RIYADH, 28 July 2003 — Saudi stock market is making waves and attracting investors in droves since the beginning of 2003. It has been in the news for touching new high, passing of capital market draft by the Cabinet, listing of Saudi Telecommunications Company (STC) etc. IPO of STC expanded the market by SR51 billion at IPO price of SR170 per share. STC has since appreciated by 130 percent and its current market capitalization stands at SR117 billion.
The new capital market law once implemented would be a quantum leap for the hitherto inter-bank trading system. It would establish a new stock market, kick-start primary market, allow the entry of brokers and eventually pilot the massive expansion through the spread of capital market culture.
Future is undoubtedly bright and that is being reflected in the strong rally that has taken the market to new heights. CCFI All Share Index rose 45 percent in the first half. In hindsight, market blossomed once it became clear that the thorn of US-Iraq dispute was going to be removed and thus it was a matter of time before bleeding of regional business sentiments would ultimately stop. Market rose 21.7 percent in less than a month from March 17. It consolidated for a month rising by one percent before galloping 19.57 percent once again from May 22 to June 16 on the back of good first quarter results. In the process, CCFI All Share Index closed at an all-time high of 277.3 on June 16.
In the first half of 2003, two stocks — Saudi Telecom and Saudi Electricity — both sole representatives of their sectors rank among major gainers with 129.5 percent and 74.43 percent respective gains. Industrial sector followed with 35.6 percent gains while banking sector was at a bottom with lowest gains of 15.7 percent.
In view of ballooning market, we take a look at factors responsible for a stupendous rally and also consider valuations to make a case for likely route it would take in the near future.
Oil Prices
Setback to the process of US occupation of Iraqi oil reserves through occasional attacks on aggressors and unexpected damage to oil wells have somewhat delayed and reduced the quantum of Iraqi oil in international market. Disruption in Nigerian oil flow because of striking workers has further raised the uncertainty in oil supplies — resulting in the continuation of oil prices at levels higher than earlier expected. As a result, Saudi Arabia — the largest oil supplier in the world — would be tremendously benefited with stronger economy, reduced deficits and increased spending. Oil contributes lion’s share of more than 30 percent in GDP and more than 70 percent in total revenues.
Moreover, oil revenues do play a significant part in capital market sentiments.
Market Size
Saudi stock market is the largest in the region with 63 percent share in market capitalization. Only Kuwait has more number of listed companies (80) as compared to 69 companies in Saudi inter-bank market.
Market capitalization has more than doubled since 1997 though the merger of ten electricity companies brought down the number of listed companies. Daily trading value has gone up twenty times since 1995 from SR72 million to SR1.5 billion today while daily volume went up by more than 40 times from just 360,000 shares in 1995 to 14,510,000 shares today. One of the factors for this gigantic rise has been STC that contributed 10 percent in total volume and 28 percent in total traded value in first half of 2003.
STC has brought GCC investors in herds to the market. The interest of overseas investors is not short term. Given high liquidity, in the GCC region, small markets and few other opportunities to park huge funds — more money is expected to flow in. The virtual monopoly of STC in Kingdom till Q4 of 2004 is a major attraction in GCC. However, incoming money is not restricted to just one stock. Relative valuations and sector specific interest is directing the fund flow.
Market Valuation
Despite recent rally, current price-earning ratios (P/Es) do not suggest stretched valuations. The current P/E ratio of all listed companies without the loss-making companies is at its lowest since 1998. For example, the P/E ratios at the end of every year since 1999 are 19.88, 15.9 (2000), 17.9 (2001) respectively and on Dec. 31, 2002 P/E ratio was 16.8 — all higher than the current P/E ratio of the market.
P/E ratios are higher in case of two sectors — service (21) and agriculture (32). Both the sectors consist of smaller companies and have moved up on account of higher book values — case of small caps getting benefited in a bull run.
Market Concentration
Despite 69 listed companies market activity is dominated by few stocks. The market capitalization concentrated with top five stocks is at its highest ever — 64 percent by the end of first half as compared to around 50 percent over 1995-1998, 57 percent (1999), 60 percent (2000), 53 percent (2001) and 56 percent (2002). Though CCFI All Share Index has YTD gained by 45 percent, major gains have come from top five stocks. Without STC market has moved up by 28 percent and without top five stocks market is up mere 18 percent.
As Q2 results have started coming out the overall scenario of the stock market looks good. Bullish oil prices, high liquidity in the region, Saudi market size coupled with limited alternative opportunities in GCC region, capital market reforms in Kingdom, better corporate results make the rise sustainable.
(The author is a financial consultant at Consulting Center for Finance and Investment, CCFI, Riyadh.)
