JEDDAH, 20 October 2003 — After accumulating 81.2 percent since the beginning of the year through Sept. 11, 2003, the Saudi equity market saw a brief profit-taking spell that trimmed some of the earlier gains to end the month with a net 69.8 percent rise for the first nine months of this year. A combination of strong macroeconomic fundamentals as well as the remarkable profitability growth of Saudi listed firms during the first half of this year has propelled the Saudi equity market during the first nine months, outperforming major stock markets around the world.
Meanwhile, the two week profit-taking spell continued to see aggressive buyers staying on the sidelines, as they await the upcoming third quarter corporate results. In addition, OPEC’s decision in late September to lower output by 900,000 barrels a day and the resulting surge in crude oil prices, as well as the expectation of positive third quarter corporate results helped renew buying interests, lifting the market yet another 1.4 percent up to Oct. 9, 2003, resulting in a 72.2 percent since the start of the year.
The record 296 percent growth seen in the total market turnover to SR450 billion during the first nine months of 2003 lifted the average value per transaction by 144 percent compared to first nine months of last year. Adjusting for the listing of Saudi Telecom Company retrospectively, market capitalization increased from SR332 billion at the end of December 2002 to SR565 billion at the end of September 2003, giving an absolute increase of SR233 billion in the wealth of investors during the first-three quarters of 2003. The picture, however, looks even brighter if the market capitalization of STC was excluded from both ends, resulting in an expansion of total market capitalization of SR163 billion to SR444 billion at the end of September 2003. Despite no serious surge to stock valuation (PE) on overall basis, the Saudi equity market has created considerable amount of additional wealth during the 9-month to September 2003, an equivalent of nearly 33 percent of total nominal GDP of last year.
Based on the annualized earnings of the first two quarters of 2003, share prices were being quoted at the end of September at 19.28 times the forward looking earnings (PE) for the whole market in comparison to 18.03 PE multiples at the end of December 2002, indicating that the underlying valuations have not deteriorated in the wake of nearly 70 percent rise seen in the overall market index. However, there are some pockets of concern showing significant overvaluations particularly for the Saudi Electricity Company with a PE of 246.68 at the end of September, followed by a PE of 36.11 for the agricultural sector, and a 32.88 PE ratio for the services sector. The PE ratios of banking, industrial, cement, and telecommunication sectors were all below the overall market average, reflecting their fair valuation for prices prevailing at the end of September 2003. The quoted share price for Al-Jazirah Bank at SR226, producing a forward-looking PE ratio of 32.38 was almost double the banking sector average PE at the end of September 2003. Based on the forward looking PE criterion, a number of stocks may be considered overvalued in relation to either their respective sectors’ average earning multiples or to that of the overall market average. The overvalued stocks are including Safco, Spimaco, Food Products, Saudi Cables, Al-Ahsa, FIFCO, SISCO, Anabeed, NAMA, Madiniah, Tabuk Cement, Hotels & Resorts, SASCO, Shamas, Fitihi, and almost all companies in the agriculture sector excluding Al-Jouf.
Based on the actual interim dividend disbursement by some firms this year and last year’s market average payout ratio of 70 percent, the combined projected income of SR29 billion for 2003 is expected to generate dividend income of SR20.3 billion. As a result, the forward-looking market average dividend yield is estimated at 3.5 percent on the basis of share prices prevailing at the end of September 2003. Across sectors, the banking sector gave the highest dividend yield of 4.3 percent at the end of September, followed by cement sector at 4.2 percent, telecommunication 4 percent, power sector 3.1 percent, industrial sector 2.8 percent and the market lowest dividend yield of 0.9 percent by the agricultural sector. Similarly, the market average price-to-book value ratio (PBV) was 2.96 on Sept. 30, compared with 3.0 at the end of December 2002, with the highest PBV ratio at 4.43 of the telecommunication sector. The overall financial indicators for the market as a whole suggest that the recent rise in equity prices this year was unlikely the result of a speculative bubble, rather they reflect the fair picture.
On the economy front, the macroeconomic conditions have remained supportive throughout the last nine months on the back of Brent crude average price of $28.61 per barrel and Saudi output level close to 9 million barrels a day. Even allowing for the reduced OPEC quota of 7.763 million barrels a day for Saudi Arabia effective Nov. 1, 2003, the full year average will reach around 8.7 million barrels a day. In what is looking to become the Kingdom’s strongest performance in two decades, oil export earnings are expected to reach $80 billion, which is likely to ensure a fiscal surplus in the range of 5 to 6 percent of gross domestic product (GDP). With the Saudi economy expected to record a 6 percent GDP growth this year besides the on going reform initiatives, there is some reason for an optimism the equity market has demonstrated during the first three quarters of this year. In addition, given total foreign reserves of around SR377 billion ($101 billion) at the end of August 2003, the Kingdom’s balance of payment is on course to record another year of current account surplus of around $12 billion in 2003, thus elevating the Kingdom’s status as a net provider of capital to the rest of the world. In all, economic fundamentals and corporate finances are pointing towards the ability of the market to sustain the gains it has made so far this year. With an aggregate supply of 2,273 million shares including nearly half being classified as free-float, the cumulative volume of shares traded totaled 4,335 million shares during the first nine months of 2003, reflecting that each outstanding share was changing hands twice in relation to the total supply.
Investment activities in the Saudi market grew markedly during the first nine months of this year, with market turnover nearly tripling by around 296.1 percent to SR450 billion in the January-September 2003 period, from SR113.6 billion in the same period a year ago.
Meanwhile, for the whole of 2003, market turnover is expected to surpass SR630 billion mark, indicating substantial commission income for the banks providing stock trading facilities. With 280.2 million shares worth SR87.3 billion, trading activity in STC stocks represented nearly 19.4 percent of the total market, following industrial stocks at 26.8 percent and worth SR121 billion. The 815.3 percent increase in the traded value of electricity shares to SR83.8 billion appears to have been overdone during the first nine months of this year. The cement sector saw a 22.6 percent decline in the value of its shares traded to SR19.5 billion during the January-September period of 2003.
The market turnover ratio, as measured by the 12- month trailing value of shares traded as percent of total market capitalization, reached 83.5 percent in September 2003, from 47.6 percent in the 12-month to December 2002, the listing of STC has largely contributed to the accelerated market activities. Ten years ago, the market had a turnover of SR17.4 billion while its ratio to market capitalization was only 8.8 percent, suggesting an expansion of more than twelve times for the value of shares traded and around 9 times in terms of its ratio to the market capitalization.
The average value per transaction rose by 144 percent from 133,391 in the first nine months of last year to SR325, 447 over the same period this year, nearly ten times the per capita GDP in nominal term, suggesting activities were mainly conducted by large investors. The market depth, measured by the market capitalization as a percent of GDP, has expanded from 40.4 percent in the 12-month to December 2002 to 63.9 percent in Sept 2003.
The market rose across the board in the last nine months, with the largest gain of 156.3 percent recorded for the Saudi Electricity Company, followed by the Saudi Telecom catching 138.2 percent rise, the prices of industrial companies upped 95.8 percent, services sector companies rose 54.1 percent, agricultural sector upped 34.7 percent, and cement sector climbed 25.1 percent. The stocks of banking sector that represent nearly 29 percent of the total market, recorded the lowest gain of 20.1 percent in the first nine months of this year, as investors were worried about the 45 year low interest rate and its impact on the banks’ profitability. The April-June period has proved to be the most exuberant for all stocks, capturing more than two third of the total gain during January-September period of 2003.
(Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah.)