Saudi share prices drifted 4.4 percent lower in June reducing the 19 percent gain the market had accumulated during the first five months of 2002 to 13.7 percent during the first half of this year. Investors in the Saudi equity market saw their wealth increasing by SR32.5 billion in the first half of this year, as the overall market capitalization expanded from SR274.5 billion at the end of December 2001 to SR307.0 billion at the end of June 2002. However, a profit-taking selling spree that started in the first week of June continued through the fifth week, particularly at a time when trading activities normally slow down due to summer holidays season in Saudi Arabia. The near-term outlook suggests low trading volume and value while prices are expected to trade in a narrow range due to holidays and upcoming corporate results for the first-half of 2002.
The strong gain in Saudi equity prices during the first two quarters of this year was the result of low interest rates, around 8.6 percent expansion in the money supply (M1) and the continuing positive business environment.
Stable oil prices during the first half of this year and continued profitability growth of Saudi corporates seem to have removed fears of any serious downfall for the equity market in the coming months, as the expected IPO of the Saudi Telecom should keep investors’ confidence high. The domestic economic picture appears rather brighter than many would have expected a few months ago, particularly after the Sept. 11 events of last year. Based on the first quarter corporate results and equity prices prevailing at the end of June 2002, the overall forward looking price earnings multiple (P/E ratio) was 22.36, price to book value ratio at 2.04, while the dividend yield was high at 4.1 percent. As some profit-taking pushed prices down and raised the current dividend yield, Saudi stocks became more attractive for long-term investors who would want to invest for income purposes. Based on the first quarter corporate results, the combined profitability of listed companies is expected to rise by 12 percent this year, suggesting buying interests will likely emerge in the coming months.
The forward looking P/E multiple for the banking sector was 17.48, attractively below the overall market average, while its price to book value was 3.53, dividend yield at 4.1 percent and return on equity of 20.2 percent. On the other hand, industrial stocks appear overvalued by nearly 46 percent due to lower profitability of SABIC and SAFCO that lifted the sector’s average P/E ratio to 32.75 at the end of June 2002, while bringing the dividend yield down to 2 percent and price to book value at 1.55. The sector’s forward looking return on equity is estimated at 4.7 percent for the whole of 2002 while the current outstanding debt to equity was at 1.38 at the end of June 2002. Within the industrial sector, stocks of Savola, NIC, Spimaco, National Gas and Gypsum offer attractive buying opportunities as their earnings potentials are still intact and P/E ratios are relatively lower than the sector’s average.
Meanwhile, the market valuation of the eight cement companies appears technically cheap based on the P/E of 16.93 and dividend yield of 4.3 percent, yet the sector does not seem to sustain price increases seen in the last 18 months. The sector seems to be over capitalized as the 0.29 debt to equity ratio stood significantly below the overall market average at the end of June 2002.
While the services sector looks undervalued when compared to the overall market average P/E, given the low profit potential and the overall characteristics of the sector, the sector appears to be overvalued. The sector’s average P/E stood at 15.31 at the end of June 2002, compared with 11.99 at the end of December, as the 3.2 percent low dividend yield deterred investors from taking long positions. However, selective picking of companies such as Saptaco, Real Estate, Taibah, and Aseer could offer wealth appreciation in the short to medium terms.
A new joint stock company, namely Zamil Industrial Investment Company (ZIIC) was listed on the Saudi equity market in March of this year increasing the total number to 77, but later in June, after the merger of the ten electricity companies, 9 were eliminated from the list, bringing the overall total to 68. Zamil Industrial Company has a paid up capital of SR300 million with outstanding shares totaling 6 million at a par value of SR50 each. The company was established as a closed joint stock company in 1998 by floating 40 percent of its shares to prominent Saudi and Gulf investors. The company acts as a holding company and is engaged in producing air conditioners, steel and glass. The company’s opening share price was first quoted at SR200 which resulted in a market capitalization of SR1.2 billion, compared with the par value of SR50 per share totaling SR300 million. This gave a price-earning (P/E) multiple of 85, suggesting a significant overvaluation at the time of floating.
In June, the ten electricity companies were merged into a single joint stock company, namely Saudi Electricity Company (SEC). Before the merger, the combined capital of the ten electricity companies stood at SR23.15 billion which was subsequently raised to SR38.29 billion after the mergers.
The price performance across the six sectors comprising the Saudi stock market remained buoyant on the back of strong economic fundamentals, higher oil prices and rising corporate profitability. The electricity sector, which led the upward move during the six months period and accounted for nearly 13.2 percent of the total market capitalization, rose by 28.3 percent. The sector’s index retreated by 19.2 percent in June after rising by 58 percent during the first five months of this year. With market capitalization of around SR147 billion, the prices of bank stocks rose by 10 percent in the first half of this year, but declined 2.2 percent in June alone. Among bank stocks, prices of Riyad Bank rose by 39.2 percent while those of Al-Fransi Bank increased by 26.2 percent in the first half of this year.
The share prices of the 24 industrial companies recorded a combined gain of 10 percent during the first six months of this year, but lost some earlier gains due to a 2.4 percent fall in June alone. Although profit-ability of SABIC remained below expectation, the company’s strong fundamentals did not harm investors’ confidence due to better prospects in the long-run. The price of SABIC share rose by 9.8 percent in the first six months of this year, after falling by a 3.7 percent decline in June alone. The company’s current price is quoted at 42 times its earnings while it is giving a 1.8 percent return on equity, suggesting an overvaluation of the stocks.
Share prices of the eight cement companies were particularly underpinned by the continued rising domestic demand for cement, which increased by 15 percent to 17.8 million tons in 2001 and further by 12.5 percent to 8.3 million tons in the first five months of this year. Meanwhile, prices of cement stocks rose by 15.6 percent during the first six months of this year. Prices of Tabuk Cement recorded a 53.8 percent rise, followed by 30.7 percent gain for the Saudi Cement and of 26.3 percent for the price of Arabian Cement Company. The average price of the eight cement companies was being quoted at 16.9 times the combined earning for the sector while the dividend yield was 4.3 percent.
Finally, the performance of the services sector was comparatively better at 19.9 percent up, while the least capitalized agricultural companies gave a return on its index of 20.7 percent during the January-June period of 2002. Within the services sector, share prices of Al-Muwashi outperformed the sector while Eastern Agricultural remained a strong performer within the agricultural sector.
After rising by 28 percent to SR83.6 billion for the whole of 2001, the value of shares traded rose further by 85.5 percent to SR77.4 billion during the first six months of this year, up from SR41.7 billion during the same period a year ago. The value of shares traded has already touched nearly 93 percent of the total of last year, suggesting that buying turnover value this year is expected to surpass SR100 billion mark. The market depth, measured in terms of market capitalization as a percentage of nominal GDP, has expanded from 39 percent in 2001 to 44 percent during the first six months of 2002, reflecting increased investors confidence and rising participation. The number of trade transactions rose by 73.1 percent to 531,774 while the average value per transaction expanded by 7.2 percent to SR145,503 during the first six months of this year. This appears to suggest that large investors were quite active in the market so far this year. Trading activities were concentrated in the cement, banking and industrial stocks.
The rising value of shares traded suggests that the market depth has also increased as the turnover ratio expanded from 30.3 percent of the total market capitalization at the end of December 2001 to 39 percent by the end of June, and is expected reach nearly 47 percent by the end of 2002. Accounting for the 52 percent free float, turnover would have exceeded 75 percent, significantly higher than the overall ratio. The most active stocks by value were SABIC, Electricity Company (central), Saudi Cement Company, Riyad Bank and Al-Muwashi.
(Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah)