JEDDAH, 16 December 2004 — After recording 11.6 percent increase in October, the rally in the Saudi stock market continued with yet another impressive 13.2 percent rise in November, bringing the total gain so far this year to around 87.7 percent, compared with 76.3 percent gain for the whole of 2003.
The Tadawul All Shares Index closed at an all-time high of 8,329.7 points on Nov. 30, adding 3,892.12 points from its closing level of 4,437.58 points on Dec.31, 2003.
With aggregate market capitalization having surpassed SR1,126 billion on Nov. 30, share prices appeared to have entered into an over valuation zone with the overall forward-looking PE ratio moving above 25.5 multiple and price-to-book value of 5.35 at the end of last month.
The ongoing stock market exuberance is likely to continue for a while on the back of ample liquidity and strong corporate earnings, which might lift the TASI in the coming weeks above the psychological level of 9,000 points, while profit-taking led selling spree should however emerge to have some correction in the current valuations. The starting of December has already seen selling spree with market index declining by more than 6.5 percent in the first three trading days of the month.
Sectoral Performance
With the exception of 2.1 percent fall seen by the nine agricultural stocks, share prices rose across the board in November, giving the largest gain of 25 percent for the industrial companies. Better than expected first nine-months corporate results of the 26 industrial companies invigorated continued stock buying interests, with their share prices rising by 51.5 percent in the 3-month ending November while bringing cumulative gain so far this year to 159.4 percent.
The industrial stocks were being quoted at 24.68 PE multiple and sold at 6.22 price to book value ratio, all pointing to an over valuation zone. However, Saudi Basic Industries Corp. (SABIC), National Gypsum and Saudi Ceramic stocks were still hovering in the fair valuation zone.
The ever positive performing cement stocks, recorded 24.4 percent gain in November on the back of robust growth in the domestic demand for cement, which is running nearly 10 percent in the first eleven months of this year. Based on the 2004 projected earnings for the eight cement companies, share prices of cement stocks were fairly quoted at 17.23 PE multiple by the end of November. The 5.31 price-to-book value ratio of the cement stocks may be considered fair in light of significantly low debt ratio of 0.14 and return on equity of 29.8 percent along with the sector’s dividend yield of 3.6 percent at the end of November 2004.
The 41.6 percent profitability growth in the nine listed banks for the first three quarters of this year pushed up share prices 22 percent last month and around 37.6 percent in the 3-month to November, bringing the total gain so far this year to around 91 percent. The share prices of bank stocks closed on Nov. 30, at price earning ratio (PE) of 25.62, price-to-book value ratio of 6.53 and dividend yield of 2.1 percent. Bank share prices prevailing at the end of November appear to reflect an overvaluation tendency of around 20 percent, from their historic norms.
The November closing share price of Saudi Telecomm Company (STC) at SR652, rose 13.4 percent in the month and 54.2 percent since the beginning of this year. The prevailing share price of STC has a room to further rise given its forward-looking PE ratio of 19.13 by end of November, which is considered 25 percent below the overall market average. The company is expected to make a total profit of SR10.5 billion for the whole of 2004, around 20 percent above its level in 2003.
Prices of the services sector climbed by nearly 5 percent in November and 82.5 percent since the starting of 2004. Services stocks are significantly overvalued with PE of 40.33 and price to book value of 3.5, while their combined return on equity was only 9 percent. After tumbling in May-June period and remaining subdued until October, share prices of electricity stocks rose 2.4 percent in November, thus lifting the total gain so far this year to around 43.7 percent. Saudi Electricity Company is highly overvalued at PE of 86.61 at the end of November.
The Wealth Effect of Market Surge
The rise in Saudi equity prices so far this year boosted the total market capitalization to SR1,126.6 billion ($300.4 billion) on Nov. 30, 2004, compared with SR590 billion at the end of December 2003, giving an absolute increment of SR536.6 billion in the wealth of investors. However, adjusting for the flotation value of the new companies listed during the first eleven months of this year, the net wealth impact is estimated at around SR530 billion, besides any additional money the investors would have received in the form of dividend cash payouts and bonus shares. The Saudi equity market has thus created a considerable amount of additional wealth during the 11-monhts to November, representing an equivalent of nearly 66 percent of total nominal gross domestic product (GDP) of 2003.
Heavy Trading Activities
The heavy trading activities slowed down in November, with the value of shares traded rising moderately by 2.4 percent to SR155.01 billion last month. However, the value of shares traded rose strongly by 202 percent to SR1,620.4 billion during the first eleven months of 2004, giving a monthly average for this year of SR147 billion.
The total value of shares traded is expected to cross the SR1,750 billion mark for the whole of 2004, nearly twice the current GDP of Saudi Arabia. Interestingly, the eleven months’ trading value this year was nearly 38 percent higher than the cumulative traded value figure since the market inception in 1985, reflecting investors’ buying appetite.
Average Value Per Trade Transaction
With 863,981 trade transactions for a combined worth of SR155.01 billion, the average value per transaction scaled up 28.2 percent to SR179,418 in November. However, the eleven-month combined average was SR135,108 compared with an average of SR158,503 for the entire 2003. This reflects that market activities in 2004 was largely driven by small investors.
Rising Market Depth
With the current aggregate supply of 2.495 billion shares of which 52 percent are being classified as free-float, the cumulative volume of shares traded totaled 9.76 billion during the first eleven months of 2004, reflecting that each share was changing hands 3.9 times. However, measuring market depth on the basis of free-float shares only 7.51 times. The high trading volumes seen in the Saudi equity market necessitates the increase in the supply of shares, either by the government further offloading of its holdings across various companies or encouraging the private sector to convert more family businesses into public joint stock companies.
Encouraged by the robust performance of the Saudi equity market in recent quarters, some of the major local firms that are considering to go public in the coming months, which include Al-Bilad Bank, National Company for Cooperative Insurance (NCCI), Al-Marai Dairy, Saudi Dairy and Foodstuff Company (SADAFCO), Saudi Arabian Mining Company (Maaden), Al- Marafiq, and NCB. With the listing of these companies, the Saudi stock market will further deepen and open up investment opportunities, thus restraining capital flight and encouraging repatriation.
(Said Al-Shaikh is chief economist at the National Commercial Bank, Jeddah.)
