GCC Market Outlook 2013 - ALPEN ASSET ADVISORSalpenassetadvisors.com/GCC_Market_Outlook 2013_20 June2013.pdf · volatile session, especially since the last week of May—the S&P index

GCC Market Outlook 2013

July 3, 2013

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Table of Contents

1. Executive Summary ............................................................................................ 3

2. GCC: Market Performance ................................................................................. 4

2.1. Saudi Arabia ...................................................................................................................................... 4

2.2. UAE ................................................................................................................................................... 5

2.3. Qatar .................................................................................................................................................. 5

2.4. Kuwait ................................................................................................................................................ 5

2.5. Oman ................................................................................................................................................. 5

2.6. Bahrain .............................................................................................................................................. 5

3. GCC Market Outlook ........................................................................................... 6

4. Themes to Watchout ........................................................................................... 8

4.1. Liquidity to improve; volatilty expected to decline ............................................................................... 8

4.2. Stabilization in oil prices and rising government spending .................................................................. 8

4.3. Recovery in the real estate sector ...................................................................................................... 8

4.4. Attractive earnings growth; valuation remains fair .............................................................................. 8

4.5. Potential risks to the economy and market ......................................................................................... 8

5. Select Sectors in Focus .................................................................................... 10

Glossary ................................................................................................................ 28

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1. Executive Summary

Morgan Stanley Capital International (MSCI) recently upgraded

Qatar and the UAE to emerging market status from frontier

market; this has made the two regional markets highly

attractive to foreign institutional investors. As a result, the rally

witnessed by GCC equity markets year-to-date in 2013 is

expected to strengthen further. The year-to-date 2013 rally has

been primarily driven by revival in macroeconomic

fundamentals of Gulf heavyweights such as Saudi Arabia and

UAE coupled with accommodative fiscal policies of developed

markets, on the global front. The GCC equity markets also

benefited from stabilization in oil price during 2012 which has

carried on in 2013. Healthy corporate earnings, positive cues

from global economy and stable oil prices have all positively

impacted the GCC markets in the recent past and reinforced

their position as one of the best performing markets in the

world.

The broad macro environment for 2013 remains encouraging

as end of fiscal cliff in the US and quantitative easing in

emerging markets as well Europe would provide much needed

impetus. The government’s commitment toward building the

non-oil sector through continuous investment in developing the

infrastructure sector and expansionary budget policies would

be key region-specific triggers for sustained improvement in

economic performance. According to the IMF, real GDP growth

in GCC is expected to slow down to 3.2% from 5.7% in 2012.

This is primarily due to the scaling back of the growth rate in

hydrocarbon production. The economic growth, however,

remains contingent on several factors such as stable oil prices

and continuous improvement in socio-political situation in the

region.

GCC markets to remain on upward curve in H2 2013

GCC equity markets are likely to remain on an upward

trajectory in H2 2013, building momentum on the strong rally

witnessed during H1 2013. Increased interest of foreign

investors in the UAE and Qatari markets following the MSCI

upgrade is also expected to contribute to the up-move. The

overall GCC market, however, remains exposed to spells of

volatility that could arise from lack of institutional participation,

high dependence on oil, and any impediment to global

economic revival. Global markets are witnessing a rather

volatile session, especially since the last week of May—the

S&P index declined 3.4% from its peak in May (May 21, 2013),

while FTSE-London plunged 7.7% (May 22, 2013). While

positive news on macro indicators in the US encouraged

market movement, news that central bank (Japan) would not

provide additional economic stimulus coupled with concerns

over tapering of quantitative easing (the US) dragged global

indices lower.

Key catalysts: Amongst others, continued momentum on

reforms, healthy economic growth, investment in non-oil

sectors, stabilization of oil prices, recovery in real estate sector,

better corporate earnings and compelling valuations are likely

to be the key positive triggers for the GCC equity markets.

According to Bloomberg consensus estimates, earnings of

equities constituting the MSCI GCC index are expected grow a

healthy 10.3% YoY in CY2013.

Major risks: Any unanticipated downturn in the US and Europe

at the global front, unfavorable movement in oil prices (which

could dent the expansionary fiscal stance of the governments),

and regional political instability could negatively impact investor

risk perception, triggering global flight to safer asset classes.

Furthermore, markets like UAE (Both Dubai and Abu Dhabi)

and Kuwait have seen aggressive bull-run in H1 2013 and

valuations look a bit stretched especially in case of the big

names.

Preferred investment strategy:

Recovery in global economy and healthy macro fundamentals

domestically, one would expect a shift in investment strategy

away from defensives to cyclical and rate sensitive sectors.

These sectors offer stronger earnings growth expectation in

2013 on account of healthy volumes gain and are currently

trading at lower valuations. We have identified five stocks from

each of our 2013 focus sectors (a total of 25) that look

attractive based on their earnings growth outlook and lower

valuation multiples. Refer to sector section for companies that

should be in focus in H2 2013.

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2. GCC: Market Performance

Growth in most GCC markets gathered momentum on YTD

basis, driven by stable hydrocarbon prices, healthy corporate

earnings and strong dividend payouts. Furthermore, positive

cues from global economy also supported the YTD gains in

the GCC indices. While the economic indicators in the US

have improved, concerns over Euro Zone debt crisis continue

to persist. During April, US unemployment rate declined to

7.5%, the lowest since December 2008; the US consumer

confidence, rising to 76.2, strengthened to the highest level in

more than five years during May. Additionally, the recent

release of reports on advancement in home prices

(S&P/Case-Shiller index) by 10.9% y-o-y, the highest since

April 2006, boosted investor confidence.

The MSCI GCC Index outperformed the MSCI Emerging

Markets Index gaining 12.4% YTD while MSCI Emerging

Markets declined 9.6% YTD. Concerns over slowdown in the

economic growth in China and contraction in manufacturing,

coupled with declining gold prices, have majorly impacted

MSCI Emerging Markets Index performance.

Among regional indices, UAE’s DFM index remained the best

performer, advancing 47.6% YTD, followed by Abu Dhabi’s

ADX (gained 39.2% YTD). The robust performance could be

ascribed to growth in the real estate and banking sectors.

Saudi Arabia’s TASI, the largest index in GCC, gained 12.1%

YTD. Recently (on June 12, 2013), MSCI upgraded Qatar and

the UAE to Emerging Market status from Frontier Market. The

upgrade is based on improving economic conditions, rising

trading volumes and market accessibility. The move is

expected to enhance institutional investors’ interest in the

Qatari and UAE equity markets, leading to higher capital

inflow. The upgrade to membership in the MSCI Emerging

Markets Index is expected to take effect around May 2014,

with the UAE and Qatar weighing 0.4% and 0.45%,

respectively. The positive news lifted the regional indices—on

June 12, 2013, DFM advanced 1.6%, ADX 2.7% and Qatar

1.8%. Volumes traded in these markets surged 118.5%,

159.3% and 62.8%, respectively on June 12, 2013.

2.1. Saudi Arabia

Saudi Arabia’s benchmark Tadawul All Share Index (TASI),

the largest bourse in the GCC region with market

capitalization of around US$ 373.3 billion, surged 6.0% during

2012. TASI commenced 2013 on a strong note, driven by an

influx of foreign investments amid robust macroeconomic

fundamentals. Also, movement of real estate investments in

equities coupled with an improvement in global sentiment and

oil prices supported the index’s growth. Government’s strong

balance sheet, robust external position, liquid, well capitalized

and well regulated banking sector are the factors that have

contributed towards the performance of the Saudi market.

Improved earnings of the heavyweight Banking sector (rose

11.9% y-o-y), Cement, and Telecommunication sectors,

coupled with positive cues from global economy has driven

the market sentiment. The index continued its upward trend

and is currently up 12.1% YTD. All sectoral indices barring

Energy & Utilities, Insurance, Media & Publishing and Multi-

Investment have maintained a positive momentum on a YTD

basis. Furthermore, the announcement by the Capital Market

Authority in May regarding tightening regulation for the TASI

to reduce the volatility of shares is expected to increase

market attractiveness for domestic and foreign investors.

Exhibit 1: GCC market performance v/s Emerging markets Exhibit 2: GCC market performance 2012

90

98

106

114

122

Jun-12 Sep-12 Nov-12 Jan-13 Mar-13 Jun-13

MSCI - GCC MSCI - Emerging Markets

80

95

110

125

140

155

170

Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13

Saudi Arabia Bahrain Oman

Qatar Kuwait UAE

Source: Bloomberg,

Index re-based to 100

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2.2. UAE

UAE has emerged as one of the top performers not only within

GCC but also in the whole world in 2013. The Emirates’ two

stock indices – DFM and Abu Dhabi’s ADX – have surged

47.6% and 39.2%, respectively. The market’s strong

performance was supported by an improvement in economic

fundamentals on successful restructuring of debt-strapped

government related entities. The UAE market has also been

buoyed by an increase in foreign investments, improvement in

the real estate market and investors’ expectation of higher

dividends.

The heavyweights, Banking and Real Estate, led the

performance of both the indices. Performance of the Banking

sector has been supported by strong growth in earnings, with

the provisioning cycle bottoming out. Recent news of upgrade

to the MSCI Emerging Market status is likely to help in

maintaining the market momentum.

2.3. Qatar

Qatar’s stock exchange index, the fourth-largest in terms of

market capitalization in the GCC region, has been on an

upswing in 2013 and is currently 13.9% up YTD. All sectoral

indices have registered YTD gains with small cap stocks

witnessing the largest gain of 16.0% YTD. The market has

witnessed an improvement in trading activity with better-than-

expected corporate earnings and dividend announcements.

The recent upgrade of the index by MSCI to Emerging Market

status from Frontier Market is expected to boost investor

confidence.

2.4. Kuwait

Kuwait has emerged as the second best performing market in

the GCC region after reaching a seven-and-a-half-year-low at

the beginning of 2012. However, positive comments from His

Highness the Amir of Kuwait regarding the economy and

financial markets, coupled with better-than-expected earnings,

has led to a regain in investor confidence. With improving

political and economic environment in the country, the stock

market has been on a rise since the beginning of 2013. It

breached the 8,000 mark in May 2013 and is up 34.3% YTD.

All sectoral indices have witnessed a gain during the same

period. Recently, the government announced its plan to spend

US$ 15.8–17.5 billion on development projects in the next 12

months. However, a delay in implementation of infrastructure

projects could negatively impact the market’s performance.

2.5. Oman

Oman’s MSM 30 Index is currently up 14.9% YTD, with all

sectoral indices registering gains. The overall cash dividend

announced by large companies in 2012 is up 9.7% y-o-y

(OMR 263 million), and a portion of this is anticipated to be

reinvested into the markets. Trading activity has also

improved significantly in the first five months of 2013 vis-à-vis

2012. Recent news that Oman government is in advanced

stages of negotiations with international oil giants for awarding

six onshore oil and gas blocks for development on production

sharing basis, has further bolstered confidence.

2.6. Bahrain

The Bahraini stock market was the worst performer among

GCC indices in 2012, extending losses to 6.8% y-o-y.

However, the trend reversed in 2013, with the index closing

positive in all five months of 2013, registering 12.9% YTD

gains. Of the six sectoral indices, Banking gained 27.4% YTD

followed by Industrial up 22.1% YTD.

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3. GCC Market Outlook

The outlook for GCC economies is expected to remain robust

in 2013 with IMF growth forecast of 3.2% supported by

accommodative monetary and fiscal conditions amid

improvement in the macroeconomic conditions in the US and

other emerging markets. An end to the uncertainty related to

the US fiscal cliff coupled with monetary easing measures in

Europe and emerging markets could help sustain global

growth. IMF expects world GDP to grow 3.3% in 2013, with

advanced economies projected to expand 1.2%. Despite a

slowdown in BRICS economies, the outlook for emerging

markets remains healthy as young and rising population, and

increasing income levels are likely to support domestic

consumption.

Improvement in the global economic outlook is likely to have a

positive impact on GCC economies given their increasing

integration with other markets. The hydrocarbon sector has

been the traditional economic growth engine in the region and

is expected to continue its reign in 2013. Higher oil reserves,

stable oil prices and a recovery in the global economy are

expected to boost GCC economies’ performance.

Stable performance of the oil and gas sector has had a

spillover effect on the non-oil sector. Revenue earned through

hydrocarbons and its by-products have been channelized

effectively to boost the rest of the economy, thus contributing

largely toward GCC’s economic diversification. In 2013,

besides incessant support from the hydrocarbon sector,

contribution from non-hydrocarbon sectors is also expected to

boost economic growth in the region. Non-hydrocarbon sectors

are expected to fare better vis-à-vis the previous three years,

and contribute nearly 75% to overall GDP growth in 2013.

Growth in the non-hydrocarbon sector would be primarily led by

the services sector (accounted for 39% of the GCC economy in

2011), particularly public services, as government spending is

a function of strong hydrocarbon revenues. In addition to

growth in the services sector, non-oil industrial growth is

expected to be driven largely by the construction and

manufacturing sectors. Individual governments may continue to

invest a significant portion of their oil revenues for developing

and modernizing the construction and infrastructure sectors

and thereby create jobs. Government spending on

infrastructure development, primarily on housing and

education, surged 8.0% in 2012. As part of modernizing

infrastructure and social services, GCC governments are

projected to invest around US$ 700 billion in the coming years.

GCC Governments however face rising break-even oil

production costs as a result of the increasing fiscal expenditure

in the non-hydrocarbon sector. Stabilization of oil prices due to

Eurozone crisis and soft growth in emerging markets could

pressurize the GCC Governments in 2013.

Despite huge government expenditure, GCC budget surplus

rose to ~11% of GDP in 2012. This was primarily supported by

its oil revenues, which accounted for more than 45% of the

GDP. With stable oil prices and burgeoning demand for

hydrocarbon by-products, the region would continue enjoying

healthy fiscal and current account surpluses in 2013. Fiscal

surplus is forecasted at US$ 124 billion in 2013, equivalent to

8.2% of GDP.

Besides the hydrocarbon sector’s contribution, rising domestic

demand could play an important role in economic growth in

GCC. With more than 50% of the population below 25 years of

age, domestic consumption would continue increasing with

Exhibit 3: GCC real GDP growth vs. other economies Exhibit 4: GCC-Proportion of oil and non-oil GDP in 2013

-5

-3

-1

1

3

5

7

9

11

2005 2006 2007 2008 2009 2010 2011 2012f 2013f

(% Y

oY

)

GCCWorldAdvanced economiesEmerging market and developing economies

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012f 2013f

Oil Non Oil

Source: IMF

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higher per capita income. In addition, strong economic

performance is attracting foreign workers to the region;

consequently, population growth is estimated to be almost

threefold the global rate at 50 million by 2013. This has led to

investment opportunities in demand-driven sectors such as

retail, health and education. Additionally, the tourism sector in

GCC continues to thrive on more entertainment and sports

venues, man-made islands (in Dubai), Haj pilgrims (in Saudi

Arabia), and growing fleet and airline network (to improve

connectivity with major cities around the world).

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4. Themes to Watchout

Stock market performance is largely tied to the economic

growth prospects of a country. Overall sentiment in the GCC

region appears positive, driven by the strengthening of the US

and European economies coupled with sustained demand from

China. GCC stock markets are expected to capitalize on the

robust macroeconomic outlook for the region in 2013.

Stabilization in oil prices and government spending are set to

attract additional investments in GCC stock markets. In our

opinion, existence of certain key themes would be favorable for

these markets in 2013. The themes are mentioned below.

4.1. Liquidity to improve; volatilty expected to decline

In 2012, most GCC bourses witnessed increased liquidity amid

an improvement in investor sentiment. According to

Bloomberg, total value traded across the six GCC bourses

grew 65.6% (source of information to be mentioned) y-o-y to

US$ 2.0 billion during the same period. Historically, GCC

markets have been characterized by high volatility due to the

absence of foreign investors and lack of market breadth.

However, we expect an expansion in market breadth and depth

due to increasing foreign participation, especially in the UAE.

Moreover, the region has evolved as a regional hub for IPO

activity—GCC, primarily Saudi Arabia and the UAE, accounted

for 97% of the total capital raised in the MENA region in 2012.

In 2012, Saudi Arabia led the country standings by raising US$

1.4 billion through seven IPO followed by UAE with US$ 277

million. Dallah Healthcare Holding Company led regional IPO

deal sizes with its US$ 143 million listing on the Saudi Stock

Exchange. We expect the Kingdom and UAE to continue being

the largest regional hubs for IPO activity in 2013 amid

economic developments. Saudi Arabia’s IPO market has

remained active with the listing of two IPOs comprising the

Northern Region Cement Company which raised US$ 240

million and National Medical Care Company which raised US$

97 million. Many companies in UAE are also considering an

initial public offering. Senaat, the industrial conglomerate, is

among a group of UAE companies considering an initial public

offering. The company holds stakes in companies including

Emirates Steel Industries and National Petroleum Construction

Company. In a recent interview with Bloomberg, Shaikh Ahmed

bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal

Committee, President of the Dubai Civil Aviation Authority,

Chairman of Emirates airline and Chief Executive of the

Emirates Group also mentioned that many companies that fall

under the umbrella of the Investment Corporation of Dubai

would be candidates for IPOs. An increase in IPO activities is

indicative of lower stock market volatility and upbeat economic

growth, and further supports the optimistic outlook for the GCC

stock market.

4.2. Stabilization in oil prices and rising government spending

Despite shifting focus to the development of non-oil sectors,

GCC economies continue to depend on the oil sector. Oil

contributes ~50.0% to the GDP. Hence, the region’s economic

performance continues to be largely dependent on the

movement in international oil prices. Recent stabilization in oil

prices is likely to improve the fiscal position of GCC

governments and encourage investments in non-oil sectors.

Refining and infrastructure projects worth US$ 700 billion are

likely to be undertaken in the region. According to MEED,

projects totaling US$ 4.1 Trillion are under various stages of

development across GCC. Rising government spending would

augur well for the region’s economic performance in 2013.

4.3. Recovery in the real estate sector

The real estate sector assists construction-related industries

and is also an indicator of the overall business activity. The

sector was a key contributor to the economic downturn of 2008.

However, the real estate sector in GCC is on a gradual

recovery path. The property sale prices in Dubai, complied by

Jones Lang LaSalle, increased 18.0% y-o-y during 1Q13.

Consolidation among large developers, such as Aldar and

Sorouh, bodes well for investor sentiment. The real estate

sector in Saudi Arabia also remains strong with the approval of

the much awaited mortgage law, which is likely to propel

demand.

4.4. Attractive earnings growth; valuation remains fair

In our opinion, the GCC market is well positioned to grow in

both short- and medium-to-long term. We expect healthy

earnings growth across major cyclical sectors in the region due

to an improvement in macroeconomic conditions. An attractive

valuation, coupled with expectation of healthy earnings growth,

would continue to boost confidence in the region’s stock

market. According to Bloomberg consensus estimates, net

income per share of equities constituting the MSCI GCC index

are expected grow a healthy 10.3% YoY in CY2013.

4.5. Potential risks to the economy and market

Our outlook for GCC economies and markets is subject to

major uncertainties and risks. GCC countries face a plethora of

challenges such as excessive reliance on oil, political instability

and global slowdown. These economies also face other

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potential risks, particularly external credit risk, as GCC is one of

the major creditors in global financial markets.

Lack of diversification renders GCC vulnerable to lower oil

prices

Although GCC countries are diversifying, driven by rapid

expansion in non-hydrocarbon sectors, hydrocarbon sectors

(particularly oil) still dominates the economy—on an aggregate

basis, the sector accounts for about 45% of nominal GDP and

more than 70% of total exports. Thus, we believe GCC is

vulnerable to a sharp drop in oil prices due to its high

dependence on the hydrocarbon segment.

Political instability

The Arab Spring, which commenced in Tunisia in January

2011, spread to the GCC economies, particularly Bahrain.

Political tension in Bahrain, which began in 2011 demanding a

political reformation, has not significantly improved, thus

continuing to pose a threat. Additionally, the situation in Syria

remains a cause for concern.

.

Prolonged global economic recovery

Slowdown in global economic growth, following an aggravation

of the Eurozone debt crisis, could adversely impact GCC

through lower oil export revenues as these countries are highly

dependent on hydrocarbon exports. Furthermore, it could

decrease the region’s access to foreign funding and lead to

shortage of liquidity. Moreover, GCC countries lending to global

and European banks are exposed to the risk of the European

debt crisis. In 1Q12, GCC’s total foreign bank claims stood at

US$ 328 billion, while funds provided to global banks

aggregated US$ 462 billion. Lending exposure to Europe was

as high as US$ 220 billion during the same period.

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5. Select Sectors in Focus

Given the reduced uncertainty at the global front coupled with robust macro tailwinds domestically, one would expect a shift in

investment strategy away from defensive stocks and towards cyclical and rate sensitive stocks. Empirical evidence reflects that

cyclical sectors in general witness re-rating of multiples when macro indicators trough and begin their upward trend. Consequently,

we remain focused on Retail, Banking, Real Estate & Construction, Transport & Logistics and Telecommunication as we believe

there still lies immense growth potential. GCC also presents a unique opportunity in terms of stocks offering high dividend yield

along with robust returns. For example, in 2012, Dubai’s stock index offered a dividend yield of 3.76% compared with 2.67% for

MSCI Emerging Markets Index. We further identify few stocks that should be in focus in the coming months, as they demonstrate

good growth prospects and are trading at lower valuations..

Exhibit 5: Select sectors in focus (Overlay each country’s chart with GCC as a whole)

Sector likely to outperform in H2 2013 Industry avg. P/E charts

Retail:

Earnings expected to grow by 16.7% in 2013.

Favorable demographics supported by rising disposable

income to support growth.

Increased internet penetration and shifting lifestyle to propel

online retail sales.

Sector trading at a current P/E of 15.6x –in line with its historic

average (2009-12) of 15.2x, however much lower than the

emerging market average of 24.3x.

10.0

12.0

14.0

16.0

18.0

2009 2010 2011 2012 Current 2013f 2014f

P/E

(x)

Saudi Arabia GCC

Banking:

Credit growth to be driven by strong macro-economic

fundamentals.

Expansionary government policy fuelling funding needs

especially in non-hydrocarbon sectors.

Real Estate boom with growing private consumption should

improve private sector lending.

5.0

13.0

21.0

29.0

37.0

2009 2010 2011 2012 Current 2013f 2014f

P/E

(x)

Bahrain KuwaitOman QatarSaudi Arabia United Arab EmiratesGCC

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Real Estate & Construction:

Earnings expected to grow by 14.6% in 2013.

Demand for affordable housing fuelled by encouraging lending

rates and favorable policy environment.

Spillover effect on construction and related sectors from robust

infrastructure project pipeline in the GCC.

Sector trading at a discount of 19.8% vis-à-vis emerging

economies.

5.0

10.0

15.0

20.0

25.0

2009 2010 2011 2012 Current 2013f 2014f

P/E

(x)

Oman Qatar

Saudi Arabia United Arab Emirates

GCC

Transport & Logistics:

Earnings expected to grow by more than 100% in 2013.

Absorbing majority of governments infrastructure spending.

Tourism and trade to demand better air, road and sea

infrastructure.

Sector trading at a current P/E of 13.0x – a discount of 15.4%

vis-à-vis emerging economies.

5.0

10.0

15.0

20.0

25.0

2009 2010 2011 2012 Current 2013f 2014f

P/E

(x)

Kuwait Qatar

Saudi Arabia United Arab Emirates

GCC

Telecommunication:

Favorable demographics and young tech savvy population to

drive demand for data services.

Rising demand for smart devices would further propel demand

for data services.

The sector’s earnings are expected to grow by 6.5% y-o-y

during 2013 and average dividend yield is forecasted to

increase to 5.3% in 2013.

In terms of current valuation, the sector is trading at a current

P/E and P/B of 11.8x and 1.9x, respectively.

5.0

11.0

17.0

23.0

29.0

2009 2010 2011 2012 Current 2013f 2014f

P/E

(x)

Bahrain KuwaitOman QatarSaudi Arabia United Arab EmiratesGCC

Source: Bloomberg, Alpen Asset Advisors

P/E: Price-to-Earnings ratio, P/B: Price-to-Book ratio

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SECTOR: RETAIL

Rapidly expanding population and a large urbanized consumer base represent an attractive market for retailers. Moreover,

factors such as a young demographic profile, rising income levels and shifting lifestyle preferences are likely to propel

consumer spending.

IMF forecasts GCC’s population to expand at a CAGR of 2.4% during 2011–16.

GCC is among the world’s most urbanized region—more than 75% of the total population resides in cities.

Over 40% of the population is below 25 years of age, reflecting an attractive demographic structure.

The proportion of expatriate population is significantly higher in the GCC—expatriates constitute more than 75% of the total

population in countries such as Qatar, the UAE and Kuwait. Increasing brand consciousness among Locals and Expatriates

is driving demand for international brands.

Disposable incomes are rising due to strong macroeconomic fundamentals in GCC, in light of increasing global demand for

oil and stabilization in long-term oil prices. Improvement in tourism and hospitality infrastructure is attracting international

travelers, shoppers and religious tourists. For e.g. Leisure travelers to UAE have significantly contributed to the economy as

well. As per estimates by Mastercard International, travelers visiting Dubai are anticipated to spend some US$ 10.4 billion in

2013, the eighth highest expenditure in the world.

Increased Internet penetration is boosting online retail sales. GCC witnessed around 30% annual growth in the number of

Internet users between 2000 and 2010.

Supportive expansionary government policies and favorable taxation to raise the disposable income of consumers. This

creates an attractive environment for the retail industry.

GCC’s retail sector is expected to witness strong growth in revenues and earnings in 2013, growing by an average rate of

18.7% y-o-y and 16.7% y-o-y, respectively. Currently the sector is trading at a current P/E of 15.6x close to its historic

average of 15.2x and emerging market average of 24.3x.

Exhibit 6: GCC Retail sector—Key metrics and ratios

Company Country CMP* M.cap (US$

million)

Sales Growth (%) Net income Growth (%)

Operating Margin (%)

D/E ROE (%)

D.yield (%)

2013e 2014e 2013e 2014e 2013e 2014e LFY LFY LFY

BMMI Bahrain 0.7 259.5 NA NA NA NA NA NA 0.0 18.2 6.6

Bahrain duty free Bahrain 0.7 204.2 NA NA NA NA NA NA 0.0 17.2 6.9

Jarir Marketing KSA 186.8 2,987.8 15.3 12.8 12.0 12.9 11.9 12.0 18.2 56.6 4.8

Fawaz Al Hokair KSA 148.3 2,767.2 37.5 21.9 36.6 16.3 14.0 13.7 64.1 36.2 0.0

United Electronics KSA 104.0 832.0 18.1 15.6 16.6 13.5 5.4 5.2 0.0 38.5 2.4

Al-Hassan GI

Shaker KSA 83.0 774.6 13.8 10.9 20.9 13.1 14.8 14.8 71.2 35.9 6.5

Al Othaim Holding KSA 99.8 598.5 9.1 9.4 (2.8) 12.2 3.4 3.4 28.5 27.8 3.6

Fitaihi Holding KSA 15.6 228.8 NA NA NA NA NA NA 0.0 NM 0.0

Magrabi Optical KSA 10.0 0.0 NA NA NA NA NA NA 16.0 18.9 0.0

Sultan Centre

Food Products Co Kuwait 120.0 242.7 NA NA NA NA NA NA 337.2 NM 0.0

AlEid Food Co. Kuwait 96.0 26.9 NA NA NA NA NA NA 62.7 9.0 0.0

Foodco Holding UAE 2.0 54.5 NA NA NA NA NA NA 81.0 4.7 4.0


NA denotes Not Available, NM denotes Not Meaningful, *Local Currency; D/E: Debt to equity, ROE: Return on equity;

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Exhibit 7: GCC Retail sector valuation landscape (Current)

Jarir

AlhokaireXtra

Shaker

Othaim

BMMI BSCFoodCo Holding

0.3

2.3

4.3

6.3

8.3

10.3

12.3

10.0 11.5 13.0 14.5 16.0 17.5 19.0 20.5

P/B

(x)

P/E (x) Source: Bloomberg

Size of the bubble represents market capitalization local currency

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RETAIL SECTOR – SELECT COMPANIES IN FOCUS

Fawaz Abdulaziz Al-Hokair (Al Hokair) (KSA)

The company’s top-line and bottom line are expected to witness strong growth in 2013 rising by 37.5% y-o-y and 36.6%

y-o-y, respectively. This would be majorly driven by new store expansion plans and acquisition of NESK.

Al Hokair’s focus on the fast growing value fashion segment continues to remain a key catalyst for top-line growth.

United Electronics Company (eXtra) (KSA)

eXtra’s earnings are estimated to grow 16.6% y-o-y in 2013.

Factors such as focus on private-label brands, sourcing products directly from manufacturers and ability to gain

discounts from suppliers are likely to support earnings growth.

Jarir Marketing Company (Jarir) (KSA)

Jarir is the largest listed retailer in Saudi Arabia, with presence in the high-growth electronics, and office and school

supplies segments.

The company’s earnings are projected to grow 12.0% y-o-y in 2013 as it plans to open six new stores. Also, Jarir aims

to generate significant earnings from the upcoming 4G technology and devices compatible with it, mainly iPhone 5,

which was launched in 4Q12. The company is likely to deliver high dividend yield of 4.6% in 2013.

Abdullah Al Othaim (Othaim) (KSA)

Same-store sales expansion is expected to boost the top line—Othaim plans to add new stores in 2013.

At a current PE of 12.6x, Othaim is trading below the industry average of 15.6x.

Al-Hassan G.I. Shaker (Shaker) (KSA)

The company is the leader in the high-growth air conditioning market in Saudi Arabia.

Ramp-up of capacity could enable Shaker to meet the rising demand and potential export demand. Earnings are

expected to surge 20.9% y-o-y in 2013. Dividend yield is estimated to be 5.0% during the same period.

Exhibit 8: GCC Retail sector select companies in focus —Key metrics and ratios

Company

P/E EPS

growth ROE (%)

P/B

Technical indicators*

Current 2013e 2014e 2014e 2014e 2014e R1 R2 S1 S2

Al Hokair 16.7 17.0 14.6 16.3 36.4 4.7 177.9 196.8 121.2 140.1

eXtra 19.4 16.9 14.7 14.7 31.7 4.4 112.2 122.2 87.4 92.3

Jarir 19.1 17.7 15.7 13.0 59.5 8.6 204.7 219.3 163.7 175.3

Othaim 12.6 13.4 12.0 12.1 22.7 2.6 117.5 127.0 89.0 98.5

Shaker 14.7 12.8 11.3 13.1 36.9 3.9 94.1 101.7 71.3 78.9


Support 1, S2: Support 2; R1: Resistance 1; R2: Resistance 2

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SECTOR: BANKING

The banking sector in GCC is set to capitalize on opportunities due to the healthy economic outlook for 2013. With regional

governments increasingly focusing on developing non-oil sectors, credit growth is expected to remain strong.

The sector has been resilient to the global financial turmoil. The Eurozone debt crisis is unlikely to have an adverse impact

on GCC banks as their net funding dependence on European banks, and external funding, in general, are largely limited and

manageable.

GCC banks are well capitalized—capital adequacy ratio in the UAE was as high as 20.8% in 2011, followed by Bahrain

(19.5%), Kuwait (18.5%), Saudi Arabia (17.1%), Qatar (16.1%) and Oman (15.5%).

Recovery in the real estate sector and growing private consumption, sustained by rising middle-class income, could spur

demand for banking services.

Government spending continues to remain the key driver for banking activity in the GCC region. Spending is estimated to

grow at an annual rate of 8.5% in 2013 and thereby support banking activity.

GCC Banks have seen robust growth in 2013. Net profits of GCC banks increased 7.1% YoY to USD 4.6 billion in Q1 13.

Net profits of banks in the UAE surged 18.7% YoY, while that for banks in Qatar, KSA and Kuwait rose 7.4%, 2.6% and

2.4% YoY, respectively.

In terms of valuation, GCC banks are currently trading at an average P/B of 1.5x close to the historical average of 1.4x over

2010–12.

Exhibit 9: GCC banking sector—Key metrics and ratios


million)



D/E ROE (%)

D.yield (%)


Al Rajhi Bank KSA 68.0 27,198.5 1.4 12.5 9.8 12.7 60.0 60.6 5.0 23.3 5.0

Samba KSA 45.9 11,015.4 (0.1) 11.1 7.4 7.6 65.8 66.8 29.4 14.2 3.7

Riyad Bank KSA 24.0 9,599.5 (9.0) 6.8 7.0 9.3 50.3 51.0 15.4 11.3 5.7

Saudi British

Bank KSA 35.0 9,332.6 (6.0) 11.0 10.4 12.0 62.8 59.4 48.1 17.7 3.1

Banque Saudi KSA 29.9 7,207.6 (8.2) 8.9 8.2 7.1 58.1 59.1 70.5 13.2 3.0

Arab Natl Bank KSA 28.0 6,346.3 (6.2) 11.6 10.2 11.0 51.4 51.4 17.9 14.0 3.8

Alinma Bank KSA 13.8 5,499.7 27.5 32.4 42.1 33.4 41.2 43.9 10.0 4.9 0.0

Natl. Bank Kuwait Kuwait 970.0 15,493.9 (20.4) 8.2 (1.6) 9.4 57.4 58.9 219.9 13.2 3.1

Kuwait Finance Kuwait 790.0 8,818.6 (27.2) 4.2 66.3 24.7 16.6 20.5 97.2 4.6 1.2

Qatar National

Bank Qatar 143.1 27,500.3 (9.2) 15.0 13.7 14.8 75.7 73.9 97.7 19.6 4.6

Masraf Al Rayan Qatar 26.5 5,458.5 7.1 10.0 (2.6) 11.1 64.2 59.6 72.2 17.5 4.0

Commercial Bank Qatar 69.0 4,689.2 (24.0) 8.9 6.2 8.9 63.3 62.1 144.9 15.0 8.5

Qatar Islamic

Bank Qatar 68.4 4,438.9 18.7 8.2 20.1 11.7 52.8 56.6 112.3 10.7 5.0

Natl Bk of Abu

Dhabi UAE 12.1 14,125.2 (18.5) 8.1 5.2 15.0 53.2 53.3 212.8 16.1 3.4

First Gulf Bank UAE 14.4 11,761.5 (17.0) 9.6 7.3 15.1 57.5 59.6 74.2 15.9 7.2

Emirates NBD UAE 5.6 8,473.6 (25.5) 5.5 11.1 29.4 25.3 28.5 121.5 7.8 8.8

Abu Dhabi Comm UAE 4.9 7,525.8 (28.9) 4.2 1.9 11.4 43.6 45.1 133.9 13.8 8.3


NA denotes Not Available, * Local Currency; D/E: Debt to equity, ROE: Return on equity;

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Exhibit 10: GCC banking sector valuation landscape (Current)

Al Rajhi

Qatar Natl Bk

Natl Bk Kuwait

SAMBAFirst Gulf

Riyad Bk

Saudi British

Banque Francis

Arab Natl Bk

Masraf

Qatar Islamic

Commercial Bk AbuDhabi Comm

Emirates

Natl Bk of AbuDhabi

0.5

1.0

1.5

2.0

2.5

3.0

3.5

7.0 8.5 10.0 11.5 13.0 14.5 16.0

P/B

(x)



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BANKING SECTOR – SELECT COMPANIES IN FOCUS

Bank Al Rajhi (Al Rajhi) (KSA)

Al Rajhi, the largest Islamic and retail bank in Saudi Arabia, maintains leadership position with ~17.0% share in

credit as of 2012.

A strong network of retail franchise would continue to be the key differentiator as the bank benefits from growth

in consumer lending in the Kingdom. Earnings are estimated to increase 9.8% in 2013, driven by growth in the

loan book and access to low-cost funding.

Commercial Bank of Qatar (Commercial Bank) (Qatar)

Growth in loan book is expected to benefit from shifting focus to infrastructure lending as the Qatari government

continues to incur higher spending on infrastructure.

Though exposure to consumer finance is likely to be lower, strong demand for credit could raise lending yields.

Emirates NBD (Emirates NBD) (UAE)

The company has strong presence in the UAE retail banking sector. Growth in the loan book would be supported

by revival in consumer spending and recovery in the UAE real estate sector in 2013.

Improvement in operating efficiency due to cost-cutting measures is expected to support earnings growth. The

net income is estimated to grow 11.1% y-o-y in 2013.

Emirates NBD trades at a current P/B of 0.9x, a significant discount to the industry average of 1.5x.

Samba Financial Group (Samba) (KSA)

Samba is the most liquid and conservative among Saudi banks, with a loan-to-deposit ratio as low as 70.2% (as

of 1Q13).

Focus on cross-selling to corporate clients would enable the Group to offset margin contraction. Also, diversified

interests in other businesses, primarily brokerage, asset management and trade finance, improve earnings

quality. Samba’s earnings are projected to rise 7.4% y-o-y in 2013.

Samba trades at a current P/B of 1.3x, at a discount to the industry average of 1.5x.

Saudi British Bank (Saudi British) (KSA)

The bank’s strong presence in the premium business for high-end retail clients would help in sustaining growth

in the loan book. Saudi British’s earnings are projected to increase 10.4% y-o-y in 2013.

Access to HSBC’s branches and brand could continue to be the key differentiator in terms of attracting high net

worth clients.

Exhibit 11: GCC Banking sector select companies in focus —Key metrics and ratios

Company

P/E EPS

growth ROE (%) P/B Technical indicators*


Al Rajhi 12.9 11.8 10.4 13.8 23.5 2.5 72.2 76.1 64.2 64.3

Commercial Bk 8.3 8.2 7.5 NA 15.6 1.1 77.7 85.5 62.9 62.1

Emirates NBD 11.3 11.5 8.6 34.0 12.7 0.9 6.7 7.9 3.5 4.2

Samba 9.5 8.8 8.1 8.3 14.5 1.1 49.8 51.5 45.2 46.6

Saudi British 10.5 9.8 8.7 12.4 17.0 1.4 40.7 43.5 32.1 34.9



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SECTOR: REAL ESTATE & CONSTRUCTION

The real estate and construction sector in GCC is expected to recover in 2013 as economic growth is projected to be robust that, in turn,

would translate into higher government expenditure.

UAE, the epicenter of the region’s real estate sector meltdown in 2008, is expected to lead the recovery with a gradual improvement in

investment demand.

GCC has been experiencing demand–supply gap in the affordable housing segment. This is likely to be resolved by encouraging stable

lending rates and supportive government policies promoting affordable housing.

Increasing expatriate population and a shift to nuclear families would translate into significant demand for housing in the coming months.

More than 20 million expatriates reside in the GCC region.

A strong pipeline of construction projects is ascribed to the government’s continuous investments for the development of infrastructure as

part of its diversification efforts. According to MEED, construction projects worth US$ 1.8 Trillion are in various stages of execution across

GCC. This is likely to benefit sub-sectors such as cement and building materials within the construction sector.

Saudi Arabia is the clear leader when it comes to infrastructure spending with more than US$ 136 billion worth of projects being awarded in

2013. Abu Dhabi also announced that it plans to spend US$ 90 billion on development projects over the next five years. Kuwait announced

recently that the government would spend US$ 15-17.5 billion on development projects in the next 12 months.

The sector is expected to witness an average earnings growth of 14.6% and is currently trading at a P/B multiple of 1.6x vis-à-vis historical

average (2010-12) of 1.4x. The average dividend yield for the sector stood at 5.0% during the last financial year.

Exhibit 12: GCC Real Estate & Construction sector—Key metrics and ratios


million)



D/E ROE (%)

D.yield (%)


Saudi Cement KSA 98.8 4,028.8 7.2 6.2 6.8 3.0 52.6 49.3 27.7 38.0 7.4

Southern Province KSA 99.5 3,714.5 11.3 13.3 7.8 16.0 NA NA 0.0 40.3 7.0

Yanbu Cement KSA 69.5 2,918.8 12.4 4.4 16.5 0.6 54.0 51.8 32.7 28.6 6.4

Yamamah Cement KSA 49.2 2,656.7 4.1 0.9 7.3 (1.3) 55.4 53.7 1.4 23.2 6.3

DarAl Arkan RE KSA 9.1 2,620.7 4.8 14.8 11.6 12.5 36.4 33.1 25.1 5.8 0.0

Qassim Cement KSA 80.0 1,919.9 1.3 2.3 1.4 0.7 55.7 53.6 0.0 31.5 7.5

Arabian Cement KSA 70.5 1,503.9 7.6 3.1 36.1 3.5 39.1 41.2 31.9 13.2 6.0

Eastern Cement KSA 58.8 1,347.3 6.1 3.2 (5.2) 4.9 NA NA 1.1 20.0 6.3

Taiba Holding Co KSA 32.8 1,311.9 (5.4) 17.2 (41.4) 2.9 NA NA 2.7 6.3 4.8

Saudi Ceramic KSA 103.8 1,037.4 13.4 11.1 17.7 13.4 19.0 19.2 61.3 20.6 3.4

Saudi Real Estate KSA 31.3 1,001.5 (16.6) 11.5 (9.2) 9.9 57.7 64.6 0.0 5.6 3.1

Tabuk Cement KSA 29.0 696.0 13.1 19.4 18.9 25.6 NA NA 0.0 16.7 6.6

Raysut Cement Co Oman 1.9 998.4 10.3 5.5 8.8 8.9 31.0 32.7 55.7 25.5 5.2

Qatar National Qatar 100.0 1,348.5 6.0 8.6 6.8 3.4 43.9 42.3 1.8 19.4 5.6

Emaar Prop Pjsc UAE 5.8 9,635.2 (0.5) 4.6 7.4 17.4 29.9 31.9 29.8 6.3 2.7

Aldar Properties UAE 1.9 2,318.3 (61.6) (42.5) 3.9 (31.9) 21.9 44.1 148.0 12.6 4.7

Sorouh RE UAE 2.3 1,672.3 25.5 (24.0) 45.1 (12.0) 18.1 22.6 30.8 7.1 4.8

Arabtec Holding UAE 2.4 1,030.0 16.6 8.3 86.6 12.5 4.9 5.4 19.9 3.9 0.0


NA denotes Not Available, *Local currency; D/E: Debt to equity, ROE: Return on equity;

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Exhibit 13: GCC Real Estate & Construction sector valuation landscape (Current)

Saudi CementSouthern Province

Barwa

Yamamah

Dar Alarkan

Yanbu Cement

Qassim cement

United DevlptAldar

Qatar NatlEastern Cement

Arabian Cement

Sorouh RE

City Cement

Raysut Cement

Saudi Ceramic

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0

P/B

(x)



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REAL ESTATE & CONSTRUCTION SECTOR – SELECT COMPANIES IN FOCUS

Dar Al Arkan (Dar) (KSA)

It is the largest real estate company in Saudi Arabia, with a strong presence in the fast growing low-cost housing segment. Dar

is expected to benefit from the implementation of the mortgage law.

Dar has a strong presence in the affordable housing segment, which is currently undersupplied.

In terms of valuation, the company trades at a significant discount of more than 60.0% to the industry average of 1.6x on

current P/B basis.

Emaar Properties (Emaar) (UAE)

Emaar has a diversified business model with a unique portfolio covering segments and geographies. The company has

increased focus on the rental business to ensure stable cash flows and stabilize overall revenues through a recurring revenue

stream.

Emaar’s hospitality and retail rental business in Dubai is expected to benefit from the strong outlook for tourism.

In terms of valuation, Emaar trades at a significant discount of ~33.1% to the industry average of 1.6x on current P/B basis.

Raysut Cement Company (Raysut) (Oman)

The government’s plan to execute the proposed infrastructure and construction projects in Oman has increased demand for

cement in the domestic market.

Development of Duqm Industrial Estate has generated significant demand, thereby increasing the company’s revenue and

earnings. Raysut’s earnings are projected to grow 8.8% in 2013.

Saudi Ceramic Company (Saudi Ceramic) (KSA)

Saudi Ceramic is the largest producer of ceramic tiles (52 million sq m) and sanitary ware in Saudi Arabia. The company is

likely to capitalize on the strong construction pipeline in the Kingdom.

Saudi Ceramic is a volume-driven play on population growth and infrastructure spending, given its strong local distribution

network, and access to government and corporate clients. Also, it enjoys a relatively favorable cost advantage.

Southern Province Cement (Southern Cement) (KSA)

The company is set to benefit from its plant locations placed at the key demand points of Saudi Arabia.

Easy access to feedstock and cheap transportation advantage could lead to the generation of high profits and support

Southern Cement’s margins.

Exhibit 14: GCC Real Estate & Construction sector select companies in focus —Key metrics and ratios

Company

P/E EPS



Dar Al Arkan 10.5 8.9 7.9 12.5 6.9 0.5 10.2 11.0 8.3 8.6

Emaar 17.1 15.8 13.6 16.3 6.9 1.0 6.8 7.5 4.5 5.2

Raysut 14.3 14.8 13.7 7.7 22.5 3.0 2.1 2.3 1.6 1.8

Saudi Ceramic 14.6 14.0 12.3 13.8 20.3 2.3 121.0 133.0 85.3 97.0

Southern Cem 14.1 12.3 11.1 10.3 43.2 5.0 105.4 111.6 94.7 93.1



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SECTOR: TRANSPORT & LOGISTICS

The transportation sector in GCC has been at the forefront of public spending plans as the government earmarks a major

portion of infrastructure spending for building and improving airports, railways, ports and roadways. Road and bridge

projects worth nearly US$ 121 billion are underway or in the planning phase.

GCC benefits from a strategic location. It is halfway between the East and West. Notably, on the back of higher trade

volumes from India, China and other manufacturing hubs in Asia and the Far East, UAE’s transportation sector (considered

as the trading hub in the Middle East region) would witness large investments.

Underscoring GCC region's importance as a key global travel hub, a study released by International Civil Aviation

Organisation (ICAO) said that GCC airports are expected to handle as much as 250 million passengers by 2020.The Middle

East’s air transport industry contributed US$ 129 billion to the region’s GDP.

The region’s significant dependence on imported goods could further increase the freight volume. In addition, strong tourism

potential is likely to propel growth in the aviation and road transport sectors.

The transportation sector continues to trade at a discount to its historical average. In terms of P/E multiple, transport and

logistics companies in the region are trading at a 16.4% discount to their historical average (2009-12).

Exhibit 15: GCC Transport and Logistics sector—Key metrics and ratios

Company Country CMP* M.cap

(US$ mn)

Sales Growth (%)

Net income Growth (%)


D/E ROE (%)

D.yield (%)


National Shipping KSA 19.8 1,658.9 41.2 43.5 40.7 39.4 22.1 22.3 86.4 9.3 5.2

Saudi Transport KSA 64.5 309.6 NA NA NA NA NA NA 0.0 1.8 0.0

Agility Kuwait 740.0 2,706.9 4.3 5.8 45.3 12.8 3.7 4.6 8.3 4.2 5.9

Aviation Lease Kuwait 305.0 831.1 NA NA NA NA NA NA 225.4 16.8 0.0

KGL Logistics Co Kuwait 315.0 367.6 NA NA NA NA NA NA 8.1 18.4 7.1

City Group Kuwait 420.0 165.9 NA NA NA NA NA NA 19.1 15.6 7.0

Salalah Port Oman 0.5 247.6 NA NA NA NA NA NA 128.2 19.0 5.0

Qatar Gas Trnsprt Qatar 17.5 2,690.0 10.0 2.2 10.7 11.4 61.0 61.3 NM 42.1 6.6

Qatar Navigation Qatar 74.0 2,327.6 1.4 4.9 (3.6) 10.2 24.5 27.2 30.1 8.4 5.9

Gulf Warehousing Qatar 41.0 535.6 17.0 17.1 13.4 33.0 20.3 21.8 111.1 12.7 0.0

DP World Ltd UAE 15.6 12,906.5 5.2 9.1 (26.2) 16.5 29.2 30.0 54.4 9.6 1.8

Aramex PJSC UAE 2.3 916.8 11.8 12.0 12.7 15.3 9.4 9.6 10.9 12.7 5.0

Polarcus Ltd UAE 5.9 512.3 12.6 7.6 903.9 46.0 30.1 33.3 145.4 6.5 0.0

Waha Capital UAE 0.9 470.0 NA NA NA NA NA NA 71.7 12.2 9.1


NA denotes Not Available, NM denotes Not Meaningful *Local Currency; D/E: Debt to equity, ROE: Return on equity;

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Exhibit 16: GCC Transport & Logistics valuation landscape (Current)

DP World Ltd

Qatar Navigation

Agility

Aviation LeaseAramex

Polarcus Ltd.Waha Capital

Salalah Port

City Group

Port ServiceRefrigeration

-

0.5

1.0

1.5

2.0

2.5

3.0

4.0 7.0 10.0 13.0 16.0 19.0 22.0

P/B

(x)

P/E (x)

Source: Bloomberg


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TRANSPORT & LOGISTICS SECTOR – SELECT COMPANIES IN FOCUS

Public Warehousing Company (Agility) (Kuwait)

Winning of new contracts from companies in Western Australia, Spain, Kazakhstan, and expansion in existing

portfolio could diversify Agility’s geographic revenue stream.

Strong network and expanding presence in emerging markets.

Aramex (UAE)

An asset-light model provides flexibility during a change in the economic environment as it requires limited

investments and reduces fixed cost.

Aramex is well positioned to capitalize on the high economic growth in emerging markets. The company has

entered into a series of joint ventures and acquisitions in Africa, Asia and Turkey.

The company is poised to leverage on its strong and established position (domestic express market share of 70.0%

in the UAE, 20.0% in Saudi Arabia and 50.0% in Egypt) in MENA markets.

National Shipping Company of Saudi Arabia (Bahri) (KSA)

The company is well positioned to benefit from rising demand in Asian markets and stabilization in Very Large

Crude Carrier (VLCC) prices in the GCC region.

Bahri would have an exclusive 10-year right to provide VLCC crude oil shipping services to Saudi Aramco. This is

likely to further support the expected earnings growth of 40.7% in 2013.

The company is currently trading at a P/E of 12.8 vis-à-vis the industry average of 13.0x.

DP World Limited (DP World) (UAE)

DP World is the third-largest marine terminal operator in the world, with more than 60 terminals and 11 new

developments across six continents.

The company is a play on global trade volumes, particularly emerging markets-revival in emerging economies in

2013 to boost volume growth.

Capacity expansion plans are on track. Expansions in Jebel Ali and London Gateway are on schedule and would

add 1mn TEU by mid-2013. Also, the Indian government has approved shipments from Vallarpadum which would

boost the company’s volumes in 2013.

Qatar Gas Transport (Nakilat) (Qatar)

Revival in the Qatari economy is likely to spur LNG exports that, in turn, would be the key driver for Nakilat’s

growth.

The company’s vessels are on long-term charter (25 years, with a 10-year extension option) take-or-pay contracts

to Rasgas and Qatargas; this provides earnings stability.

Ancillary revenues, primarily shipbuilding, repair and maintenance, are expected to support top-line growth.

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Exhibit 17: GCC Transport and Logistics select companies in focus —Key metrics and ratios

Company

P/E EPS



Agility 19.7 14.8 12.3 20.0 5.1 NA 873.3 966.7 593.3 686.7

Aramex 13.4 12.0 10.5 15.2 13.6 1.5 2.6 2.8 2.1 2.2

Bahri 12.8 11.0 7.9 39.4 10.8 1.3 21.4 23.4 18.0 17.5

DP World 17.2 23.5 20.1 17.3 7.4 1.5 17.3 18.7 12.9 14.3

Nakilat 12.6 11.5 10.3 11.6 51.3 5.1 18.9 19.8 16.1 17.0

Source: Bloomberg, Alpen Asset Advisors NA denotes Not Available, Support 1, S2: Support 2; R1: Resistance 1; R2: Resistance 2

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SECTOR: TELECOMMUNICATION

The telecom industry in GCC is poised to reap the benefits of a liberalized environment, an expanding tech-savvy younger

population, increased government spending for supporting infrastructure and higher disposable income.

The Data segment holds tremendous growth potential given the Internet is fast achieving mass market exposure in Saudi

Arabia. Rising demand for smart devices would further propel demand for data services in the coming years.

Growth in expatriate and local population in the GCC region offers new telecom operators an opportunity to garner market

share by introducing lower tariffs and bundled offers.

The voice segment is set to expand geographically given the saturation in home markets. Pricing pressure remains high

that, in turn, could dent margins; however, in terms of valuation the telecom sector is trading at 10.3x 2013 P/E, 44.0%

below that in emerging economies.

The sector’s earnings are expected to grow by 6.5% y-o-y during 2013 and average dividend yield is forecasted to increase

to 5.3% in 2013.

Exhibit 18: GCC Telecommunication sector—Key metrics and ratios

Company Country CMP* M.cap (US$ mn)

Sales Growth (%) Net income Growth

(%) Operating Margin (%)

D/E ROE (%)

D.yield (%)


Bahrain Telecom Bahrain 0.4 1,563.1 (1.7) 0.5 (4.9) 9.4 23.4 27.4 42.8 11.2 8.7

Saudi Telecom

Co KSA 40.9 21,812.2 1.2 3.8 30.2 7.0 21.5 19.8 21.9 12.7 4.6

Etihad Etisalat KSA 80.3 16,477.1 10.0 8.2 8.2 6.5 25.8 25.3 41.0 31.1 5.5

Mobile Tele

Saudi KSA 8.9 2,563.3 9.2 9.9 (23.5) (34.0) NM NM 149.0 NM 0.0

Mobile Tele

Kuwait Kuwait 700.0 10,555.2 (2.6) 4.0 (3.5) 5.9 29.8 29.6 36.1 13.1 6.4

National Mobile Kuwait 2200.0 3,874.7 6.9 3.7 37.1 9.6 21.6 22.2 8.8 8.6 5.3

Hits Telecom Kuwait 75.0 188.9 NA NA NA NA NA NA 40.8 NM 0.0

Oman Tele Oman 1.5 2,824.5 2.1 2.5 0.2 4.7 28.2 28.3 8.5 25.0 7.8

Nawras Oman 0.5 818.3 3.0 3.3 14.7 0.0 27.2 25.6 19.7 22.1 8.2

Qatar Telecom Qatar 120.0 10,556.8 6.8 5.6 25.1 11.5 21.9 23.0 126.5 13.2 4.8

Vodafone Qatar Qatar 9.4 2,170.9 22.6 22.0 (15.7) (30.3) NM NM 18.5 NM 0.0

Etisalat UAE 11.7 25,184.3 10.6 4.9 15.7 4.2 38.7 37.8 12.5 17.6 7.7

Du UAE 5.9 7,280.9 11.7 7.3 (6.1) 0.2 28.9 29.1 34.2 33.8 8.6


NA denotes Not Available, NM denotes Not Meaningful, *Local Currency; D/E: Debt to equity, ROE: Return on equity;

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Exhibit 19: GCC Telecommunication sector valuation landscape (Current)

STCO

Etisalat

Mobily

Mobile Tele Kuwait

Qtel

Emirates

National Mobile

Oman Telecomm

Batelco

Nawras

0.0

1.0

2.0

3.0

4.0

5.0

8.5 10.0 11.5 13.0 14.5 16.0 17.5 19.0

P/B

(x)

P/E (x)

Source: Bloomberg


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TELECOMMUNICATION SECTOR – SELECT COMPANIES IN FOCUS

Emirates Integrated Telecommunication Company (Du) (UAE)

Targeting new phase of efficiency since the beginning of 2012 with shifting focus towards EBITDA margin

improvement amid maturing telecom market in UAE.

In our opinion, expansion outside the UAE would prove beneficial for the company. Du plans to target mobile

virtual network operator (MVNO) opportunities in Saudi Arabia and Egypt.

Etihad Etisalat (Mobily) (KSA)

Mobily is the market leader in the fast growing data segment in Saudi Arabia; revenue from mobile data segment

rose 41% y-o-y in 2012 comprising of 27% of total revenues.

Under the new dividend policy (introduced in FY2011), Mobily paid dividends amounting to SAR 5.0/ share in

2012.

The company has increased focus on achieving operational efficiency by managing costs.

Oman Qatari Telecommunication Company (Nawras) (Oman)

The company’s strong balance sheet and ability to effectively manage cost would support margins, given the

underlying competitive telecommunication landscape.

Revenues are expected to increase due to Nawras’ sea cable agreement with Tata Group, driven by a rise in

international capacity and lower international transmission costs. Earnings are expected to grow 14.7% y-o-y in

2013.

Considering the company’s ability to generate strong free cash flows, dividend yield is expected to be 8.5% in

2013.

Qatar Telecommunication (Qtel) (Qatar)

With a diversified service portfolio, Qtel is set to benefit from tremendous demand potential for 3G services in

Indonesia, Iraq, Algeria, Qatar, Kuwait and Tunisia.

The company enjoys significant support from Government of Qatar (55% direct stake).

Saudi Telecom Company (STC) (KSA)

With the domestic voice market approaching maturity at a faster pace, STC is diversifying operations in high-

growth international markets—Malaysia, Turkey and South Africa have started to yield returns.

STC’s significance presence in the fast growing enterprise segment might diversify the revenue stream.

A strong balance sheet with ample liquidity is expected to support dividend yield.

Exhibit 20: GCC Telecommunication sector select companies in focus —Key metrics and ratios

Company

P/E EPS



Du 12.6 14.3 14.4 (0.9) 22.9 3.5 6.7 7.6 4.2 4.9

Mobily 10.1 9.6 9.0 6.7 27.5 2.3 85.9 92.0 71.2 73.6

Nawras 9.0 7.3 7.3 0.5 23.0 1.5 0.5 0.6 0.4 0.4

Qtel 12.2 10.2 9.4 8.8 12.8 1.2 127.8 133.8 109.6 115.6

STC 12.8 8.6 8.1 6.6 16.2 1.3 46.4 50.6 38.1 38.0

Source: Bloomberg, Alpen Asset Advisors Support 1, S2: Support 2; R1: Resistance 1; R2: Resistance 2

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Glossary

Terms / Abbreviations Meaning

CMP Closing Market Price

Debt to equity (D/E) The ratio is a measure of company's financial leverage calculated by dividing its total liabilities by

stockholders' equity

DFM Dubai Financial Market

Dividend yield (D.yield) A financial ratio that shows how much a company pays out in dividends each year relative to its share

price

GCC Gulf Cooperation Council

IPO Initial Public Offering

LFY Last Financial Year

Loan-to-deposit The ratio is calculated by dividing the banks total loans by its total deposits, commonly used to asses

bank's liquidity

Market breadth This technique gauges the direction of the overall market by analyzing the number of companies

advancing relative to the number declining

Market depth The market's ability to sustain relatively large market orders without impacting the price of the security.

It is closely related to liquidity and volume within a security

MEED Middle East Economic Digest - business intelligence tool for the MENA, providing analysis and

commentary on Middle Eastern markets, companies, people and data on the regional projects market

MENA Middle East and North Africa

MSCI Emerging Markets

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed

to measure equity market performance of emerging markets. The index currently consists of the 21

emerging market country indices

MSCI Frontier Markets

The MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is designed to

measure equity market performance of frontier markets. The MSCI Frontier Markets Index currently

consists of the 25 frontier market country indices

MSCI GCC Index This represent the universe of companies in 6 Gulf Cooperation Council equity markets: Bahrain,

Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates

P/B Price to book - A ratio comparing a stock's market value to its book value calculated by dividing the

current closing price of the stock by the latest quarter's book value per share

P/E Price to earnings - A ratio of a company's current share price compared to its per-share earnings

Return on Equity (RoE) The amount of net income as a percentage of shareholders equity

TASI Tadawul All Share Index

YTD YTD refers to Year To Date returns considering closing prices as of June 12, 2013

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For any query regarding this report, please contact:

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Documents

GCC Market Outlook 2013 - ALPEN ASSET ADVISORSalpenassetadvisors.com/GCC_Market_Outlook 2013_20 June2013.pdf · volatile session, especially since the last week of May—the S&P index