March 2011

TASI set to rise in tough conditions

The TASI has been extremely volatile in recent weeks. Regional
unrest pushed the market to a 22-month low in early March, before
buying led by state-run pensions funds triggered a recovery. At its
current level we think the market is attractively valued. While two
substantial government spending packages will boost the economy,
regional tensions are likely to linger through this year and weigh on
investor sentiment. After an examination of the prospects for all
sectors, we conclude that the fair value for the TASI at the end of the
year is around 7,400, but the political uncertainty elsewhere in the
region means this level is not likely to be reached and instead the
TASI will end the year between 6,600 and 7,000.

TASI
7000
6800
6600
6400
6200

While we think that the market as a whole is undervalued, some

sectors are more attractive than others and we think the following
investment themes will be profitable this year.

6000
5800
5600
5400

Government investment expenditure: Government investment

spending has been very high for several years, but the listed
building and construction companies have not benefitted greatly.
This should change in 2011, with far more focus on residential
housing and pressure to reform the public tenders system.
These trends should also help the industrial investment sector.

Greater spending by low income consumers: Both retail and

agriculture and food stand to benefit from two recent
supplementary government spending packages that allocate
more funds to those on low incomes, including unemployment
benefit an additional two months salary for all government
employees and extending social insurance payments.

Regional troubles: While the prospect of ongoing regional

troubles will dampen market sentiment, it should keep oil prices
high, boosting the petrochemicals sector, as will the loss of
Japanese petrochemical production. The transport sector will
also benefit as long as the Kingdom has to compensate for
reduced oil supply from elsewhere in the region.

Banks: The banks have completed the bulk of bad debt

provisioning and have substantial funds to put to work. We think
that current valuations do not fully reflect the health of the sector.

High dividends: In this volatile environment investors should

consider yield. At a time when sustained share price gains are
not guaranteed, stocks with high dividends are particularly
attractive. Both the building and construction and cement sectors
have dividend yields of over 6 percent. Other sectors that tend to
pay high dividends are transport, energy and real estate.

5200
1/2/10

3/2/10

5/2/10

7/2/10

9/2/10

11/2/10

1/2/11

3/2/11

For comments and queries please contact the

authors:
Paul Gamble
Head of Research
pgamble@jadwa.com
and:
Gasim Abdulkarim
Associate Director: Research
gabdulkarim@jadwa.com
or:
Brad Bourland, CFA
Chief Economist
jadwaresearch@jadwa.com
Head office:
Phone +966 1 279-1111
Fax +966 1 279-1571
P.O. Box 60677, Riyadh 11555
Kingdom of Saudi Arabia
www.jadwa.com

March 2011

Recent performance and valuation

Heading into 2011, the TASI was rallying, investor sentiment was
improving and volumes were picking up. The TASI was up by 4.8
percent in December 2010, which more than doubled its gains for the
previous eleven months of the year, resulting in a total rise of 8.2
percent last year. This return was some way below those recorded in
most emerging markets and many of the major developed markets.
Nonetheless, the TASI was the second best performer in the GCC
last year. With bank provisioning for bad debts declining and the
economy strengthening, many investors were optimistic that the
market was set for a period of improvement after several years of
disappointing growth.

Monthly performance of the TASI

8
6
4
2
(percent)

0
-2
-4
-6
-8
-10
-12
Jan 2010

Mar

May

Jul

Sep

Nov

Jan 2011

Mar

TASI
21,000

18,000
15,000
12,000
9,000
6,000
3,000
0
Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

TASI P/E ratio

25

20

15

10

0
Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan
2007
2008
2009
2010
2011

Over the first two weeks of the year the TASI continued up and on
January 16 it closed at 6,788, its high point since early May.
Investors had shrugged off the rapid political change in Tunisia, as
the country has little financial and economic links to the Kingdom.
But once the protests in Egypt began to gain traction towards the
end of the month, the market fell, as economic and financial relations
are much closer, with many Saudi investors having positions in the
Egyptian stock market, in addition to property in Egypt and personal
connections. The TASI pulled back most of its losses in February,
but as the troubles spread to Bahrain and Oman it fell for 13
consecutive trading days from February 13, over which time it lost
19.8 percent.
Following a statement from the Minister of Finance that the state-run
pension funds were buying during the previous week to take
advantage of the low prices, later supported by a similar statement
from one of the Kingdoms leading private investors, the market
rallied. The TASI rose for seven successive days, climbing by 18.5
percent. On March 15, the TASI stood at 6,075, 8.2 percent below its
end-2010 level. Unlike most global and emerging markets, the TASI
is still below where it was when the global financial crisis dramatically
intensified in September 2008 (currently, it is 21.7 percent lower).
We find it difficult to see a return to the all-time high of 20,634 in
February 2006.
The fall in the TASI this year has moved valuations into attractive
territory. The price-to-earnings (P/E) ratio fell below 12 at its March
low point and it is currently 13.5, compared to an average for 2010 of
15.8. At this level it remains well above most of the other markets in
the GCC, which is normal given the local bias of the Kingdoms large
investor base, though it is now some way below the P/E for the
Kuwaiti market, which is unusual. Compared to global markets, the
TASI also looks reasonably valued. The P/E is below that of many
Comparative valuations
Market
P/E ratio
Abu Dhabi
9.9
Bahrain
12.8
Brazil
12.9
China
13.4
Dubai
9.7
Kuwait
18.1
India
20.2
Indonesia
19.0
Malaysia
15.8

Market
Oman
Qatar
Russia
Saudi Arabia
South Africa
South Korea
Turkey
UK
US (S&P 500)

P/E ratio
11.6
10.7
10.0
13.5
17.8
15.0
11.9
15.0
16.6

March 2011

fast growing Asian countries, and on a par with China. It is also

below those of the UK and US, which have lower earnings potential,
though it is above other leading emerging markets such as Brazil,
Turkey and oil-rich Russia.
Daily turnover
9
8
7

(SR billion)

5
4
3
2
1
0
Jan
2009

Apr

Jul

Oct

Jan
2010

Apr

Jul

Oct

Jan
2011

Net purchases through the swap agreement

1000
800
600
400
(SR million)

200

0
-200
-400
-600
-800

-1000
Mar May
2009

Jul

Sep

Nov

Jan
2010

Mar

May

Jul

Sep

Nov

Jan
2011

Purchases through the swap agreement

2.0
1.8
1.6
1.4
(SR billion)

1.2

1.0
0.8
0.6
0.4
0.2
0.0
Mar May
2009

Jul

Sep

Nov

Jan Mar
2010

May

Jul

Sep

Nov

Jan
2011

Recent volatility has caused a significant pick up in stock market

volumes. So far in March, the daily number of transactions has
averaged 120,000, the highest since October 2009. At its peak on
March 12, turnover was SR6.9 billion, the largest since mid-October
2009 and total volumes were the greatest since mid-June 2009. A
consistent decline in volumes has been a concern for investors, so it
was encouraging that when the market was hit by a wave of selling,
there were sufficient buyers and that the recent revival occurred
amid even higher volumes. Volumes are still a long way from where
they were two years ago, but if they can be maintained around the
current levels for a sustained period, it will bolster investor
confidence. Various options are available to increase volumes further
and it is likely that some of these are being examined by the Capital
Market Authority.

The role of foreign investors

Foreign investors fled the market when the unrest in Egypt
intensified at the end of January, but were net buyers during
February even though the regional troubles spread closer to the
Kingdoms borders. Monthly data published by Tadawul on the
breakdown of stock market trading show that there were net sales
worth SR905 million by foreigners through the swap agreement in
January, compared to average net purchases of SR290 million per
month during 2010. Given that the Kingdom was one of the regional
markets favored by foreign investors at the start of the year and that
performance was good in the first part of the month, we estimate that
well over SR1 billion was withdrawn from the market by foreign
investors in the final few days of January. In contrast, in February,
foreign investors were net buyers of shares worth SR40 million, with
total purchases, at SR1.67 billion, the highest since October 2009.
One of the arguments against a broader opening of the stock market
to foreign investors is that flows of hot money would bring greater
instability. The data for the last few months are not conclusive.
Foreigners account for only a small proportion of total trades (an
average of 2.5 percent over the first two months of this year,
compared to 83.8 percent for Saudi individuals), but trends in foreign
transactions are closely watched by other investors. While foreign
outflows may well have contributed to the 5.1 percent fall in the
market in the last few days of January, the 6.5 percent plunge in
February occurred while foreign institutions were buying and was
clearly driven by local retail investors. We do not expect any further
opening of the market to foreign investors this year.

Performance by sector
Projections for the remainder of the year are subject to more
vagueness than usual given the fluid nature of regional political
events. Political risk will probably cloud investor sentiment for most
of the year and could trigger sharp moves in share prices. At the
same time, the Kingdoms economy will benefit from higher oil prices
and production. Furthermore, two substantial spending packages

March 2011

announced by the King Kingdom should yield important benefits for

low income consumers. Implications of the recent events for each of
the 15 sectors of the stock market are considered below.

Key economic assumptions for 2011

Global economy: The world economy is in good shape. Momentum
from emerging markets is driving a solid sustainable global
expansion. The health of the US economy has been reestablished,
with unemployment declining and credit concerns fading as debt has
fallen. Risks to the economic expansion have faded, but policy is still
backwards looking, focusing on old and diminishing threats to the
recovery rather than new economic concerns, particularly rising
inflation in emerging markets.

Oil price
120

Oil prices: Tensions in the Middle East have pushed oil prices over
$100 per barrel. Opec producers are concerned about the impact of
high prices on demand and, led by Saudi Arabia, are pumping more
oil to cover the shortfall in Libyan production and to reassure
consumers. Political uncertainly is adding a risk premium to oil
prices, but as the situation stabilizes in the region, the risk premium
should decline and we expect global demand growth to remain
healthy. We forecast that Brent crude will average $97 per barrel and
WTI $89 per barrel in 2011.

110

($ per barrel)

100
90
80

70
60

1/4/2010

4/4/2010

7/4/2010

10/4/2010

Brent crude

1/4/2011
WTI

Saudi economy: The increase in oil production will result in faster

economic growth in the Kingdom and we have revised up our
forecast for real GDP growth to 5.5 percent. Non-oil growth is also
expected to improve in line with higher government and consumer
spending and greater bank lending. The combination of high oil
prices and increased production mean that the supplementary
government spending packages can be afforded and we still expect
a budget surplus. We will expand on these themes in a forthcoming
report.
We had expected the performance of the banking sector to be one
of the key factors supporting the stock market this year and still find it
one of the more attractive sectors, with earnings per share growth
forecast at 25 percent. This is because it is likely that the banks have
completed the bulk of the build up in the provisioning for bad loans
that hit their financials during the past few years. Over 2009 and
2010 listed banks set aside SR15.8 billion to provision for bad loans
resulting from high profile defaults by two large local groups and
problems caused by the economic slowdown. With total provisions
now in excess of bad loans and SAMA comfortable with loan-loss
coverage levels, provisioning should be less of a drag on
performance.

Bank provisions for bad loans

5,000
4,500

4,000
3,500
(SR million)

3,000
2,500
2,000
1,500
1,000

500
0
Q1
2006

Q3

Q1
2007

Q3

Q1
2008

Q3

Q1
2009

Q3

Q1
2010

Q3

As the economy continues to pick up, there should be more lending

opportunities, which should enable the banks to deploy more of the
funds they have placed with SAMA (banks had SR65.9 billion in
excess deposits at SAMA at the end of January, earning just 0.25
percent). Banks have refined lending policies and been very cautious
about lending over the past few years and there is a possibility that
the regional tensions may cause them to retain this stance, but given
the minimal exposure of most borrowers in the Kingdom to the
unrest, we do not think any renewed caution will last. Likewise, we
still expect greater corporate banking activity, though there may be

March 2011

some pause due to the regional uncertainty. Ongoing very low

interest rates will dampen banks profits.
The two supplementary spending packages will yield some rewards
for the banking sector. Although the capital increases for the
government credit institutions are theoretically creating less
opportunity for commercial bank lending, there is probably little
overlap between the borrowers that will benefit from new loans from
the Real Estate Development Fund and the Saudi Credit Bank and
those who would borrow from the banks. We think gains for listed
banks are possible if new home owners turn to banks to finance the
furnishing of their accommodation. It has not been announced how
the new unemployment benefit will be paid, but this is likely to be
directly into bank accounts, which will add to the deposit base. These
funds should more than offset any reduction in deposits caused by
regional uncertainty encouraging expatriates to remit more of their
savings.

Lending by Real Estate Dev. Fund

2000
1800

1600
1400
(SR million)

1200
1000
800
600
400
200
0
Q1 2006

Q1 2007

Q1 2008

Q1 2009

Q1 2010

There are indications that the approval of the mortgage law may be
close. Although this would not have a large immediate impact, and
banks would want to test the legal framework before initiating largescale lending, housing finance should be a long-term area of growth
for the banks, increasing future earnings potential.
We think the petrochemicals sector will be the main beneficiary of
the volatile regional environment, owing to the likelihood of higher
prices and we forecast earnings per share growth for the sector of
around 30 percent. Petrochemical prices have jumped in line with oil
prices, with ethylene up by 15 percent so far this year and naphtha
up by 17 percent. Although prices at this level may dampen demand,
so far the appetite of major Asian customers remains strong,
especially for fertilizers, which are being sought to increase yields in
the face of rising food prices. The natural disaster in Japan may
lower production from that country for a while, creating room for
more Saudi production.

Ethylene price
1500

1400
1300

($ per tonne)

1200
1100
1000
900
800
700
600
500
Jan-09 Apr-09

Jul-09

Oct-09 Jan-10 Apr-10

Jul-10

Oct-10 Jan-11

Cement production
4.0
3.5
3.0

(million tons)

2.5
2.0
1.5
1.0
0.5
0.0
Jan Apr
2008

Jul

Oct

Jan Apr
2009

Jul

Oct

Jan Apr
2010

Jul

Oct

Jan
2011

Higher product prices will be supported by greater production. New

facilities from Saudi Kayan and SIIG will start production this year
and output will be ramped up at Yansab and PetroRabigh. In
addition, Sabic should see revenues from its 30 percent investment
in the Maaden phosphate complex in the second half of the year.
Robust construction activity, including the likely acceleration in
housing provision, should ensure sufficient demand to absorb higher
local cement production and keep prices stable over the year.
Cement sales were up by 11.5 percent last year, but listed cement
company revenues rose by just 1 percent owing to lower prices.
Over January and February of this year sales were 8 percent higher
than they were in the first two months of last year. The industry has
now passed through the bulk of the recent capacity upgrade program
(Southern Cement is the only producer significantly lifting capacity
this year). Although competition has intensified and there remains
plenty of spare production capacity, the fallin the clinker inventory
suggests that, in the absence of new export licenses, companies will
restrain output growth to keep local prices stable. The increase in the
electricity tariff last year added to production costs, though this
should be offset during 2011 by a greater contribution from
companies new subsidiaries and foreign investments. We forecast
earnings per share growth for the cement sector of 10 percent.

March 2011

The diverse range of companies in the retail sector should see

further healthy earnings growth as consumer spending continues to
rise, stimulated by the two government spending packages.
Strengthening economic growth, the payment of unemployment
benefits and the confirmation of the permanence of the 15 percent
public sector pay hike will contribute to higher expenditure, even if
there is some near-term consumer uncertainty. Spending on
consumer staples, such as groceries and fuel, is likely to grow at the
fastest rate. Competition in the sector will remain tough and there is
likely to be pressure on margins. As a result, we expect earnings per
share will grow by around 12 percent this year.
Earnings for the energy sector, which is dominated by Saudi
Electricity Company (SEC), will continue to benefit from the increase
in the electricity tariff for commercial, industrial and government
customers introduced half way through 2010. We therefore think that
energy will see the fastest pace of earnings per share growth of any
of the 15 sectors, at 40 percent. Further tariff adjustments are
expected in the future, though we think it unlikely they will occur this
year. To meet the rapidly growing demand for energy, SEC has
embarked on massive expansions to upgrade its power generating
capacity and launched two major joint-ventures with private sector
partners, all of which will add to revenues this year. Other than
possibly increasing the cost of new sukuk (SEC is one of the
Kingdoms few issuers) regional events should not further impact the
energy sector.
It is important to note that although we expect the energy sector to
have the highest earnings per share growth this year, it is not
necessarily one of the most attractive sectors for investment, as our
growth forecast is based on the impact of the higher electricity tariff
introduced last year and so should already be factored into the share
price.
EPS of agriculture and food sector
25

20

(SR)

15

10

0
2005

2006

2007

2008

2009

2010

Companies in the agriculture and food sector, particularly the food

processors, should gain from increased spending on consumer
staples prompted by the introduction of unemployment benefit and
other measures targeting low income consumers. The widening of
product lines should also help company performance. Sectoral
earnings will be boosted by a bounce from Savola, one of the large
producers, whose 2010 profits were hit by large one-off investment
losses. However, several of the leading food processors have
operations in Egypt that may have been affected by the unrest in that
country. The pure agricultural companies will continue to be hit by
the withdrawal of subsidies. For the whole sector we forecast that
earnings per share will grow by 15 percent.
We expect reasonable earnings growth for the insurance sector,
though there will be notable divergences in performance reflecting
the progress of the many small companies in the sector. Half of the
30 recently listed insurance companies recorded losses last year,
though others are gaining traction as the take up of medical, auto
and capital equipment insurance rises. Claims related to the recent
floods in Jeddah will hit the finances of all insurers, but there is no
exposure to regional tensions. We expect the sector to continue to
record a loss, but this will be smaller than last year and there is a
chance that a profit will be recorded.
Intense price and product competition will remain the main feature of
the telecoms sector, limiting earnings per share growth to 10

March 2011
Mobile phone penetration
60

200
180

50

160

(million)

120
30

100
80

20

60
40

10

20
0

0
2001

2002

2003

2004

2005

Subscribers

2006

2007

2008

2009

2010

Penetration - RHS

Earnings per share growth

30
25
20
15
(percent)

(percent)

140

40

percent. Mobily was the only company to grow its earnings in 2010
and with mobile phone penetration at close to saturation point (186
percent at the end of last year), we see little room for substantial
earnings growth. Companies will attempt to grow revenues through
providing greater content and applications and widening the take up
of broadband (42 percent at end-2010). At the same time, Saudi
Telecoms is increasing its focus on its foreign operations.

10
5

0
-5
-10
-15

2006

2007

2008

2009

2010

2011f

Performance of companies in the multi investment sector will

depend upon their exposure to troubled regional markets. In general
the outlook for the sector is healthy, with the global economy in a
period of fairly solid expansion and global stock markets likely to post
reasonable gains. However, regional markets will be weighed down
by political unrest and companies with investments in countries
where there has been serious disruption will see their finances hit.
As many of the investments of Kingdom Holdings, the dominate
player in the sector, are outside of the affected countries we expect
earnings per share growth of 20 percent.
Projected earnings per share growth by sector
Sector
(percent change)
Banks
25
Petrochemicals
30
Multi-investment
20
Building & construction
30
Energy & utilities
40
Industrial investment
28
Cement
10
Real estate
5
Transport
10
Media & publishing
5
Hotels & tourism
8
Retail
12
Telecoms
10
Insurance
Agriculture & food
15
TASI
20
Earnings per share of the industrial investment sector are forecast
to grow by 28 percent as a result of the beginning of commercial
operations of a major project at mining company Maaden, the
largest in the sector. Production from Maadens huge phosphate
project is scheduled to start in the second half of this year, which will
cause a major turnaround in the companys earnings, which plunged
in 2010 owing to a jump in pre-operating expenses. Earnings will
also be boosted by the impact of higher international fertilizer prices.
Smaller companies in the sector should profit from improving
economic conditions and the easier availability of credit. Those
engaged in activities related to housing construction will also gain
from the likely increased pace of activity.
Performance of the building and construction sector has been
disappointing in recent years, with only three of the 14 listed
companies recording a profit last year (and only two in 2009). High
commodity prices and competition from new entrants will remain a
drag on performance as will the subdued, though improving, demand
from other GCC markets. Nonetheless, in light of the robust building
activity in the Kingdom and particularly the likely increase in property

March 2011

construction, we expect earnings per share growth of 30 percent. A

few of the large companies in this sector have subsidiaries in Egypt,
which may be affected by that countrys economic slowdown, but
recent strategic alliances with international companies and new
operations in fast growing GCC countries will bolster revenues for
some in the sector.
EPS of real estate sector
8
7
6

(SR)

5
4
3
2
1

0
2005

2006

2007

2008

2009

2010

Many of the listed real estate companies are focused on specific

projects, which in some cases are far from completion, so the
earnings per share for the sector are expected to rise by only 5
percent despite the growth in real estate construction in the
Kingdom. Rising raw material costs will be a mounting burden for
those companies (Emaar Economic City, Jabal Omar and
Knowledge Economic City) that are in the process of building their
developments. Greater government provision of housing will
probably put downward pressure on prices of residential real estate
and new supply means that commercial real estate prices are
unlikely to show much growth.
The transportation sector is dominated by the National Shipping
Company, which is set to have a reasonable year in 2011 owing to
higher trade flows and freight rates. Improved economic growth will
lift import and export traffic, and the impact on the National Shipping
Company will be bolstered by the commencement of operations at a
new subsidiary focused on transporting bulk grains. In addition, two
new petrochemicals tankers will join the companys fleet in the first
half of this year, coinciding with greater local production, though
issues with the Korean contractors have caused the cancellation of
other planned tanker deliveries. The company is exposed in the
event of disruption to the Suez Canal, though we do not expect this
to happen. The other listed transport companies should see a higher
volume of business as economic growth picks up, though Saptco
would be hit if there is a decline in pilgrim traffic. We predict earnings
per share growth for the transport sector of 10 percent.
Earnings of the media and publishing sector fell for the third
consecutive year last year, as restructuring, cost cutting and
expanding into new business lines was still not sufficient to offset
declining advertizing revenues. Media companies are adapting to
pressure on advertizing revenues by building alliances with telecoms
operators, expanding into information technology and adopting other
methods to selling advertizing. In addition, the dramatic events in the
region will probably add to sales of print media. We therefore expect
earnings per share to grow by around 5 percent in 2011.
The small hotels sector is likely to suffer if regional troubles reduce
the numbers of visitors. Egypt is the largest source of Hajj and
Umrah visitors from within the region, while some business travelers
are likely to be deterred by higher perceptions of risk across the
region. This will be aggravated by the suspension of the tourist visa
system. Nonetheless, there has been a notable improvement in the
finances of the company that dominates the sector. With the
management of two new hotels assigned to a leading global hotel
company, we expect the gains to be maintained and forecast
sectoral earnings per share growth of around 8 percent.

Outlook
Using our sectoral earnings forecasts generates a fair value for the
TASI of 7,400 at the end of 2011. The dominance of retail investors

March 2011

in the Saudi market means that sentiment plays an important role in

share prices and therefore that the TASI can move some way from
fair value. Given the likelihood of prolonged political uncertainty, we
expect the TASI to end the year at between 6,600 and 7,000, which
is below the fair value, but above where it stands today. The risks to
this forecast are mainly on the downside, though if the state-run
pension funds maintain their recent policy of buying when the market
falls to levels that are clearly attractive for long-term investors, much
of the downside risk will be mitigated.
Moves in global markets have the potential to pull the TASI away
from our forecast, though we do not foresee them exerting too much
pressure this year. With the global economic outlook generally
encouraging, we anticipate modest gains for global stock markets
over the rest of 2011. The TASI has underperformed the recovery in
developed and emerging stock markets over the past two years and
the prevailing regional political environment means it is likely to do so
again this year, despite the potential for catch up. There are risks to
the global market outlook and an intensification of one of these, such
as the Eurozone debt problems or a dramatic tightening of Chinese
economic policy, would probably pull down the TASI. Allowing
greater foreign participation in the market would lift both values and
volumes, though we do not think this will occur during 2011.

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Jadwa Investment.
The data contained in this Research is sourced from Reuters, Bloomberg, Tadawul
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