Saudi bond success ‘reflects overall economic strength’

31/10/2016 05:17 AST

The net income of Saudi listed companies declined 2.1 percent year-on-year in the third quarter of 2016, but remained almost flat sequentially on an aggregate basis giving indications of resilience in view of the current economic challenges, according to Al-Rajhi Capital.

The banking sector which has been under pressure due to concerns of liquidity and potential increase in non-performing loans, seems to be benefitting from increasing asset yields, Al-Rajhi Capital stated in a research report.

One bright spot was the recent successful issuance of Saudi dollar denominated bonds which reflected the overall economic strength and confidence of larger global investor community, which is likely to help ease liquidity in the banking system and pave way for future issuances from corporates with the establishment of a sovereign yield curve, said the economists. Among the sectors in the Saudi stock market, insurance was the brightest spot with earnings (before zakat) growing 65 percent y-o-y, Al-Rajhi Capital added.

While recent economic challenges will mainly impact domestic oriented sectors, the report said that export-oriented petrochemical sector is likely to hold up with improvement in product — feedstock spreads and efficiencies. Most domestic oriented companies seem to have absorbed the revenue decline for now to stay in the positive earnings territory due to the historical higher margins they enjoyed.

SABIC led the pack among Saudi petrochemical companies, as it raised the bar showing a sustainable improvement in cost structure. Metals and fertilizer segments were victims of depressed commodity prices.

However, on the positive side, there is unlikely to be significant downside from these levels and overall performance of petrochemical firms could be sustained in the near term if current product spreads are maintained.

According to Al-Rajhi Capital, challenges in the local economy for majority companies in the domestically oriented sectors are expected to increase, as impact of recent austerity measures such as the cut in allowances of some public sector employees are yet to be reflected on spending (impacting revenues) and broader economy.

Cost side pressures are also likely to continue with further likely reduction in subsidies and increase in energy prices (in line with announced Government objectives) on the one hand, and increasing borrowing costs (in line with SAIBOR and widening credit spreads), and Saudization requirements on the other.

Additionally, new potential measures such as white land and municipal fees, and VAT will also increase revenue and cost pressures for certain companies. The researchers expect more clarity to emerge giving investors more comfort as additional measures are announced.

The report said that most domestic oriented sectors has been weaker than what the aggregate numbers suggest.

It said that the performance of heavyweight sectors and Saudi Electricity Co. seems to have overshadowed the overall weaker underlying performance of most companies. The report added: “About 75 percent of the 130 companies used in our analysis (ex-insurance sector) registered a y-o-y decline in 9M 2016 net profit compared to 58 percent of the companies during FY 2015.”

Excluding Saudi Electricity Company, which reported its best quarterly profit in a decade, aggregate net profit for listed companies declined 17 y-o-y during 9M 2016.

“Further, excluding the performance of heavy weight (petrochemical and banking), insurance and energy sectors, net profit was down 25 percent y-o-y during 9M 2016,” said the report.

“This in our view provides an indication of the underlying trend in the profitability of listed companies and broader market, which is also reflected in the increasing number of companies reporting a decline in net income during the year compared to past few years,” it added.

Arab News