Global : Saudi Stock Market – Surge in market capitalization in 2005

Global : Saudi Stock Market – Surge in market capitalization in 2005

Global Investment House – Saudi Arabic Economic & Strategic Outlook – Saudi Stock Market– The Saudi stock market continued to surge in 2005 as well on the back of strong investors’ interest in the stock market. The Saudi market ended the year with the whopping yearly gain of 103.7% on the back of yearly gains of 84.9% and 76.2% reported in 2004 and 2003 respectively. The market capitalization of the Saudi stock exchange at the end of 2005 stood at US$645.9bn, registering a growth of 111% over US$305.9bn reported at the end of previous year. This is attributed to the reform pursued by the government, strong earnings by the corporates, high liquidity and positive investors’ sentiments on the bourses. The strong buying interest can be gauged by the fact that no stock out of 77 listed stocks on the Saudi stock exchange reported yearly losses in 2005.

Stock Exchange Performance by Sector Indices

Source: Saudi Stock Exchange

Among the sectoral indices, Services and Agriculture sector index reported more than 200% growth in 2005 while banking and industrial sector indices reported the yearly growth of more than 100% in the year. The market capitalization of the TASI increased by 111.2% in 2005 and crossed the SR2-trillion mark. The market capitalization at the end of 2005 stood at SR2,423.2bn (US$646bn). Industry sector continued to account for the highest proportion of the Saudi market capitalization with 38% of the total market capitalization. Banking sector, on account of rising prices and listing of Bank Al Bilad too surged and aggregated the market capitalization of SR773.3bn at the end of 2005 accounting for 31.9% of the total market capitalization. Telecom sector, with only 2 constituents, STC and Etihad Etisalat still accounted for 14.4% of the total market capitalization in 2005.

Market Capitalization by Sector

Source: Saudi Stock Exchange

Among the companies, the Saudi Basic Industries Corporation (SABIC) continued to lead with a whopping market capitalization of SR632.3bn (26.09% of the total market cap.) recorded at the end of 2005. It was followed by the Saudi Telecommunications Company (STC) with the market capitalization of SR278.4bn at the end of 2005. Al Rajhi Banking & Investment Corp led the banking sector with the market capitalization of SR243.9bn as on Dec-end 2005. The market capitalization of the Saudi stock market at the end of 1Q-2006 stood at SR2.5bn.

The year was marked by the surge in trading activity as the market saw deluge of retail and institutional players increasing their allocation for stock investments. The aggregate volumes of shares traded on the bourse in 2005 stood at 12.3mn shares, registering a yearly growth of 19.3%. However, what is worth noting is that the number of transactions in the year 2005 registered an increase of around 250% over the previous year indicating the strong presence of retail investors. The aggregate value of shares traded on the exchange too increased by 133% over the previous year as it amounted to SR4.1 trillion in 2005. Among the sectors, industrial sector accounted for 33.8% of the aggregate volume of shares traded and 44% of the total value of shares traded on the exchange in 2005.

Volume of Shares Traded by Sector

Source: Saudi Stock Exchange

Among the individual stocks that witnessed increased trading activity in the year 2005, SEC led the market as it saw 1.4bn shares changing hands in 2005 followed by Saudi Livestock (0.99bn) and Qassim Agriculture (0.61bn). Among the aggregate value of shares traded on the exchange in 2005, SABIC, the index heavyweight, led the market with the aggregate value traded of SR395.7bn followed by STC which reported SR205.2bn value traded in 2005.

Value of Shares Traded by Sector

Source: Saudi Stock Exchange

The year saw four high-profile listing which took the total number of listed companies at the end of 2005 to 77. The primary market saw heavy oversubscription level indicating the abundance of liquidity in the market and the strong investors’ interest to invest in quality issues. We believe that the performance of both the primary and secondary markets in 2005 will spur many government undertaking as well as family businesses to tap the capital markets in 2006-07 and unlock the wealth of their investments. The last quarter of the year saw Saudi Arabia entering the WTO which will further enthuse the foreign/private investors to invest and participate in the economic growth of the country.

However, the strong growth of the stock market stretched the valuations with the earning multiples at abnormally high level. Market participants were expecting a correction and it did come when the Saudi market in March-2006 nose-dived 12.5%. The market has reported YTD gains of 2.1% till Mar-05. In 2004-05, the market cap growth had abnormally out-performed the corporate earnings growth. The liquidity in the market also took a hit owing to the IPOs, rights issues and capital expansions undertaken by the corporate/banks in the region. The Saudi regulator CMA also took step in order to curb volatility in the market by reducing the allowed percentage of fluctuation in the value of all shares from 10% to 5%.  The par value of all the listed companies was also reduced from SR50 to SR10 which will result in more liquidity on the bourse and increased retail participation. However, in the long-run the Saudi market is expected to stabilize. The number of listed companies increased to 79 at the end of Mar-06. We believe that with the capital expansions and new issues, the free float is likely to increase in the market making the market more liquid and deep.

Corporate Earnings

The aggregate earning of the Saudi corporates was SR64.7bn in 2005, up 41.7% as compared to the previous year.  All the sectors have shown an improvement in the profitability which indicates to the broad-based improvement in the economic profile and corporate performance. However one thing which stands out is the impact of the investment income on bottom-line. With the stock market giving fabulous returns in 2005, Saudi corporates had a major chunk of profit coming through investment income/gains but increased proportion of investment income is likely to increase the volatility of earning in future.

Corporate Earnings

Source: Global Research

The insurance sector comprising of only one listed company NCCI recorded a whopping growth of 359.3% in 2005 on account of increased insurance penetration in the country. However, the company will face pressure in the future keeping in mind the liberalization program and new licenses being given in the lucrative, under-penetrated Saudi insurance sector. Agriculture sector too recorded a 123.8% growth in the net profit reaching SR256.6mn in 2005.

SABIC, the market leader in terms of market capitalization led in terms of net profit too as it notched 35.1% increase in its net profit in 2005 aggregating to SR19.2bn. However, there are concerns as to whether the company will able to show that kind of growth in future keeping in mind the commodity prices and production levels. Services sector too reported strong growth in net profit led by Saudi shipping that notched SR438.8mn in net profit in 2005 compared with SR427.8mn reported in the previous year.

Banking sector taking advantage of strong fee income from brokerage activities and investment banking activities reported a strong growth of 65.6% in its 2005 net profit. The spreads of the banks also widened as a result of the increase in the interest rates. The country premier Islamic bank, Al Rajhi Banking & Investment Corp reported a whopping 91.9% increase in its net profit reaching SR5.6bn in 2005. Overall, the banking sector accounted for 34% of total listed companies 2005 profits. Saudi banks are expected to benefit from positive economic conditions currently prevailing in the country. With the oil revenues at its lifetime high and the government focusing its efforts to increase the non-oil sectors’ participation to the country’s economic development and growth, it augurs well for the banks and other private sector players. Also the banks are likely to improve penetration in the lucrative high-margin retail segment which will further boost their profitability.