Based on NCB Capital’s analysis, the leading Saudi Arabian wealth manager finds TASI volumes and the index level coming under pressure immediately before, and during, most of the month of Ramadan. And from the third week of Ramadan onwards, both volumes and the index level pick up. In its newly issued report, NCB Capital believes the Retail, Food, Telecom and Real Estate sectors are the main beneficiaries of Ramadan and Hajj due to increased consumption by locals and visitors. On the other hand, Banking, Cement and Construction sectors might see a decrease in activity given the reduced working hours and general decrease in business activity during the religious holidays.
Commenting on the report, Farouk Miah, Head of Equity Research at NCB Capital said: “We find that the volume of shares traded begins to decrease during the 6-8 weeks before the start of Ramadan, and remains low during most of the month. On average over the past five years, the volume of shares traded during the month of Ramadan is 51% lower than the average for the year. We believe this reflects reduced appetite to trade by retail investors given their focus on religious activities.”
NCB Capital data suggests that during the period 8 weeks and 2 weeks prior to the start of Ramadan, there is net buying in the market, resulting in the Index level moving up. However, between the period 2 weeks before Ramadan and the 3rd week of Ramadan, since 2000 (excluding 2005 and 2008) the index on average fell by 2.3%. This could be attributed to retail investors liquidating some of their portfolios to pay for the extra costs they incur in Ramadan.
There is a noticeable increase in traded volumes and the index level from the last week of Ramadan onwards. NCB Capital believes this could be due to many investors hoping to benefit from the market recovery once the market re-opens after Ramadan. On average, the TASI index gained 5.9% between the 3rd week of Ramadan and 8th week post the end of Ramadan. Volumes increased by 126% on average in the two months after Ramadan vs. the average during Ramadan.
From analysis of quarterly results of stocks under coverage, NCB Capital believes Retail and Food stocks are positively impacted the most by Ramadan. “For example, from management feedback we believe sales of key dairy products at Almarai double during the month of Ramadan. Additionally, other retailers such as Al Hokair and Jarir will benefit due to people buying gifts. Telecom and RE stocks also benefit from profit gains due to increased telecom usage by locals and visitors, as well as full capacity at most hotels in the religious cities of Makkah and Madinah (which directly benefits stocks such as Taiba),” highlighted Mr. Miah.
NCB Capital believes the level of activity recorded by the Banking, Cement, Construction and Industrial companies will fall during Ramadan. For banks, this is mainly due to the limited operating hours, less demand for loans and lower TASI activity. For the Cement, Construction and Industrial sectors, this is due to the reduced construction activity during Ramadan given that employees will be fasting and thus working on a construction site will be difficult. For the cement sector, NCB Capital finds sales volumes in the last three years during the month of Ramadan are 36% below the average of the previous month.
According to the Saudi Central Department of Statistics, 2.9mn people performed Hajj in 2011, up around 5% YoY. Around 1.1mn were from Saudi Arabia and 1.8mn from abroad. And according to various reports, the Saudi economy benefits by up to USD30bn from the Hajj period each year.
Key sectors for which Hajj is important include Telecoms, Retail, Food, Real Estate and Banks – this is largely due to their consumer nature and the high influx of people and money into the country for the pilgrimage
Telecoms: There is high competition to gain the business of foreign pilgrims who typically stay in Saudi Arabia for three to four weeks and will be making many international calls. A variety of free marketing items are handed out by the three main companies such as bags, pens, umbrellas etc. For Mobily, where 100% of revenues are KSA based, thus easier to analyse, 4Q net income for the past few years has averaged around 35% of the total annual income with net margins around 800bps higher than other quarters. Both Mobily and STC have started the competition to gain the international pilgrim business abroad: e.g. they have alliances with Hajj travel agents in major countries such as Indonesia and Turkey to provide their respective SIM cards to pilgrims before they leave their home countries.
In 2011, STC claimed in a statement that it saw a five-fold increase in data traffic over the Hajj period against 2010. It also stated that it saw a 51% increase in SMS usage. However the returns on these volume numbers may be questionable as it provided very attractive packages. Packages offered the first two minutes for free for international calls and the first two messages for free with a 40% discount on an international number of the choice of the customer if requested. Mobily claimed that it saw a 225% YoY increase in Makkah in incoming international calls in the few days prior to the Hajj period as pilgrims started arriving. For the first day of the main five day Hajj period, Mobily in a separate local newspaper, stated it had seen a 30% increase in international calls and 10% increase in local calls YoY in Mina (the main town for pilgrims on this day).
Retail: Fashion retailers such as Al Hokair will benefit given the location of many of its stores in Makkah as many pilgrims will purchase gifts for relatives in their home countries. Makkah and Madinah contain several large malls close to the main mosques with Al Hokair owned brands present. The benefit to Jarir will be more limited given there are no Jarir stores in the immediate area around the Hajj pilgrimage site.
Food: Companies such as Almarai are a beneficiary from the Hajj pilgrimage due to the extra 2mn people who will consume their products. However, Ramadan remains more important for Almarai than Hajj due to the vast majority of all 28mn people in KSA consuming more products for a month vs. 2mn extra people consuming extra products for the limited period of Hajj.
Real Estate: Taiba is the main beneficiary from the companies under NCBC coverage, given that the majority of its hotels are based in the religious sites of Makkah and Madinah. In the past few years, 4Q net income contributed to around 50% of net income for the full year. From discussions with ARAC (The tourism arm of Taiba Holding Company), NCB Capital believes all their properties were fully booked during the Hajj period in 2011. However, NCB Capital understands that the overall occupancy rates around the central locations for the sector decreased between 5% and 7% YoY in 2011 primarily due to more pilgrims seeking hotels/furnished apartments at affordable rates.
Banks: The main benefits to the banking sector during Hajj are higher deposits (e.g. by the SME’s operating in the pilgrimage locations), transfers, FX and ATM transactions. Bank branches in Makkah, Madinah and airports remain operational during the holiday; however banking operations are limited in the rest of the country (i.e. most of the bank branches are closed during the Hajj holiday). Thus, the country wide closure probably more than negates the benefits for bank branches in the western region.
Given the location of the Hajj sites in the western region of KSA, any businesses which are focused in other areas of KSA will lose out from the movement of people to the western region: e.g. Al Othaim is largely based in the Central region of Saudi Arabia, thus for around one or two weeks when many people from Riyadh go to Makkah for the Hajj, their business may suffer due to lower consumer numbers in and around Riyadh.
On the other hand, many of the retail stores in, and around, the main sites of the Hajj pilgrimage are small family owned outlets. Therefore, these will benefit at the expense of the larger organized stores which are present in the rest of the area.