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Poor Earnings Dampen GCC Stock Performance

October 2016

With earnings growth expectations remaining weak, the performance of GCC markets is expected to remain muted, says M.R. Raghu, Managing Director, Marmore MENA Intelligence, a research firm with focus on providing information on MENA businesses

Earnings season is eagerly watched by investors and analysts as it is one of the fundamental factors that affect the movement of stock prices in the long-term. It is very rare that a company’s share price falls when its earnings have increased and vice versa. This generally happens because, analyst revisit their valuations, which can increase if the company has performed better than anticipated. Increase in corporate earnings generally cheer investors who tend to perceive it as an indicator of resilience of the company.

According to Marmore’s corporate earnings report for the first half of 2016 (H1 2016), total earnings in GCC in H1 2016 was USD 32.8 billion which represents a fall of 7.4%, compared with the same period a year ago. The fall in corporate earnings could be attributed to a host of factors such as prolonged period of lower oil price, decline in GDP growth and tightening liquidity in the banking system. Oman was an exception in GCC’s earnings trends for H1 2016. Despite the economic downturn in the region, its earnings increased by 7% during H1 2016 YoY led by construction related sector whose earnings grew 10% (H1 2016, YoY). Bahrain and Qatar suffered the most with 11% lower earnings each. Earnings in UAE and Saudi Arabia contracted by 7.9% and 7.6%, respectively followed by Kuwait whose earnings declined by 6%.

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In the first-half of the year, earnings in the banking sector remained flat while earnings in commodities, real estate and construction related sectors contracted by 13%, 26% and 10% respectively as the fall in oil prices is increasingly felt across non-oil sectors. Lower credit growth in the region along with short term pressures on interest rates have led to lower earnings for the banks. Earnings of National Commercial Bank (NCB, Saudi Arabia) grew marginally by 2% YoY in H1 2016 while other major banks in the region, First Gulf bank (FGB, UAE) and National Bank of Kuwait (NBK) deteriorated by 8%. NBKs profits witnessed a negative growth owing to higher base effect and inclusion of some one-off items in H1 2015 leading to higher profits last year. FGB’s income from commissions and fees declined by 10% in H1 2016 owing to which profits declined. Smaller banks (in terms of market cap) in UAE such as Commercial Bank of Dubai, Union National Bank and National Bank of Ras Al Khaimah took a heavier hit on their bottom line with a decline of 20%, 22% and 38% respectively. Among blue chip banking stocks, NCB’s stock plunged 34.7% YoY and followed by NBK and FGB shares losing 19.3% and 6.7% respectively.

Subdued demand and lower price realization for petrochemical products amid supply glut in the market following the fall in oil prices has dampened the earnings of petrochemical companies. Net income of SABIC, the largest listed company in GCC, declined by 18% mainly due to the global decline in petrochemical and mineral prices. SABIC, however gained positive momentum in the stock market as its H1 2016 earnings has exceeded analyst expectations on one hand and investors’ confidence on the company’s long term strategy on the other. SABIC recently announced plans to set up integrated chemicals and plastics manufacturing plants to expand its product portfolio and reduce cost overheads. Industries Qatar, another major chemical company witnessed 19% decline in profits in H1 2016 (YoY) causing a 35.1% (YTD) plunge in the share prices.

Subdued activity in infrastructure space and softening real estate activity have led to payment delays in the construction industry, thereby increasing their receivables and straining their bottom lines. Among the major construction companies in UAE, net profit of Damac Properties and Deyaar Properties declined by 27% and 15% YoY respectively in H1 2016 with increasing number of unsold dwelling units. Arabtec holding incurred losses amounting to USD 55 Mn.

Almost every sector’s earnings declined, the only saviors being telecom and financial services sector.. UAE’s Etisalat witnessed 110% increase (YoY basis) in its earnings in H1 2016 while Ooreedo (Qatar) posted a gain of 46%. Share prices of ETISALAT and Ooredoo increased by 23.3% and 27.5% YTD.

marmore-chart-octnov-2Except UAE and Oman, all other equity indices in GCC have declined in value in 2016 with the largest bourse in the region, Tadawul, witnessing a steep fall. Interestingly, Abu Dhabi and Dubai indices increased despite a fall in their corporate earnings. Announcement of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) merger and speculation of more consolidation in the banking industry in UAE led to buying spree.

Saudi Arabian bourse ended 14.2% lower in the red as its corporate earnings declined by 7% in H1 2016. According to Marmore’s monthly markets review report, stocks of National Commercial Bank (NCB) and Saudi Telecom (STC) plummeted by 8% and 6.5% in August this year. STC’s profit for H1 2016 declined by 16% YoY, adding to the woes of Saudi Telecom’s plans to offer fourth generation mobile phone services in Egypt failing to materialize last month.

GCC markets continue to face headwinds as oil price hover below $50/barrel, almost 50% lower than its price level in 2013 and 2014. Sluggish corporate earnings have turned investors more cautious than before. Continued declines in corporate earnings growth, since the second half of 2014 have dragged down the performance of GCC markets, which according to Credit Suisse have been worst performing emerging and frontier markets in 2016. With earnings growth expectations remaining weak, the performance of GCC markets is expected to remain muted.

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