The Saudi economy maintains a positive outlook, enhancing the investment case for the TASI, highlighted NCB Capital in the updated version of its annual Saudi Factbook.
Since its inception four years ago, the annual NCB Capital Saudi Factbook has become an important aid to the investment community's understanding of the strengths of the Kingdom's market and the positioning of its companies and sectors against local and global demand drivers. The report covers the Saudi economy and capital markets, and contains commentary on all sectors and 152 stocks in the Tadawul All-Share Index (TASI). The report additionally highlights forward looking estimates for the 37 stocks covered by NCB Capital.
"Strong GDP growth expected in 2012 is combined with low debt levels, strong reserves and continued government infrastructure spending, making the Saudi economy resilient to any global slowdown," said Farouk Miah, head of equity research at NCB Capital commenting on the launch of the 4th edition of the Saudi Factbook. "Despite the good market performance in Q1 12, the TASI remains at a discount to historic valuations with good earnings growth supporting upside potential of the market."
Through a combination of higher than expected income from petrochemical sales, continued infrastructure spending and a buoyant domestic economy, GDP expanded by 6.8 percent in 2011, the fastest rate in eight years. Going forward, the economic outlook remains encouraging, even though growth may see some moderation in 2012 due to a reduction in government spending and oil prices retreating somewhat. The IMF expects economic growth to marginally slow down to 6.0 percent in 2012.
"With SR 270 billion of construction contracts awarded in 2011, more than double the value in 2010 and surpassing the previous high of SR 207 billion in 2009, this should support growth in the coming years as these projects are executed. We expect the ongoing infrastructure spending by the government to continue to drive the domestic economy in 2012," added Miah.
Saudi market profitability
Due to strong growth from the domestically focused and defensive sectors such as cement, telecoms, retail and banks, coupled with high absolute profits from the petrochemical sector, NCB Capital believes profitability for the listed companies should exceed SR 100 billion for the first time in 2012. It expects net income of the listed companies to grow by 18 percent YoY in 2012 to SR 112 billion. The listed Saudi banking sector, accounting for 29 percent of the free float weight of the TASI, is expected to record YoY profit growth of 10 percent, equivalent to net income of SR 28 billion.
NCB Capital believes the Saudi market is well positioned to grow both in the short and medium-to-long term. "The TASI is currently trading at 15.2x trailing P/E, below its historic average of 17.5x and the 20.0x and above valuation for similar frontier and emerging markets. This compelling valuation coupled with the good profit growth expectations for the market and limited correlation with other "mainstream" emerging market economies, we believe, leads to a compelling investment case for the TASI," said Miah.
However, the report noted that the continued global economic uncertainty poses a risk to the Saudi Arabian economy. While progress has been made towards resolving the euro zone debt crisis, a permanent solution still remains elusive. Similarly, growth concerns in the US and emerging economies continues to weigh on global sentiment. All these factors have a potential to hold back Saudi Arabia's growth momentum with lower oil demand and prices the key initial trigger.
NCB Capital Equity Research has coverage on 37 stocks in the Saudi market, equivalent to over 80 percent of the TASI market cap.
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