Global markets are expected to be volatile as they await clarity on President Trump’s policies, while there could be deviations from his initial rhetoric, the impact for GCC would be largely through oil prices. Oil markets continue to be stable for now reacting moderately to news flows; Saudi Arabia’s statement that the agreement may not be renewed in June 2016 would be crucial for oil markets and continue to act as an overhang on the market. Risk remain as rig counts inch up and inventory draws could potentially abate a demand surprise. That said, topical data is supportive as output levels from OPEC have declined with combined output down by 1.5mn BPD, 80% of the planned cut. US oil companies added 29 rigs in the week ended Jan 20, the total rig count at 551 is now at November 2015 levels while US oil production has risen 6% since mid-2016. China’s GDP growth for Q4 2016 stood at 6.8% slightly better than the previous quarterly growth rate of 6.7%, overall Chinese growth rate remains in line with expectation. It will be important to see what growth rate the government targets for 2017. According to media reports, the central bank in China has reduced reserve requirement Ratio (RRR) for the five largest banks by one percentage point for 28 days, this will ease liquidity position in the banking system for week long public holiday for Chinese New Year starting 27 January.
Results season has is now underway and to date Mena markets have presented a mixed picture. In Saudi, the loan book declined across banks as working capital financing disbursed last year was repaid as government cleared-off overdue payments. The liquidity situation has improved with loans to deposit ratio declining across the banks. Net interest margin was also lower as improved liquidity in the banking system was offset by lower SIBOR leading to decline in NIMs. With regards to loan loss provisioning, the picture was mixed, for Al Rajhi, NCB and Alinma provisioning was lower than third quarter whereas for Riyad bank, Arab National Bank cost of risk increased substantially. In 2016, though the overall macro environment remained challenging, the aggregate profitability of seven banks was flat. We don’t expect 2017 to be much different from 2016 in terms of the growth in profitability however as evident from the fourth quarter numbers, liquidity will be better and credit growth will be slower, provisioning is expected to remain higher with average cost of risk of around 40-50 bps points. On the positive side the profitability of the banks can improve on the back of increase in US interest rates. From valuation point of view the sector is trading at 1.1x price to book (five year average is 1.7x) and RoE of 13% (five year average is 14%). Thus, sector is trading at a discount to its long term average multiple partly justified by uncertain macro environment and slower net income growth.
The consumer sector reported a weak set of results with discounting and trading down trends quite visible. Almarai reported weak revenues with 0.7% yoy growth due to decline in core juice and dairy revenues, margins were bouyed by cost controls and operating efficiencies, however profits grew by 1% due to higher finance costs and forex impact. Al Hokair reported weak set of numbers significantly below consensus estimate on stable sales and contraction in margins. Savola reported a loss of SAR 964mn on provisions worth SAR 860mn taken on account of EGP devaluation, inventory reduction costs and impairment of non-core investments. We expect discretionary spending to continue to be under pressure as the impact of cut in public sector allowances feeds into the market and cost of living moves higher later in the year due to rationalisation of subsidies and additional charges such as expat fees as part of NTP execution. The price appreciation in Saudi markets seen since October last year can be justified for companies with earnings resiliency and pricing power, one needs to be selective. The insurance sector continues to deliver stellar performance on premium growth, improved profitability and market share shifts. The second rung companies fared particularly well when compared to front line companies like BUPA and Tawuniya. The 100% health care exposed BUPA reported weaker results compared to multiple line insurer, Tawuniya. The cement sector continues to be weak with a massive decline in margins driven by a poor pricing environment and a decline in volume offtake.
Petrochemical sector results were healthy but with limited positive surprise. Industry barometer SABIC reported 3% yoy increase in Q4 net profit to SAR 4.55 bn and the number was broadly in line with market expectation of SAR 4.6bn. The company is committed to its growth plans both domestically and overseas. Sipchem turned around with a Q4 profit (reported Q4 NI of SAR 52 mn vs Q3 loss of SAR 59 mn), on the back of 30% recovery in methanol price. The stock was down by 6% post earnings announcement on profit taking. Sahara was the exception, Q4 earnings surged by 52% qoq to SAR 160 mn and beat consensus estimate by 65%, on the back of significant improvement in income from JV investments. The stock jumped by 5% on the day of earnings announcement. Saudi healthcare names reported a mixed set of results. On the positive side, Mouwasat’s Q4 earnings jumped by 54% yoy and 43.5% qoq to SAR 72mn, which was mainly attributed by higher revenue from Riyadh hospital and expansion in specialty clinics. On the negative side, Al Hammadi Hospital’s Q4 earnings plummeted 50% on sequential basis while Care reported a loss. The main reason behind weak results from these companies was an increase in the doubtful debt provision.
In Saudi Arabia, the telecom sector reported a mixed set of results with both Mobily and STC reporting a decline in revenues due to the ongoing SIM card registration issues. STC reported a 10.2% yoy growth in net profit supported by improved EBITDA margin despite a 9.3% yoy decline in revenues. Mobily reported a net loss of SAR71 mn for Q4 2016, below market expectations but against a net loss of SAR11 mn for Q4 2015. Mobily’s Q4 2016 results were negatively impacted by a 17% yoy decline in revenues but positively supported by a 60 bps improvement in EBITDA margin resulting from better cost control. Zain KSA, however, reported a 54% yoy decline in net loss supported by lower impairment charges resulting from extended license period and a 7.7% growth in revenues. Within the real estate space in Saudi Arabia, Dar Al Arkan reported a net profit of SAR37.3 mn, down by 23.4% yoy and also below market expectations. Q4 2016 net profit was negatively impacted by lower revenues from land sales and higher operating costs which were partially offset by increased lease revenues and lower finance charges. Emaar Economic city reported Q4 2016 net profit of SAR128 mn, down by 19% yoy, due to decrease in industrial and residential land sales and an increase in SG&A expenses due to new project launches and promotions. However, the company reported a 15% yoy growth in revenues in Q4 2016, mainly supported by increased revenue contribution from property sales and lease rentals.
Fund & Portfolio Positioning
Our Fund portfolio positioning remains biased toward the UAE and Qatar at the expense of Saudi Arabia. We have also built positions in Kuwait as the market strengthens on renewed confidence in the market post the recent government bond issuance, Kuwait remains attractive in terms of valuations but had lacked specific catalysts to derive the market forward.
NBAD UTF (GCC) and NBAD UGF (UAE) have had a good start to the year registering year to date returns around the 4% mark with UAE being the main driving factor. Strong performance can also be seen in our MENA aggressive mandates which have recorded returns YTD of 3.5%. Our funds also rank well when compared to the peer group UTF and MENA aggressive mandates are top ranked in terms of absolute and relative performance. Our Mena Growth mandates are flat to plus 0.75% year to date, and Mena Dividend funds and mandates are flat to 1.3% for the year in-line with benchmarks.
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