Earnings and price estimates for Saudi Arabia have undergone revision as recent developments led to a stark decline in the rate of growth of earnings in the current year as compared to 2007, the Kuwait Financial Centre (Markaz) said in its latest outlook report sent to the Saudi Gazette on Monday. In its January outook report, Markaz had expected the TASI Index to have an upside potential of 6 percent. However, the index in the YTD period has witnessed a 44 percent decline, which has wiped out all the gains made in the year 2007. Markaz was expecting a 6 percent upside based on a 15 percent earnings growth and a PE discounting the 2007 earnings by 22 times. M.R. Raghu, head of Research, and Amrith Mukkamala, senior analyst, the authors of the report, said till the first half of this year, the aggregate earnings of Saudi Arabian companies have witnessed a YoY growth of 12 percent and the bottoms - up approach in earnings estimation points to similar growth for the full year 2008, which is a 200 bps reduction to the previous estimate. From a sectoral perspective, chemicals earnings forms the bulk of the total earnings of Saudi Arabia at 39 percent, this segment is expected to witness a 20 percent growth in 2008E. SABIC forms 82 percent of the earnings in the chemicals segment and is expected to grow at a rate of 13 percent for 2008 on a YoY basis; this indicates a decline in the rate of growth from 33 percent in 2007. The factor that has impacted the index target call the most has been a significant contraction in the price to earnings. The markets have witnessed a contraction in Forward PE from 23 times as at the end of 2007 to 12 times at current market prices. This lead to low premium over expected growth. As at the end of 2007, the Saudi Arabian markets were trading at a PEG (Forward earnings and growth) of 2.52, this has contracted significantly to 1.06 at the current market rates. Markaz estimated the fair value PEG (price/earnings to growth ratio) for emerging markets to be at 1 (base case - provides no premium over forward earnings growth), which provides to a down side risk of -6 percent and an index fair value of 5,804. The chemicals segment, accounted for 36 percent of total earnings in 2007 and 40 percent of 2008E earnings. The sector's earnings are expected to grow at a rate of 17 percent for 2008, which will result in a reduction in growth rate by 13pps. Sabic alone provides to 86 percent of the chemical sector earnings. For first half of 2008, SABIC posted a 14 percent YoY increase in earnings at $3.86 billion. Markaz expects the company to post USD 8.18 Bn in earnings for 2008, which will result in a full year growth of 13 percent, a decline in growth rate as compared to 2007 full year growth of 33 percent. SABIC is the crucial determining factor for aggregate earnings, the report noted, as the compnay is expected to provide 31 percent of the aggregate 2008 earnings. Therefore an earnings call on SABIC is a crucial determining factor on the aggregate Saudi Arabian corporate earnings. The call for a 13 percent earnings growth is based on the fact that there has been a softening in the gross margins of the company, the impact of which is more profound in its petrochemical segment, which is the main stay of the company. The overall gross margins have declined to 34.25 percent in the second quarter of 2008 as compared to 34.49 percent and 38.61 percent in 1Q08 and 2Q07, respectively. The petrochemical gross margins have declined from 39.06 percent in the first half of 2007 to 30.61 percent in the same period this year. This can be primarily attributed to the inclusion of SIP (erstwhile GE plastics) numbers. The net margin of the petrochemicals segment witnessed a significant decline to 6.21 percent in the first half of 2008 as compared to 19.03 percent in the same period last year. SIP produces high - end plastics (polycarbonates) for which the basic raw material is Bisphenol-A. Bisphenol-A is produced from Phenol and Acetone, derived basically from Benzene. Benzene prices are impacted significantly by Naptha prices. Benzene, which is the key raw material has witnessed a 37 percent increase in the YTD period and on a YoY basis has increased by 22 percent (Benzene, Europe CIF Rdam Spot $/MT Prices), Naptha on the other hand has witnessed a 39 percent increase on a YTD period and 76 percent increase on a YoY basis (Naphtha Far East CFR Japan Prices). This has a negative impact on SIP. The report notes that SIP does not have the similar cost advantage in feed stock as SABIC does. The rest of the segments - fertilizers and steel have performed exceptionally well in the current quarter. Steel revenues were up by 66 percent and net profits were up by 145 percent in the first half of this year as compared on a YoY basis. Markaz expects to see a negative impact on margins due to declining global margins and its impact on SIP. Natural gas prices and Naptha (Naphtha Far East CFR Japan) have increased by 76 percent and 39 percent respectively in the YTD period. This might have a slight negative impact on the margins of the petrochemical segment. However, steel prices continue to hold up, it added. The Saudi Arabian banking sector continues to witness low to negative earnings growth rates. In 2007, aggregate bank earnings fell by 17 percent. This was mainly due to an increase in provisioning and lower value traded in the markets. Both these factors spilled over into 2008. Four banks have announced their results for 9 million ending September. The aggregate earnings of these four banks - Samba, BSF, Al Rajhi and ANB formed 68 percent of the total earnings of banks in 2007 and the growth for September has been flat at 1 percent on a YoY basis. Markaz expected the depressed sentiment on the Tadawul exchange to negatively impact banking earnings by reducing the fees and commissions incomes. Credit growth has till now been the driver of earnings growth. SAMA statistics as at the end of June 2008 points to a credit growth of 32 percent on a YoY basis for the sector. Given the increasing control to tame the money supply growth which is currently at more than 20 percent by increasing reserve requirements for banks, the Kuwait-based Markaz said that credit growth will also witness a decline. It expected a 6 percent growth in earnings for the banking sector as compared to a -17 percent growth witnessed in 2007. The Kingdom's telecom sector - comprised of three listed telecom companies- has an aggregate market capitalizations and 2007 earnings of $38.35 billion and $3.5 billion, respectively. The Saudi Telecom company (STC) with 2007 earnings of $3.21 billion forms 89 percent of the total earnings of the segment. STC posted robust growth in earnings of 18 percent in first half of this year to $1.83 billion. Markaz predicted that the company will post an earnings growth rate of 4 percent this year. Some of the major trends supporting the telecom segment earnings were the 33 percent YoY growth in subscribers and 18 percent increase in mobile Average Revenue Per User (ARPU) in the first half of 2008. By the end of June 2008, the subscriber base in Saudi Arabia had increased to 30 million from 22.5 million. The mobile ARPU also increased from $24.9 in June 2007 to $29.5 in June 2008. However, with the Saudi government opening up the telecom sector, new telecom players like Saudi Mobile Telecommunications Company (Saudi Zain) have entered the Saudi market. This is likely to increase competition among players operating in the telecom space and push ARPU down, Markaz said. The earnings growth of telecom companies is likely to moderate in the second half of the year. The tececom sector will close the year with 7 percent growth in earnings, the report noted. The real estate sector, which contributed 3 percent to 2007 earnings, is expected to record a strong 40 percent growth in earnings for 2008. Companies in the real estate space reported healthy growth in earnings for the first half of 2008. The earnings of companies such as Taiba Holding Co., Dar Al Arkan Real Estate Development Co. and Saudi Real Estate Company grew 90 percent, 27 percent and 17 percent, respectively, on YoY basis. Corporate earnings in Saudi Arabia are driven by the performance of Large Cap stocks that account for 71 percent of total earnings. Earnings of large cap stocks grew at a rate of 13 percent in 2007. Markaz said large cap stocks will witness an increase in earnings by 10 percent in 2008 earnings; the rate of growth is lesser as compared to 2007. Saudi Basic Industries Corporation and Saudi Arabia Fertilizers Co. are likely to drive large cap earnings in 2008. Saudi Basic Industries Corporation is estimated to post 13 percent growth in earnings, while Saudi Arabia Fertilizers Co is set to record 55 percent growth in its bottom-line. Mid caps, which contributed 15 percent of Saudi Arabia's corporate earnings in 2007, are expected to grow by 9 percent. Saudi Hollandi Bank is expected to lead mid caps, in terms of earnings in 2008. The bank's earnings increased 59 percent to $162 million in the first half of 2008 compared to $102 million a year ago. Small caps, accounting for a meager 11 percent of total earnings, are expected to record 29 percent growth in earnings. Companies such as Advanced Polypropylene Company and Emaar The Economic City are expected to lead small caps in terms of earnings growth in 2008. The stock markets reversed the upward trend seen last year until September this year. The Tadawul All Share Index (TASI) declined 33 percent after rising 41 percent last year. The Insurance (-46 percent), Banking (-45 percent) and Cement (-34 percent) sectors underperformed the TASI on YTD basis in 2008. Some of the sectors that outperformed the TASI, but yielded negative returns for investors were Agriculture (-8 percent) and Telecom (-21 percent). Historically (2001-2007 CAGR), the Industrial (44 percent) and Agricultural (43 percent) sectors have provided handsome returns to investors, surpassing TASI's 29 percent gain. By August 2008, close to 40 billion shares changed hands on the TASI. This is about 70 percent of the full year volumes on TASI in 2007. Going by current trends, volumes for the full year are likely to remain almost in line with the levels seen last year. The telecom sector drew a lot of investor attention in 2008 as volumes traded in YTD 2008 were dominated by companies from this industry. In all, 4.5 bilion telecom shares (accounting for 11 percent of total volume) changed hands. On annualized basis, this works out to 6.8 bn shares, about 12 times higher than 2007 levels. The banking sector also recorded a robust increase in trading volumes relative to 2007. The sector accounted for 10 percent of total volumes traded in 2008 relative to just 3 percent last year. Trading volume declined across other sectors. For instance, the Agricultural sector (1.9 billion shares in 2008 - annualized) is set to witness a sharp decline in volume traded for 2008. The sector accounted for 14 percent of total trading volume in 2007, but may account for just about 3 percent in 2008. At $416 billion, the total value traded, till August this year is set to decline by 9 percent on full year basis, going by the trend seen so far. Value traded has seen a sharp drop of 51 percent during 2007. On YTD basis, the value of trade in telecom and banking stocks increased in 2008. On annualized basis, the Telecom sector is all set to record the maximum rate of growth in turnover (5 times to $50 billion in 2008). The Industrial sector dominated other sectors in terms of value traded with a share of 36 percent in 2007. Other sectors are set to decline this year. At 128 percent, turnover velocity in the Saudi market is lower compared to last year (161 percent)., Markaz report further said. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997 and was recently awarded a BBB+ corporate rating by Capital Intelligence Ltd. __
