JEDDAH, 16 October 2004 — Having increased by 76.3 percent for the whole of 2003, Saudi share prices further rose by 48.6 percent during the first nine months of this year, lifting the total gain to around 162 percent in the last 21 months.

A combination of strong macroeconomic situation and the remarkable profitability growth of listed Saudi firms has underpinned investors’ confidence. Furthermore, the upcoming third quarter corporate results are also expected to validate those advances across all sectors. Consequently, the Tadawul All Shares Index closed at an all-time high of 6,593.76 points on Sept. 30, adding 2,156.18 points so far this year. The Saudi equity market’s All Shares Index has been giving 14.3 percent compound annual return in the last ten years to September 2004, besides giving hefty cash dividends averaging around 4 percent a year, in addition to an average of 2.5 percent in bonus shares. Thus, the overall average gain amounted to around 20.8 percent per annum in the last ten years.

The Wealth Effect of Market Surge

The value of shares traded rose by 192 percent to SR1,314 billion during the first nine months of 2004, from SR450 billion in the same period last year. The total value of shares trading is expected to surpass SR1,700 billion for the whole of 2004, almost double the current gross domestic product (GDP) of Saudi Arabia. The consolidated average value per transaction scaled up 83.2 percent to SR311,905 for the first nine months of 2004, from SR170,278 over the same period a year ago, suggesting a higher concentration in market activities by large investors.

The rise in share prices so far this year boosted total market capitalization to SR889.7 billion by September 2004, compared with SR596.5 billion at the end of 2003, resulting in an absolute increment of SR293.2 billion in the wealth of investors. However, adjusting for the floatation value of new companies listed during the first nine months of this year, the net wealth impact is estimated at SR288 billion, besides any additional money investors would have received as dividend cash payouts and bonus shares. The Saudi equity market has thus created a considerable amount of additional wealth during the nine months to September 2004, representing an equivalent of nearly 36.4 percent of total nominal GDP of 2003.

Strong Corporate Fundamentals

The prevailing share prices in the Saudi market are considered fairly valued on the back of remarkable profitability growth of listed companies. Based on the annualized earnings of the past two quarters, share prices were being quoted at the end of September at 21.31 times the forward looking earnings multiple (PE) for the whole market compared to 19.56 PE at the end of December 2003, indicating that the underlying valuations have not deteriorated in the wake of nearly 48.6 percent rise seen in the overall market index. However, there are some pockets of concerns showing significant overvaluations particularly that of the Saudi Electricity Company with a PE of 91.22 at the end of September, followed by PE of 45.56 for the agricultural sector, and 38.34 PE ratio for the service sector stocks. 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 2004.

On the other hand, the quoted share price for Al-Jazirah Bank at SR415.5, producing a forward looking PE ratio of 37.06, was almost double the banking sector average PE at the end of September 2004.

Overvalued stocks included SAFCO, SARCO, NIC, Spimaco, Saudi Cables, Advanced Industries, Amiantit, Alujain, Saudi Pipes, and NAMA. Except for Tabuk Cement, all other cement stocks were fairly valued at current prices.

Within the services sector, overvalued stocks included Hotels & Resorts, SAPTCO, Al-Muwashi, Aseer, Makkah Construction, Al-Baha, Arriyadh Construction, and Shamas. Amongst the agricultural stocks, prices of NADEC and HADCO were fairly valued, while prices of all other companies were significantly overvalued.

Based on the actual interim dividend disbursements by some firms so far this year and last year’s market actual payouts, the combined projected income of SR41.8 billion for 2004 is expected to generate dividend income of SR25.3 billion. As a result, forward looking market average dividend yield comes at 2.8 percent on the basis of share prices prevailing at the end of September 2004. Across sectors, share prices of Saudi Telecom sector had a dividend yield of 5.3 percent at the end of September 2004, followed by the cement sector at 4.5 percent, banking sector 2.7 percent, electricity company 2.3 percent, industrial sector 1.8 percent, services sector 1.3 percent, and the market lowest dividend yield of 0.7 percent for the agricultural sector. Similarly, the overall market average price-to-book value ratio was 4.3 on Sept. 30, compared with 3.1 at the end of last year.

The Supportive Economy

On the economy front, macroeconomic conditions have remained supportive during the last nine months on the back of Brent crude prices averaging at $35.9 per barrel in addition to the Saudi current output of 9.512 million barrels a day. In what is looking to become the Kingdom’s strongest performance in three decades, oil export earnings are expected to reach $112 billion this year ensuring a fiscal surplus around 15 percent of gross domestic product (GDP). Furthermore, with economic growth expected to amount to 9.3 percent and reform initiatives accelerating, there is some reason for optimism in the equity market. With estimated total foreign reserves around SR510 billion ($133 billion) at the end of July 2004, the Kingdom’s balance of payment is on course to record another year of current account surplus of around $20 billion, thus elevating the Kingdom status as a net provider of capital to the rest of the world.

The Rising Market Depth

Given an aggregate supply of 2.478 billion shares, including around 52 percent of total supply being classified as free-float, the cumulative volume of shares traded totaled 8.478 billion during the first nine months of 2004. This suggests that each outstanding share was changing hands 3.4 times.

Given the robust performance of the Saudi equity market in recent quarters, a number of local firms are expected to go public in the coming months including Al-Bilad Bank, National Company for Cooperative Insurance (NCCI), Al-Marai Dairy, SADAFCO (Saudi Haleeb), Ittihad Etisalat Consortium, Saudi Arabian Mining Company (Maaden), Al-Marafiq, and National Commercial Bank (NCB). With the listing of these companies, the Saudi market will further deepen, thus open up local investment opportunities and help restrain capital flight.

(Dr. Said Al-Shaikh is chief economist at the National Commercial Bank in Jeddah.)