect full year 2011 net
profit of USD 48 bn, a 15% annual growth, which would underperform our
forecast.
Oman and Bahrain have suffered the implications of political turmoil in the two countries at the start of the year. Oman and Bahrain both saw 1Q11
earnings fall, by 26% and 10%, respectively. Financial Services declining 66% YoY, in addition to a 20% decline in Telecom earnings brought down
Q1 earnings in Oman; however, Banking provided some support,
maintaining a YoY growth of 10%.
Telecom was the main drag in Bahrain, down 28%, while Financial Services were down 72%.
Consequently, we expect full year earnings growth to decline by 5% in Oman.
Normalizing earnings growth
coupled with poor market performance is stretching
valuations in some cases
In 1Q11, GCC earnings came in
at USD 13.78 bn, a 19% YoY
growth
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Kuwait saw some extraordinary income in 2010, mainly pertaining to the Zain/Bharti Airtel deal which inflated earnings. Consequently, our
expectation of a full year 2011 net profit of USD 5.6 bn would result in a
3.3% decline in earnings. However, if we remove extraordinary earnings from the picture, the 2011 forecast would actually be a growth of about
80%, provided Financial Services and Real Estate resume positive profit. Figure: 4 – Consolidated GCC Earnings Trend (USD Mn)
Among sectors, banks are expected to show a growth of 12% in 2011 (versus our initial forecast of 30%) due to a more muted recovery than we
had expected (Figure 5). Telecoms managed to push through an impressive 36% annual growth in 2010 (albeit due to booking of extraordinary
investment-related profits from Zain). However, 2011 is looking to be flat
for the sector, when excluding extraordinary income.
The commodities sector received a boon in Q1 as crude prices spiked on political turmoil in the region. 1Q earnings gained 51% to USD 3.3 bn; we
expect full year growth to even out to about 11%. Figure 5: Consolidated GCC Earnings Trend (USD Mn)
Among sectors, banks are expected to show a growth of
12% in 2011
The commodities sector
received a boon in Q1 as crude
prices spiked on political turmoil in the region
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At the beginning of the year, we were quite positive on all countries in terms of earnings growth due to several rebound stories. However, despite
a more or less positive Q1; we have a Neutral view on Saudi Arabia, Kuwait
and Bahrain earnings going forward. We maintain positive views on UAE and Qatar due to a turnaround story in the former (Real Estate) and healthy
growth in the latter (Table: 4).
4. I4. Investor Sentiment We have used the Bayt’s Consumer Confidence Index to determine investor sentiment (Table 5). The Index is survey based and reveals the economic
well–being of a country. 2010 saw a fluctuation in consumer confidence across the GCC; rising in 1Q before declining through 3Q.
The first quarter of 2011 has seen confidence rise substantially in Saudi, by
about 13% YTD. Kuwait and UAE have seen respectable increases as well however; political turmoil in Oman and Bahrain brought confidence down.
Table 5: Bayt Consumer Confidence Index
Saudi Arabia Kuwait UAE Qatar Oman Bahrain
May-08 517 522 549 551 580 544
Jul-08 504 541 497 549 568 515
Nov-08 504 520 475 557 547 526
Feb-09 498 413 379 496 528 454
May-09 540 503 481 523 605 514
Aug-09 562 567 539 584 652 545
Dec-09 569 549 509 579 623 557
Mar-10 553 554 537 577 643 568
Jun-10 533 529 534 589 608 588
Sep-10 539 569 537 583 587 470
Dec-10 542 542 551 600 646 532
Mar-11 612 586 588 612 639 524
YTD 13% 8% 7% 2% -1% -2%
Assessment Positive Positive Positive Neutral Negative Negative
Source: Bayt.com, Markaz Research
Table 4: Earnings Growth Potential
Earnings Growth
Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Overall GCC
2003 64% 105% 46% 73% 0% 123% 72%
2004 48% 21% 72% 65% 150% 95% 48%
2005 45% 107% 137% 72% 26% 6% 72%
2006 17% -26% 8% 25% 17% 21% 5%
2007 7% 74% 38% 22% 48% 34% 30%
2008 -46% -97% -7% 31% -15% -62% -42%
2009 26% 109% -26% 17% -10% 7% 4%
2010E 34% 654% -53% -18% 26% 24% 12%
2011F 1% -3% 111% 12% -5% 3% 15%
Assessment Neutral Neutral Positive Positive Negative Neutral
Source: Markaz Research
Despite a more or less positive Q1; we have a Neutral view on
Saudi Arabia, Kuwait and
Bahrain earnings going forward
The first quarter of 2011 has seen confidence rise
substantially in Saudi, by about 13% YTD
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5. Geopolitical Developments
We have used two of Economist Intelligence Unit’s ratings – Political risk and Economic Structure. Economic structure risk ratings for all GCC
countries have remained constant through 2009/2010. (See Section A for closer look at geopolitical developments in 1H11).
Given the political turmoil at the beginning of 2011; Oman and Bahrain’s
rating were downgraded in terms of Political Risks. Oman was brought to
BB while Bahrain down to B. However, Economic Structure Risk has remained the same despite the upheaval.
Table 6: Risk Ratings
Political Risk Saudi Arabia Kuwait UAE Qatar Oman Bahrain
2002 C C C C B C
2003 D C C B B C
2004 D C C B B C
2005 D C C B B C
2006 B BBB BBB BBB BBB BB
2007 B BBB A BBB BBB BB
2008 B BBB A BBB BBB BB
2009 B BB BBB BBB BBB BB
2010 B BB BBB BBB BBB BB
2011 B BB BBB BBB BB B
Economic Structure Risk
Saudi Arabia Kuwait UAE Qatar Oman Bahrain
2002 B B B B B B
2003 B B B B C B
2004 B B B B B B
2005 B B B B B B
2006 BBB BBB A A A BBB
2007 BBB BBB BBB A A BBB
2008 BBB BBB BBB A A BB
2009 BBB BBB BB A A BB
2010 BBB BBB B A BBB BB
2011 BBB BBB B A BBB BB
Assessment Positive Positive Positive Positive Neutral Neutral
Source: EIU, Markaz Research
Given the political turmoil at the beginning of 2011; Oman
and Bahrain’s rating were downgraded in terms of
Political Risks
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6. Market Liquidity
Liquidity has been on a downward trend for the last four years, culminating in just USD 296 bn in 2010 as opposed to a high of USD 1.6 tn back in
2006.
Value traded has picked up somewhat in 2011; 1H11 value traded came in at USD 194 bn, a 10% YoY growth. This was led by Saudi Arabia, where
value traded in the first half of the year grew 28% YoY to USD 155 bn.
Qatar was the only other GCC country to show a YoY growth in liquidity, at 33%. Kuwait registered a 47% YoY decline in 1H11 value traded to USD
13.5 bn.
Figure 6: Value Traded Trends (USD Bn)
Given the positive YoY growth in liquidity so far this year, we have a
Positive view on the same for Saudi Arabia and Qatar while maintaining our
Negative view on other markets.
Table 7: Market Liquidity
Value Traded ($m)
Saudi Arabia Kuwait UAE Qatar Oman Bahrain
CAGR (2001-2005)
136% 39% 214% 118% 45% 51%
Growth - 2005 133% 86% 663% 345% 85% 54%
Growth - 2006 46% -35% -9% -29% -25% 116%
Growth - 2007 -58% 103% 20% 48% 86% -39%
Growth - 2008 -23% 2% -3% 61% 70% 120%
Growth - 2009 -36% -43% -54% -47% -33% -77%
Growth - 2010 -40% -42% -58% -28% -43% -39%
2011 YoY 28% -47% -43% 33% -8% -26%
Assessment Positive Negative Negative Positive Negative Negative
Source: Zawya, GulfBase
1H11 value traded came in at
USD 194 bn, a 10% YoY growth
Kuwait registered a 47% YoY
decline in 1H11 value traded to
USD 13.5 bn
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D. Country Views Saudi Arabia – Neutral
We maintain a Neutral outlook on Saudi Arabia for 2H11 due to moderate
economic activity (especially inflation and the fiscal balance) in addition to
moderate earnings growth. Positive factors arise in valuation and market liquidity which has been picking up.
The 2011 Saudi fiscal budget is expected to run a deficit of USD 10 bn, with
spending forecasted at USD 154.7 bn (7% lower than actual 2010
expenditures of USD 167 bn). The budget is expected to show increased infrastructure spending. The Kingdom’s $385 bn, 5 yr development plan is
expected to spur economic activity by encouraging construction/real estate projects, which in turn should spur lending by banks. The program includes
housing, ports, and upgrading the educational system.
Additionally, the government has ramped up spending on welfare programs
and Saudization plans in order to quell civil unrest and address its unemployment issues. Consequently, the fiscal balance is expected to drop
from 13% of GDP in 2011 to 9% in 2012.
As for corporate earnings, these are expected to be flat in 2011 versus a
30% growth in 2010 (which was largely driven by Commodities). We expect support to come from the Banking sector, which we expect will grow at
10% in 2011 while slower growth in telecoms may be a drag on overall earnings. Investor sentiment (as measured by Bayt.com) was up 13% as of
March 2011 while the geopolitical outlook (as measured by EIU) remains
stable despite some signs of unrest at the beginning of the year.
As previously mentioned, market liquidity is up in the Kingdom. Value Traded came in at USD 155 bn for 1H11, a 28% YoY growth, which would
translate to over USD 300 bn if the pace keeps up to the end of the year.
Kuwait – Neutral
We have downgraded our outlook on Kuwait from Positive to Neutral for the
remainder of 2011 due to poor market conditions, more muted earnings growth and continued weakness in market liquidity.
The economy is expected to grow by 5.3% in 2011 following a growth of 2.3% in the previous year, aided by high oil prices and increased
government spending. This growth is expected to be maintained through 2012. Inflation, which is expected to have jumped to 6.1% in 2011, due to
subsidies and grants, is forecasted to come back down to 2.7% in 2012. This is below the long-term average of about 4%.
Fiscal and Current Balances are expected to remain the highest in the Gulf, at 23% and 37% of GDP, respectively, in 2011 and holding steady through
2012.
Corporate earnings in Q1 were fairly positive; aggregate net profit was at
USD 2.14 bn, boosted by extraordinary telecom earnings and a return to positive results for the financial sector. However, we expect full year 2011
results to come in at USD 5.6 bn, a 3% decline from last year.
We have a Neutral outlook on Saudi Arabia for 2011 due to
moderate economic activity
We have downgraded our
outlook on Kuwait from
Positive to Neutral for the remainder of 2011
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UAE – Abu Dhabi: Positive, Dubai: Neutral
We remain Positive on Abu Dhabi while being Neutral on Dubai. The
economy grew at an estimated 2.4% in 2010 and is expected to show a growth of 3.3% in 2011 followed by 3.8% in 2012. Inflation is expected to
jump to 4.5% in 2011 versus 2% in 2010. The geopolitical and regulatory arenas are considered to be stable. However, lack of liquidity remains a
problem as value traded in the UAE continues to dry up.
Corporate earnings are expected to rebound in 2011 after the Real Estate
sector suffered a significant loss in 2010 (due to Aldar Properties). 1Q11 was a little weak, aggregate net profit was at USD 2.8bn, a 1% decline.
However, a return to profitability in the Real Estate segment should push
aggregate net earnings in 2011 to USD 10.2 bn. We expect banks to show a net profit of USD 5.36bn, a 17% annual growth.
Qatar – Positive
We remain Positive on Qatar owing to its high economic growth prospects,
healthy banking sector and heavy government support in addition to
increasing liquidity.
The economy is expected to show another year of double-digit growth, boosted to a forecasted 20% in 2011 (due to high commodity prices) before
falling back to a more sustainable 7% in 2012. Inflation remains well under
control despite the growing economy, remaining at a steady 4% through 2012.
1Q11 net profits came out to USD 2.4bn, a 23% YoY growth. We expect
corporate earnings to continue growing at a healthy pace to USD 8.5bn by the end of the year, which would translate to an annual growth of 12%.
Bucking the GCC trend; Qatar value traded grew in 1H11 to USD 12.95bn, a 33% YoY growth. Should the government be successful in raising Foreign
Ownership Limits (a prerequisite for MSCI Emerging Market inclusion), we could see liquidity increase significantly in the coming year.
Oman – Neutral
We have downgraded our view on Oman from Positive to Neutral due to the political situation which impacted corporate earnings, sentiment and
geopolitical perception.
Real GDP is expected to have grown at 4.7% in 2010 to decline to 4.4% in
2011 and down to about 4% in 2012 as economic growth slows. Consequently, inflation is also expected to decline through the years; it is
forecasted at 3.5% in 2011 before declining to 3% in 2012. Given healthy oil prices, the government balance is expected to remain quite healthy, at
about 17% of GDP in 2011 before declining slightly to 14% in 2012.
As previously mentioned, corporate earnings in Oman were impacted by the
political turmoil at the beginning of the year, coming in at USD 338 mn, a 26% YoY decline. We expect some weakness to remain throughout the
year, specifically in the financial services and Telecom sectors, with full year
net earnings at USD 1.5 bn, a 5% annual decline versus our beginning of the year outlook, which forecasted a 21% increase.
We have segregated our UAE
outlook and are Positive on
Abu Dhabi while being Neutral on Dubai
Bucking the GCC trend; Qatar value traded grew in 1H11 to
USD 12.95bn, a 33% YoY growth
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Bahrain – Neutral
Our outlook on Bahrain is Neutral but verging on Negative due to weakened
corporate earnings outlook in addition to a less than favorable geopolitical environment which is negatively impacting investor sentiment and market
liquidity.
From a 24% annual growth in 2010 we expect FY 2011 corporate earnings
to grow just 3% in 2011 due to financial services weakness. Q1 results came in at USD 315 mn, a 10% YoY decline.
The Final Analysis
Our view on market attractiveness is summarized in the table below. As per
the six force framework assessment, we are positive on Abu Dhabi and Qatar while remaining Neutral on all other markets for the rest of the year
(Table 8).
Table: 8 – Final Ranking
Our outlook on Bahrain is Neutral but verging on
Negative
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Appendix 1: Key Events
January (-2.6%2)
- Egyptian protests erupted over the last week of January; the Egyptian market shed close to 20% before being closed, while S&P, Fitch and Moody all downgraded Egypt credit and placed it on
Negative outlook. Kuwait, Saudi and UAE markets, which all have close ties to Egypt, saw their stocks fall in the final week of the month.
- The 11 Arab bourses3 lost nearly USD 45 bn between 25th and 31st of January.
- Saudi 5 Yr CDS–one of the world’s 10 safest debt issuing sovereigns – rocketed more than 46% on the 28th of Jan and ended at around 110bps, up from 75bps. Qatar saw its CDS rate shoot up by 15% the
same day, ending at 102bps while Dubai CDS inched up to 453 bps before declining to 425 by month end.
February (-6.5%)
- Political unrest spread from Egypt and Tunisia to Libya, Bahrain, Oman and portions of the Levant. - CDS rates continued to rise; Saudi 5 Yr CDS rocketed more than 46% on the 28th of Jan and is up
81% for the year. Dubai 5 yr CDS was up 7% for the month. - Bahrain 5 Yr CDS rates are up 65% YTD as unrest continues. Moody’s has placed the Kingdom under
review for a possible downgrade on its A3 rating. S&P has already cut Bahrain’s Long term rating to A-
and Short-term to A-2. - The Zain/Etisalat deal continued to dominate headlines in Kuwait, crowding out most news in the
country. The telecom firm rejected three bids for its Saudi unit; from Kingdom Holding, Batelco and a consortium of investors, which brought down blue chips on the KSE. The February 28th due diligence
deadline passed without comment from Zain or Etisalat, which prompted a rapid sell-off as investors
considered the deal to be scrapped.
March (6.06%)
- The Egyptian market reopened on the 23rd of March, primarily to avoid exclusion from MSCI indices for lack of trading, after being closed for nearly two months following political unrest earlier this year.
- S&P cut Bahrain’s rating by two notches to BBB (long-term foreign currency) with a Negative outlook.
- The arrival of foreign troops into Bahrain in mid-March caused the CDS spread to jump 46 bps to a 20-month high as the government instituted a 3 month State of Emergency.
- Kuwait Investment Authority announced a plan to inject over USD 3.5 bn into the local property market through a portfolio to be managed by Kuwait Finance House.
- The Kuwait Capital Market Authority regulations came into effect during the month.
- Etisalat officially walked away from its proposed USD 12 bn offer for a 46% Zain stake, citing everything from regional unrest to a divided Zain board and due diligence issues.
April (3.16%)
- According to the Institute of International Finance (IIF), the GCC will see a combined current account
surplus of over USD 290 bn this year, more than double that of 2010, as oil prices strengthen.
- The Kuwait government resigned in April, lending uncertainty to the market in the face of the Kuwait Development Plan implementation and pending approval for the second plan’s budget.
2 MSCI GCC Index monthly return 3 GCC markets (7), plus Egypt, Morocco, Jordan, Lebanon
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May (-1.72%)
- Bahrain’s sovereign credit rating was cut by Moody’s to Baa1 (from A3) with a Negative outlook due to
continued political unrest. According to the rating agency, these events are likely to have damaged economic growth significantly, especially in service sectors such as tourism, trade and financial
services4. - During the month, the Kuwait market was hit by speculation that the Zain deal to sell its stake in Zain
Saudi Arabia to Batelco and Kingdom Holding for USD 950 mn was hitting roadblocks. Batelco and
Kingdom Holding stated that negotiations were ongoing and rumors of difficulties were “unsubstantiated and speculative in nature.”
June (-1.99%)
- In response to the IEA measure of releasing 60 mn barrels of crude oil to compensate Libyan
production, Kuwait Supreme Petroleum Council said that it expected oil prices to settle in the USD 90 – USD 100 per barrel range for the rest of 2011, which could put a dent in GCC growth for the year.
Despite the IEA move, Saudi Arabia pumped an average of 9.5 mn barrels a day in June. - MSCI upgrading of the UAE and Qatar to Emerging Market status was put on hold until the end of
2011 pending further review. Increased Foreign Ownership Limits (FOL) are seen as a vital component
to inclusion, which is more of an issue in Qatar versus the UAE. Qatar is currently in talks with various firms to consider raising the FOLs.
4 GCC Fixed Income Update – 29 May 2011, Markaz
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Appendix 2: Index Movers Given the high degree of concentration in GCC markets, there are a handful of companies which, due to
their size and scope of influence, are pivotal in moving the overall market. We have identified 8 such firms and present a short brief on each below;
Sabic
Code: 2010.SE |Current market Price: SAR 106 | Mcap: USD 85 Bn
Saudi Basic Industrial Corporation (SABIC) is one of the top 10 largest petrochemical manufacturers in the
world. SABIC has 6 main strategic business units which include: Basic Chemicals, Intermediates, Polymers, Specialized Products, Fertilizers, and Metals. According to Zawya, SABIC is the most profitable petrochemical
company in the world and it is worthy to note that the Government of KSA owns over 70% of SABIC which
will ensure cheap feedstock and continuous support in the foreseeable future.
Table 1-Historical Financial Highlights
All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11 YoY
Income Statement
Revenues 20,815 22,963 33,570 40,115 27,414 40,526 11,967 31%
COGS 12,015 13,593 20,816 27,942 19,802 27,580 7,853 34%
Net profit 5,096 5,398 7,188 5,860 2,414 5,741 2,051 42%
Balance Sheet
Total Assets 36,429 44,313 67,492 72,288 78,965 84,690 89,139 10%
Total Liabilities 19,846 24,926 43,245 44,908 50,169 52,481 54,879 9%
Total Shareholder's Equity
16,583 19,387 24,247 27,380 28,796 32,209 34,260 13%
Sources: Reuters, Zawya and Gulfbase
On a historical view, SABIC continues to post positive growing numbers and is aiming to reach the scheduled 2020 vision of doubling output and sales. Net income bounced back in 2010 after a poor 2009, totaling USD
5.74 bn, more than double that of the previous year, as Revenues grew by 48% to USD 40.5bn.
High commodity prices in 1Q11 boosted earnings further; net income was at USD 2bn, 42% high than 1Q10,
as Revenue grew by 31% YoY to USD 12 bn.
Looking forward:
2011 remains healthy in terms of commodity prices which should allow for positive results for SABIC.
Analysts are expecting positive earnings growth for the company and have issued Buy/Overweight recommendations.
Consensus Estimate Table (2011 f)
Annual (USD mn) NCB Capital EFG Hermes Nomura Al Rajhi Capital
Jun-11 Jul-11 Jun-11 May-11
ROA: 8.70% - - -
ROE: 22% 21.60% - 21.20%
Revenue: 50,794 49,324 50,216 49,169
Net Profit 8,331 7,269 8,076 6,698
EPS(SAR) 10.41 9.3 10.1 9.09
Growth 45% 27% 41% 17%
Fair value 128.6 133 145 131.2
Recommendation Overweight BUY BUY Overweight
Sources: Reuters Knowledge
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Al Rajhi Bank Code: 1120.SE |Current market Price: SAR 74.5 | Mcap: USD 29.7 Bn
Al Rajhi Bank is the largest lender in the Kingdom with a financing book worth USD 33 bn as of 1Q11. Al Rajhi offers a wide range of commercial banking and investment services complying with Islamic law.
Ownership is stable with AlRajhi family owning 39.9%. A stable ownership structure especially for banks in
the region gives positive signals to investors, due to management stability and continuity, thus, strategies are usually followed through.
Historical Financial highlights-
All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11 YoY
Income Statement
Income from Banking activities 1,516 2,042 2,171 2,512 2,613 3,171 592 1.91%
Operating Expense 484 521 647 752 793 509 93 -2.64%
Net profit 1,502 1,947 1,720 1,739 1,804 1,806 453 0.96%
Balance Sheet
Financing (Gross) 21,430 24,076 28,210 38,188 37,330 39,805 33,134* 5%
Total Assets 25,343 28,056 33,312 43,543 45,516 49,292 54,143 18%
Deposits 19,039 19,494 23,927 31,097 32,764 38,151 42,784 22%
Total Liabilities 21,752 22,674 27,015 36,338 37,854 41,207 46,404 20%
Total Shareholder's Equity 3,592 5,381 6,297 7,205 7,662 8,085 7,738 4.2%
*Net Source: Reuters Knowledge and Zawya
2010 did not see the banking sector recover as well as most would have hoped. Prudential provisioning among the banks led to mitigated net profit growth. Al Rajhi’s bottom line was flat in 2010 and into Q1,
coming in at USD 453mn.
The bank’s Financing book is at USD 33bn, 5% higher than the same quarter in 2010 while Deposits were
up 22% in the same period to USD 42bn, giving a Financing to Deposit ratio of 77%.
Looking forward
The Saudi banking sector is expected to perform significantly better this year due to lower provisioning and healthier economic activity.
Al Rajhi Bank net profit expectations range from -1% to 16% growth for 2011 though should Q2 be as
muted as Q1, these estimates may subsequently be tempered.
Consensus Estimate Table (2011f)
Annual (USD mn) Global Inv
House NCB Capital Taib
Jul-11 Jun-11 Jun-11
ROA: 4.00% 3.80% 3.70%
ROE: 27.70% 23.50% 22%
Revenue: 3,347 3,252 3,097
Net Profit 2,089 1,789 1,867
EPS(SAR) 5.2 4.5 4.67
Growth (EST)5 16% -1% 3%
Target price (SAR) 70.3 84.9 80
Recommendation HOLD Overweight Neutral
Source: Reuters Knowledge
5 Based on Projected 2010 net income
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Zain Group Code: ZAIN; Current market Price: KWD1.02; Mcap: USD16Bn
Zain group was established in 1985 and was the first telecommunication company in the GCC. Zain started its robust expansion in the MENA region, with operations in 6 ME countries and 13 African counties including
Sudan. Earlier this year Zain sold the majority of its African assets to focus on regional expansion.
Historical Financial highlights- All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11 YoY
Income Statement
Gross Revenues 2,119 4,744 6,133 7,324 4,618 4,942 1,186 -2%
COGS 332 1,004 1,394 2,088 1,190 1,297 316 2%
Net profit 665 1,079 1,172 1,177 713 3,886 256 36%
Balance Sheet
Total Assets 7,519 12,764 15,967 20,167 20,829 13,565 14,540 -30%
Total Liabilities 3,183 7,812 10,183 12,052 12,432 3,886 5,050 -59%
Total Shareholder's Equity 4,335 4,952 5,784 8,115 8,397 9,678 9,490 11%
Source: Zawya
Zain booked the earnings from its USD 10.7bn sale of African assets to India’s Bharti Airtel resulting in net earnings of USD 3.88bn for 2010.
Q1 results came in at USD 1.2bn in revenues, a 2% YoY decline, while net profits were up 36% YoY to USD
256 mn.
Looking forward
With the sale of its African assets, a new strategy has arisen; in the past, Zain wanted to a be a strong
global player and compete head to head with the big names in telecommunication, however now, Zain plans
to focus on the regional segment were ARPU’s are still high.
Broker recommendations remain Neutral given current market conditions.
Consensus Estimate Table (2011f)
Annual (USD mn) Global Inv House SICO
Jun-11 May-11
ROA: 9.70% 8.60%
ROE: 12.60% 12.90%
Revenue: 4,892 5,367
Net Profit 1,163 1,137
EPS(KWD) 0.08 0.08
Growth [1](EST) NM NM
Target price (KWD) 1.00 1.06
Recommendation HOLD HOLD
Source: Reuters Knowledge
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Industries Qatar Code: IQCD.DSM | Current Market Price: QAR 139.5| Mcap: USD21Bn
Industries Qatar was established in 2003, the main objective of the company is to act as a holding company, for different industrial corporations, including; Qatar Steel Company Limited (QASCO), an integrated steel
manufacturer; Qatar Petrochemical Company Limited (QAPCO), a producer and seller of ethylene, polyethylene, hexane and other related products; Qatar Fertilizer Company (QAFCO), a producer and seller
of ammonia and urea, and Qatar Fuel Additives Company Limited (QAFAC), which is engaged in the
production and export of methyl-tertiary-butyl-ether and methanol.6
Historical Financial highlights-
All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11
Income Statement
YoY
Revenue 1807 2137 2561 4048 2651 3386 1099 48%
COGS 707 980 1108 1920 1581 1758 492 27%
Net Operating profits 853 899 1235 1853 916 1416 544 79%
Net income 883 994 1369 1998 1339 1531 575 72%
Balance Sheet
Assets 3345 4088 5532 7537 7447 8762 8582 6%
Liabilities 714 1,010 1,733 2,476 2,130 2,789 2,862 11%
Shareholder’s Equity 2,570 3,042 3,754 5,009 5,230 5,972 5,719 3%
Source: Zawya
2010 net income was at USD 1.5bn, a 14% annual growth. High commodity prices have boosted Q1 earnings as well, with net profit at USD 575mn, a 72% YoY growth, driven by Q1 Revenue growth of 48%.
Looking forward
High commodity prices are expected to hold through the remainder of the year, giving a boost to industrials across the region.
Brokers expect high earnings for Industries Qatar in 2011, ranging from 21% - 60% growth on the back of high commodities and healthy economic growth.
Consensus Estimate Table (2011f)
Annual (USD mn) EFG Nomura TAIB
Jul-11 Jun-11 May-11
ROA: 21.00%
ROE: 37.00% 30.60%
Revenue: 4,389 4,729 4,111
Net Profit 2,232 2,440 1,857
EPS(QAR) 14.8 16.2 12.3
Growth Est 46% 59% 21%
Target price (QAR) 170 142 164
Recommendation BUY Underperform Overweight
Source: Reuters Knowledge
6 Excerpt from www. gulf base.com on Industries Qatar
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Qatar National Bank Code: QNBK | Current Market Price: QAR 143.3| Mcap: USD25Bn
Qatar National Bank (QNB) was established in 1964 and is the largest lender; currently QNB employs 1330 personnel, serving 65 local branches and 9 international branches. Its business units include; full range retail
banking, treasury, Wealth management, corporate finance and Islamic finance solutions which are offered to individuals, corporations and Governments.
Historical Financial highlights-
All Figures in USD Mn 2005 2006 2007 2008 2009 2010 2Q11 Income Statement
YoY
Interest income 597 933 1,270 1,679 1,756 2,166 655 4%
Interest expense 244 493 784 990 846 890 184 -29%
Provisions - - - 68.03 77.26 147 57 115%
Total Operating profits 604 724 936 1362 1533 1411 423 21%
Net income 422 549 689 1003 1154 1566 497 26%
Balance Sheet
Gross Loans & Advances 8,648 12,700 18,150 27,488 29,898 29,136 41,886 30%
Assets 13,753 19,688 31,409 41,728 49,239 61,343 72,388 42%
Deposits & CD's 10,016 14,267 20,380 26,092 29,895 38,469 53,900 68%
Liabilities 11,360 17,364 27,603 37,158 43,755 54,687 61,856 37%
Shareholder’s Equity 2,393 2,323 3,806 4,570 5,431 6,656 10,532 82%
Source: Zawya
In 2010, QNB saw a 36% growth in its bottom line as Interest Income was up 23% and despite a 90%
increase in provisioning. Loans growth was rather flat while Deposits were up 29% to USD 38.5bn.
In 2Q11, the bank saw a robust 30% YoY growth in lending coupled with a 68% YoY growth in Deposits, giving a Loans to Deposit ratio of 78%. Additionally, the bank saw a 26% YoY growth in net profit to USD
423mn.
Looking forward
Given the high degree of government support afforded the bank, in addition to its ranking in the Qatari banking sector, analysts are positive on the bank for the rest of the year. Net profit growth forecasts range
from flat to around 25% which is in line with performance for the year thus far.
Consensus Estimate Table (2011f)
Annual (USD mn) Beltone EFG-Hermes NBK Capital
Jul-11 Jul-11 Jul-11
ROA: 2.80% 2.78% 2.80%
ROE: 21.70% 22.12% 21%
Revenue: 2,423 2,407 2,626
Net Profit 1,566 1,859 1,946
EPS(QAR) 10.54 10.64 11.89
Growth7](EST) 0% 19% 24%
Target price (QAR) 163.7 176.4 156.3
Recommendation Outperform BUY Outperform
Source: Reuters Knowledge
7 Based on projected 2010 Projected numbers.
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NBK Code: NBK |Current market Price:KWD1.160| Mcap: USD17Bn
National Bank of Kuwait (NBK), established in 1952, in the state’s largest lender; today NBK employs 4,900 personnel, serving 69 local branches and 17 international branches. The bank offers a wide array of
products including, retail banking, Corporate banking, wealth management, structured and trade Finance. Moreover, NBK has a dedicated investment center, which offers portfolio management, fund management
and brokerage services.
Historical Financial highlights-
All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11 YoY
Income Statement
%
Interest income 1,160 1,676 2,132 2,387 1,907 1,762 445 -5%
Interest expense 473 867 1,222 1,108 593 450 103 -22%
Net interest income 687 809 910 1,279 1,314 1,312 342 2%
Provisions 87 113 87 295 137 43 24 NM
Net profit 721 887 959 891 925 1,103 295 6%
Balance Sheet
Total Assets 21,234 27,330 42,115 43,382 44,973 47,163 50,857 9%
Loans 11,788 15,104 20,748 24,258 27,263 28,714 28,927 2%
Deposits 13,799 15,271 19,205 19,340 23,019 23,346 26,182 13%
Total Liabilities 18,580 23,641 35,929 37,698 38,567 39,054 43,049 8%
Total Shareholder's Equity
2,634 5,381 6,297 7,205 7,662 8,108 7,808 19%
Source: Zawya
Net income for the bank topped USD 1bn in 2010 despite flat top-line performance, aided by a 69% decline
in provisions to USD 43mn. Loans were up 5% for 2010 while Deposits grew just 1%.
In 1Q11, provisions were back up, coming in at USD 24mn, over half the total for 2010. Interest Income
was down 5% while Interest Express shed 22% resulting in a 2% increase in Net Interest Income to USD 342mn. Net Income gained 6% YoY to USD 295mn. Lending was up 2% while Deposits were up 13%.
Looking forward
Analysts are Neutral with an optimistic bias on the stock. Brokers expect 2011 net income growth of around 4%, which is considerably lower than the 19% seen in 2010.
Consensus Estimate Table (2011f)
Annual (USD mn) Beltone EFG-Hermes Taib
Jun-11 Jun-11 Jun-11
ROA: 2.40% 2.35% 2.50%
ROE: 14.70% 13.50% 16.40%
Revenue: 1,949 2,347 1,989
Net Profit 1,152 1,134 -
EPS(KWD) 0.07 0.11 NA
Growth (EST) 4% 3% NA
Target price (KWD) 1.4 1.22 1.25
Recommendation Outperform Hold Hold
Source: Reuters Knowledge
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National Bank of Abu Dhabi Code: NBAD.ADX| Current Market Price: AED11.00 |Mcap: USD8.59Bn
In 1968 NBAD was established to act as the government bank and to some extent the central bank of Abu Dhabi, however, after the formation of the currency board in 1975; NBAD started serving the public through
3 main segments, Investment banking, retail banking and corporate banking (which includes international banking unit). NBAD is the second largest lender in the UAE and the largest in Abu Dhabi; it currently
employs 3200 personnel serving local and international branches (23).
Historical Financial highlights-
All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11 YoY
Income Statement
%
Interest income 1,049 1,486 1,929 2,010 1,823 1,946 507 12%
Interest expense 592 936 1,274 1,028 614 580 154 21%
Net Interest Income 457 550 655 982 1,209 1,366 353 9%
Provisions 42 26 11 195 383 328 99 62%
Net income 702 573 682 822 822 1,003 252 -10%
Balance Sheet
Gross Loans & Advances 14,243 16,390 22,478 30,638 35,714 38,361 40,192 10%
Assets 22,777 27,489 37,961 44,828 53,592 57,559 63,565 16%
Deposits & CD's 16,219 19,259 22,253 28,173 32,583 33,521 38,400 23%
Shareholder’s Equity 1,994 2,452 3,053 3,909 5,565 6,565 6,569 13%
Source: Zawya
In 2010, NBAD saw a 22% growth in net income to just over USD 1 bn as Interest Income grew 7% while Interest Expense was down 6%. Provisions were lowered by 14% to USD 328mn, or 0.86% of loans.
Lending grew 7% for the year while Deposits were up 3%.
In 1Q11, net income was down 10% to USD 252mn as provisions were up 62% to USD 99mn. Interest
Income growth was strong at 12% YoY, but a 21% YoY growth in Interest Expense resulted in Net Interest Income growing just 9% YoY to USD 353mn. Loans were up 10% YoY to USD 40bn while Deposits were up
23% to USD 38.4bn.
Looking forward
Analysts are mostly positive on the bank with Target Prices in the AED12.4-AED14.1 range. Net profit growth forecasts are fairly neutral though, from a low of -2% to 7% annual growth forecasted for 2011.
Consensus Estimate Table (2011f)
Annual (USD mn) NBK Capital Beltone EFG-Hermes Global Inv House
Jul-11 Jun-11 Jun-11 Jun-11
ROA: 1.8% 1.7% 1.7% 1.6%
ROE: 15.0% 15.8% 18.7% 16.9%
Revenue: 2,112 2,049 2,121 2,049
Net Profit 1,070 980 1,063 989
EPS(AED) 1.37 1.5 1.36 1.3
Growth(EST) 7% -2% 6% -1%
Target price (AED) 12.4 14.1 13 13.5
Recommendation Outperform BUY HOLD BUY
Source: Reuters Knowledge
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Emaar Properties Code: EMAR.DU | Current Market Price: AED 3.06| Mcap: USD5.07Bn
Established in 1997 Emaar Properties (Emaar) is now one of the leading Real Estate development companies in the region. Recently Emaar added new segments such as Hospitality and Malls to enhance revenue
streams.
Historical Financial highlights- All Figures in USD Mn 2005 2006 2007 2008 2009 2010 1Q11 YoY
Income Statement
Revenues 2,277 3,813 4,865 2,918 2,291 3,308 540 -31%
COGS 976 1,917 2,945 1,494 1,175 2,070 261 -43%
Net profit 1,288 1,735 1,790 45 89 666 114 -45%
Balance Sheet
Total Assets 8,769 11,351 16,602 18,156 17,465 17,016 17,219 -1%
Total Liabilities 1,809 3,189 8,017 10,504 9,658 8,558 8,810 -6%
Total Shareholder's Equity 6,960 8,163 8,586 7,653 7,809 8,458 8,409 5%
Source: Zawya
After two years of depressed performance due to a struggling Real Estate sector, Emaar saw net profit of
USD 666mn in 2010 as Revenues grew 44%. However, some weakness has emerged in 1Q11 with Revenues declining 31% YoY to USD 540mn while net income has declined 45% YoY to USD 114mn.
Looking Forward
Analysts are optimistic on the stock with Buy/Outperform recommendations across the board. However, net profit forecasts for 2011 vary widely; from -53% to a growth of 41% for the current year. Annualizing Q1
results would bring a full year net profit of USD 458mn, a 31% annual decline.
Consensus Estimate Table (2011f)
Annual (USD mn) NBK Capital Taib
Global Inv House
Nomura EFG -
Hermes
Jul-11 Jul-11 Jun-11 Jun-11 Jun-11
ROA: - 3.2% 2.8% - -
ROE: - 6.7% 5.0% 4.6% 10.4%
Revenue: 2,115 2,352 2,304 2,483 3,382
Net Profit 316 554 467 393 942
EPS (AED) 0.19 0.33 0.28 0.33 0.53
Growth -53% -17% -30% -41% 41%
Target price (AED) 3.67 3.6 3.91 4.26 5.15
Recommendation Outperform Outperform - BUY BUY
Source: Reuters Knowledge
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Appendix 3: Markaz 6-Force Framework 1. Economic parameters
Even though this is a very broad parameter to evaluate, we have taken in five criterions with weightings to evaluate the attractiveness of the
economy. These five parameters are mostly forward looking and the
estimates are arrived at by taking into consideration forecast data from International Institute of Finance (IIF) in corroboration with the IMF.
a. Forecasted Real GDP Growth b. Forecasted Inflation
c. Forecasted Fiscal balance as % of GDP d. Forecasted Current account balance as % of GDP
e. Historical broad money growth trend (M2)
2. Valuation attraction
We have considered the levels of valuation on an historical basis (TTM) to arrive at ascertaining the attractiveness of the markets. The valuation
parameters used are:
a. Price to Earnings b. Price to Book
c. Dividend Yield
3. Earnings growth potential Earnings growth potential provides the forecasted earnings expectation for
the year. We have arrived at these forecasts using a bottom up approach of
aggregating earnings data for companies listed in GCC stock markets.
4. Investor sentiment We have used the consumer confidence survey results over a period of time
provided by Bayt.com to ascertain the trend in investor sentiments.
5. Geopolitical Developments
Due to the changing nature of the geo political scenario in the region we have used two different equally weighted parameters provided by EIU to
arrive at a score for geo political risk.
a. Political risk b. Economic structure risk
6. Market liquidity
Due to the change in liquidity levels in the markets post the credit crisis, we have included this parameter to evaluate attractiveness in terms of liquidity.
We have used value traded to ascertain the same.
All the parameters are scored on a scale of 0-5, wherein 0 would mean the lowest score implying negative assessment and 5 would mean the highest
implying positive assessment.
We have taken in six criterions
with weightings to evaluate the
attractiveness of the economy.
R E S E A R C H August 2011
Appendix-4 Economic Factors
Real GDP Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Real GDP Growth (2000-2009 Avg) % GDP 3.5 5.4 6.1 13.2 5.3 5.8
Real GDP Growth (2010 e) % GDP 3.4 2.3 2.4 16.0 4.7 4.0
2011 f 7.5 5.3 3.3 20.0 4.4 3.1
2012f 3 5.1 3.8 7.1 4.1 5.1
Source: IMF
Inflation Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Inflation (2000-2009 Avg) annual change 3.1 3.9 5.5 6.3 4.3 2.1
Inflation (2010 e) annual change 5.5 4.1 2.0 1.0 4.4 2.6
2011 f 6.0 6.1 4.5 4.2 3.5 3.0
2012f 5.6 2.7 3.0 4.1 3.0 2.8
Source: IMF
Fiscal Balance % of GDP Saudi Arabia Kuwait UAE Qatar Oman Bahrain
(2000-2009 Avg) 11 27 12 9 8 3
2010 e 7 21 -1 11 7 -7
2011 f 13 23 7 9 17 2
2012f 9 21 6 6 14 0
Source: IMF, IIF
Current Account Balance % of GDP
Saudi Arabia Kuwait UAE Qatar Oman Bahrain
(2000-2009 Avg) 9 27 11 9 7 2
2010 e 9 29 9 17 12 3
2011 f 20 37 14 20 15 12
2012f 14 31 11 16 15 13
Source: IMF, IIF
Broad Money Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Average (1998-2002)-% change 8 5 12 16 7 10
Average (2003-2009)-% Change 15 15 24 24 17 16
2010 e 9 3 6 23 11 11
1Q11 YoY 15 5 12 15 5 9
Source: Central Banks
R E S E A R C H August 2011
Disclaimer
This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by
the Central Bank of Kuwait. The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial
instruments or to participate in any particular trading strategy in any jurisdiction.
The information and statistical data herein have been obtained from sources we believe to be reliable but no representation or warranty, expressed or implied, is made that such information and data is accurate or
complete, and therefore should not be relied upon as such. Opinions, estimates and projections in this
report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinion of Markaz and are subject to change without notice. Markaz has no obligation to update,
modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes
inaccurate, or if research on the subject company is withdrawn.
This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice
regarding the appropriateness of investing in any securities or investment strategies discussed or
recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each
security’s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past performance
is historical and is not necessarily indicative of future performance.
Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals,
with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
R E S E A R C H August 2011
Markaz Research Offerings
R E S E A R C H August 2011