Gulf companies are not among the most opaque in the world, as anyone who has ever flicked through the annual results of major market players may know. “Less is more” is certainly the mantra of Saudi boards, while the country’s biggest companies operate a siege mentality when it comes to inquiries from the media.
But where does that leave investors? The thousands of local retail day traders that currently dominate the Tadawul, the official stock exchange of Saudi Arabia, may be content to stake or sell based on quarterly results or rumors, but foreign investors will surely want more information should they be allowed to invest in the secretive bourse. The high-profile implosions that have hit some major Gulf companies, such as Kuwait’s Global Investment House and Saudi Arabia’s Al Gosaibi, suggest that sometimes a firm’s success is not all that it seems. It would only take one Saudi Enron to shatter confidence in the fledgling market for good.
But those who watch the Saudi market closely point out that since the Tadawul’s opening to foreign investors was first touted, the Capital Markets Authority, the Saudi Arabian government organization responsible for regulating the country’s capital markets, has taken steps to ensure more transparency. Requirements to reveal detailed results to investors and hold regular annual general meetings are now not only compulsory but also enforced by authorities.
“With the CMA having adopted global best practice and enforcing it, the increased scrutiny of foreign investors would stand up to inspection,” says Peter Gotke, the Dubai-based vice president for Bank of New York Mellon’s depository receipts business in the Middle East and North Africa region. “Tadawul is to be applauded for their efforts to ensure that their quoted companies have the skills already in place to communicate with investor queries.”
Gotke also feels that the mentality of “bolting the doors” is starting to fade in the Gulf. He has seen major United Arab Emirates companies — such as DP World, which listed in London last year — take part in investor events overseas. This is a trend that is now crossing over to Saudi.
“For some time you have seen the leading Saudi companies attend the global investor conferences and put in place dedicated investor relations departments. Possibly, as the smaller companies get asked more questions, there could be an educational and cultural hurdle to cross, but the structure is in place for these companies to leverage skills and experience that is already on the ground,” he says.
Sleiman Aboulhosn, assistant fund manager at Al Masah Capital in Dubai, says that political risk, a major consideration for investors, is nonexistent, at least while Saudi’s vast oil wealth continues to guarantee its economic prowess.
“The only potential risk would be related to the regulation of stock markets and publicly listed companies,” he says. “However, we feel that Saudi’s stock market is relatively mature and doesn’t pose any significant threats from a regulations point of view.”
Aboulhosn — citing Saudi Arabia’s plans to build 500,000 new low- to middle-income homes and to undertake other major projects throughout the kingdom — points to banks, real estate and construction as good investments. “We see consumer, banking and real estate stocks having the most potential in the short to medium term,” he says. Not everyone is so upbeat, however. Sébastien Hénin, portfolio manager at the National Investor, an investment research group in Abu Dhabi, believes that foreign investors will be cautious investing serious sums in a market so dependent on oil revenues — almost 40 percent of companies on the Tadawul are in the petrochemical field — particularly as oil prices waver.
Still, Hénin highlights petrochemicals as a strong buy for investors looking at the Saudi exchange. “I like Yansab, an ethylene producer and subsidiary of Sabic [Saudi Basic Industries Corp., the largest public company in Saudi Arabia as listed on the Tadawul]” he says. “The company buys gas at a significant discount compared to international prices and channels an important part of its cash flow to shareholders,” he says, adding that its 2012 ebitda margin of 50 percent could mean a large dividend.
“Nevertheless, I don’t think that foreign retail investors will be very active in this market, and institutional investors will have to deal with a very volatile market, even if in the recent past it has been somewhat quiet,” says Hénin. The geopolitical situation in the Middle East has always been complicated, and it should remain so in the medium term. Moreover, oil dependence is another factor to consider, even if current oil prices give some comfort to the country, says Hénin.
BNY’s Gotke does not agree. He thinks that foreign investors do indeed have an appetite for Saudi shares and that all that is needed is for access to be granted. “The Saudi story is well known, well followed and well liked,” he says. “People talk about adding an “S” to BRIC, and that “S” would be Saudi. The potential is clear, and Saudi could well be spoken of in the same bracket as China.”
