(Crealis) -- Kuwait Financial Centre "Markaz" in its recently released research note has identified opportunities which are selling at a bargain in these troubled times. According to the report, three Saudi Arabian companies are the top picks.

M.R.Raghu and Amrith Mukkamala, the authors of the report, note that the current market situation shows tremendous stress, however due to the macro scenario, a lot of quality stocks are also selling at bargain prices.

The report points out that nearly 35% of companies in the MENA region trade below their book value (p/b less than 1) as against 0% at the start of the year. Overall contraction in p/b for GCC companies was a stunning 63% from 3.7 to 1.3 during 2008.

However, contraction in RoE has been relatively mild from 21% to 17%. While financial services and real estate took the brunt (for the right reasons), opportunities emerge in other non-distressed sectors. This phenomena is not just peculiar to the MENA region but can be observed throughout emerging markets with BRIC leading the opportunity pack. Price to book for Indian companies contracted by 68% during 2008

The report has concentrated on index stocks that are reasonably sized, in stable sectors with listing history and liquidity. The report then examines this list for cash flow, interest cover, profitability, valuation and dividend parameters. From an initial starting point of 461 companies, the fishing exercise resulted in a list of 21 companies diversified across region and sectors. M.R. Raghu and Amrith believe this list will be "low risk" with limited downside given their ability to withstand such a rigorous scrutiny.

Sabic is ranked the highest in the list of bargains mainly due to its healthy cash flow to net income ratio of 0.92, high interest coverage ratio of 14x , expected RoE of 30% and significant correction in both the stock price and the PB multiples by 72% and 76%, respectively. The stock is currently trading at a PE of 4.72x.

Net income growth in 2009 in our view is expected to be negative mainly due to falling product prices and lower off take. Ethylene prices (Europe Spot) have fallen by 63% on a QoQ basis in Q408 to USD 525 per tonne, which is expected to continue impacting the gross margins negatively. For 3Q08, the company posted a 3% decline in earnings and for the 9M08 period, the net income growth was at 7%.

As for 2009, the company had previously announced an expansion in capacity to come on stream 1.35 Mn tones in 2009 (Kayan), this should partially negate any further fall in product prices. However, falling product prices and a decline in margins will carry a negative impact on 2009 earnings also. Expect a negative earnings growth for 2009.

At the current valuations, the stock is trading at a significant discount (approx 30%) to the global petrochemical average P/e multiples. This in the scenario of the significant cost advantage as compared to the rest of its peers which in our view should warrant a premium in valuation multiples as compared to the rest of its peers. We believe that a 76% decline in the stock prices has already discounted the worst.

Safco has the highest operating margin among the fertilizer producers in the region. The low feed stock cost of USD 0.75 per MMBTU of natural gas has benefited the company in terms of profitability. Coupled with this product prices have been witnessing a significant uptrend till Q308. As at the end of Q308, the company's main products, Ammonia and Urea, have witnessed a 46% and 21% increase in prices on a QoQ basis. The earnings have also witnessed a growth of 195% for Q308 and 154% for 9M08 on a YoY basis.

The company has announced capacity expansions as a part of its fifth expansion plan, SAFCO V for an ammonia and urea complex at Jubail in KSA. The USD 500 Mn facility would have an annual capacity of 1.5 Mn tons of Urea and 1.2 Mn tons of Ammonia. The project is scheduled to come on-stream in 2011. Till that time, product prices would be a key factor for earnings growth sustainability.

The ammonia and urea prices in Q4 till date have already declined by 84% and 70%, respectively, this trend, we believe would have a negative impact on the earnings going forward. However, the company has a very low interest cost which is a major plus.

The stock is currently trading at a PE of 4.44x and has witnessed its stock price decline by 54% in the YTD period, which has wiped out the similar amount of gains the stock posted till June this year. The price decline has also increased the dividend yield to more than 11%.

Saudi Telecom has been one of the most aggressive telecom players in the year 2008 when it comes to expansions. In less than a year, the company has been able to expand its operations from 1 (Saudi Arabia) to 8 new countries. Maxis acquisition (25% stake) provided the company with an entry into Malaysia, India and Indonesia. Oger telecom acquisition (36% stake) provided a foot print into Turkey, South Africa, Lebanon and Jordan, and a 26% stake in the third mobile license of Kuwait - operations branded under VIVA. This has resulted in additional capital outlays and expenditures as compared to the previous years. However, the beneficial part of these acquisitions is that majority of them are in low penetrated emerging markets. This is expected to provide substantial revenue growth for the company in the future.

For the 9M08 period, the wire line and wireless revenue growth continues to be robust at 117% and 35% respectively. A part of the growth in Q308 was due to consolidation of Oger telecom numbers. The EBIDTA margin continues to be healthy at 49% (a decline of 500 bps as compared to 9M07). However, the bottom line growth has been impacted negatively mainly due to one -off items and forex losses.

At the current market price, apart from expected growth in revenues and net income due to expansions, the stock also offers an attractive dividend yield of 9.51% and the company has a strong cash flow to net income ratio of 1.41. The stock has witnessed a fall of 46.63% and the price to book has declined by 50%.

Industries Qatar has witnessed a significant expansion in RoE in 2008 by 24Pps. The expansion in RoE has mainly come on the back of enhanced production capacity and increase in commodity prices. Almost all the segments of the company witnessed production capacity expansions in 2008, and this is expected to continue in 2009 also. However, the prices of commodity has witnessed significant deceleration post Q308.

For 9M08, the company reported a 88% growth in revenues. The steel manufacturing unit (QASCO) and the petrochemical unit (QAPCO) which are the major contributors to the revenues (40% and 20% respectively) witnessed an increase in revenues by 87% and 86% respectively. Steel prices were 61% higher on a YoY basis in August when it peaked out. Also, Ethylene and LDPE prices were 35% and 36% higher in July on a YoY basis when it peaked out. Currently these commodities are 23%, 67% and 46% lower on a YoY basis for Steel, Ethylene and LDPE respectively.

The net income growth till Q308 has been robust. Industries Qatar posted a 110% earnings growth for 9M08. This earnings growth was driven by a 145% increase in earnings from its steel division (23% of earnings) and 113% earnings growth from its Fertilizers division (QAFCO) (43% of earnings).

Going forward, the decline in product prices is expected to impact the earnings growth rates negatively. However, the company is expected to expand its capacities in 2009 the same pace as it was in 2008. Expect a 30% increase in sales quantity of Ethylene and a 16% increase in wire rod sales quantity in 2009 on a YoY basis.

The stock price of Industries Qatar has witnessed a decline of 48% in the YTD period and the price to book has declined by 62%. The stock is currently trading at a trailing twelve month PE of 3.71x.

Abu Dhabi National Energy had an installed capacity of approximately 10,000 megawatts (MW) in oil/gas production, gas processing, natural gas storage and pipelines as of April 2008.

TAQA's net profit increased to USD 433.6 Mn in 9M08 from USD 103.8 Mn, an increase of 3x. Total revenues grew 145% YoY to USD 3.5 Bn during 9M08 from USD 1.4 Bn, driven by higher revenues from the Oil & Gas segment. The Oil & Gas segment was the major growth driver as its contribution to EBIT in 9M08 increased to 60% from just 11% in 9M07. Revenues from the Oil & Gas segment stood at USD 1.7 Bn for 9M08 relative to USD 125.8 Mn for 9M07. This increase was primarily driven by the consolidated revenues of USD 1.3 Bn from the three acquisitions in Canada.

TAQA plans to spend USD 2-2.5 Bn over the next 4-5 years to increase its offshore production and purchase oil & gas reserves in the North Sea. By FY09, the company intends to increase its offshore oil output by 50%, and aims to develop its oil & gas assets from the current USD 5 Bn to USD20 Bn by 2016. TAQA was also planning to acquire energy companies struggling to deal with the global financial crisis. The company expects these acquisitions (worth approximately USD 1 Bn) to culminate in 4Q08. The acquisitions are likely to boost TAQA's downstream businesses further, as it plans to invest in power and desalination projects, and pipeline infrastructure in North America.

The company has a strong cash flow to net income ratio of 2.71x and the price to book value at the current market prices is at 0.71x and the dividend yield is at 8%. The promoter holding in the stock is high at 75%.

Subscribe in a reader

Related Posts by Categories

Widget by Hoctro | Jack Book