2015 MENA Equity Investment Strategy

30 Stock Picks in Four Key MENA Markets

Photo by JESHOOTS.COM on Unsplash

Investing is no longer the same as we know it. Look back twenty years ago and picture this:

·         Google, Facebook, Twitter, and YouTube did not exist, and neither did Hotmail!

·         Amazon.com and eBay were just start-ups.

·         Apple – currently the largest company in the world by market cap – was at the brink of bankruptcy with a market cap of USD 5 billion (less than 1% of today’s USD 690 billion).

·         GSM mobile phones were just making their way to mainstream, the Internet in its modern form was just about being commercialized, and there were no iPhones or iPads.

·         Investors in the most developed markets often had to call their brokers by phone to place buy and sell orders.

·         There were no official stock markets in Saudi Arabia, the UAE, or Qatar.

Now fast forward twenty years, things have changed with the world converging, thanks to disruptive technologies: mobile internet and social media, to name a couple.

As one of the global innovators, we at Mubasher Financial Services provide our clients with untapped opportunities to help them in their investment planning process, whether investing in their local markets or other regional and global markets. Noting that Arabs are traders by nature, one can understand why individuals make up 60-70% of all Arab markets, excluding Saudi Arabia, and around 80% if Saudi Arabia is included. Self-directed traders (SDTs) take pride in their abilities to make the right investment decisions at the right time when the markets are in an uptrend. However, during times of market sell-offs, those same traders run for the exits, lamenting their bad luck, and try to find someone else to blame for their own mishaps.

Indeed, online trading has enabled SDTs to take control of one side of their personal investment process, namely execution. However, they mostly lack the research side, being swayed by hearsay in times, pressured by the herding behavior in other times or left with the short end of the stick most of the times. At Mubasher Financial Services, we work on addressing this need to help our clients – both retail and institutional – take advantage of global macro themes, complemented by a bottom-up approach.

As global markets start another year with more geopolitical, economic, and financial issues to tackle, investors are once again dealing with several unknowns. Most of these unknowns relate to the timing and magnitude of certain events as opposed to the probability of their occurrence. A case in point is the question when will the US Fed start raising interest rates and by how much. For the past three years or so, global investors have been more accustomed to a low-volatility environment, especially in developed markets (e.g. the US). However, more recently this environment has changed with volatility picking up in the wake of a sharp and abrupt slump in oil prices (more than 50% in six months). Nowadays, a daily change in global equity markets in excess of ±2% is not all abnormal anymore.

One major unknown that has a major bearing on MENA markets in general and GCC markets in particular is the future of oil prices. The question is not whether oil prices will recover or not, but it’s “when?”. We believe the year 2015 will be a story of two halves with low oil prices in H1 2015 followed by recovery in H2 2015. We see market sentiment becoming more accustomed to seeing low oil prices. Notwithstanding external shocks, we should see the mean-reversion theory manifest itself in oil markets eventually.

If oil prices still have more room to fall, how much lower can they go? Can we expect another 50% drop? It did happen before in the aftermath of the financial crisis in 2008/2009, but the dynamics back then were different. The global economy was tumbling, and the financial system was cracking; lower oil prices were driven by expectations of lower global growth. To the contrary, today’s lower oil prices should support global growth. Beneficiaries will definitely be (1) oil-importing and (2) consumption-driven economies, such as China, India, Indonesia, and European countries for the former and the US for the latter.

Undoubtedly, MENA markets (including the GCC) have experienced an extended wave of sell-off driven by lower oil prices and exacerbated by margin calls being activated. With most MENA markets still driven by retail investors, margin calls usually create supply overhang whenever equity markets try to recover. Today, we believe this risk is mostly behind us. In view of the big macro picture that is conducive to growth, we think this can be a bear trap and hence advise investors to look for bargains. We believe timing the market is very difficult, if possible at all. Thus, it is imperative that investors are ready to (1) adjust nimbly, (2) avoid making irrational investment decisions driven by the herd mentality, and (3) pay more attention to the big picture (global, regional, and local). In other words, investors need to cut out the noise of the day-to-day trading that has led to heightened volatility. Thus, at times when markets drop to abnormally low levels, investors should think of this as the start of their shopping season. If investors are ready with their favorite list of stocks to shop at such hard times, they will more likely end up as winners if they keep a balanced and reasonable risk-reward trade-off.

In light of the above and in order to formulate our investment strategy for 2015 in MENA equity markets, we have developed a three-pronged view, including a country view, a sector view, and a stock view. We examined four key stock markets, namely Saudi Arabia and the now-three emerging markets in the MENA region (Egypt, Qatar, and the UAE). To complement these two top-down approaches, we ranked all listed stocks in the four stock markets according to a set of metrics, hence the bottom-up approach. We then combined all three views to come up with the best selection of stocks in our opinion. As such, we have updated our MENA Favorite List – our 30 stock picks for 2015 across Saudi Arabia (16 stocks), the UAE (7), Qatar (4), and Egypt (3).

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Our MENA Favorite List (Top 30 Stock Picks)

Consumer & Health Care

1.       Agthia Group (UAE)

·         A diversified portfolio of products, and increased market share of its bottled Water and "Yoplait" during 2014.

·         High profitability and attractive multiples, benefitting off government subsidies and already relatively law raw materials costs.

2.       Almarai (Saudi Arabia)

·         Diversified portfolio and business segments with ongoing expansions (more than SAR 10 billion in capex over the last three years).

·         Geographical expansions across the MENA region with a cost advantage, translating into above-average dividend yields.

3.       Eastern Tobacco (Egypt)

·         A monopolist producer of an inelastic product (tobacco) with high cash flow from operations and consistently improved margins over the last four years.

·         Signing a contract with General Electric to build a 10-12 MW power plant to reduce reliance on national power grid.

·         Has a plan to establish a cigarette production unit in Malawi at a cost reaching of USD 40 million.

4.       Fawaz Abdul-Aziz Al-Hokair (Saudi Arabia)

·         Increased disposable income levels.

·         Ongoing store expansions.

5.       Halwani Brothers (Saudi Arabia)

·         A diversified and expanding high-quality product mix.

·         Tapping into new markets and increasing market share in existing ones. 

·         Potential for growth, supported by sustainable demand drivers.

6.       Jarir Marketing Co. (Saudi Arabia)

·         Plans to double its stores in five years.

·         Sales growth will be supported by high demand for consumer electronics and strong domestic consumer spending power.

7.       Mouwasat Medical Services (Saudi Arabia)

·         Supported by a high population growth rate and sustainable and growing demand for medical services.

·         A solid financial position with capacity expansion boosting earnings in the coming years.

8.       National Medical Care Co. (Saudi Arabia)

·         Capacity expansion to boost earnings in the coming years.

·         The drug distribution arm is growing and the planned acquisition of exclusive rights of distribution for certain international drugs within the Kingdom should be very positive in the near future.

Financials

9.       Al Rajhi Bank (Saudi Arabia)

·         The second largest bank in the sector.

·         Improving asset quality, with a healthy and increasing coverage ratio.

10.   Arab National Bank (Saudi Arabia)

·         A strong loan growth.

·         Improving asset quality, with a healthy and increasing coverage ratio.

11.   Bank Albilad (Saudi Arabia)

·         Increasing lending capacity on higher capital.

·         Improving asset quality, with a healthy and increasing coverage ratio.

12.   Banque Saudi Fransi (BSF) (Saudi Arabia)

·         Trading at a discount when compared to peers.

·         Improving asset quality, with a healthy and increasing coverage ratio.

13.   Commercial International Bank (CIB) (Egypt)

·         The largest constituent in the market’s main index (above 25% weight in EGX30), thus the biggest beneficiary of any positive sentiment on the Egyptian market.

·         The largest private bank in Egypt, with a high corporate profile, to benefit from capex lending which is expected to increase in 2015.

·         Strong asset quality, with more-than-comfortable NPL coverage.

14.   Commercial Bank of Qatar (Qatar)

·         The second largest bank in Qatar, benefiting from domestic expansion.

·         Acquisition of Turkey’s Alternatif Bank was a positive addition, adding on to the bank's profitability.

·         Still trading at a discount to peers.

15.   Dubai Financial Market (DFM) (UAE)

·         IPO focus and listings planned in the coming period will support fees income.

·         Enhanced trading volumes on expected improved operating environment.

16.   Qatar National Bank (Qatar)

·         The largest bank in Qatar, with an assets market share of c.50%, to benefit from expected public infrastructure spending.

·         Strong asset quality and comfortable coverage.

17.   Samba Financial Group (Saudi Arabia)

·         The third largest bank in the Kingdom with a healthy capital adequacy ratio (CAR).

·         Increasing lending capacity on higher capital.

·         Improving asset quality, with a healthy and increasing coverage ratio.

·         Lagging the market and a relatively cheap stock.

18.   Saudi British Bank (Saudi Arabia)

·         Increasing lending capacity on higher capital.

·         Improving asset quality, with a healthy and increasing coverage ratio.

19.   Saudi Hollandi Bank (Saudi Arabia)

·         Strong loan growth.

·         Increasing lending capacity on higher capital.

·         Improving asset quality, with a healthy and increasing coverage ratio.

20.   Saudi Investment Bank (Saudi Arabia)

·         Strong loan growth.

·         Increasing lending capacity on higher capital.

·         Improving asset quality, with a healthy and increasing coverage ratio.

Industrials, Energy & Utilities

21.   Air Arabia (UAE)

·         Low penetration rates to spur low-cost carriers (LCCs) growth in the Middle East.

·         Growth potential from growing fleets and destinations.

·         Recent Ras Al-Khaima’s (RAK) DCA deal and Amman's hub to utilize its growing fleet.

·         Declining fuel costs to boost margins further.

22.   Arabtec Holding (UAE)

·         An impressive backlog to secure future top-line growth.

·         Diversifying into other countries and segments.

·         Securing mega projects is possible, particularly from its major shareholder: Aabar Investments.

·         To benefit from the large infrastructure spending in the MENA region.

23.   Dana Gas (UAE)

·         Stable revenue stream backed by long-term exploration and production concessions.

·         An eased receivables issue with strong potential coming from (a) new gas production enhancement agreement in Egypt of USD 350 million over the next three years, (b) developing the Zora field in Sharjah with a capacity of 40 mmscfd, on-stream in H1 2015, and (c) resumption in LPG production in Iraq.

24.   Drake & Scull International (DSI) (UAE)

·         A solid diversified backlog with the bulk of awards in Saudi Arabia and the UAE.

·         Hosting important events and huge investments in infrastructure across the MENA region could boost the sector growth.

25.   Qatar Navigation (Qatar)

·         Performance highly linked to Qatar's growth prospects.

·         Substantial investment portfolio; revenues diversification.

·         Has a sizeable stake in Nakilat, giving access to a stable revenue stream.

26.   Saudi Ceramics (Saudi Arabia)

·         A dominant market share in an underserved market.

·         Sustainable demand with expansion plans.

·         Low input costs ensure high margins.

Real Estate

27.   TMG Holding (Egypt)

·         A large unutilized land bank in Eastern Cairo, with access to commercial land.

·         A strong legal position, particularly once the new investment law is ratified.

·         A healthy backlog and vast pre-sales with moderate cancellation rates.

Telecom Services & IT

28.   Etisalat (UAE)

·         Benefiting from its international exposure outside the UAE.

·         Can unlock value by listing its Egyptian unit, Etisalat Misr, on the Egyptian Exchange.

·         A high number of internet users (c.88% of population) supports data revenues.

·         Benefiting from a vast, technology-oriented, wealthy population in the UAE.

·         Introduction of new innovative services can spur demand for mobile internet.

·         Should benefit off expected growth as a result of Expo 2020.

29.   Ooredoo (Qatar)

·         A diversified business with operations in 17 countries.

·         Recently won one of two mobile licenses in Myanmar which has one of the world’s lowest mobile penetration rates.

30.   Saudi Telecom Co. (STC) (Saudi Arabia)

·         Enjoys the highest market share in the Kingdom (44% in September 2014).

·         Virgin Mobile Middle East & Africa operation through STC's will appeal to the youth market (c.47% of population under the age of 25).

·         Opening the Saudi stock market to foreigners in H1 2015 can attract new funds, given its position in the market.