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THE TOP 100 companies IN THE GCC.

Summary: Falling oil prices and economic uncertainty have had a mixed impact on the region's stock markets and, as a result, our top 100 companies list. Read on to find out the ups and downs among the region's leading businesses

It has been a difficult time for companies in the GCC, where indices continued to witness declines in 2016 due to persis- tent low oil prices, poor corporate earn- ings and diminished investments into equity markets.

Saudi Arabia's Tadawul (TASI) has shed 18.5 per cent in the year to date (YTD), becoming the largest loser in the region. The kingdom's shares bore the brunt of the negative investor senti- ment due to indecision prevailing among OPEC and non-OPEC members to freeze oil production. Kuwait and Bahrain bourses registered losses of 8.8 per cent and 6.5 per cent respectively. Meanwhile, the S&P GCC Composite index tumbled 9.8 per cent, mainly due to the drag of the TASI, as the region's largest index.

With the exception of the UAE and Oman, all other equity indices in the GCC have declined in value in 2016. Oman's corporate earnings increased by 7 per cent year-on-year (YoY) in H1 2016 mainly owing to higher earnings in the construction sector. Following the posi- tive earnings, Oman's indices ended 3.8 per cent higher. Interestingly, Abu Dhabi and Dubai indices increased by 1.9 per cent and 6.5 per cent despite a fall in their corporate earnings. Overall, H1 2016 was another lackluster period for GCC markets after falls in 2015.

Emerging markets have become the favourite destinations for foreign inves- tors with US interest rates remaining low. India's Sensex has gained 7.3 per cent YTD with $5.8bn worth of invest-

Saudi Basic Industries Corporation

ments flowing into the mid cap and small cap stocks in the market. The MSCI Emerging markets index and MSCI BRIC index have also gained 15.2 per cent and 15.8 per cent respectively. Markets in the advanced economies were also positive with the S&P 500 and the UK's FTSE increasing by 5.4 per cent and 12.8 per cent respectively.

According to the monthly market review published in October 2016 by Markaz, Brent crude has risen 4.3 per cent to close at $49 per barrel, which rep- resents a YTD increase of around 32 per cent. This followed a 6 per cent increase in September 2016, amid signs OPEC coun- tries would agree to freeze production. The group reached an agreement to limit its production within a range of 32.5-33 mil-

lion barrels per day (bpd) in talks held on the sidelines of September's International Energy Forum in Algiers. The deal is expected to be finalised during a policy meeting in November.

GCC countries are turning to both domestic and foreign debt markets to finance their rising fiscal deficits, and this trend is likely to persist in the short to medium term. Since mid-2014, the drop in oil prices has shifted the large aggregate current account surpluses of GCC countries, accumulated in the past decade, to a deficit of $35bn in 2015. This is expected to widen to $89bn or 6.5 per cent of the GDP in 2016, indicat- ing an unfavourable change in the mac- roeconomic situation in GCC in the last one and a half years.

Saudi Arabia has scaled down its investments in various projects it had planned earlier. The value of contracts awarded plummeted by 39 per cent in the first quarter of 2016 followed by

a decline of 27 per cent in the second quarter on a quarter-on-quarter basis. Contraction in spending in the economy made investors skeptical and they heavily withdrew from Saudi stocks.

In measures to save the equity mar- kets and boost investments, Saudi Arabia has said it will lift restrictions on foreign investment in its securities markets on

September 4, sooner than previously indicated. Reforms in the stock market are in line with the country's vision to reduce its dependence on oil. One major step in this direction is Saudi Aramco's IPO, which is estimated to be worth anywhere from $2 trillion to $10 trillion. Without institutional and foreign investor participation, absorbing such huge proceeds from the Aramco IPO would become difficult for the Saudi market.

UAE markets, both Dubai and Abu Dhabi, have remained resilient to the fall in the oil price in H1 2016. The Dubai General Index and Abu Dhabi General Index have registered YTD returns of 6.5 per cent and 1.9 per cent respectively. The better performance of telecom, banking and real estate stocks in UAE markets has been the major boosting factor to the country's indices.

The UAE's concerted efforts towards economic diversification, Dubai's image as the financial hub and business friendly environment in the region and possible consolidation in

the banking sector have all bolstered investor confidence.

Qatar's index jumped 3.6 per cent in August with the inclusion of Qatari stocks in the FTSE Emerging markets index. In September, the general index declined 5 per cent, as investors booked profit in some of the included stocks. In comparison with other major indices, Qatar general index remained relatively flat closing 0.7 per cent lower (YTD as of October 9 2016).

The IPO market in the GCC was sluggish in H1 2016, similarly to 2015. As of September 2016, 10 IPOs were announced with most rights offerings. In terms of new companies being listed in the markets, 2015 and H1 2016 wit- nessed poor activity due to the negative investor sentiment that loomed over GCC stock markets as a result of low oil prices.

The liquidity in most GCC markets reduced with this declining sentiment. Kuwait and Qatar witnessed poor liquidity among the major markets in the GCC. Elsewhere, Saudi Arabia and

the UAE witnessed 30 per cent and 10 per cent reductions in their turnover ratio respectively in 2016.

Road ahead

Persistent low oil prices have forced GCC governments to fast-track reforms, both on the revenue and expenditure side. In future years, we can expect major changes in the region such as the implementation of taxes, removal or reduction of subsidies and a greater emphasis on diversification plans implemented by various govern- ments. As per Marmore's estimates, cor- porate earnings in the GCC are expected to contract by 3.6 per cent in 2016. Earnings in the banking sector are expected to be flat and commodities sector earnings will

decline by nearly 14 per cent. GCC markets continue to face headwinds as oil prices hover around $50/barrel, almost 50 per cent lower than price levels in 2013 and 2014. With earnings growth expectations remaining weak, the performance of GCC markets is forecast to remain dull in the coming months.

Saudi Arabia -- making efforts to lure foreign investment Saudi Arabia has been restrictive of for- eign investments in its capital markets in the past. As a result foreigners still own only 1.03 per cent of the $390bn market. When Riyadh opened its bourse to direct foreign investment in June 2015, it took a careful approach, imposing tight own- ership limits and minimum qualifica- tions for overseas institutions to reduce the risk of sudden changes in market dynamics. However, the Capital Markets Authority has decided to open up the market to foreign investment in an effort to attract more institutional money into its bourse. Reforms in the stock market are in line with the country's vision to reduce its dependence on oil.

Some of the changes implemented are that each asset manager will only need to have a minimum of $1bn of assets under management globally to qualify as a foreign institutional inves- tor in Saudi Arabia, instead of the ear- lier minimum of $5bn.

Each foreign institutional investor is also allowed to own directly a stake of just under 10 per cent of a single listed company, up from the earlier ceiling of 5 per cent. Other restrictions, including a ceiling of 10 per cent on combined ownership by foreign institutions of the market's entire capitalisation have been removed. However, foreign investors combined will still be limited to owning 49 per cent of any single firm.

Apart from reforms in the stock market, the kingdom issued a record $17.5bn last month to plug its 13.5 per cent budget deficit.

According to Marmore's GCC Sovereign Bond Issuance report, Saudi bond issuances in 2016 will account for some 67 per cent of the total issuances in the Gulf.

Kuwait -- lack of liquidity in the market

The liquidity crunch in the Kuwaiti exchange continues in 2016, as inves- tors of some major portfolios abstained from trading for most of the year. Market liquidity in the country is lower compared to major GCC economies such as Saudi Arabia and the UAE and continues to be an impeding factor on the growth of the capital market in the country. Poor coverage of Kuwaiti stocks by analysts is another impeding factor for liquidity apart from the series of del- istings (24 companies) after 2015.

Kuwait witnessed a decline of 6 per cent in net earnings in H1 2016, with commodities, real estate and financial services declining by 11 per cent, 23 per cent and 53 per cent respectively. The banking and telecoms sectors bucked the declining trend. Financial services saw the highest decline in Kuwait due to declining oil prices and GDP growth.

The UAE -- reforms boosting investor confidence Implementation of economic as well

policy reforms has been faster in the

UAE than other GCC countries. The emirates is one of GCC's least dependent economies on oil with the hydrocarbon sector accounting for 31 per cent of the country's real GDP. Consolidation of

the banking industry with the merger of two major banks, National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) and speculation of more consoli- dation in the banking industry has led to a buying splurge in the markets. Apart from banks, the financial services, tel- ecommunications and construction sec- tors have registered increases in earnings of 6.5 per cent, 16.4 per cent and 32.4 per cent respectively in H1 2016 (YoY).

The UAE has also been implement- ing policy changes, such as the reduction of fuel subsidies to rationalise govern- ment expenditure and the implemention of taxes to boost government's revenue. Further cuts to water and energy sub- sidies are expected, as well as the intro- duction of Value Added Tax (VAT) in 2018. To bridge its budget gap, the UAE has resorted to bond issuances in 2015

and 2016. According to Marmore's UAE Asset Management report, the govern- ment of Abu Dhabi has issued four bonds amounting to $10bn and account- ing for 68 per cent of the bonds issued in UAE in 2016. Many corporates, especial- ly banks in the country, have resorted to bond issuances in order to manage their liquidity position. The number of issu- ances in 2015 increased by 89 per cent from 38 in 2014 to 72 last year, athough most were for smaller amounts. NBAD issued bonds amounting to $2.34bn in 2015, the largest among corporates in the UAE.

Qatar -- markets cheer with FTSE inclusion Qatar's earnings fell by 11 per cent in H1 2016, affected by an almost 50 per cent fall in real estate sector earnings. However, the telecommunications and banking sectors have witnessed increases of 35 per cent and 3 per cent respectively in 2016. Despite poor earnings, Qatari markets were positive in August 2016 as FTSE relaxed its liquidity rules allow-

ing Qatari blue chips to be included in the index. Blue chips in Qatar surged in August. However, the overall stock exchange has remained flat in 2016 (till October 9).

According to Marmore's report titled Q atar economic themes, Qatar's $9bn bond issuance was one of the major steps taken by the country to bridge

its budgetary deficit and ease liquidity pressure in the banking system. Qatar's economy is expected to grow by 3.9 per cent during 2016 and 2018, supported by strong non-hydrocarbon sector growth in the country.

Sector Focus

Telecommunications: According to Marmore's corporate earnings report, the telecommunications sector had the high- est H1 2016 earnings growth at 6 per cent, followed by financial services at 2.1 per cent. Despite the fall in average rev- enue per user (ARPU), and a maturing subscriber base, the telecoms sector has witnessed significant growth in earnings. The UAE's Etisalat recorded a 110 per

cent increase in its earnings in H1 2016 on a YoY basis. Ooredoo's net income jumped by 46 per cent in H1 2016 (YoY). The group's positive performance was influenced by strong contributions from Indonesia, Myanmar and Algeria and supported by positive foreign exchange movements as well as data usage growth from individual and enterprise customers. Saudi Telecom Company (STC), however, witnessed a 16 per cent decline in earn- ings YoY in H1 2016 due to increased operation costs.

Real Estate: The real estate sec- tor bore the brunt of the slowdown in economic activity and infrastructure spending in the GCC in the first half of 2016 and is down 26 per cent. Softening

real estate activity led to payment delays in the construction industry, thereby increasing receivables and straining bot- tom lines. Among the major construction companies in the UAE, the net profit of Damac Properties and Deyaar Properties declined by 27 per cent and 15 per cent YoY respectively in H1 2016 with an increasing number of unsold dwelling units. Arabtec Holding incurred losses amounting to $55m.

Top Tens

YTD returns: In September 2015, five stocks in the GCC's top 50 companies had YTD returns of more than 90 per cent, Humansoft Holdings of Kuwait registering 190.1 per cent and being the largest gainer. Currently, among the top 100 stocks, Saudi's Yanbu Cement com- pany has the maximum YTD return (43.1 per cent) followed by Abu Dhabi Islamic Bank (38.3 per cent) and Qatar Investors Group (33.4 per cent). Out of top 10 companies that registered higher YTD returns, four of them were in banking and

investment services. Country wise, Qatar had the maximum number of companies (four), followed by the UAE (three), Saudi Arabia (two) and Kuwait (one). Overall, the YTD returns of the top 100 stocks have been much lower in 2016 compared to 2015.

By market capitalisation: Saudi Basic Industries Corporation (SABIC) retained its first place in 2016 as in 2015 and 2014. Etisalat gained one rank and moved to second postion while Qatar National Bank (QNB) moved one place down to third posi-

tion. National Commercial bank (NCB) lost two ranks and dropped from fifth postion in 2015 to seventh position in 2016. Saudi Electric Company gained

two positions and moved to sixth rank in 2016 from its eigthth rank in 2015. Among the top 10 companies in terms of market capitalisation, four are from banking and industrial services and two are from the telecommunications sector. Energy, utilities, transport and indus- trial conglomorates have one company each in the list.

By revenues: The top four com- panies in terms of revenue are SABIC, Etisalat, STC and Saudi Electricity. These companies also retained their spots in 2016. Ooredoo dropped one

position to sixth rank while Qatar National Bank gained three spots and moved to fifth. National Commercial Bank was the new entrant to the

top 10 list (ninth) while National Industrialisation Company lost its posi- tion in the top 10 companies.

By earnings: SABIC and QNB have retained the first and second positions in H1 2016. National Commercial Bank moved two positions up to third and replaced Saudi Telecom which moved

down to fifth. Among the top 10 com- panies by net income, seven were from banking and investment services, two from telecommunications and one from the energy sector. Five companies from Saudi Arabia and four from the UAE are part of the top 10 companies by earn- ings. Barwa Real Estate which was in the sixth position in 2015 did not feature in the list in 2016, while Samba Financial Group was the addition occupying the 10th spot.

By liquidity: Unlike 2015, when all 10 companies in terms of value traded were from Saudi Arabia, two UAE com- panies featured in the list in 2016. Saudi Kayan Petrochemicals moved from 10th in 2015 to fifth in 2016. Ma'aden, Etihad Etisalat, Mobile Telecommunications, Emaar Economic City and Knowledge Economic City lost their places in the list. Al Tayyar Travel Group Holding, Dubai Financial Market, National Shipping Company of Saudi Arabia, Tihama Advertising and Public Relations and Marketing Holding and Insurance House are the new entrants to the list.

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Publication:Gulf Business
Article Type:Company rankings
Geographic Code:7QATA
Date:Nov 13, 2016
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