MIDEAST WEEKAHEAD-Markets to contend with slowing Gulf earnings growth

July 10, 2014

* Base effect wanes as recovery from global crisis is completed * Property firms, banks in particular to lose steam * Dubai Q2 earnings growth to remain fastest among major markets * Petchems seen lifting Saudi to second place * Industries Qatar, Ooredoo to weigh on Doha By Olzhas Auyezov DUBAI, July 10 (Reuters) – Slowing corporate earnings growth in major Gulf economies is an issue for the region’s stock markets, which may have to get used to more modest rates of profit expansion in coming months. Over the past two years, corporate profits in the Gulf have risen as economies have recovered from the global financial crisis, which triggered property market crashes and a string of debt restructurings in the region. The recovery has been particularly helpful to real estate developers, which benefited from a snap-back in property markets, and banks, which were able to cut new provisions for bad debt. This boosted stock markets sharply. But second-quarter earnings forecasts by analysts surveyed by Thomson Reuters suggest the earnings boost provided by the economic recovery is fading. The recovery is almost complete, so profits will grow at more normal rates – rates which may no longer compare favourably with many other markets in the world. Companies in Saudi Arabia and Qatar are starting to announce second-quarter earnings this week, and they will be followed in the next few weeks by firms from the United Arab Emirates. The analysts’ forecasts indicate Dubai will again enjoy the fastest earnings growth among major Gulf economies for the second quarter of this year, but the rate will slow sharply. The combined net profit of 12 major listed firms in Dubai’s main stock index is expected to rise 22 percent year-on-year for the second quarter, after surging 38 percent in the first quarter. Emaar Properties, Dubai’s largest listed company by market capitalisation, accounts for much of the expected slowdown. Analysts expect the firm’s profit to grow 18 percent in the second quarter after surging 55 percent in the first. This is not because of any weakening of Emaar’s business outlook; it is simply that most of the company’s recovery from Dubai’s property market crash has now been completed, so growth will become more normal. Last year, Emaar said its property sales had quadrupled in the first half of 2013. Analysts also expect slower growth at other property-related companies. They forecast builder Arabtec’s profit will rise 36 percent in the second quarter after a 121 percent jump in the first quarter. Overall, analysts think the corporate earnings growth of major Dubai companies will moderate to 18 percent this year from 24 percent in 2013 and 23 percent in 2012. The Dubai stock index is up 37 percent year-to-date, but after a slide caused in part by management turmoil at Arabtec, it is 15 percent below the multi-year peak hit in May. The earnings outlook suggests it may be hard for the market to surpass that peak in coming months. SAUDI PETROCHEMICALS Combined earnings growth of 47 major companies on Saudi Arabia’s bourse is actually expected to accelerate in the second quarter, to 10 percent – the region’s second-highest rate – from 7 percent in the first quarter. But that is due to improvement in the petrochemical sector, a globally focused industry, rather than domestic sectors such as banking and retailing. Petrochemical giant Saudi Basic Industries (SABIC) is expected to boost its second-quarter profit by 10 percent, after a 2 percent drop in the first quarter. SABIC’s unit Saudi Kayan is likely to report its fourth profitable quarter in a row, and other firms in the sector should do well. “The petrochemicals sector’s earnings are expected to grow year-on-year, supported by higher volumes from the anticipated increase in operating rates, lower duration of shutdowns and increased petrochemical prices,” Saudi Arabia’s NCB Capital said in a report last week. Combined profits at 10 Saudi banks, on the other hand, are expected to grow just 4 percent, partly because of Al Rajhi , the country’s biggest listed lender, whose profit is forecast to fall 8 percent after a 16 percent drop in the first quarter because of a surge in bad loan provisions. The combined profit of Abu Dhabi’s 12 leading companies is expected to slip 1 percent, reflecting a 58 percent drop in the profit of leading developer Aldar Properties . Aldar recorded a one-time gain of 2.6 billion dirhams ($708 million) from its merger with rival Sorouh Real Estate in the second quarter of 2013. With Aldar excluded, major Abu Dhabi firms’ profits are seen rising 10 percent for the second quarter, about the same as in the first quarter. That marks a slowdown from 14 percent last year and the same rate in 2012. The outlook for Qatar is less optimistic; total profit at 10 major listed companies there is expected to drop 12 percent for the second quarter, after shrinking 5 percent in the first quarter. Last year, earnings of the same companies grew 1 percent, down from 8 percent growth in 2012. Plant shutdowns at conglomerate Industries Qatar are the main reason for the projected second-quarter decline this year. But even excluding Industries Qatar, total earnings are projected to fall 4 percent, after jumping 12 percent in the first quarter. Mobile telecommunications operator Ooredoo is forecast to post the biggest profit drop of 41 percent, partly because of its exposure to conflict-torn Iraq. One of the firm’s units is Iraq’s second-biggest operator Asiacell, which has been providing a fifth of Ooredoo’s total revenue. 2012 2013 2014 2015 Dubai 23 24 18 22 Abu Dhabi 14 14 8 9 Qatar 8 1 9 11 Saudi -2 6 16 8 Arabia EARNINGS QUALITY Analysts’ current predictions for 2015, shown in the table above, indicate a modest a reacceleration of earnings growth for some Gulf markets next year. It is also true that earnings growth is not the only major factor affecting the stock markets; with a dividend yield of 4.0 percent Qatar is approached by many investors as a dividend play, so it is partly insulated from sluggish earnings. But with the exception of Dubai, the Gulf earnings growth forecasts do not look particularly impressive when compared with other regions. In the United States, for example, profits for S&P 500 companies are projected by analysts to grow 6 percent for the second quarter, 11 percent in the third quarter and 12 percent in the fourth quarter. Some emerging markets may register considerably higher growth. High oil prices and strong government spending in the Gulf look set to keep many of its economies growing at annual rates near 5 percent in coming years. But it is not clear that many Gulf companies are dynamic enough to keep profit growth at double-digit rates. Profit margins in the Gulf are high, mainly because of a lack of competition in industries dominated by protected firms or where companies are supported by governments, Tarek Fadlallah, chief executive of the Middle East operations of Nomura Asset management, said in a study released last month. But returns on equity are much lower than returns in the United States, suggesting sales are low relative to the size of assets and that capital structures are not optimal, he added. This could pressure companies’ profits as future economic liberalisation causes their margins to drift lower. “Unfortunately, most companies in the Gulf remain sub-scale with few catalysts to engage in consolidation, while owners tend to hoard assets and often run them in the pursuit of non-commercial considerations,” Fadlallah said. (Editing by Andrew Torchia)

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