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Kuwait Price Index up by 19% in Jan 2017

Date : 09/02/2017
Author:  Marmore MENA

According to Marmore’s recently released Monthly Market Review, MENA bourses had a positive start to the year 2017, with nearly all markets ending the first month in green. Kuwaiti Price and Weighted indices led the charge, rising by 18.9% and 12.4%, respectively, followed by Bahrain (6.8%). Saudi Arabia and Oman were the only markets to register a fall in January, falling by 1.5% and 0.1%, respectively. Various reasons are being touted for the 14-day consecutive rally in the Kuwait bourses, but a look at the top five stocks by value traded suggest that main activities are largely in large cap companies. The appointment of the new chairman and a series of market reforms may have led to investors hoping that steps might be taken to boost foreign inflows, following the regional peers UAE, Qatar and Saudi Arabia. Also, with Pakistan upgraded to MSCI Emerging Markets Index, Kuwait and other countries could see increased representation in the MSCI Frontier Markets Index.


With the fall in oil output, in line with the OPEC agreement, many of the Saudi sectors were affected, with losses posted in Banking, Retail, Hotels & Tourism and Transport sectors. Corporate earnings across all sectors rose by 2% in 2016, but earnings in Banks and Materials companies fell by 5% and 8%, respectively. S&P GCC grew by 1.6% in January, to close the month at 101 points.

MENA markets witnessed an upswing in momentum in January, with volumes rising 53% and value traded 3.7%. All MENA markets, barring Saudi Arabia, witnessed a rise in market liquidity in December, with Kuwait, Bahrain and Abu Dhabi leading the charge. Value traded in Kuwait stood at USD 3.9bn in January, compared to USD 9.5bn for the whole of 2016. In terms of valuation, P/E of Morocco (20.7x), Kuwait (17.9x), and Qatar (15.4x) markets were the premium markets in the MENA region, while the markets of Egypt (7.7x), Dubai (9.9x), and Bahrain (10.0x) were the discount markets.

Blue Chips also had a positive month, with Kuwaiti large caps dominating the best GCC performers in January. Shares of Zain, Kuwait Finance House, National Bank of Kuwait and Kuwait Projects posted double-digit growth, at 20.7%, 14.8%, 12.3% and 12%, respectively. Saudi Telecom (-7.6%) and Emirates Telecom (-4.8%) lagged behind the rest. Kuwait Finance House and National Bank of Kuwait also posted positive growth in 2016 earnings, as revenues grew, while Saudi Telecom witnessed an 8% fall in profits. Q4 profits for SABIC were positive for the first time in ten quarters, which indicated that  the worst might be over for Saudi Arabia's petrochemical sector, since the fall in oil price and government austerity measures raised the cost of gas feedstock. Qatar National Bank has reported a 10% jump year-on-year in net profit to USD 3.4bn for the year ended 2016, helped by stronger core earnings.

New Year Reforms and Bond Issuances
Saudi Stock Exchange is set to introduce settlement of trades within two working days of execution (T+2) during the second quarter of 2017. Tadawul also published draft rules for short-selling, and the borrowing and lending of securities. Presently, trades must be settled on the same day, which has inconvenienced foreign investors in particular, as they must have large amounts of money on hand before trading.

The Saudi cabinet approved an IMF-backed value-added tax (VAT) to be imposed across the Gulf, following the slump in oil prices. A 5% VAT will be levied on certain goods, following an agreement with the GCC in Jun’16. The move is in line with the IMF recommendation for Gulf States, to impose revenue-raising measures including excise and value-added taxes to help adjust to the low oil price environment that has slowed regional growth. The GCC countries have also agreed to implement selective taxes on tobacco, and soft and energy drinks this year.

The government of Oman has approached banks for an international bond issue with tranches of 5- and 10-years as the country plugs a budget deficit caused by lower oil prices. Oman's budget deficit is forecast to be USD 7.8bn in 2017, and the finance ministry has stated that it would cover this year's deficit with USD 5.5bn of international borrowing, USD 1bn of domestic borrowing and the drawdown of USD 1.3bn from financial reserves. Last year, the government raised a USD 1bn international syndicated loan in January, and issued tranches of 5- and 10-years international bonds worth USD 2.5bn in June, followed by another issue of USD 1.5bn in September.

Oil Market Review
Brent crude fell by 2 per cent to close the month at USD 55.7 per barrel, having maintained the price level at above USD 50 per barrel for all of January. OPEC nations Saudi Arabia, Kuwait, Algeria cut production in January more than they had originally committed to, while Russia followed suit and trimmed production faster than was initially agreed. However, rising US rig count and output put a cap on any oil price growth, as the US President had vowed to increase production.

Tags:  Bonds, Capital Markets, GCC, Oil, Stock Market

 Current rating: 0 (3 ratings)

GCC Markets Mixed, OPEC Deal Uncertain

Date : 08/11/2016
Author:  Marmore MENA


According to Marmore’s recently released Monthly Market Review, GCC bourses had a mixed October, with Saudi’s TASI index rising 6.9 per cent, followed by Egypt (5.5 per cent) and Morocco (5.2 per cent). On the other end of the spectrum, Oman (-4.3 per cent), Dubai (-4.1 per cent) and Abu Dhabi (-3.9 per cent) indices witnessed fall. Saudi Arabian enjoyed their longest winning streak in more than two years, on the back of investor optimism and improving outlook for the kingdom’s banks. Saudi Arabia sold the largest international sovereign bond (USD 17.5bn) in emerging-market history, which would improve liquidity boost payments to contractors thereby help improve expectations regarding non-performing loans. Egyptian markets were buoyed by the possibility of a USD 12bn loan approval from the IMF. Speculation continues to mount that the central bank would devalue the currency, as the black market and official rate diverged to a record discrepancy. The country’s currency had been tumbling almost daily on the black market since Saudi Arabia halted petroleum aid to Egypt this month, forcing it to spend USD 500mn for oil products on the spot market.


Selling pressure created by Foreign Institutional Investors (FIIs) led to the fall in the Muscat index, while sharp fall seen in the Dubai index was attributed to profit booking, due to volatility in the international commodities and currency market. In terms of valuation, P/E of Morocco (18x), Qatar (14.3x) and Jordan (14.2x) markets were the premium markets in the MENA region, while the markets of Egypt (8.5x), Dubai (8.8x), and Oman (9.3x) were the discount markets.

Blue Chips also had a mixed month, with National Commercial Bank (Saudi Arabia) and Zain (Kuwait) ending the month at the top of the pile, gaining 33.5% and 16.4%, respectively. Kuwait Projects lagged behind the rest of the blue chips, falling by 10%, despite an 8% YoY rise in nine-month net profit. Although third quarter profit fell by 1.6%, shares of NCB were buoyed by the expected easing of liquidity, as the kingdom issued international bonds to tide over rising deficit. The bank cited an 18.7% jump in total operating expenses, caused by higher impairments on financings and investments for the fall in net profit. Zain Kuwait's number of subscribers increased to 2.9mn for the nine months to 30 September, in a very challenging period that witnessed intense price competition. The company also reported a better than expected 12% rise in third-quarter profit. Qatari telecom operator Ooredoo reported a 51% fall in third-quarter net profit, as the earnings continued to be affected by foreign exchange losses and plunging earnings from Iraq, although a strong domestic performance has helped mitigate the impact. Emaar Properties reported a 31% jump in third-quarter profit, as rising property sales overcame the wider real estate market malaise.

Saudi bond issue and market reforms
Saudi Arabia raised USD 17.5bn in the biggest ever bond sale from an emerging-market nation, as the kingdom sought to shore up finances battered by the slide in oil. The government supposedly sold dollar-denominated bonds due in five years yielding 135 basis points more than similar-maturity US Treasuries, 10-year notes at a spread of 165 basis points and 30-year securities at 210 basis points. The kingdom raised USD 5.5 bon in each of the five- and 10-year bonds, and USD 6.5bn in 30-year debt.

In a bid to improve foreign investment in capital markets and bring the Saudi stock market into the global investing mainstream, the nation's 175 listed companies are now required by the Capital Markets Authority to adopt the International Financial Reporting Standards (IFRS) from Jan 2017.

Oil Market Review

Brent crude rose to USD 53.14 per barrel in the month of October, before falling 9% and closing the month at USD 48.3 per barrel, as the OPEC deal to reduce crude output faced some obstacles towards the end of the month. OPEC members Iran and Iraq disagreed with the organization’s data on production levels, and have now refused to limit their crude output. Iraq, the second-largest producer in the cartel, is reportedly asking for exemptions from any production limits due to disruptions caused by the insurgency, while other members, including Iran, Libya and Nigeria already have exemptions.

Tags:  Capital Markets, MENA, Oil, Stock Market

 Current rating: 0 (3 ratings)

Sources of Stock Market Wealth Creation: 3 Distinct Case Studies

Date : 18/10/2016
Author:  Marmore MENA

Stocks around the world create wealth to the shareholders either through dividends or capital gains or a mix of both and this holds true for the GCC region too. In this blog we examine three different stocks in the region that have created wealth through the above mentioned factors. Industries Qatar, a Qatari conglomerate, has generated shareholder wealth mainly through dividends while Saudi Arabia Mining Company (Maaden), a metals and mining giant, has generated shareholder wealth exclusively through capital gains. Between these two extremes lie Emirates telecom (or Etisalat) whose shareholder wealth generation was evenly split between dividends and capital gains. We examine the reasons behind such differences in the wealth creation patterns.

Stock market wealth creation_Fig1

Cash flows, ownership structure and free float shares of the company combined affect the dividend policies of the company. Industries Qatar for instance is majority owned by the government of Qatar. Traditionally regional governments’ have held majority stake in companies that deal in natural resources in the region. Industries Qatar is a good example of the role that government ownership plays in dividend policies. The government of Qatar owns close to 67% of the company and thus enjoys higher say in formulating the dividend policies of the company which could be one of the reasons behind higher dividend pay-out ratio (60% till 2014). Qatar’s budget revenues consist of income from oil& gas, investment income and other incomes with investment income alone accounting for 30% of the revenues in 2015. Dividends from Industries Qatar roughly account for 6% of the investment income (majority of the dividends comes from Qatar Petroleum). As a result dividends serve as an important source of income for the government. Qatar government then spends this on developing the infrastructure in the country which goes in line with Industries Qatar’s dividend policies which lists sharing part of the wealth generated in the oil and gas segment with its shareholders as a key objective. As a result, the average pay-out ratio of dividends for the company till 2014 stands at 60%. Its capex as a % of cash flow from operating activities averages 27% over the observation period which suggests that the company has been generating enough cash flows to fund its capital expenses, liquidity, and withstand unexpected trading conditions. Positive cash flows has prevented the company from seeking outside capital for running its business and the company has used the positive cash flows to pay off some portion of its debt over the past four years. Revenues for the company peaked in 2012 following which it has witnessed a declining trend. Its three main segments: Petrochemical, Fertilizer and Steel have witnessed revenue declines of -13.5%,-9.7% and -12.4% during 2015. Weakness in oil prices has had an impact on prices of petrochemicals as well as fertilizers. Steel prices have suffered from global oversupply and weakness in key construction markets. Despite a lull in both top line and bottom line, the company has had positive cash flows from its operating activities which has been enough to cover its capital spending and pay dividends to its shareholders.

In contrast, Saudi Arabia Mining Company (Maaden) did not pay dividends at all during the period of study and therefore its wealth creation has entirely come from capital gains. This is despite Saudi government holding 65.42% of the company (direct holdings – 15.43% and public investment fund – 49.99%). Maaden’s operating cash flows have been positive however owing to its nature of its business it is required to invest a significant amount in securing future supply of mines. As a result of this, the company resorts to external borrowing since the cash flow from operations is not enough to cover its capex. From being debt free in 2008 it currently has a debt equity ratio of 1.66 times, significantly higher than the industry median of 0.45 times. Over the ten year period (2006-15) Maaden has cumulatively invested close to USD 20Bn on purchase of fixed assets, exploration of mining assets, project expansion etc. Its total debt issuances for the period amounts to USD 12.1B and almost of half of that has gone into purchase of fixed assets (USD 6Bn). Because it is cash negative due to high capex, it did not pay any dividends. However, exceptional topline and bottomline growth on the back of increase in price of the commodities has fuelled the growth of the share price over the years as a result of which all of the shareholders gains have been through capital appreciation. Maaden’s topline grew by 47% during 2006-15 which was largely driven by the growth in volumes in its key commodities i.e. Ammonia, Gold and Aluminum. Net profits grew at an annualized rate of 17% and would have been higher were it not for increase in selling/general and administrative expenses especially from freight and overhead charges. Industries Qatar and Maaden have managed to return 3.6% and 1.5% (CAGR) respectively.


Emirates Telecommunication (Etisalat) is one of the two major telecom operators in the UAE which is 60% owned by the Emirates Investment Authority while the rest is owned by institutional investors and general public. Etisalat’s dividend policy has been a generous one and positive cash flows from operations have ensured that it remains the same over the years. Etisalat has faced 5 instances when its market cap has declined on a YoY basis. Despite this the company’s stock has managed to add wealth to its shareholders fuelled by healthy growth in UAE in mobile and data segment. Analysing the cash flow statement reveals that the company has enough operating cash flows to cover its capital expenditures and overseas business acquisition. In the past ten years it has raised debt amounting to USD 7.5 Bn and close to 57% of the debt was raised in 2014. Net margins have remained in double digits over the years despite the saturation in the market owing to limited competition in the market (UAE has only two mobile operators). As a result of this the Return on Invested capital has managed to stay at higher levels.

The three case studies discussed here represent three models of wealth creation viz., only through dividends (Industries Qatar), only through Capital Gains (Maaden) and a combination of the two (Etisalat). As they say, dividends and capital gains are the two main pillars of wealth creation. A balanced contribution of both dividends and capital gains (like Etisalat) can result in robust long-term wealth creation than to depend on just one leg of wealth creation (like Maaden and Industries Qatar). This is borne out by their total return performance (see chart). While devising an investment strategy, it may be worthwhile to favour stocks that generated wealth for shareholders through a judicious combination of both pillars (dividends and capital gains) than just one. While 3 stocks may be too small a sample size, however the argument of balanced contribution from both sources of wealth creation still holds.

Tags:  Capital Gain, Capital Markets, Dividend, Stock Market

 Current rating: 0 (3 ratings)

Flat July for GCC Markets

Date : 15/08/2016
Author:  Marmore MENA

Flat July for GCC Markets

According to Marmore’s recently released Monthly Market Review, July was a marginally positive month for the MENA indices, with most markets ending the month in green, as positive quarterly earnings led to increased investor activity. Markets in Egypt (13.1%), Qatar (7.3%) and Dubai (5.2%) performed well, while Saudi’s TASI (-3.0%) and Kuwait weighted (-0.2%) indices lagged behind. The negative performance of the largest GCC market led to flat performance of S&P GCC index. Other indices witnessed slight rise in index values, despite the steepest monthly fall in oil prices in 2016. Egypt HRMS index rose in the last week of the month, as the country’s plan to secure a USD 12bn loan from the International Monetary Fund (IMF) was close to fruition. The loan is being sought to ease a crippling dollar squeeze, and restore confidence in the economy, and would be the fund’s biggest aid package in a region that has been pummeled by political unrest and oil price fall.

MMR Table - Figure 1

Blue chips drove Qatar’s index surge, with real estate (8.52%), telecoms (7.94%) and banking stocks (7.1%) performing well in July. The recently announced Qatar’s fuel subsidy reform will also help shrink its budget deficit by reducing expenditures; a move that will help investments in private sector. Saudi index fell due to fall in oil price, and the continued resilience of shale oil, as increasingly efficient US shale production continues to drive a wedge in OPEC’s strategy of flooding the market with excess crude.

Blue Chips had a mixed July, with Emaar Properties (UAE) and Ezdan Holdings (Qatar) ending the month at the top, gaining 10% and 9.6%, respectively. National Commercial Bank (Saudi Arabia) and First Gulf Bank (UAE) witnessed a slump, losing 6.0% and 4.4%, respectively. Positive Q2 results contributed to improved market performance for most companies in the region, as investors returned to the markets post Ramadan. Dubai's Emaar Properties reported a 8% rise in Q2 net profit, as strong investor demand led to higher revenue recognition. Ezdan Holdings half-yearly profit went up 8%, driven by rise in operations. Despite posting a profit of 3.2% in Q2, shares of National Commercial Bank declined the most in July, as the bank proposed a lower dividend for the first half of the year, as compared to the previous year. Q2 profits of First Gulf Bank slipped 10%, meeting analyst estimates, while the merger between FGB and National Bank of Abu Dhabi was confirmed early in July.

Rise in Debt issuance
According to IIF, GCC countries are turning to both domestic and foreign debt markets to finance their rising fiscal deficits, and this trend is likely to persist in the short to medium term. Since mid-2014, the drop in oil prices has shifted the large aggregate current account surpluses of GCC countries, accumulated in the past decade, to a deficit of USD 35bn in 2015, and this is expected to widen to USD 89bn or 6.5% of the GDP in 2016. The large resident capital outflows in the form of investments, which peaked at USD 384bn in 2013, have virtually disappeared, and international reserves are being used to fund widening deficits.

Prior to 2016, GCC sovereign debt issuance had been relatively sparse, barring Bahrain, particularly in foreign currency, and usually reserved for benchmarking or for monetary policy purposes. Thus far, in 2016, both Abu Dhabi and Qatar have tapped international markets with sizeable issues.

Fall in Real Estate transactions
Saudi Arabia has registered a sharp drop of 56.7% in the total weekly sales, settling at USD 0.5bn, the lowest weekly level in a decade. Experts claim this drop in sales was caused by the low demand that followed the implementation of the so-called white land fees regulation, which pushed people who want to buy properties to wait for a real decline in prices.

Oil Market Review
Brent crude fell sharply by 14.5% in the month of July, closing at USD 42.46 per barrel; the lowest close in 4months. Oil output from the Middle East rose to a record high in June, with production rising above 31mn barrels per day for the third month running. Supply from the Organization of the Petroleum Exporting Countries has risen to 33.41 million barrels per day (bpd) in July from a revised 33.31 million bpd in June, adding downward pressure on prices.

Tags:  Capital Markets, Oil, Stock Market

 Current rating: 0 (3 ratings)

Private equity can fill the funding gaps left by banks

Date : 23/06/2016
Author:  Marmore MENA

The article originally appeared in The National.

Is this the perfect time for GCC private equity and venture capital to scale up?

After the global financial crisis, private equity activity in the GCC declined tremendously. Fundraising became anaemic, despite the sizeable amount of dry powder accumulated over the boom years, and deals had stalled as acquisition finance became expensive and difficult to obtain. After a long hibernation, value raised under private equity experienced a quantum leap from US$900 million in 2013 to $2.4bn in 2014, but fell to $500m last year.

The recent entry of UAE and Qatar into the MSCI Emerging Markets index has led to many market reforms across the region aimed at improving disclosures and standardising corporate governance. But nascent legal and regulatory framework, with stringent foreign ownership restrictions, weak bankruptcy laws and high set-up costs, continue to dampen investor enthusiasm.

So what has changed in the recent past? Last year marked one of the worst years for oil prices and revenues – the backbone of most of the GCC economies. And the consensus forecast for the next two years indicates only a modest increase in prices, at less than $60 per barrel, a consider­able fall from the high of $115 per barrel in June 2014.

Such a drastic drop in revenues has triggered a liquidity fall, affecting several sectors of the GCC, especially in banking and financial services industry.

Growth in deposits are lagging behind credit growth and this deficit is accentuated by falling government deposits and continued remittance outflows.

Government borrowing has also been on the rise, which crowds out the private sector and deprives them of credit facilities. S&P has already forecast that Saudi Arabia is expected to tap international debt markets by 2016-17, as the domestic banking system can lend only up to $100bn, which comprises only one-third of their borrowing needs.

In addition, the looming rate hikes from the Fed could increase cost of capital, which makes it more difficult for the private sector to access funds. The IPO market, which in 2014 had 14 new issues worth $9.7bn, including the listing of NCB, the largest IPO in the region, had a dull year last year, with fewer than five new issues.

Most companies are staying away from floating shares in the GCC markets, owing to the oil price volatility and weak global cues. This hurts small and medium-sized enterprises (SMEs) and start-ups, which were already facing stringent collateral requirements, including personal guarantees.

Banks are reserved about funding SMEs because of their limited size and higher risks as SMEs are more vulnerable to eco­nomic fluctuations. Larger corporations in the GCC also rely heavily on bank financing, as it allows them to be less transparent and maintain greater control over their operations. But this leads to crowding out of funds as SMEs compete directly for capital with large corporations. For example, in Kuwait, the percentage of total bank loans given to SMEs is as low as 2 per cent. Fewer options in terms of Sharia-compliant products also imply that many SMEs find themselves excluded from the banking sector.

The number of start-ups have also risen in recent years and require strategic guidance to expand during the early stages. It is in this setting of challenging economic situations coupled with growing number of start-ups that PE & VC funds cannot only provide the required capital but also leverage on their industry contacts to share their domain expertise, streamline operations and thus create value for these businesses.

For example, Saudi Arabia’s STC Ventures provided a $3m venture capital funding for, a Dubai- based finance comparison start-up, which is expanding into Saudi Arabia. STC would also facilitate expansion by getting local support, and access to untapped sectors.

Many major sectors in the GCC are set to grow in the coming years, as rising disposable incomes will inevitably lead to higher consumption of goods and services. Expanding retail businesses, from jewellery, beauty and cosmetics, clothing, supermarkets and restaurants are expected to intensify investor interest, with significant opportunities in online retail (general and discount) space, as mobile penetration continues to rise in the region.

Luxury retailing is already a thriving business in the GCC – propelled by affluent locals, splurging expatriates, growing brand-aware youthful population and deep-pocketed tourists. Rising public spending in education has been driven by the need to develop skills of a rapidly growing population in the GCC countries and offer considerable opportunities for PE players.

Similarly, health care has attracted a lot of investments in the PE space, as the need to tackle the effects of lifestyle issues and newly introduced mandatory insurance are driving industry growth. In the en­ergy sector, GCC states have also started exploring alternative sources of energy including ­solar power, nuclear and natural gas to boost capacity and diversify the energy mix.

Governments are also focused on modernising their transport and infrastructure, in partnership with the private sector. The entry of PEs into the family businesses can help in the greater flow of ideas, realign focus on core assets and competency, and can generate lead to better sustainability.

Private equity funds could fill the existing funding gap and take advantage of the growing regional economy.

Tags:  Capital Markets, equity, GCC, Oil, private

 Current rating: 0 (3 ratings)
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