13
January 2010
Despite
a major drop in earning in 2009 that was led by large provisions taken
by the banking sector and drastic reduction in petrochemical and
commodity prices especially during early 2009, the relative valuation
of the Mena remains attractive, according to a new report by Audi
Capital, titled, Mena Equity Strategy - 2010, Active Management to
Dominate in 2010.
"Given the positive outlook for oil prices and
the supportive expansionary fiscal and monetary policies, we expect
earnings in 2010 to rebound by at least 25 per cent offering attractive
investment opportunities, when markets react to reflect such strong
fundamentals," said the report.
The report pointed out that last
year the global turmoil took its toll on Mena markets. "Though the
problem started in the US, Mena markets were severely affected by the
global crisis, but did not fully join the recovery," it said.
As
far as catching up with global recovery is concerned, the authors of
the report said there were many obstacles the region faced when the
problems came hitting its shores and led to massive erosion of wealth.
"Mena
markets had witnessed severe losses with not a single market
registering a full recovery," said the report, adding that this market
"is not one single bloc. Fundamentals differentiate country
performance".
Pointing out factors that had drastic
repercussions on the economy, the authors of the report said: "Tight
debt markets and restricted credit policies by the banks in the Mena
region had resulted in major problems for corporations that wanted to
revolve their maturing debt in 2009."
Citing the case of Saad
and Algosaibi (major family conglomerate) in Saudi Arabia, they mention
that default of major family conglomerates resulted in a major shock to
the Saudi banking sector as well as all major banks in the region.
"Until today the case of Saad and Algosaibi has not been settled yet,
nor the exact exposure has been determined."
The
report also cites concern about the debt problems of government-related
entities. However, they should be seen in proper perspective, it said,
adding that "though the restructuring of the debt is a major concern
for all investors in the region and should not be underestimated, the
issue needs to be put in proper perspective".
Despite the problems that had plagued the regional market in the past
year, Audi Capital said Mena fundamentals remain strong.
Mena
is rich with large oil and gas reserves and the outlook for oil is
positive. There are relatively aggressive GDP growth rates, relaxed
fiscal policy, coupled with huge expenditures on infrastructure
projects.
Even though there was a huge pullback in the size of
projects last year, mainly in the UAE, which is attributed to the crash
in real estate and as access to credit has been restricted in 2009, the
huge spending happening in Saudi Arabia should offset that.
"Projects
in KSA are still expanding in size where a major contribution comes
from the plan championed by King Abdullah to build six new cities
throughout the country.
"These cities together will have four times the geographical area of
Hong Kong and an economic output equal to Singapore's."
Moreover,
the countries in the region had enough cash to weather storms as during
the last decade Mena has managed to accumulate huge amounts of foreign
reserves.
"This provides Mena governments major cushion to manage any emerging
crisis."
Citing
examples of their ability to repay, the authors take the case of the
UAE, which paid fully $4.1 billion (Dh15.06bn) of Nakheel in December.
Moreover, Abu Dhabi provided a total of $20bn support to Dubai when
needed.
In Qatar, QIA has participated in the capital increase
of most Qatari banks when needed. "Qatar authorities bought the real
estate portfolios and the domestic equity portfolios at favourable
terms from commercial banks."
Regional sovereign funds have intervened several times in the stock
markets.
KSA
has spent a total of $130bn in 2009 and plans to spend a similar amount
in 2010. Kuwait is also launching a $62bn plan in 2010.
Focusing
on the Saudi economy, the authors of the report said the largest
economy in the region will play a vital role this year.
"KSA
is the largest economy in Mena region and most powerful player in the
global oil market with a 22 per cent share of global oil reserves and
13 per cent share of global oil production.
"Oil is key driver
for the economy, supported by the current positive outlook. Massive
investment spending is underway - around $500bn between 2008-2012."
The
country has ample room for counter-cyclical fiscal policies given the
high level of fiscal reserves that were accumulated during the previous
six years. This coupled, with prudent and conservative monetary policy
and strong population growth reaching around three per cent with
favourable demographics should make a positive impact in the country's
economy.
Despite the worldwide credit crunch, the Saudi had a record budget in
2009 and then in 2010.
"Government
is confirming its expansionary fiscal policy with massive investment on
infrastructure and education," said the report.
"Undoubtedly,
the huge figures in the budgets over the past two years, is evidence of
the confidence the leadership has in the outcomes of the economy and
its ability to accommodate more, despite the shrinkage being witnessed
in the global economy," Dr Muhammad Al Jasser, Governor of Sama is
quoted as saying in the report.
The government's commitment to continued spending had offset the
drawbacks of the limited spending by the private sector.
"Fiscal
spending on infrastructure projects had counterbalanced some of the
pullback by the private sector spending. The total value of projects in
KSA had not changed from 2008 to 2009 and many projects that were
shelved in 2009 are coming back on the table in 2010."
Throwing
light on country/sector performance in Mena, the report said despite a
broad-based rally, some sectors and countries have lagged others,
opening the door for the opportunity of catching up soon.
"Although
Qatar recorded the largest GDP growth in 2009, Qatar underperformed
KSA, Egypt, and UAE markets". And within Saudi Arabia "despite the
massive government spending on infrastructure-related projects, the
building and construction sector under-performed the peer sectors in
the country".
And, in times of crises, correlations have increased and country
diversification became less of an applicable concept.
However, when the turbulence lessens, investors will again target
markets with solid fundamentals, said the report.
According
to the authors of the report, factors to consider include level of
economic activity, fiscal and monetary policy, level of public debt and
regulatory changes.
On sector allocation, the report highlighted
that building and construction will benefit due to massive government
spending through expansionary fiscal policy.
"[This] will benefit all companies within this sector, especially after
resolving the inventory problems in 2009."
Another
sector to watch out for is banking. "Having survived several
consecutive shocks of different types, the banking sector in the GCC
region, mainly KSA and Qatar, is expected to rebound benefiting from
improved macro-economic conditions and sufficient liquidity in the
system, which will be translated into increased appetite for granting
loans.
Also, lower provisioning charges on the loan book as
well as on the investment book will act as positive catalysts for
banks' earnings.
Shipping and logistics also figures in the list
as demand for vessels, whether tankers or containers, is expected to
increase as the global economy is moving towards a recovery.
The
supply, on the other hand, is expected to decelerate for two main
reasons - ageing fleet and restrictive regulations. Thus, the combined
effect will result in an impressive surge in this sector, said authors
of the report.
Companies of choice
Even with the sharp plunge in oil prices, GCC
countries are still taking massive investments in oil and gas sector.
Arabian Pipes Co (APC)
For
example, Saudi Aramco has allocated a budget of $60 billion
(Dh220.38bn) to implement oil and gas projects until 2014. This will
have a positive reflection on Arabian Pipes Company (APC) since a major
chunk of its operations comes from this sector.
This will ensure
a good backlog for APC due to its new dimensions of pipe products and
huge production of 460K tonnes of steel pipes.
Commercial Bank of Qatar
Commercial
Bank of Qatar has good asset quality indicators: The bank's loan
quality is acceptable with non-performing loans representing only 1.04
per cent of gross loans and they are fully provided for.
The
bank is operating at good efficiency levels with a cost efficiency
ratio of 25.8 per cent as of Q3 09. CBQ is well capitalized with a
revised capital adequacy ratio of 12.20 per cent compared to the 10 per
cent minimum set by the central bank.
Industries Qatar (IQ)
The
IQ group is comprised of four companies, Qafco, Qapco, Qasco and Qafac,
whose operations are focused in the fertilizer, petrochemical, steel
and fuel additives markets, respectively.
The future seems
bright for the company as crude oil prices are projected to rise and
demand for biofuel feedstocks is expected to grow in line.
Maridive and Oil Services
The
company offers oil and gas related construction and maintenance
services and despite that its contracts are usually of short-term
nature. MOS has secured some long -term contracts both inside and
outside Egypt. The most important are a two-year, $400 million contract
with Aramco in KSA and a $180 million project in India. The industry in
which MOS operates is very capital intensive and this serves as a good
barrier to entry for new candidates, giving it an edge.
Nakilat
Qatar
is increasing its natural gas production and Nakilat being the main
company in Qatar that transports LNG from the country to the rest of
the world will benefit. The company is following an aggressive
expansion plan to increase its LNG fleet size and all the vessels are
long term chartered. This will assure the company a constant stream of
revenues, regardless of the volatility in the shipping spot rates.
Qatar Telecom (Qtel)
Qatar
Telecom (Qtel) aims to be one of the top 20 telecom companies in the
world by 2020. It has expanded its operations in the past two years
through significant acquisitions.
Qtel has a diverse revenue
base and in the first nine months of 2009, more than 70 per cent of the
company's revenues were generated from overseas subsidiaries.
Samba Financial Group
Samba
has a liquid balance sheet, reflected in its loans to deposits ratio of
60.6 per cent in Q3 09. This healthy liquidity position is expected to
continue in the coming years with the loans-to-deposits ratio
forecasted to hover around the 64 per cent placing the bank in a better
position to benefit from the next cycle of lending growth.
Sabic
Sabic
is one of the world's largest petrochemical producers and urea
exporters. The petrochemical industry has already shown signs of a
recovery, which is good for the company. The restocking of inventories,
which were depleted during the economic turmoil period, has begun amid
concerns that petrochemical prices might increase further on expected
higher energy costs. This has resulted in consumption creeping back up.
Sorouh Real Estate
Sorouh
has a diversified project portfolio where the majority of its projects
strategically located within central Abu Dhabi city.
Amid the
current liquidity squeeze, the company has the financial resources
needed to bid on rewarding projects making it well positioned to
benefit from the real estate market slump.
Saudi Arabian Amiantit
Amiantit
manufactures many kinds of pipe and has a good future considering that
Saudi boosted budget expenditures on water infrastructure by almost a
third from 2009 budget. This issue will benefit companies, including
Amiantit that deal with infrastructure.
Amiantit has
diversified its geographical presence in a way to be close from their
client and reduce the high transportation costs that will incurred to
move if they where in another region.
By Shuchita Kapur
© Emirates Business 24/7 2010 |
