GCC markets under selling pressure in Feb-06.

Published March 19th, 2006 - 10:21 GMT

GCC markets under selling pressure in Feb-06.

 

 

 

<?xml:namespace prefix = v ns = "urn:schemas-microsoft-com:vml" /><?xml:namespace prefix = w ns = "urn:schemas-microsoft-com:office:word" />Global Investment House – <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Kuwait – GCC Market Review – February 2006 -The GCC stock markets  came under a strong bout of selling pressure as all the markets with the exception of Saudi Arabia ended the month in red. Qatar markets led the decliners with its benchmark index (Global DSM Index) losing a whopping 18.4% in Feb-06. Bahrain, Kuwait and Omani market too witnessed profit booking as they lost more than 3% each in the month. Saudi Arabia, the sole exception managed to remain in black with a monthly gain of 3.7%.The market breadth was heavily skewed towards the declining stocks with 2 stocks reporting a monthly decline for each advancer.

 

However, the market participants were expecting profit booking as some of the markest looked stretched and the market cap growth had abnormally out-performed the corporate earnings growth. However, in the long-run the market is expected to stabilize but this is high time that  investors should have a careful look at each stock in their portfolio rather than getting panicked at the overall downturn seen by the markets. The liquidity in the market has also taken a hit owing to the IPOs, rights issues and capital expansions undertaken by the corporate/banks in the region. We believe that with the capital expansions and new issues, the free float is likely to increase in the market making the market more liquid and deep. However, we reiterate that the fundamentals of our economies and particularly that of the corporates remain strong. The volatility in the markets are the part and parcel of capital market growth but it is the ability to absorb these shocks which will determine the strength of our markets.

 

Table 01: Index Performance

Country

Measured by

 

Index Close

MTD Growth (%)

YTD Growth (%)

Bahrain

Global Bahraini Stocks Index

177.21

-3.5

2.8

Kuwait

Global General Index

320.62

-3.2

0.1

Oman

MSM Index

5264.91

-3.3

8

Qatar

Global DSM Index

597.01

-18.4

-23.4

Saudi Arabia

Tadawul Index

19502.65

3.7

16.7

UAE

NBAD Index

 

-2.6

-11.4

Source : Respective Stock Exchanges and Global Research

 

 

GCC corporates - Looking outwards

The improvement in the macro-economic profile of the GCC region on back of strong petro-dollar surplus has taken liquidity in the economies to unprecedented levels. The financial sector is awash with funds and corporates are taking advantage of the low interest rate scenario (although rising) to borrow at cheaper rates to fund expansion both regionally as well as internationally. The strong corporate performance has given the financial flexibility to the companies in the region to look for investments outside the region. The investment funds and private equity players are getting strong support from the investors in terms of increased investment in both Islamic as well as conventional funds to fund the deal flow. Apart from looking at the interesting opportunities in the region, the investment companies/corporates are looking at other promising markets outside the MENA region to diversify their investment base/revenues. This is crucial as it will hedge their risk of operating in a single market.

 

Table 02 : Major Deals (Not a complete list)

Institution/ Fund

Target Company

Country

Industry

Details of the Deal

Buyout Fund I

BMA Capital Management

Pakistan

Stock and Commodity Brokers

50% equity stake purchased through a rights issue (3.3 M shares) with no leverage

Dubai International Capital

Daimler Chrysler

Germany

Assembly Plants

2% equity stake

Dubai International Capital

Doncasters Group Limited

United Kingdom

Industrial Machinery

Buy majority stake from RBS

Dubai International Capital

Tussauds Group

United Kingdom

Recreation

100% equity stake

IDB Infrastructure Fund L.P.

CDC Globeleq's 2 IPPs

Bangladesh

Electricity Supply

24% equity stake

IDB Infrastructure Fund L.P.

Senai Desaru Expressway

Bangladesh

Diversified Transport Services

38% equity stake

Istithmar

Spice Jet

India

Airlines

Significant equity stake

Istithmar

Hyflux

Singapore

Water Supply

Equity stake in a public company as a prelude for strategic relationship in MENA

Istithmar

One Trafalgar Square

United Kingdom

Landlords and Developers

100% equity stake

Istithmar

Inchcape Shipping Services

United Kingdom

Freight Forwarding Services

100% equity stake bought from Electra Investment Trust

Istithmar

Kerzner International

United States

Hotels and Resorts

13% equity stake

Istithmar

Tender Loving Care Health Care Services

United States

Healthcare Services

NA

Istithmar

230 Park Avenue

United States

Landlords and Developers

Fully owned building acquired through $140 M in equity and $ 665 M debt

Istithmar

Island Global Yachting

United States

Landlords and Developers

Founder with 29% equity stake

Istithmar

Yacht Haven Grande

USA Minor Outlying Islands

Landlords and Developers

Founder with significant equity stake

Real Estate Fund

Twin Islands

Pakistan

Landlords and Developers

30% equity stake with no leverage

Real Estate Fund

Abanar LLP

United Kingdom

Landlords and Developers

33.3% equity stake with no leverage

Source: Zawya

 

Among the major acquisitions, Dubai International Capital, a part of Dubai Holding invested US$1 billion in DaimlerChrysler, making it the company's third largest shareholder, followed by the US$1.5 billion acquisition of The Tussauds Group in the UK -- the largest operator of visitor attractions in Europe. Istithmar's acquisition of London's

One Trafalgar Square
for £155 million was another big-ticket deal which reinforced that the investment companies in the region are interested in taking large stake in the international reputed companies. There are also reports that Istithmar has signed an agreement with UBS Limited to create a derivative instrument that would give Istithmar exposure to Time Warner shares. The common theme that emerges out of this is that almost all the deals involved one of the biggest brand names in their industry which would be helpful for the investment companies to showcase to their clients/investors worldwide.

 

However, the companies in the GCC region have not looked at only the developed market like they did in the past. They are taking strategic stakes in the emerging market companies such as Dubai Investment Group LLC proposal to buy 49 per cent of Malaysia's largest Islamic bank. Istithmar and Temasek Holding, the Singapore government’s investment arm, announced plans for a joint investment of US$20mn in Indian airline company named SpiceJet.

The companies are also looking at acquisition opportunities to expand their market share internationally and gain from synergies resulting from M&As. In this, one of the most talked about and controversial has been the US$6.8bn bid Dubai Ports made for UK’s Peninsular and Oriental Steam Navigation Co. After this deal, DP World will be the third largest port operator in the world. It is reported that Dubai Ports World will enter the market soon to borrow US$6.5bn to fund its takeover of the P&O, the biggest term loan to come out of the Middle East. ARAMEX, part of Arab International Logistics, has acquired Priority Airfreight, a leading UK-based express service provider that specializes in courier traffic between the UK and the US. Oman’s Renaissance Services acquired the UK's BUE Marine, one of the largest ship owners and marine services groups in Europe, providing support to the offshore oil and gas industries worldwide. The acquisition created one of the top ten offshore vessel operators worldwide. Public Warehousing Co, the market leader in the logistics industry in the region has made major acquisition which included Singapore-based Trans-Link Group, and US-based Transoceanic Shipping Co. and GeoLogistics Corporation

Among the big-ticket deals, Kuwait’s MTC acquired 100% share capital of Celtel for a total consideration of US$3.36bn.Celtel is a leading mobile operator in sub-Saharan Africa with six million managed customers and licenses covering approximately 30% of Africa's population (about 250 million people). Celtel acquisition more than doubled MTC’s total number of subscribers to over 9.5 million spread across 18 countries, and increased its number of overseas licenses to 17, making it by far the largest telecommunications company in terms of geographical coverage in the Middle East and Africa. It also gave MTC access to some of the fastest growing telecoms markets in the world. On the other hand, Etisalat, UAE incumbent, is eyeing Denmark's biggest phone company, TDC A/S as part of a plan to join the ranks of the world's top 10 telephone companies. Etisalat emerged as the successful bidder in privatization process of the Pakistan Telecommunication Co Ltd (PTCL) outbidding competitors such as China Mobile and SingTel. In the banking sector, Islamic banking leaders in the GCC, Kuwait Finance House and Al Rajhi Bank are looking at the lucrative Islamic banking business in Malaysia which will help them to cross-sell their products in South-East Asia.

 

The GCC corporates have been also active in the privatization deals that are going on in the emerging markets, as a way to enter the burgeoning sectors in those economies. According to the reports, public and private sector entities from three Arab countries were among seven international firms that hope to acquire between 51% and 75% of Pakistan Steel Mills Corporation (PSMC). The companies are participating in the bidding process for PSMC under a privatization deal which is expected to generate around $1 billion for the Pakistan government.

 

We believe that this is the right time for the corporate and banks in region to expand outside the MENA region which will help them in attaining economies of scale, increase their brand recall worldwide and enter the lucrative markets to improve their market share and profitability. With the recent spate of acquisitions, the world is taking note of the players in the GCC region which will help them grow further and align with the leading players worldwide.

 

New Energy Project Opportunities in Qatar

In February 2006, MEED organized a 4th conference on Major New Energy Project Opportunities in Qatar. Mentioned below are the salient views expressed by the various reputed speakers.

 

-          In the last decade and a half, Qatar has entered into many joint venture partnerships and production sharing agreements in the oil and gas sector, aiming to utilize its hydrocarbon resources and also to diversify its sources of revenue.

 

-          By 2012 Qatar targets to become the world's largest Liquefied Natural Gas (LNG) exporter with an annual production of about 77mn tons per annum, which will take Qatar’s market share to 30% from the current 10% (2004) of the global LNG market. It also expects to achieve the production level of one million barrels of oil per day within the next three to four years which will require use of latest and most sophisticated technology and investments of over US$5bn.

 

-          As for Gas-to-Liquids (GTL) production, Qatar will soon surpass all other countries and a number of agreements have already been signed which should allow a production of over half a million barrels of GTL products within the next few years.

 

-          Besides LNG and GTL, the country will utilize its North Field to supply gas through pipelines directly to customers at home and abroad. Meanwhile, through the Dolphin Project, Qatar will be exporting two billion cubic feet of gas daily to the UAE before the end of this year. The country hopes to export gas by pipeline to many other neighbouring countries and eventually to link up with a future GCC wide gas network.

 

-          With regard to Electricity and Water sectors, Qatar Electricity & Water Company, Ras Laffan Power Company and Q-Power are the current suppliers of these two utilities. Under the new projects are  Ras Laffan B which will be a consortium of QEWC 55%, International Power 40% and Chubu 5%. It will have 1,025 MW of Power generation capacity and 60 MIGD of Water. First Phase of the project will start in April 2006 and it will be fully implemented by June 2008. Another IWPP project is RAF B2, which will have 567 MW of Power generation capacity and 29 MIGD of Water and the project is likely to be fully operational by August 2007. MesaieedIndustrialCity will also have Power and Water station, Mesaieed A, which will have capacity of 2,000 MW of power and 40 MIGD of Water. The first phase will start operations in 2008 and will be fully implemented by 2010.

 

-          The country also has power transmission network capex of US$2.7bn from 2006-2010 and distribution network capex of US$1.5bn from 2006-2010. Water sector also has network capex of US$0.4bn from 2006-2010.

 

-          According to Dealogic 2005, Qatar raised the highest volume of project financings  in EMEA with US$20bn and took 2nd spot in total project financing volume after the US. In Qatar, the project financing market has become more competitive and therefore pricings are becoming more tighter. At present Qatar offers good project financing opportunities in the Oil & Gas, Petrochemicals and Independent Power and Water plants. Apart from the local banks, international banks are also trying to play a vital role in Qatar’s project financing market.

 

We believe that such a large scale of new project opportunities will definitely offer ample business opportunities especially to the service sector companies and therefore apart from big players, the SMEs would turn out be the biggest beneficiaries out of this, which will further create the need to raise funds from  the capital market by the SMEs. This will expand the depth and breadth of the capital market and will widen the choice of investment avenues available to investors.

 

UAE stock market outlook…

 

The year 2005 was another year of stupendous performance by Emirates’ markets, though the party seemed to have come to an abrupt end in the last quarter. The factors which nurtured the positive sentiments were spiraling crude oil prices, good macro-economic parameters, promotion of non-oil sector, positive business and consumer confidence along with the high level of liquidity. On the back of these, the markets have gained 79.8% in 2005 as measured by the barometer NBAD general index, which was on the top of 88.4% growth rate witnessed in 2004. The index touched its life time high of 19,151.73 during November 2005. During the year, the markets had also attracted regional investors, especially from Saudi Arabia and Kuwait. The year 2005 also brought many ‘firsts’ for the UAE markets in terms of capital market activities, such as ‘highest growth in market capitalization’, ‘highest growth in market activities such as volume and value of shares traded’, etc., and it also ‘led the region in terms of fund raising through IPOs’. The growing secondary market buzzed the primary market and several new companies or existing joint stock companies raised funds though initial offerings. Many IPOs had received tremendous response, such as IPO of Sourouh Real Estate oversubscribed by 176 times, Dana Gas oversubscribed by 140 times.

 

However, late during the year, especially in the third quarter of 2005, UAE markets started witnessing selling pressure, mainly due to stretched valuations which led to profit booking. Investors resorted to withdrawing of funds out of the markets due to other activities like IPOs, rights issues, new projects, etc. In this process, the NBAD index regressed by a massive 25.5% (till Feb. end) since its peak in 2005. Valuation multiples appeared to be stretched as the corporate earnings couldn’t kept pace with the stock market growth. However, we believe that this gravitational effect turned the markets from speculative to healthy.

 

On the macro-economic front, the UAE's economy is expected to gain a staggering US$30bn in nominal terms in 2005 to become the third largest economy in the Middle East, as projected by the IMF. The UAE’s GDP peaked at around US$104.2bn in 2004 after soaring by more than 17% over the 2003 GDP of US$88.5bn. In 2005, the GDP is projected to surge by 28.5% to record US$133.8bn and will continue its growth to reach US$150.9bn in 2006. Further to sustain the pace of economic growth, Emirates are implementing a number of strategic projects in order to sustain their competitiveness and leading position. Only in Dubai alone over US$100bn worth of developmental projects are either under implementation or are in the phase of planning and approval.

 

The rally in the year 2005 were liquidity driven and purely of speculative nature. However, fundamentals of the economy remains sound. The market expectations with regard to growth in corporate earnings for the year 2005 grew wildly as also the earnings discounting . However, we believe that the corporate earnings have grown at a healthy pace in 2005 and also delivered handsome pay-outs to their shareholders. This momentum in earnings growth are likely to continue during the current year as well. For the year 2006, we believe that the primary market will continue to buzz with activities, though at a slower pace as compared to 2005. Going forward, it seems that the market is moving towards a point of equilibrium between growth in corporate earnings and growth in earnings discounting, which will bring the valuations to realistic and logical levels.

 

Market activity

The decline in the markets have been accompanied by the increase in the trading activity which is not good sign for the markets. The GCC markets saw 8.5bn shares being traded in Feb-06 as compared to 7.7bn shares being traded in the previous month. The market capitalization of the Saudi market increased to US772.7bn in Feb-06 as compared to US$726.1bn recorded in the previous month. However, with the intro

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