Update from the investment team Emirates MENA Top ... - Mondial Dubai

                                              





     •          •             •           •                      •                   •                    •                            •               •              

  









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





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

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

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







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   





 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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 

GCC equity markets: where to, post the summer volatility?     

June 25th, 2014

Pre Ramadan summer volatility in full swing GCC markets remain the best performing over one year Iraq turmoil upsetting markets High oil prices adding to current account surpluses Defensive positioning in quality stocks with sustainable earnings and high dividends

How to be positioned post the summer volatility? A sharp selloff in Dubai (DFMGI) yesterday (-6.7%), accompanied by a lesser sell off in the other GCC markets was recovered today (+6.09%). The DFMGI is down 20%, since the peak in mid-May. The selloff was broad based, triggered by a number of factors. News on management changes in Arabtec, the region’s largest real estate contractor was a catalyst and over leveraged investors being hit by margin calls added to the wider selling. The seasonal pattern also repeats itself over the years, with investors booking profits pre Ramadan. The geo political situation with the civil war in Iraq is adding to fears. The UAE indices crossed a critical technical support closing below the 100 day moving average. Dubai is still the best performing market globally on a one year perspective. Saudi equities, post MSCI EM inclusion of UAE and Qatar on 1st June – have proven to be relatively resilient (-2.5%), in comparison to the DFMGI (-16.4%), the ADSMI (-11.69%) and the Qatar DSM Index (11.6%). UAE and Qatar equities rallied prior to their MSCI EM inclusion and sold off once the event was over, following historical trends. The DSM Index (Qatar) was impacted by the adverse news flow on the FIFA review. GCC trading volumes are significantly down this past week. Volumes had declined 2008 to 2012 and 2013 was the first year volumes picked up significantly in the GCC markets. Most of the positive catalysts have been factored in and Q2 earnings, starting with Saudi corporates in early July, will be the next pivotal point. Until then we expect volatility in the UAE and Qatar to continue and sideways trading on the Tadawul. Post the summer volatility there should be opportunities to buy the quality names with sustainable earnings and strong cash generation. Performance and Valuation of UAE, Qatar and Saudi Arabian equity markets (25th June 2014) x DFMGI (UAE) ADSMI (UAE) DSM (QATAR) SASEIDX ( Saudi) MSCI EM MSCI World

YTD 4,253 4639 12,101 9571 1,048 1,737

26% 8% 17% 12% 5% 5%

1 year 88% 31% 32% 27% 18% 23%

3 years 177% 71% 47% 48% -6% 36%

5 years 129% 77% 82% 71% 40% 81%

2014 P/E 2014 P/B 13.0 11.8 11.9 13.2 10.4 14.3

1.8 1.8 2.1 2.1 1.4 2.1

Earnings Dividend Yield % Growth 2015 30% 2.6% 9% 4.0% 14% 4.3% 13% 3.2% 9% 2.8% 9% 2.5% Source: Bloomberg

UAE equities are expensive historically compared to peers, but become compelling if double-digit earnings growth continues in 2015. Investor attention had turned to small and midcap stocks, with higher betas and lower trading volumes than the blue chips, and these stocks are more vulnerable to the correction, that the markets are currently witnessing. Should we stay invested in the GCC markets considering their outperformance both absolute and relative to global markets and emerging markets? UAE equities now trade more in line with the GCC on the basis of consensus Price to Earnings multiples, (see above chart). Dubai is at a premium to Abu Dhabi, Qatar, EM and the world. The UAE premium is justified if UAE GDP growth stays above EM growth, current account surpluses continue to build on account of high oil prices and contribution to GDP from non-oil sectors such as tourism and trade remains resilient. Dubai’s hosting of the Expo 2020 and Abu Dhabi’s Vision 2030 will ensure government spend on infrastructure will continue. GCC Q1 2014 Median earnings growth (y/y) Q1 2014 median UAE earnings +24%, Saudi +4% and Qatar+10%. These earnings need to be sustainable for valuations for these markets to remain reasonable and this was suitably demonstrated by the quality of earnings especially from the real estate and banking sectors. GCC Real estate developers earnings grew +61%, contractors +78%, the only earnings decline was cement at (-17%). Real estate developers grew income largely on retail and mall rentals. The cement sector, dominated by Saudi companies, has seen mixed results, as the sector continues to recover from the labour amnesty in Saudi last year. Food and retail grew 14% driven by the Saudi consumer names and increased spending power of the nationals, backed by social spending of the Saudi government. Petrochemicals earnings were -10% year on year. The Saudi petrochemicals saw weak results, with a majority of companies reporting revenue and net income below consensus estimates, on weaker product prices and volumes. Long term strategic drivers of the sector in the form of low feed stock costs remain in place, which together with higher global growth over the medium term should benefit the sector. Banks earnings grew +10%. Barring Al Rajhi Bank the sector showed a very positive performance with improving asset quality. Telecom earnings were +6% on the back of data driven revenue growth and strong cash flows. GCC equity markets have witnessed strong performance over the last year. Future performance is expected to be determined by Q2 2014 earnings season.

Q2 2014 Earnings preview Real estate/ construction: Q2 should bring in the first round of handovers which will positive for UAE real estate earnings. Recurring earnings from retail and malls should provide stability and sustainability. Growing labour costs and Saudisation may affect construction in Saudi Arabia. Reduced imports suggest Saudi cement stocks may surprise positively. Airlines/ Logistics: Tourism and trade growth are positive for earnings. Banks: Q1 2014 performance should be repeated in second quarter 2014, supported by increasing private and public sector credit growth. Petrochemicals: Expect stable cash and income generation. Potential headwinds The next important catalyst is the second quarter earnings season. The Iraq situation needs to be watched carefully in case it escalates. In the past the market has shown sharp sell offs on military strikes in the region though recovering eventually. As inclusion in the MSCI EM index is largely based on market cap and trading volumes the danger exists of reduction in weights of the 19 stocks that have been included from UAE and Qatar, however we do not see this to have a significant impact. What to expect from the markets: We expect the UAE and Qatari markets to remain volatile in the summer months and stay with our recommendation of holding diversified portfolios with exposure regionally and internationally to the better quality and dividend yielding stocks, with sustainable earnings growth. The search for yield continues globally and the regional petrochemical companies, banks and telecoms provide dividend yields in excess of 6%. In the last one year the real estate and consumer sectors delivered the best returns and we expect these sectors will continue to perform. Expect increasing dividend payouts and bonus shares as companies generate increasing free cash flows. Selected portfolio of high dividend yielding stocks in the GCC (Data source: Bloomberg) Security QATAR Doha Bank Industries Qatar Nakilat SAUDI ARABIA Mobily (EEC) AAPC SABIC Yansab SAFCO NIC SIIG Saudi Cement KUWAIT Zain (MTC) Average Yield

Currency 2011 2012 2013

Last 2014E 2015E traded price

Banks Chemicals Transport

QAR QAR QAR

7.0

8.9

7.7

7.2

7.3

5.6

5.5

6.5

6.3

6.7

4.9

6.6

5.4

5.2

5.7

Telecom Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Cement

SAR SAR SAR SAR SAR SAR SAR SAR

6.2

5.5

5.5

6.2

6.8

7.0

7.6

3.1

5.1

5.4

4.5

4.8

5.0

Telecom

KWd

Performance One Year

Earnings 2014 growth 1 BEst PE year

58.0 179.0 22.7

73.1 190.5 23.6

24% 12% 26%

10.5 13.1 15.6

16% 9% 14%

98.0 45.1 125.7 73.7 150.0 37.2 38.6 118.7

5% 37% 25% 28% 11% 24% 39% 11%

9.4 13.2 12.1 13.7 15.1 11.9 11.1 14.4

6% 1% 3% 5% 7% 15% 13% 10%

736.3

-9%

10.2

11%

5.2

5.6

N.A.

N.A.

4.1

5.5

6.2

7.4

7.9

7.7

6.9

6.9

3.7

7.2

4.5

5.2

6.3

5.3

4.4

3.1

4.4

5.4

9.0

7.4

6.9

6.4

6.7

83.0 44.3 114.4 72.2 159.4 32.7 36.1 112.8

7.2

6.4

7.2

8.5

9.0

620.0

6.3%

BBG Target

Though rental yields in the UAE have fallen to 5% they are still among the highest globally and while there are concerns about rising sales prices, yields remain supportive for real estate investing. In comparison to 2007/ 2008, the leverage in the system is lower and macroeconomic imbalances are no longer there. UAE authorities may introduce further measures to cool the property market, in addition to limiting transfers for off-plan properties and a 4% transfer fee. IPO’s should bring depth and breadth in the GCC markets with over 25 proposed listings, with the most visible being Emaar Malls in the third quarter. The two recent, Oman Power IPO’s debuted, with a 25% gain, on listing. Higher oil prices will lead to increasing current account surpluses and consequent spend by the government on infrastructure and the related flow through to the consumer and banking sectors. Top and bottom performers GCC 2014 YTD (1st Jan to 24th June 2014) Top performers YTD Dubai (DFM) UNION PROPERTIES PJSC ARABTEC HOLDING CO COMMERCIAL BANK OF DUBAI MASHREQBANK DUBAI FINANCIAL MARKET EMAAR PROPERTIES PJSC DUBAI INVESTMENTS PJSC NATIONAL CEMENT CO EMIRATES NBD PJSC DUBAI NATIONAL INSURANCE

Bottom performers YTD

%

67.65 52.20 29.96 28.49 25.51 22.38 19.89 19.84 18.27 18.25

%

TAKAFUL HOUSE GULF NAVIGATION HOLDING TABREED DUBAI ISLAMIC INSURANCE CO ISLAMIC ARAB INSURANCE COM NATIONAL GENERAL INSURANCE AIR ARABIA PJSC EMIRATES INTEGRATED TELECOMM TAKAFUL EMARAT INSURANCE ARABIAN SCANDINAVIAN INS CO

-47.28 -46.90 -37.92 -36.58 -29.71 -28.57 -25.81 -23.42 -13.41 -5.26

Abu Dhabi (ADSMI) NATIONAL CORP TOURISM & HOTE FOODCO HOLDING ARKAN BUILDING MATERIALS CO FUJAIRAH BUILDING INDUSTRIES AGTHIA GROUP PJSC ABU DHABI ISLAMIC BANK AL WATHBA NATIONAL INSURANCE INVESTBANK ALDAR PROPERTIES PJSC AL DHAFRA INSURANCE CO. P.S.

145.47 100.00 39.17 35.59 29.19 27.96 23.05 22.68 20.29 18.25

INTL FISH FARMING CO-ASMAK METHAQ TAKAFUL INSURANCE ABU DHABI NATL CO FOR BUILDI ESHRAQ PROPERTIES CO PJSC UNION CEMENT CO DANA GAS NATIONAL BANK OF FUJAIRAH ABU DHABI NATIONAL ENERGY CO AL KHAZNA INSURANCE CO GREEN CRESCENT INSURANCE CO

-52.84 -52.11 -43.82 -36.30 -33.86 -30.77 -26.32 -25.17 -22.73 -22.31

Saudi Arabia (SASEIDX) AL ALAMIYA COOPERATIVE INSUR BUPA ARABIA FOR COOPERATIVE THIMAR ABDULLAH AL OTHAIM MARKETS ARABIAN SHIELD COOPERATIVE WAFRAH FOR INDUSTRY AND DEVE AL SAGR CO-OPERATIVE INSURAN AL KHALEEJ TRAINING AND EDUC THE NATIONAL AGRICULTURE DEV JABAL OMAR DEVELOPMENT CO

200.10 97.40 89.83 76.02 66.19 60.94 59.85 56.94 54.57 54.11

WAFA INSURANCE WEQAYA FOR TAKAFUL INSURANCE ALLIANZ SAUDI FRANSI COOPERA SANAD COOPERATIVE INSURANCE ARABIA INSURANCE COOPERATIVE AMANA COOPERATIVE INSURANCE SOLIDARITY SAUDI TAKAFUL CO SALAMA COOPERATIVE INSURANCE TOURISM ENTERPRISE CO/ SHAMS AL QASSIM AGRICULTURAL CO

-52.47 -38.83 -35.00 -32.53 -30.77 -28.70 -25.48 -25.33 -24.55 -12.52

Qatar GULF INTERNATIONAL SERVICES VODAFONE QATAR MASRAF AL RAYAN MEDICARE GROUP QATAR INSURANCE CO

95.29 82.07 58.15 51.62 49.44

OOREDOO QSC DOHA BANK QSC QATAR NATIONAL BANK INDUSTRIES QATAR AL KHALIJ COMMERCIAL BANK

-1.60 -0.34 2.33 5.98 6.05

GCC Market performance and volume (Aug 2007 to June 2014)

All data sourced from Bloomberg

Emirates NBD PJSC Head Office Baniyas Road, Deira P.O Box 777 Dubai Arjuna Mahendran Chief Investment Officer +971 4 609 3739 [email protected] CIO Office

Anita Gupta Equity Strategist +9714 609 3564 [email protected]

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