JEDDAH, 5 November — Almost the entire 15.4 percent gain, which the Saudi equity market had accumulated during the first eight months of this year, vanished in just two weeks after Sept. 11, before some buying interest lifted prices to close the month 11.3 percent lower from the levels prevailing at the end of August. While the Saudi equity market is still relatively closed for foreign investors, the selling spree in September became more or less a global phenomenon, as fresh worries started surfacing about the risk of instability in the region, besides the emerging of global recession and the weakening of oil prices and their ripple effects on the Saudi economy next year. The NCFEI All Sectors Index plunged nearly 294 points in September alone to close at 2,311 level, while investors lost nearly SR33.1 billion from the market value of their shareholdings in just 26 trading days in that month. Selling pressure led the market activities to rise by 10.6 percent in September while the average value per transaction declined by 3 percent in the same period, suggesting that small investors were more active. The outlook for October appears to be somewhat positive, as the upcoming third quarter results are anticipated to be supportive. However, price movements over the next two months will continue to be driven more by news rather than by economic and corporate fundamentals.
While we believe that equity prices will remain volatile on either positive or negative news pertaining to the movement of oil prices and uncertainty in the region, the recent drop in equity prices has made valuation quite attractive for long-term investment, as strong fundamentals are still intact. Based on the annualized corporate results for the first half of 2001, the overall market average price earning multiple (PE) was 21.17 at the end of September 2001, down from 23.86 at the end of August. However, by excluding the perpetual loss making electricity sector, the PE multiple was even more attractive at 14.76 at the end of September, compared to 16.76 one month ago. Based on the equity prices prevailing at the end of September, market’s average dividend yield was 3.9 percent and by excluding the electricity sector it was 3.79 percent, compared respectively with 3.46 percent and 3.34 percent at the end of August. The market average price to book value ratio dwindled from 2.17 at the end of August to 1.93 at the end of September and by excluding electricity sector, the ratio came down from 2.32 in August to 2.05 in September. Elsewhere, the above indicators lead us to suggest that the financial fundamentals of the listed companies are still strong while the prevailing prices at the end of September were offering strong buying opportunities.
The downward move in September was deep across the board, with many stocks recording double digits decline, led by Saudi Cables (down 23.6 percent), Yanbu Cement (down 20.4 percent), and Arabian Cement (down 17.4 percent). The prices of bank stocks, which together accounted for nearly 47.5 percent of the total market capitalization, fell 11.6 percent in September 2000, after rising consistently every month since February up till August to register a total gain of 17.1 percent for the period. Investors in the banking stocks lost around SR16.2 billion in the market value of their holdings, representing nearly 49 percent of the aggregate loss the overall market had seen in September 2001. Nonetheless, the bank stocks were still in positive territory, reaping a cumulative gain of 1.3 percent since the beginning of this year.
The Saudi banking industry, whose combined net-profit rose by 12.1 percent to SR6,690 million in the first eight months of this year, should provide a great deal of stability to the market in the nearterm. But, a steep drop in the short-term interest rates will likely invigorate investors’ concern about future profitability and the related market valuation of bank stocks. Within the banking sector, the share price of Arab National Bank (ANB) suffered the most with a drop of 16.7 percent in September, followed by Riyad Bank (14.6 percent down), and Saudi Fransi Bank (13.4 percent down). The share prices of other banks also suffered losses last month ranging between 8 to 12 percent. Based on the annualized results for the first half of 2001 and the share prices prevailing at the end of September, the combined average PE for the sector was 14.72 compared with 16.44 at the end of August. The dividend yield for bank stocks stood at 4.6 percent and price to book value at 3.01 at the end of September 2001.
The industrial stocks, which are dominated by the export oriented SABIC and Safco companies, fell by 12 percent in September, as global uncertainties and worldwide economic recession are more likely would hurt exports of petrochemicals and fertilizers. Investors in the industrial stocks faced a loss of around SR8.85 billion in the market value of their shares in September 2001, while the prices were still 8.4 percent lower since the beginning of the year. Share prices of SABIC and Safco dropped respectively by 12.4 percent and 10.6 percent in September 2001. Elsewhere, within the industrial sector, Saudi Cables, Saudi Refineries, Saudi Ceramics, Savola, NIC and National Gaz saw their prices declining in double digits in September. Based on the annualized results for the first half of 2001, the sector’s average price earnings multiple (PE) was 15.09 at the end of September compared with 17.15 at the end of August. The sector’s dividend yield was 2.4 percent while the price to book value ratio was 1.44 at the end of last month. These indicators send mixed signals to investors as current prices of industrial stocks might by considered overvalued when examined against overall market average PE multiple, but looked undervalued in relation to price to book value ratio of the total market.
The cement sector, which was already poised for correction as a result of exuberance performance in the first eight months of the year, suffered the most with a loss of 15.2 percent in September, narrowing the whooping gain so far this year to around 38.8 percent. While the investors of cement stocks lost nearly SR4.5 billion in the market value of their shares in September, their wealth still stood around SR7 billion more than what it had been at the end of December 2000. Within the cement sector, the largest loss in September was embraced by Yanbu Cement (20.4 percent), followed by Arabian Cement (17.4 percent), Eastern Cement (16.9 percent), Saudi Cement (16.1 percent) and Southern Cement (15.1 percent). Other cement companies sustained losses in September ranging between 9 to 12 percent. The cement sector’s average price earning multiple (PE) was 14.84 at the end of September 2001, compared with the market average of 21.17, while the dividend yield was impressive at 4.8 percent against the market average of 3.9 percent in the same period.
The performance of services, electricity and agricultural sectors was somewhat moderate in September, but all ended in the negative territory. Prices of services sector companies dropped by 7.7 percent in September, narrowing the cumulative gain made in the first eight months of the year to around 11.5 percent. Investors in the services sector’s stocks lost around SR900 million from the market value of their shares in September, but their wealth was still SR1,000 million more than what it was at the end of 2000. The main losers in the services sector were the Saudi Exports Company, recording a loss of 17.8 percent in September, followed by transportation company, Mubarad, declining by 16.4 percent, while Hotels & Resorts was down by 14.9 percent in the same period. The sector’s average P/E was 13.78 and price to book value ratio amounted to 0.93, thus suggesting most stocks were undervalued at the end of September.
With a 6.9 percent drop in the prices of electricity stocks, the investors saw the market value of their shares falling by SR2.6 billion last month representing around 7.8 percent of the total loss seen by the overall market in September 2001. With a number of positive developments going forward in the electricity sector, investors of electricity stocks were still making an additional gain of around 7.2 percent over what their wealth was at the end of last year. The least capitalized agricultural sector was down 8.6 percent in September and was even lower by 0.2 percent since the beginning of this year.
On the trading counters, the value of shares traded rose by 10.6 percent to SR10.65 billion in September, bringing the total to SR69.53 billion for the first nine months of this year, an increase of 38.5 percent over the SR50.2 billion recorded for the same period of last year. The value of traded shares for the whole of 2001 is expected to surpass SR85 billion mark, around 30 percent higher than what was attained in the 12 months of last year. In all, 77,588 trade transactions were executed to exchange 100.1 million shares in September, compared to 68,043 trade transactions and 78.8 million shares in August, representing an increase of 27 percent for the month. The corresponding average value per transaction declined by 3 percent to SR137,296 in September, from SR141,564 in August, suggesting that trade transactions were dominated by small volumes. The overall market average, however, rose by 8.5 percent to SR136,469 for the first nine months of this year, compared to SR125,723 for the same period of last year.
The top 10 traded companies accounted for nearly 61.1 percent of the total market value for the first nine months of this year. The combined average value per transaction for the top ten traded companies was SR188,014 for the period, compared to SR169,011 in August, suggesting that trades were concentrated in larger volumes for those major companies.
Stocks of banking, industrial and cement sectors dominated trading activities last month, which together accounted for nearly 82.2 percent of the total market in September 2001. Trading in the banking stocks, which represented nearly 36.6 percent of the total market, rose by 79.3 percent to SR3,899 million in September, bringing the first nine month’s total to SR20,164 million, compared with SR29,521 million for the whole of 2000. Trading activities in the industrial stocks declined by 29.1 percent to SR2,710 million in September, compared with SR3,822 million in August, thus bringing the first nine months’ total nearly 15 percent higher than the whole of 2000 at SR23,608 million. Trading in the services and electricity sectors showed higher volumes and values while those of the cement and agricultural sectors were lower in volumes and values.