JEDDAH, 21 January — The Saudi stock market index increased by 7.6 percent to close at 2,430.11 points for the whole of 2001, with much of the rise seen in the cement sector, gaining a massive 58.7 percent. However, the Sept. 11 attacks in New York and Washington prompted a major sell-off in equity markets across the globe and Saudi Arabia was no exception. The NCFEI All Shares Index had surged to a record high of 2,608.58 points by Sept. 1, registering a significant 15.1 percent rise in the first eight months of the year. Thereafter, a selling spree was triggered first by profit-taking, but then was aggravated by the Sept. 11 events to wipe out all the gains year-to-date. The Kingdom’s equity market remained underpinned by the supportive reforms agenda and the recovery of oil prices in the subsequent period of September. Moreover, better-than-expected third quarter corporate results, mostly in the cement and banking sectors, brought back confidence as the Saudi stock exchange rebounded from its year low of 2,206.33 points on Oct. 9, 2001. Despite the outlook of lower interest rates and continued profitability, the Saudi equity market remains to be volatile, thus largely driven by developments in the oil markets. The near-term outlook for 2002, however, suggests that the Saudi stocks will come under downward pressure in line with the direction of oil prices.
Based on the annualized corporate results for the third quarter of 2001, the market average forward looking price earning multiple (PE) was 22.75 at the end of last year, higher than the 20.68 at the end 2000. However, excluding the perpetual loss making electricity sector, the PE multiple was more attractive at 15.79 by the end of December 2001, yet was lower than its peak at 16.76 at the end of August. The average dividend yield for the whole market stood at 3.70 percent in December compared to 3.9 percent in September, but by excluding the electricity sector, it reached 3.60 percent from 3.79 percent over the same period. The market’s average price to book value amounted to 1.99 percent by the year-end and was slightly higher at 2.10 percent if the electricity sector was not taken into account. With such strong financial indicators, Saudi stocks present attractive opportunities to long-term investors, particularity in the banking and cement sectors.
The performance of individual stocks in 2001 was mixed, with the best performing stock being Arabian Cement, which rose by an impressive 78 percent to SR186, and still within the same sector, Tabuk Cement gained 65.6 percent to SR86.5 per share. In the services sector, the National Shipping and Real Estate, recorded sharp gains at 73.8 percent and 54.1 percent, respectively, in the same period. The banking sector was boosted by a significant 41.8 percent increase in the price of Saudi Hollandi’s shares and a 32.9 percent rise in the shares of Arab National Bank. Although the industrial sector ended the year in the negative territory, the National Gas stock managed to reverse the trend gaining 39.3 percent, while SISCO’s stocks rose by 32.7 percent. Among the worst performing stocks of 2001 were Zoujaj (National Glass Co.), Beshah and the Saudi Exports Company, all fell sharply by 45.5 percent, 30.9 percent and 23.2 percent, respectively.
The nine listed banks; with a combined market capitalization of SR132 billion to account for 48 percent of the total, saw their share prices rising by 7.9 percent for the whole of 2001, compared to a return of 12.3 percent in 2000. After peaking to 8,285.6 points on Aug. 30, the sector’s index plunged to one year low at 6,933.8 points on Oct. 9, but then rebounded on the announcement of better-than-expected third quarter results. Based on the annualized results for the first nine months of 2001, the average PE ratio for the banking sector stood at 15.84 by the end of December compared to 16.65 in August. The dividend yield was put at 4.3 percent, while price to book value amounted to 3.05 by year-end compared to 4.0 percent and 3.41, respectively, in August. Two of the largest listed banks in the Kingdom, Saudi American Bank and Al-Rajhi Bank, with capitalization of SR35.6 billion and SR30.6 billion, respectively, together accounted for half of the banking sector. The performance of these two stocks, however, was below the sector’s average, with SAMBA’s shares rising by only 6.4 percent, while those of Al-Rajhi losing 8.0 percent last year. Though the financial fundamentals of Al-Rajhi are still quite strong, the fall of US based energy company, Enron, weighted heavily on the price of Al-Rajhi stocks because of its SR300 million exposure to that company. Elsewhere, healthy gains were seen in the Saudi Hollandi (41.8 percent), Arab National Bank (32.9 percent), Saudi-Fransi (22.5 percent) and Riyad Bank (22.0 percent). The worst performing banking stocks last year were those of the Saudi British Bank, which lost a substantial 22.3 percent to end the year at SR335 per share.
The cement sector consists of eight Saudi cement companies, with a total market capitalization of SR28.7 billion or 10.4 percent of the Saudi equity market. The sector index increased by a significant 58.7 percent to close the year at 2,753.7 points compared to 1,735.3 points in the year before. Based on the third quarter corporate profits, the average PE for the cement sector amounted to 14.60 and price to book value was at 2.93 by year-end compared to 17.48 and 3.02 in August, showing renewed confidence over cement stocks. In addition, return on equity for the cement sector averaged 20 percent for the whole of 2001, largely attributed to the strong rebound in the Kingdom’s construction activities, as well as to the sharp increase in cement exports. Individual cement stocks performed extremely well with Arabian Cement gaining a massive 78 percent in 2001, while the lowest performer of the sector, the Saudi Cement managed to rise by 35.1 percent. The outlook for 2002 appears to be neutral to slightly negative, given the expected profit taking and foreseen slowdown in the construction sector activity, which might weigh on the prices.
The Saudi Arabian Basic Industries Corporation (SABIC) is the largest listed company on the Saudi stock exchange, with SR46.7 billion or around 17 percent of total market capitalization. As a major component of the industrial sector, SABIC shares dropped by 17.1 percent due to shrinking profitability driven by lower demand and prices of petrochemical products. This, in turn caused the industrial sector to lose 8.7 percent for the year, while its average PE stood at 17.26, price to book value of 1.42 and return on equity at 8.2 percent. Among the other sectors, services increased by 17.2 percent, electricity by 11.6 percent and the least capitalized agricultural sector rose by 2.3 percent. Based on the third quarter corporate profits, the average PE for the services and electricity sectors were 11.99 and negative 12.33, respectively.
Over the year 2001, the value of shares traded rose by 28 percent amounting to SR83.6 billion against SR65.3 billion in the previous year. Moreover, 605,035 trade transactions were made, exchanging 691.8 billion shares during 2001, compared to 498,135 transactions and 554.9 million shares traded in 2000. The average value per transaction increased by 5.4 percent to SR138, 176 against SR131, 075 the year before, indicating that rather larger ones dominated transactions. However, the top ten trading companies, which constituted 60 percent of the market trading value in 2001, included SABIC (SR8.2 billion), Al-Rajhi Bank (SR7.4 billion), Riyad Bank (SR7.2 billion), SAFCO (SR5.7 billion) and SAMBA (SR4.3 billion). The combined average value per transaction for the top ten traded companies was SR192, 461, substantially higher than the market average, thus suggesting the active shares were mostly in the blue chip stocks.
The market turnover ratio stood at 30.2 percent at the end of 2001 compared to 25.7 percent in the previous year. However, the turnover ratio reaches 58 percent when calculated on the basis of market capitalization of the free-float shares only. With the number of free-float shares remaining in limited supply, further rise of the turnover ratio may lead toward some speculative tendencies in the market. Therefore, there is a growing need to offload, yet on a gradual basis, those stocks owned by the government, while at the same time encouraging more companies to be listed and coming into the trading floor of the Saudi market.
(The author is chief economist at the National Commercial Bank, Jeddah)
