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Negative sentiment rules despite earnings growth

June 2006
The market once again slipped to yet lower year to date levels vis a vis March 15 with both the HFI and CIBC indices closing deep in the red at 51780.1 and 215.68, down 6.5 percent and 11.2 percent year to date, respectively. This implies a drop of 11.4 percent and 10.1 percent, respectively, in the period from April 15 to May 15. The advance to decline ratio dropped to its lowest level so far into the year (0.15)!

Ironically enough, a glance at listed companies' first-quarter results shows a growth rate of 20 percent on average. Yet, such growth rates have not translated into capital appreciation due to an overwhelming sentiment effect keeping a cap on stock prices.

By large it was first-quarter results season. Several companies reported their financial results ended March 31 during this period, the majority of which were on the positive side. For example, CIB posted a 31 percent higher net profit of £E 187.6 million in its first quarter, helped mainly by non-interest income and lower provisions booked. Also in banking, NSGB's net profit jumped 56 percent to £E 105 million in the same quarter, thanks in good part again to lower provisions. CIB stock ended the period down 4.5 percent at £E 71.17, while NSGB's was down 5.4 percent at £E 44.26.

One of last year's high-profile IPOs, AMOC reported a 28-percent growth rate in its bottom line profits to reach £E 509 million in the nine-month period ended March 31. Yet, the stock closed 18 percent lower at £E 67.44. Likewise, Arabia Cotton Ginning rang up a 30 percent higher net profit, of £E 39 million, but its stock ended almost 10 percent lower. Also in textiles, Oriental Weavers grew its net profit by 11 percent to £E 62 million in the first quarter, yet its stock lost 17 percent of its value, dropping to £E 65.40.

In telecom land, Telecom Egypt (TE) exhibited a 44-percent jump in net profit to £E 536 million in its first quarter. Interestingly, TE's stock closed down 12.8 percent for the period at £E 13.52, around 9 percent lower than the IPO price. Even Orascom Telecom (OT) followed suit with around 30-percent growth in profits (excluding one-time gains) despite higher non-cash charges net and financing costs. It is worth noting that OT could soon be bidding for Saudi Arabia's third mobile license once auctioned. OT's stock did not escape the slide and ended 7.5 percent lower at £E 286.77.

On the other hand, there were a few profitability disappointments as those of EFIC (40 percent lower) and Al Ezz National Iron & Steel (31 percent lower). The former's stock dropped 21 percent, while the latter's dropped 23 percent.

All this indicates is that sellers are still outnumbering buyers. Yet, one positive development is the 20-percent drop in the type of investors from around 80 percent retail to only 60 percent. Hence, sentiment-driven retail investors are being filtered out. Nevertheless, one should not be surprised if another wave of sellers hit the market dragging indices further down, as this would be a good buying opportunity.

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EFG- Hermes Holding
By large, EFG-Hermes Holding stock has become the market's bellwether in the last few months, grabbing attention with its volatile performance and retail followers. The stock has been making the top five list in terms of value traded almost every day now. Yet, it was the worst performer last period, losing 42 percent of its value from £E 72.08 to £E 41.52. The stock's traded value amounted to £E 3.4 billion, representing around 25 percent of total market turnover over the period. On May 15 after the trading session, the company announced that it has been granted a license by the Saudi Capital Market Authority to operate investment banking and brokerage operations in the kingdom. The stock rebounded the following day by 10.5 percent to £E 45.87. It is worth noting that the company had posted £E 209 million of net profits in its first-quarter results compared to only £E 42 million a year ago.

© Business Monthly 2006