Mena Markets – Reforms & Oil

Weekly Equity Comment – 23 May 2017

Regional markets recovered some lost ground over the past week as investors sought to balance a weaker oil price against regional reforms. As we write, US President Donald Trump’s visit to Saudi Arabia has created some positive sentiment as defense deals and multiple business MOUs have been signed with the objective of driving trade and growth for both the US and Saudi Arabia. With regards to our holdings in Saudi Arabia, Maaden has signed agreements with Alcoa and Mosaic for further co-operation and expansion in the Aluminium and Phosphate arena.

We see signs of progress in the Saudi Arabian power sector where the process of privatization of power generation assets begins with the first tender expected in Q417. This is in line with our view that it would be easier to attract investor interest in annuity businesses versus grassroots industrial units, at least initially until reforms progress. As we head into Ramadan we expect trading activity to decline and possibly recover as we get into mid-June on expectations of Saudi’s inclusion in MSCI EM watch-list.

Sustainability of a regional rally would depend largely on news flows, either oil related or sector specific. For example, gauging from media reports, if fuel and utility subsidy cuts are postponed until year end as against July we could see the consumer space build on gains witnessed since the recent reversal of allowance cuts for public sector employees. In addition, the planned imposition of VAT in Q1 2018 could mean that some opportunistic spending is advanced. More importantly, we have the OPEC meeting scheduled for 25th May, consensus is for an extension to existing output cuts to Q1 2018. Any additional cut in production would be a positive surprise and would be in line with Saudi Oil minister’s recent “whatever it takes” comment. Such a surprise would improve price outlook but could call into question current compliance discipline.

As far as corporate earnings are concerned, in Saudi Arabia, both Al Hammadi hospital and Middle East Healthcare reported strong sequential earing growth in Q1 as lower provisioning against government receivables boosted quarterly profits. Within the Saudi petrochemical space, while Tasnee (NIC) Q1 results swung back to profit (from SAR 104mn loss in Q1 16 to SAR 103 mn profit in Q1 2017), the stock was sold aggressively post earnings announcement as Q1 profits missed estimate by 20% on IFRS adjustments. Saudi Industrial Investment Group reported stellar Q1 results (SAR 310mn, 968% up y-o-y and 496% up q-o-q) on the back of a strong rebound in their chemical products pricing but a degree of reversal is expected as product prices have witnessed a sharp correction since April.

In UAE, Dubai Parks (DXB) reported Q1 net loss of AED 292mn. The main disappointment was the number of visitors that came in at slightly less than 600k (annualized at 2.4 mn), well below earlier guidance. Management commented that the operating environment continues to be challenging and expects visits to further drop in the next two quarters due to summer and the holy month of Ramadan. Tabreed, the district cooling company, reported strong quarterly earnings, Q1 net profit rose 19% y-o-y to AED 75.4mn driven by the new connections made last year and fresh capacity addition of 20,000 refrigerated tons this year. Arabtec saw an irrational bout of trading last week with rights trading all the way to 20 fils as against the exchange’s starting price of 1 fils despite a negative option value.

Funds & Portfolios
The prospect of an MSCI announcement in June for the inclusion of Saudi in the watch-list for the MSCI EM Index will likely be a catalyst to drive regional markets during the traditionally slow Ramadan period. Our funds and portfolios are skewed toward solid blue chip large cap names which have a higher probability of inclusion in the EM Index, at the same time we are also focusing on names that will benefit from NTP reforms. We have gradually reduced our exposure to Qatar and Oman while maintaining our overweight position in Kuwait and UAE. The cash level in our mandates ranges from 5% to 10% and we are considering deploying into select growth stories as dividend season has now come to an end.

High paying dividend stocks in the GCC have disappointed this year with most stocks correcting to greater extent than dividends paid and recovery has been drawn out. As a result our dividend mandates lag the broader benchmark and growth mandates. We expect the MENA market to re-rate once earnings visibility improves but caution that stock selection is key. Weekly performance for funds and portfolios was in positive territory ranging from 0.46% for Mena Dividend Leader ton1.11% for our GCC dividend mandates, performance for our MENA growth mandates was as high as 1.7%. Our UAE growth mandates delivered a return north of 1.34%.

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