| 02 Mar 2010 |
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SHUAA Capital releases KSA Vision 2010
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Saudi Arabia has weathered the storm of the financial crisis well, with 2009 real GDP growth estimated at 0.2%. Growth expected to accelerate to 3.2% in 2010
Anticipated circa 20% increase in the Saudi index in 2010
2010 earnings expected to grow by around 26%, after having witnessed a 21% decline in 2009
outlook for 2010 with a special focus on the petrochemical, banking and telecom sectors as well as stock briefs for more than 30 Saudi listed companies. In addition, the report also reviews the Kingdom's markets throughout 2009. The SHUAA Saudi Vision 2010 offers an indispensable reference guide on how to navigate the dynamic market environment of Saudi Arabia for local, regional and international investors. Saudi Arabia has weathered the storm of the financial crisis well, thanks to timely and appropriate fiscal and monetary policies that have helped to support growth and the stability of the financial system. Real GDP growth is estimated at 0.2% in 2009 and we expect growth to accelerate to 3.2% this year. The key drivers behind our macro view are a sustained global recovery and the associated higher oil prices, continued expansionary fiscal policy and the resumption of local bank lending, easing financing constraints on the private sector. We forecast nominal GDP will reach SAR1.5 trillion this year.
As we anticipated in our Vision 2009 report, the Saudi marketSaudi market had a positive year in 2009 as the petrochemical sector led the gainers. The Tadawul All-Share Index recorded a net gain of 27.5% in 2009, falling slightly short of our estimate, in our Vision 2009 report, of 30%. Overall, and after recording a dismal 56% drop in 2008, the Saudi marketSaudi market managed to outperform all other GCC markets, which recorded a composite growth of 15.3% in 2009, as per the SHUAA Capital GCC Index.
On corporate earnings SHUAA Capital's Research department anticipates 26% earnings growth in 2010. Boosted by significantly expanding earnings in the petrochemical sector, which was the main culprit behind the lower aggregate growth in 2009. Coming from a low base, it forecasts an increase of around 90% in the sector's aggregate earnings.
Similarly, the report expects the banking sector to record a growth of circa 31% as banks' top line will benefit from the resumption of lending, and their bottom line will be further supported by the reduction in specific provision levels compared with the peaks of 2009. Furthermore, reaching a settlement in the Saad/AHAB case in favour of local banks would be a major catalyst for the sector specifically, while significantly restoring confidence in the Saudi marketSaudi market as a whole.
and its corporate the Vision 2010 explains: "We anticipate a circa 20% increase in the Saudi index in 2010, corresponding to a Tadawul All-Share Index benchmark target in the proximity of 7,400, on the back of strong commodities prices, expansionary fiscal policy, recovering private sector growth, and a steadily improving local credit environment. We expect 2010 earnings to grow by around 26%, after having witnessed a 21% decline in 2009. The strong headline earnings growth across the board would be one of the key drivers of market performance for the year.The Report focused on potential issues which could affect the Saudi economy over the course of the year: "Potential risks to our forecasts include a steep decline in oil prices and a possible wave of selling in global equity markets. Also, the emergence of other conglomerate bankruptcy cases and the negative repercussions stemming from the inability of Dubai World to reach a satisfactory agreement with creditors are likely to take a heavy toll on the markets and investor confidence in the region."
SECTOR REVIEW
PETROCHEMICAL
Alongside upstream oil & gas (O&G) production, the petrochemical sector was the largest industry contributor to the kingdom's SAR 1,385 billion nominal GDP in 2009. Equipped with an easily available feedstock advantage over other countries/regions, the GCC, and Saudi Arabia in particular, have been a major source of imports for fast developing Asian countries such as China and India over the last ten years. Due to the high correlation of basic petrochemical (such as ethylene) prices with oil and natural gas prices, Saudi Arabia petrochemical industry has enjoyed a bonanza since the early years of 2000 till the summer of 2008.
The ride stopped unexpectedly as oil prices fell off the cliff from a USD 147/bbl peak in June/July to a low USD 30's/bbl at 2008-end, with most petrochemical prices following suit progressively. As the ripple effect spread through the economy, listed Saudi petrochemical companies' revenues and earnings took a hit in H2 2008. The negative trend persisted into early 2009, with the petrochemical sector's aggregate earnings reaching a trough in Q1 2009 with a combined SAR 0.56 billion loss (inclusive of a SAR 1.18 billion goodwill impairment for SABICSABIC) as oil prices ended 2008 on a USD 31.4/bbl multi-year low (December 22nd) and averaged USD 43.2 in Q1 2009, down significantly from the average of USD 97.8 in Q1 2008 and USD 58.0 in Q4 2008.
For the year ahead, we expect a continued recovery from 2009-end demand levels, yet highlight the road to recovery may be paved with hurdles as the real extent of 2009 underlying demand levels is still somehow uncertain - despite some recent guarded/restrained notes of mild optimism from industry leaders such as SABICSABIC and Dow Chemicals. Irrespective of global demand levels for this year, we believe Asia, and China specifically, will constitute a bright spot.
Despite an anticipated strong recovery in the petrochemical sector's aggregate earnings - we forecast for circa 90% increase year on year in 2010, as supported by Q4 2009 results - we believe that much of the positivity is already priced-in, leaving the sector with limited upside potential in 2010.
BANKING
After 2008's turmoil, which shook regional confidence levels and raised doubts over the strength and quality of Saudi Arabian banks' existing assets, the local banking industry managed 2009 with great prudence and caution in anticipation of unsuspected asset quality deterioration. These worries materialised when two of the country's largest family holdings, Saad and Al Gosaibi groups (and related subsidiaries), defaulted on debt repayments estimated around USD 22 billion owed to domestic, regional and international banks. This unparalleled announcement, at the time, sent a shockwave of panic within the international and regional financial communities. That said and despite a strong rise in NPLs during the year, Saudi banks were capable of showing great resilience.
In terms of profitability, the Kingdom's eleven banks 2009 net profit was down 10% YoY. This came despite a 5% increase in net operating revenues stemming from: 1) 10% YoY growth in net interest revenues which was driven by lower funding cost, offsetting the insignificant assets' growth and 2) 7% YoY decline in non-interest interest revenues mainly on lower fees and commissions and volatile investment returns. In other words, and while banks were relentless in controlling their operating costs, provision charges, particularly loan-loss related were the main reason behind the Saudi banks' profitability slump.
In 2009, Saudi banks' profitability was mainly affected by weak assets' growth, MTM investment losses and a strong rise in loan loss provisions, resulting in listed banks' net profit falling 10% year on year. For 2010, we believe Saudi banks' earnings have the capacity to grow by around 31% on the back of:
• Our growth forecasts of 10% and 12% for deposits and loans respectively. This should act as a strong support to interest-related revenue generation, with volume effect offsetting an expected contraction in net interest spreads.
• Momentum of non-interest income growth, which we forecast to be sustained by higher loan-related fees and positive MTM investment returns after the losses incurred in 2009.
• Continuous cost control.
• Notable clean-up process performed on their loan book in Q4 2009 complemented with assets' collaterals. This, in our view, is likely to be matched by lower loan loss provisions, should pressure on asset quality remain relatively contained in the course of the year.
TELECOM
Saudi Arabia's telecom sector revenues increased 7.5% in 2009 to SAR 52.3 billion (USD 14.0 billion), according to our estimates. This marked the end of the double digit growth era. This said, we estimate the mobile segment, which constituted 80% of KSA's telecom sector, delivered 10% revenue growth in 2009. On the other hand, we calculate the fixed line segment's top-line remained flat year on year in 2009.
While the number of landlines in KSA was flat to slightly up in 2009 at c.4.2mn, broadband adoption hit an inflection point. Broadband penetration almost doubled in 2009. Wireless broadband stole the show in 2009. For a category that was non-existent prior to 2007, wireless Internet reached almost half of all broadband connections in the kingdom at the end of 2009.
According to our analysis, Saudi Arabia's active mobile penetration reached approximately 149% in 2009. We believe market penetration has room to grow towards 160% in 2010. We forecast the Saudi telecom sector to grow by 6% in 2010, with the mobile segment achieving 8% revenue growth. Mobile data, other value-added services, and broadband Internet will be the growth drivers of the sector. Our forecast calls for 40% YoY growth in broadband subscribers in the kingdom, with penetration jumping from 10% to 14% of the population at year-end 2010. Saudi Arabia is turning into a wireless society. We predict wireless broadband subscribers (HSPA+WiMAX) to overtake DSL/fixed-broadband subscribers in 2010.
-Ends-
About SHUAA Capital psc:
www.shuaacapital.com
SHUAA Capital psc maintains a leadership position in Investment Banking, Asset Management, Brokerage, Private Equity, Finance and Research. Headquartered in Dubai, in the United Arab Emirates, SHUAA Capital has a regional presence with offices in Abu Dhabi, Riyadh, Doha, Cairo, Beirut and Istanbul.
Embedded in the dynamic economic environment of the Gulf Cooperation Council (GCC), SHUAA Capital provides a broad range of financial services to corporations, governments, institutional clients, and high net worth individuals.
Since 1979, SHUAA Capital has played a prominent role in shaping the financial services landscape of the GCC and will continue to be at the vanguard of regional integration into global financial markets.
For further information contact:
Oliver C. Schutzmann
Chief Communications Officer
SHUAA CAPITAL psc
Level 2, West Wing, The Gate Building
Dubai International Financial Center
P.O. Box 31045, Dubai - UAE
Tel: +971 4 3199 872
Fax: +971 4 3303 550
Mob: +971 506405722
oschutzmann@shuaacapital.com
Tarek S. Fleihan
Senior Associate - Investor Relations & Corporate Communications
SHUAA CAPITAL psc
Level 2, West Wing, The Gate Building
Dubai International Financial Center
P.O. Box 31045, Dubai - UAE
Tel: +971 4 3199 874
Fax: +971 4 3303 550
Pager: +971507080571
tfleihan@shuaacapital.com
© Press Release 2010
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