吀䠀䔀 夀䔀䄀刀 䄀䠀䔀䄀䐀
䘀䤀一 䐀 䤀一 䜀 吀䠀 䔀 刀䤀䜀 䠀 吀 䘀䤀吀 䤀一 ㈀ 㠀
氀搀 爀 漀 瀀 甀 圀 䌀 礀 爀 攀 瘀 䔀堀 漀 倀伀 挀 ㈀ 攀 ㈀ 刀
伀 椀氀 倀 䤀倀 爀椀挀 伀猀 攀猀
栀 琀 䔀 眀 䤀 䴀 漀 渀挀 洀 爀 氀甀 爀 䜀 猀椀漀 漀 渀 攀 昀 瘀 攀 椀 猀 刀 猀 猀 眀 愀 漀 倀 氀 䘀 猀 渀 漀 椀 琀 挀 攀 氀 䔀 Table of Contents
Executive Summary 2
Strategy Themes 4
Sectors 14
Country Analysis 39
Coverage Tables 84
Contacts & Disclaimer 94
Executive Summary THE YEAR AHEAD - 2018
The Year Ahead - Executive Summary
This year’s EFG Hermes Year Ahead Book is the first to be based on our expanded coverage of Frontier Markets and MENA Small & Mid-Caps. We now cover 229 stocks in 14 markets, up from 154 stocks in nine markets at end of 2016 and expect to broaden our coverage further in 2018. We have also broadened our macro-strategy coverage to include key frontier markets, complementing our bottom-up work. While the rise of index-tracking strategies looks unstoppable in developed and major emerging markets, we think that there is a strong case to be made for fundamental research for investors in MENA and smaller emerging and frontier markets. The book begins with our key strategy assumptions for 2018, followed by the MENA Top 20 List and our top FEM Buy ideas. Our sector teams then present their views and stock picks for 2018, followed by macro-strategy analysis of nine major MENA and FEM markets. The book concludes with a full coverage table.
Our 2018 strategy views are based on two key variables – USD and oil prices
The USD and oil prices are likely to trade within a narrow range in 2018, rather than setting a clear price trend. For the dollar, a rising FFRR will be balanced by the likelihood of a widening fiscal deficit as the Trump administration pushes through tax cuts. For oil, we think that the changing shape of the future’s curve reflects concerns over rising supply and weaker demand growth in the medium term, limiting upside risks, in spite of OPEC action.
China still a big factor – we expect continued heavy investments in FEM
Industrial commodity prices are likely to be weaker in 2018, as China’s government focuses on quality – rather than quantity – for future growth. Side effects of such policies include rising nitrogen fertiliser prices and good long-term growth in demand for natural gas. We think that China will continue to invest heavily in key Frontier Emerging Markets (FEM), supporting growth and improving infrastructure. We keep an eye on the risk that such capital flows could leave FEM currencies looking overvalued.
Index events: All eyes on Kuwait and Saudi Arabia for upgrades
The continuing rise in passive-managed funds is likely to ensure a big bang for pending and potential FTSE and MSCI upgrades for Kuwait and Saudi Arabia (passive flows will be well over USD10bn for the latter). Vietnam, a major frontier market, still has work to do on FOLs before it can join the watchlist for an MSCI upgrade. We also think that new benchmarks for investing in smaller emerging and frontier markets will emerge over the next few years.
Tensions within MENA are likely to mean that regional markets trade at a discount to EM peers
Political overhangs partly explain the big valuation discrepancies between FEM countries in late 2017. Elections will be in focus in 2018, notably in Pakistan, where the ruling party had a difficult 2017. The political timetable could also affect reform momentum in Egypt, Nigeria and, potentially, Lebanon, while investors in Saudi Arabia will be looking for clarity on the government’s plans to revive growth after a difficult few years.
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Executive Summary THE YEAR AHEAD - 2018
Egypt is our top pick for 2018
Within MENA and FEM, our top country pick is Egypt, where falling interest rates and accelerating growth will drive strong stock performance. We also like Kuwait, where the FTSE upgrade is a key driver, supported by strong growth, and – in FEM – Nigeria, where last year’s devaluation, the recovery in oil prices and attractive valuations, together, promise good returns.
Neutral on Saudi Arabia and UAE, and Qatar a non-starter until GCC relations improve
In MENA, we are Neutral on the biggest market, Saudi Arabia, believing that valuations are not attractive enough, given the uncertain growth outlook – we think the market should be traded around index announcements and other newsflow. We are also Neutral on the well- owned UAE market. With Qatar being one of the worst performing markets of 2017, value has clearly opened up, but we think that a lasting recovery in this market is unlikely until the political outlook in the Gulf has improved.
Pakistan is cheap, but for a good reason, and Vietnam could take a breather at high levels
Elsewhere, in FEM, we look for more clarity on FX and politics before becoming more bullish on the admittedly-cheap Pakistani market. We think some of the froth needs to come off the Vietnamese market before becoming more bullish there and think that Kenyan stocks are not accurately pricing in banking sector and growth risks.
3
Strategy Themes THE YEAR AHEAD - 2018
MENA & FEM Investment themes for 2018
No breakouts for oil and USD in 2018; China slowdown may weigh on global growth Active-to-passive shift continues in EM – good for Qatar, supports big-bang upgrade in KSA China’s outbound investment important for FEM – supporting expensive currencies? Elections in Pakistan, Egypt in 2018, leading up to Nigeria in 2019; MENA overhang will stay in place
USD: Will interest rate hikes support the USD in 2018?
The USD index lost 9% YTD, despite the interest rate differential between the US and the rest of the world; however, the USD is still 18% above the 2014 lows, and plenty of EM currencies are still below their long- term average REER, which could mean that, despite the strong interest rate expectations, the USD might not outperform EM currencies in aggregate. The dot plot implies three rate hikes in 2018, which support the USD – in theory – against major currencies; however, the potential for tax reforms, and implied US higher budget deficit, could counteract the higher US rates.
In the MENA region, we still see no risk to the GCC pegs in the short and medium terms, despite the emergence of an offshore discount for QAR. OMR is the GCC currency at greatest risk, but a move looks unlikely in 2018. In Egypt, we believe that some mild appreciation against the USD is possible in 2018; we see USD/EGP17 as a reasonable level. Elsewhere in FEM, PKR remains in focus, due to recent CA deterioration and reserve burn – a currency move is likely to be linked to the political timetable. Nigeria still has to unify the various NGN rates, but the biggest move is behind us. KES looks somewhat expensive on a REER basis (well above average), but ample reserve coverage is likely to mean another year of USD-KES stability at this level.
Figure 1: Dots imply three hikes in 2018 Figure 2: Despite the drop, the USD is still 18% above the 2014 lows FOMC dots and Fed funds futures for year-end DXY index (USD index)
FOMC Dots Median 105 Fed Funds Futures - Latest Value 3.0% 100 2.5% 95 2.0% 90 1.5% 85 1.0% 80
0.5% 75
0.0% Jul-17 Jul-16 Jan-17 Jan-16 Jun-14 Jun-15 Oct-17 Oct-16 Sep-14 Apr-17 Sep-15 Apr-16 Dec-13 Dec-14 Mar-14 2017 2018 2019 Mar-15
Source: Bloomberg Source: Bloomberg
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Strategy Themes THE YEAR AHEAD - 2018
Oil will trade in range; we estimate USD57/bbl avg. for Brent
We have not changed our oil price forecasts for 2018 and 2019 for this yearbook, preferring to stay slightly conservative – we expect Brent to average USD57/bbl in 2018 and USD60/bbl in 2019, with falling inventories balancing incremental supply from US producers. We note that oil prices for prompt delivery have moved to a significant premium in the past six months, justifying some conservatism. Moreover, analysis from the NY Fed suggests that much of the recovery in prices the mid-2017 slump has been driven not by supply management (in spite of continuing headlines about OPEC-Russia cooperation), but by demand. Global growth expectations have been revised upwards in recent months, implying a continuing demand effect in 2018, but we warn that Chinese demand growth may be less healthy, following the recent CPC Congress.
Figure 3: Clear shift in future curve in late 2017 Figure 4: Demand was the driver of oil prices in 2H17 Brent crude futures in USD/bbl (current is CO1) Cumulative drivers of 2017 YTD Brent crude price
Nov-16 May-17 Demand Residual Aug-17 Nov-17 Supply Oil price 65 40% 30%
20% 60 10%
0%
-10% 55 -20%
-30% 50 2-Jun 6-Oct 7-Apr 8-Sep 14-Jul 28-Jul 3-Nov 5-May 13-Jan 27-Jan 16-Jun 30-Jun 10-Feb 24-Feb 20-Oct 21-Apr 22-Sep
Current 1yr 2yr 3yr 4yr 5yr 30-Dec 17-Nov 10-Mar 24-Mar 11-Aug 25-Aug 19-May
Source: Bloomberg Source: Fed NY Fed Oil Price Dynamics Report
China slowdown possible, but investment in FEM still critical
We suspect that the post-CPC congress period will mean a greater focus on the quality of Chinese growth – rather than the rate of growth – over the next few years. This will have an indirect impact on emerging and frontier markets. Our materials team highlights the impact of tighter environmental regulations in China on the nitrogen fertiliser market, and a greater emphasis on clean fuel will support long run demand in the currently well-supplied natural gas market. In the short term, demand for industrial metals may be relatively soft as China continues to move away from its investment-heavy growth model.
However, China will continue to be a major investor in emerging and frontier markets, in support of its Belt and Road Initiative (which itself supports Chinese exports of goods and construction services). The data show that investment, which is heavily-weighted in favour of financing for construction contracts, has slowed down slightly in 2017. This may be because of timing factors – our 2017 data are for 1H – and also because of the CPC Congress itself. However, we expect this flow of funds to remain strong. It is worth bearing in mind that the amounts involved are very small, relative to total Chinese investment at home, but are significant for recipient economies, notably Pakistan.
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Strategy Themes THE YEAR AHEAD - 2018
Figure 5: Chinese investment in MENA & FEM is debt-heavy Figure 6: Is China money supporting expensive currencies? Aggregate Chinese debt & equity investment in projects (USDbn) Real Effective Exchange Rate (current level premium to LT avg.)
Debt Equity 40% 50
45 30% 40 20% 35 30 10% 25 0% 20 15 -10% 10 -20% 5 0 -30% TZ PE KE PK PH TN EG AR BD BH CR VN RO CO NG
2012 2013 2014 2015 2016 2017e KW MO
Note: Data for 11 MENA & FM countries, 2017 is annualised 1H17 data Note: Highlighted countries discussed in detail below Source: Bloomberg Source: Bloomberg, EFG Hermes calculations
China supports FEM growth, keeping currencies higher for longer
Chinese investments are an important source of short-term balance of payments financing, but with debt dominating Chinese financial flows into many FEM and MENA markets, interest and principal payments will weigh on external balances in the medium term. Real Effective Exchange Rates (REER) for a number of FEM markets point to overvaluation. REERs are not definitive proofs of overvaluation– for example, Vietnam’s premium to its long-run average may point to past productivity gains – but they are suggestive. We currently think that PKR requires some FX adjustment in the short term, while other FEM currencies, such as KES, may be vulnerable if current trends continue.
Politics: Pakistan overhang in 1H18; MENA discount to linger
Political factors add to the macro risks for a handful of MENA and FEM countries in 2018. The run-up to Pakistan’s general elections is already creating uncertainty, given the ruling PML-N’s ongoing troubles, keeping us cautious on inexpensive Pakistan stocks until 2H18 at the earliest. There is less uncertainty about the outcome of Egypt’s presidential elections in 1H18, and we are bullish on that market, but we may see some increase in market volatility around the polls. Elsewhere in MENA, Crown Prince Mohamed bin Salman’s consolidation of power in Saudi Arabia is complete, but tensions between Middle Eastern powers is likely to ensure that MENA equities in aggregate trade at a discount to EM peers. Turmoil surrounding Kenya’s elections appears to have dissipated, and our focus is now on growth and credit quality. Nigerian elections will not take place until 2019, but pre-election positioning may be a factor in market performance in late 2018.
6 Strategy Themes THE YEAR AHEAD - 2018
Will passive AUMs continue to rise in 2018?
There is no slowdown in sight in the continued shift to passive investments, be it in the US or internationally. EPFR Global data show that passive GEM funds received cUSD50bn YTD, while active GEM funds received cUSD10bn YTD only. Going back to 2014, there is clear evidence that while in-aggregate active GEM funds lost AUMs, passive funds received a total inflow of USD70bn, most of which came in 2016 and 2017. Looking at ETF flows, it is obvious that cost is a key consideration for money allocation, as ETFs with lower expense ratios are grabbing the bulk of the EM ETFs flows.
The shift to passive is good for Qatar, which is a heavy UW by active managers and is also supportive of the Saudi upgrade, as it increases the size of the guaranteed bid as a result of index inclusions, regardless of how active managers will position. The active-passive shift could have a negative impact on popular markets such as the UAE, as market flows reflect the shift from actively-managed funds, in which the UAE is OW, to passive-managed funds, in which – by definition – the UAE is at benchmark weight.
Figure 7: Passive-to-active shift continued in 2017, with Figure 8: …passive AUMs account for c.36% of total EM passive GEM funds receiving 5x the active GEM funds inflows AUMs, according to EPFR Global data YTD… Cumulative flows into GEM funds since January 2014 in USDmn AUMs in USDbn (LHS) , passive AUMs as % of total (RHS) Passive USDbn (USDbn,LHS) Active Passive Active AUMs (USDbn,LHS) 80,000 Passive AUMs as % of total GEM funds AUMs 900 40% 800 60,000 35% 700 30% 40,000 600 25% 500 20,000 20% 400 15% 0 300 200 10% (20,000) 100 5% 0 0% (40,000) Jul-02 Jul-13 Jan-08 Jun-03 Jun-14 Oct-10 Feb-07 Apr-05 Sep-11 Apr-16 Dec-08 Nov-09 Mar-06 Mar-17 Aug-01 Aug-12 May-04 May-15 Jul-14 Jul-15 Jul-16 Jul-17 Jan-14 Jan-15 Jan-16 Jan-17 Oct-14 Oct-15 Oct-16 Oct-17 Apr-14 Apr-15 Apr-16 Apr-17
Source: EPFR Global, EFG Hermes Source: EPFR Global, EFG Hermes
7 Strategy Themes THE YEAR AHEAD - 2018
Valuations and index flows
Big discrepancies in FEM – Vietnam looking pricey, Pakistan, Nigeria and Egypt looking cheap EG looks best-placed for 2018, looking for clarity in PK & NG, consolidation in VN Kuwait & KSA set for more index newsflow in 2018; both are under-owned, but local offer in question Vietnam is a slow burner for MSCI upgrade – longer-run question about future of FM benchmark
Valuations: PK, EG & NG are cheap; VN is looking pricey
Frontier and MENA valuations are widely dispersed going into 2018, even when taking into account differences in expected growth (ranging from a 2017-19 EPS CAGR of 8% for Morocco to 23% for Vietnam).
Pakistan, Nigeria and Egypt are grouped together, trading at a hefty discount to EM, FEM and MENA peers. This discount reflects perceived macro and political risk, though we note that the three markets are at different stages of the cycle. Nigeria is the most geared to the recent rally in oil prices, but the authorities still have work to do in bringing various exchange rates into equilibrium. Pakistan faces political uncertainty in 1H18 and also needs to reduce pressure on PKR (the State Bank of Pakistan said on 8 December after the PKR weakened that such a “market-driven adjustment” would reduce this pressure), but the long-run story looks robust. Egypt's FX market is functioning more smoothly, and we expect sharp cuts in interest rates from early 2018 as inflation drops. We think that all three markets offer good value, but see greater risks in Pakistan and Nigeria at this stage.
Figure 9: Egypt, Pakistan & Nigeria looking cheap… Figure 10:…Vietnam is literally off the charts 2017 PE vs. 2017-19 EPS CAGR (all consensus for MSCI indices) Trailing PB multiple vs. 12m forward ROE (all consensus for MSCI indices)
2017 PE Markets Aggregates PB Markets Aggregates 22 4.5
20 BD 4.0 BD 18 3.5
16 FEM 3.0 MA EM 14 Big discount on key 2.5 MENA KSA KW KE FEM markets 12 2.0 FEM QA LK EM EG 10 OM AE KSA EG PK 1.5 KW MENA NG 8 NG OM PK 1.0 QA LK AE 8% 10% 12% 14% 16% 18% 20% 2017-19 EPS CAGR 10% 15% ROE 20% 25% Note: Chart excludes Vietnam (26x 2017PE, 23% 2017-19 EPS CAGR) and Note: Chart excludes Vietnam (5x PB vs. 23% ROE) and Kenya (3.7x PB vs Morocco (19x PE, 8% EPS CAGR) 31% ROE) Source: Bloomberg Source: Bloomberg
At the other end of the spectrum lies Vietnam, which offers good growth at a very high multiple. Recent price action suggests over-exuberance in the Vietnamese markets, and we look for a correction to bring prices back in line with the admittedly strong fundamentals. Kenya also trades at a premium, having shrugged off political turmoil, slower growth and an interest rate cap. We think this premium is difficult to justify, given concerns about credit quality and high fiscal deficits.
Valuation differences could be ascribed partly to index composition. The above charts use the MSCI country indices and aggregates, which reflect the investible universe for foreign investors. In Vietnam, the index is skewed by heavyweight VNM, which trades at the high multiple typically seen for staples; high ROE stocks Safaricom and COMI dominate in Kenya and Egypt, respectively. Investors should be aware of index composition, but not let such factors outweigh macro factors and valuations when comparing markets. 8
Strategy Themes THE YEAR AHEAD - 2018
2018 flows – focus on Kuwait, and KSA; still early for Vietnam
Investors should keep an eye on Kuwait and Saudi Arabia in 2018 (more details in the country section). As both countries are expected to see newsflow related to index inclusion, be it from FTSE (Mar 2018) and/or FTSE (Jun 2018). The inclusion of Saudi Arabia, in particular, should help bring MENA closer to its full potential within EM, leading to more allocations to the region from active GEM funds as well. However, the pace of changing allocations could be dampened by geopolitical uncertainties.
Figure 11: MENA is still below its full potential in EM – Saudi inclusion and Aramco’s IPO would change this
MENA as % of EM GDP MENA's weight in MSCI EM MENA as % of Total EM Mcap 25%
20%
15%
10%
5%
0% Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
Source: Bloomberg, IMF, MSCI, EFG Hermes
In Mar 2018, we expect FTSE to announce that the pending Kuwaiti upgrade will be done over two phases (Sep 2018 and Mar 2019), resulting in a weight of c0.5% for Kuwait in FTSE EM and cUSD800mn worth of inflows. We also see a higher chance next year for MSCI to place Kuwait on the watchlist for a potential EM upgrade. Finally, Kuwait will also benefit from a potential upgrade to EM for Argentina, which is currently the largest country in MSCI FM.
For Saudi Arabia, a favourable upgrade decision by both MSCI and FTSE will depend on the ease of trading, once the buy orders pre-validation moves from custodians to brokers in Jan 2018. If the move, rules and regulations around it are seen as workable for brokers and investors, Saudi Arabia should receive the nod from both FTSE (Mar 2018) and MSCI (Jun 2018), with implementation likely in Mar 2019 for FTSE and May 2019 for MSCI, split over two phases or more, in our view. Saudi Arabia could account for 2.2% of MSCI EM and 2.7% of FTSE EM, seeing USD8.5bn and USD4bn of passive inflows, respectively, at current AUMs.
Given the relatively low foreign ownership in Kuwait and Saudi Arabia, it is safe to assume a decent amount of pre-positioning ahead of such events in both markets.
It is still early for Vietnam to be considered for an upgrade cycle to EM, but we expect that ongoing IPO activity will increase the investibility of this market, and newsflow on an upgrade may pick up in 2018. Low foreign ownership limits and uneven disclosure are the biggest obstacles to EM status for Vietnam, with the former creating a large discrepancy between the investible market for foreigners and the underlying market.
9
Strategy Themes THE YEAR AHEAD - 2018
Figure 12: Top 15 names by total FTSE and MSCI estimates passive flows for Saudi Arabia (c80% of total passive inflows expected) Est. FTSE flows Est. MSCI flows Est. total 3MADVT Flows / ADVT (USDmn) (USDmn) (USDmn) (USDmn) (x) SABIC AB 565 1,420 1,985 103.1 19 RJHI AB 451 958 1,409 75.0 19 NCB AB 317 796 1,113 10.2 109 STC AB 198 530 728 5.2 140 SAMBA AB 197 436 633 6.5 98 ALMARAI AB 155 469 625 13.5 46 MAADEN AB 196 413 608 9.0 68 SECO AB 154 383 537 8.5 63 RIBL AB 156 275 431 3.1 140 ALINMA AB 117 247 364 132.2 3 BSFR AB 152 202 354 28.5 12 YANSAB AB 107 241 348 5.1 68 SAFCO AB 93 214 307 3.5 88 SAVOLA AB 95 196 291 4.7 62 KAYAN AB 59 127 186 16.2 12
Source: MSCI, FTSE, EFG Hermes estimates
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Strategy Themes THE YEAR AHEAD - 2018
MENA Top 20, Sell ideas and country weights
We remain OW Egypt, Kuwait, Neutral UAE and UW Qatar We upgrade Saudi Arabia to Neutral from UW on expansionary budget, index inclusion newsflow Our country weighted portfolio delivered 10% total return vs. 2% for MENA, MENA Top 20 +21% MENA Top 20 list - additions: QNB, Budget and TAWUNIYA; deletions: Bupa, Mezzan and Extra MENA Sell ideas - additions: DXBE and DAMAC; deletions: QIB and Maaden
Figure 13: Top 20 outperformed in 2017, sell ideas lost outperformance on Maaden’s rally since June USD Total return in %
Top 20 MENA Sell Ideas 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Jul-17 Jan-17 Jun-17 Oct-17 Feb-17 Apr-17 Sep-17 Dec-16 Mar-17 Aug-17 May-17
Source: Bloomberg, EFG Hermes
Figure 14: EFG Hermes country weights New Current Index DY Rating Mcap ADVT P/E (x) P/B (x) ROAE (%) weight weight weight (%) % % % (USDbn) (USDmn) 2017e 2018e 2019e 2018e 2019e 2018e 2019e 2018e
KSA Neutral 54% 49% 54% 439 822 14.7 13.1 11.8 1.7 1.6 11.6 12.4 4.3 UAE Neutral 15% 16% 15% 233 175 10.9 10.2 9.6 1.5 1.4 14.6 14.7 5.4 Egypt OW 14% 16% 2% 47 67 10.8 9.4 8.0 2.0 1.7 19.4 19.4 4.5 Kuwait OW 12% 15% 8% 82 66 13.3 11.9 10.6 1.4 1.3 10.6 11.2 4.7 Qatar UW 5% 5% 12% 114 49 10.6 9.5 8.7 1.5 1.4 14.7 15.2 4.7 Morocco UW 0% 4% 67 19 17.5 15.9 15.7 2.2 2.0 12.9 13.1 1.3 Oman UW 0% 1% 21 12 9.3 7.8 6.8 0.9 0.9 10.2 11.3 6.6 Bahrain - 0% 1% ------Lebanon UW 0% 1% 8 2 5.0 4.4 3.9 0.8 0.7 16.4 17.3 9.5 Jordan UW 0% 1% 23 7 9.0 8.3 9.5 0.8 0.7 8.8 9.2 6.2 Tunisia - 0% 0% ------MENA 1,062 1,210 12.4 11.2 10.2 1.6 1.5 12.9 13.4 4.7 EM 14.1 12.0 10.8 1.7 1.6 10.4 11.9 2.7
Source: Bloomberg, MSCI , EFG Hermes estimates
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Strategy Themes THE YEAR AHEAD - 2018
Figure 15: MENA Top 20 List Close TP Upside Rating Perf. MCap ADVT PE (x) PB (x) DY (%) (LCL) (LCL) 2017 (USDbn) (USDmn) 2017 2018 2019 2018 2017 Juhayna Egypt 9.7 10.5 8% Buy 57% 0.52 0.6 34.2 17.9 13.1 4.2 2.6 Eastern Co. Egypt 380.2 408.0 7% Buy 174% 2.15 1.5 13.0 14.0 13.7 5.8 2.4 CIB Egypt 75.4 91.5 21% Buy 3% 4.91 4.9 12.9 10.5 8.7 3.2 1.0 Ezz Steel Egypt 19.8 26.5 34% Buy 11% 0.61 1.1 N/M 17.9 10.3 1.9 - Nasr City Housing Egypt 10.2 14.2 39% Buy -1% 0.58 1.3 9.7 8.9 6.7 3.7 - Budget Saudi KSA 24.5 36.0 47% Buy -15% 0.47 3.4 10.7 9.7 8.7 1.8 6.1 Al Othaim KSA 128.4 130.0 1% Buy 30% 1.54 0.6 21.1 19.5 18.7 4.2 2.3 Al Rajhi Bank KSA 64.2 66.0 3% Neutral 2% 27.80 75.3 14.0 12.1 10.4 2.0 3.7 Samba KSA 22.7 26.0 14% Neutral -7% 12.11 6.2 10.4 9.4 7.9 1.1 6.7 Tawuniya KSA 97.9 118.0 21% Buy 13% 3.26 2.8 18.5 16.4 13.1 3.8 2.7 YANSAB KSA 60.8 65.0 7% Buy 12% 9.11 5.3 14.5 12.9 13.8 2.0 5.8 Humansoft Kuwait 3.7 6.0 62% Buy 37% 1.51 1.5 16.0 13.9 12.5 13.4 5.1 NBK Kuwait 0.7 0.9 24% Buy 17% 14.26 7.2 13.9 12.3 10.7 1.5 4.1 Zain Group Kuwait 0.4 0.5 9% Buy 10% 5.84 11.9 10.3 9.9 9.4 1.1 6.7 QNB Qatar 120.0 140.0 17% Buy -19% 29.94 10.0 8.5 7.9 7.2 1.7 2.9 QEWC Qatar 168.6 250.0 48% Buy -26% 5.01 2.4 10.6 12.2 11.6 2.0 4.7 FAB UAE 10.2 11.3 11% Neutral 2% 30.29 14.2 10.3 9.4 8.3 1.3 6.1 DIB UAE 6.1 7.6 26% Buy 9% 8.15 5.8 8.5 7.8 7.4 1.8 7.4 DP World UAE 24.1 27.5 14% Buy 38% 20.02 4.3 16.3 15.3 13.7 2.1 1.7 Aldar Properties UAE 2.2 2.8 26% Buy -15% 4.78 4.5 7.0 6.3 7.4 0.7 4.9
Source: Company data, EFG Hermes estimates
Figure 16: MENA Sell ideas Close TP Upside Rating Perf. MCap ADVT PE (x) PB (x) DY (%) (LCL) (LCL) 2017 (USDbn) (USDmn) 2017 2018 2019 2018 2017 Chemanol KSA 7.9 4.0 -49% Sell -2% 0.25 4.3 N/M N/M N/M 0.9 - DAMAC Properties UAE 3.4 2.6 -23% Sell 34% 5.60 2.1 6.3 6.2 6.2 1.4 7.4 DXB UAE 0.7 0.7 9% Neutral -48% 1.46 2.0 N/M N/M N/M 0.8 - Etisalat UAE 16.6 18.6 12% Neutral -12% 39.34 7.7 16.2 15.7 15.2 2.9 4.8
Source: Company data, EFG Hermes estimates
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Strategy Themes THE YEAR AHEAD - 2018
FEM Top picks and Sell ideas
Egypt in recovery is our favourite market for 2018, with Nigeria as runner-up Vietnam needs a correction to take froth off the market; looking for FX and political clarity in Pakistan Kenya looks expensive, given banking sector stress; Kuwait is an index-flow story We like Egyptian and Nigerian banks, consumer names in Egypt and Vietnam Oil sector is a hedge against possible PKR and KES weakness
Figure 17: FEM Top picks Close TP Upside Rating Perf. MCap ADVT PE (x) PB (x) DY (%) (LCL) (LCL) 2017 (USDbn) (USDmn) 2017 2018 2019 2018 2017 Eastern Company Egypt 380.2 408.0 7% Buy 174% 2.15 1.5 13.0 14.0 13.7 5.8 2.4 CIB Egypt 75.4 91.5 21% Buy 3% 4.91 4.9 12.9 10.5 8.7 3.2 1.0 Kenolkobil Group Kenya 14.9 22.6 52% Buy 0% 0.21 0.1 7.7 5.9 5.0 1.8 3.3 NBK Kuwait 0.7 0.9 24% Buy 17% 14.26 7.2 13.9 12.3 10.7 1.5 4.1 Zain Group Kuwait 0.4 0.5 9% Buy 10% 5.84 11.9 10.3 9.9 9.4 1.1 6.7 Zenith Bank Nigeria 24.9 31.6 27% Buy 68% 2.16 1.4 5.2 5.7 5.2 1.0 9.1 FBN Holdings Nigeria 7.3 12.4 69% Buy 119% 0.73 0.4 6.8 4.4 2.5 0.4 2.0 OGDC Pakistan 159 181 14% Buy -4% 6.47 1.9 10.7 9.9 9.3 1.3 3.8 MCB Bank Pakistan 202 245 21% Buy -15% 2.27 1.2 10.6 8.6 6.5 1.4 7.4 MWG Vietnam 136 138 1% Buy 75% 1.84 3.4 25.7 18.6 19.0 7.4 1.6
Note: Vietnam stocks close and target prices are in VND000s Source: Company data, EFG Hermes estimates
Figure 18: FEM Sell ideas Close TP Upside Rating Perf. MCap ADVT PE (x) PB (x) DY (%) (LCL) (LCL) 2017 (USDbn) (USDmn) 2017 2018 2019 2018 2017 KCB Group Kenya 41.0 33.2 -19% Sell 43% 1.20 0.8 6.1 7.1 5.7 1.2 7.3 CBK Kenya 16.2 12.8 -21% Sell 47% 0.92 0.2 7.7 7.1 5.6 1.4 5.0 Bank Sohar Oman 0.2 0.1 -27% Sell 7% 0.71 2.8 10.7 9.5 7.7 0.9 2.8 Engro Foods Pakistan 80.7 71.0 -12% Sell -58% 0.59 0.2 121.4 89.6 41.0 6.2 - VCB Vietnam 49.4 31.0 -37% Sell 39% 7.82 3.8 26.3 19.0 15.3 3.5 2.2
Note: Vietnam stocks close and target prices are in VND000s Source: Company data, EFG Hermes estimates
13 Sectors
Financials 15
Consumer 21
Materials 25
Real Estate 29
Telecom 31
Healthcare 35 Financials Sector
THE YEAR AHEAD - 2018
MENA Financials: Key Buys
CIB in Egypt: Strong play on the recovery in lending demand from large corporates, which we expect to drive loan growth from mid-2018, particularly CIB. Strong track record in mobilising low-cost deposits, very resilient credit quality and both have a sizeable buffer of provisions and capital. We also expect CIB to maintain above-sector ROEs (27% for CIB and 34% for CAE) and assume a slight decline in the next two years.
NBK in Kuwait: Best play on investment spending in Kuwait, excess provisions and an already high cost of risk because of precautionary provisions requested by the CBK means that cost of risk should be stable next year despite IFRS9 implementation in Jan 2019. NBK is also a beneficiary of rate hikes via higher net interest margins.
ENBD in the UAE: ENBD is a key beneficiary from interest rate hikes, which will be positive for net interest margins. We also expect cost efficiency gains for ENBD because of a strong focus on digitalisation.
Tawuniya and Walaa in KSA: We prefer exposure to Saudi Arabian insurers vs. Saudi Arabian banks: Insurers offer better visibility on revenue growth, particularly in the motor business.
Frontier: Key Buys
Zenith Bank and First Bank in Nigeria: Zenith is our top pick in Nigeria on a risk-reward basis because of its leading deposit market shares, low balance sheet leverage, high capitalisation and strong costs discipline. First Bank is our preferred risk play in Nigeria. Relative to its tier-I peers, FBNH is trading at a forward P/B discount of over 50%, despite stabilisation in its risk outlook and clarity in its capitalisation. We do not believe this is a failed institution.
MBB in Vietnam: Relatively strong corporate governance, which is reflected in its broad beneficial ownership structure and highly independent Board. Furthermore, we are encouraged by its strong potential for ROE expansion, on the back of lower risk charges and continued strong credit growth.
Key Sell: Co-op Bank in Kenya: We do not believe current valuations accurately reflect the structural decline in its profitability because of moderation in growth and decline in margins, which are being exacerbated by increasing macro and sector level risks (political impasse, reduced government spending, slowdown in agricultural sector).
15 Financials Sector
THE YEAR AHEAD - 2018
Figure 1: Financials – Key themes for 2018 per country (to be continued)
Country Key themes Top picks/Top Sell ideas
Middle East
• Loan growth should improve, driven by slight improvement in economic growth and a pick- SABB: Superior returns profile, up in retail appetite, as the lifting of ban on female drivers boosts consumer spending leverage to US rates, solid trade • Investment book growth for banks is likely to be a key theme in 2018 as gov't issues franchise and solid capitalisation Saudi domestic debt to fund budget deficit underpin our positive view Arabia • Spread improvement to hinge on higher US rates and domestic liquidity conditions. With at (Banks) least two Fed hikes likely in 2018, Saudi Arabian banks should be key beneficiaries BSF: Strong culture of credit risk • We expect credit quality to remain under pressure and provisioning to be higher, owing to mgmt., a well-capitalised balance weak macro and incremental IFRS 9 provisioning sheet and decent div. yield
• In the ST we see headwinds for insurers stemming from a weak macro, which is affecting Tawuniya: A multi-line insurer, labour market, car sales and causing corporates to resist increases in premium rates with unmatched scale offers better growth prospects than Bupa and Saudi • Looking ahead, we believe there are better opportunities for motor-focused insurers arising an enduring competitive edge over Arabia from lifting of the ban on female drivers in 2H18 and stricter motor insurance enforcement, which should add SAR10bn to annual premiums by 2020 small insurers (Insurance) • Growth outlook in medical subject to the enforcement of medical insurance on Saudis working in the private sector and initiatives to widen the mandatory insurance net; however, Walaa: Mid-sized, motor-focused, timing remains unclear with good underwriting discipline and ambitions for growth in P&C
• Stronger loan growth prospects on a gradual pick-up in investment spending in Abu Dhabi ENBD: Offers exposure to Dubai's and uptick in private sector spending linked to Expo 2020 in Dubai favourable macro, is a key • Higher interest rates to drive spreads. We do not see risk to liquidity as we approach end of beneficiary of rising interest rates 2017 on a better liquidity position compared to a year ago and expect the bank to make efficiency gains as the bank focuses UAE • Banks likely to post positive JAWS, as cost growth is kept in check, due to growing automation of processes and increased focus on digital banking on digitalisation • Scope for provision release is lower as NPL ratios approach normalised levels. Strong general provision buffer to help mitigate incremental provisioning due to IFRS 9 RAKB: Earnings recovery story, driven by provisioning normalisation
• Public sector driving credit growth. Investment spending plans not affected by GCC QNB: Better loan growth outlook embargo on Qatar. Loan growth at c10% in 2018 in Qatar as it has a large market • Spreads have been very resilient in 2017, as expensive GCC deposits were replaced by share in public sector. Strongest Qatar cheaper public sector deposits. We assume a less benign outlook for spreads and factor in credit rating in Qatar allows for (Banks) c15bps decline next year lower funding costs vs. peers. Low • Credit quality could come under some pressure next year (hotels, real estate). But ultimate risk loan book due to significant owners are Qatari VIPs with very deep pockets, and we do not expect, as a result, a large gov’t exposure increase in defaults
• Premium growth in Qatar in 2018-19 in mid-single digits. Mandatory health insurance is a QIC: Strong de-rating post 3Q17 potential catalyst for premium growth, but the authorities have not set any particular losses linked to USD hurricanes. timeline for implementation These were one-offs, and • Due to the small size of the Qatari insurance market, the largest insurer, QIC, has focused on profitability should normalise in Qatar expansion in developed markets; thus, allowing QIC to gain product depth, something that 4Q17. QIC has lagged the re-rating (Insurance) GCC/developing markets lack. 73% of GWP are international, with its global reinsurer, of reinsurers’ stocks, which Qatar Re, accounting for 43% of GWP corrected at the time of the hurricanes, but have, since then, bounced back, with higher premium rates being a positive catalyst for the industry Source: EFG Hermes estimates
16 Financials Sector
THE YEAR AHEAD - 2018
Figure 2: Financials – Key themes for 2018 per country (to be continued) Country Key themes Top picks/Top Sell ideas Middle East
• Visibility on the loan growth story for Kuwait banks in context of the GCC: high single-digit NBK: Strongest profitability in loan growth, driven by gov’t expenditure Kuwait, largest market share in • Upside risks for net interest income: rate hikes are positive for NIMs (floating rates, CASA large corporate/multinationals Kuwait deposit mix of c50%) lending, strong credit-risk culture • Cost of risk already elevated due to precautionary provisions requested by the Central Bank; most banks have a large stock of excess provisions, and they are well-placed for the upcoming implementation of IFRS9
• Loan growth, at 8%, has been decent, with construction and industry being the main Arab Bank: Our preferred bank in drivers. It is, however, difficult to see a meaningful improvement in 2018, in light of the Jordan. It offers a liquid and well- weak macro outlook and growing liquidity constraints capitalised balance sheet; it should • Deposit growth has been quite weak at -1% Y-o-Y, with LDR at 73%, a level not seen since benefit from higher US rates, and it Jordan 2008 offers exposure to the fast-growing • The Central Bank is tightening interest rates to prevent dollarisation and follow the US rate Egyptian market increases. This should be positive for spreads, but could weigh on credit quality of the retail segment
• Loan growth has been weak in 2017, and the political instability is a blow to confidence. We None. We like BLOM Bank, as a expect further deceleration in loan and deposit growth rates defensive bank, very well- • Potential rate hikes in the US are an upside risk to earnings, as banks hold a large amount of capitalised and with high ROE ST USD liquidity. However, banks might need to increase rates in USD deposits due to (17%). However, we would avoid Lebanon political risks, and the impact on net profit could be lower compared to previous rate hikes Lebanon, for now, until there is • Banks used last year's large non-recurrent gains to clean up balance sheets: goodwill has clarity on the political scene been written off, and banks added very conservative provisions last year, ahead of IFRS9 implementation. NPL coverage is above 100% for banks under coverage
• Loan growth momentum is subdued at mid-single digits, as weak macro has dented both Bank Muscat: Unrivalled market retail and corporate lending appetite. Competition from international banks on projects' leader, defensive play with high financing in Duqm zone and Sohar region is fierce. Retail regulatory caps put a ceiling on capitalisation, strong provisioning retail growth buffer and sound credit quality. Its • NIM outlook is improving marginally as better liquidity has released some of the pressure on valuation is attractive, in our view, funding costs. Some banks have managed to pass on part of the deposit costs to borrowers, and it is best-placed to cope with Oman which gave an uplift to asset yields current macro challenges in Oman • Fee income is still sluggish, due to regulatory restrictions on collecting fees on some retail products in 2016-17 and also weak volume growth • Credit quality holding up well, despite weak macro. Recoveries, on the back of legacy NPLs for Bank Muscat, easing of some provisioning rules for other banks, have helped keep cost of risk under control
Source: EFG Hermes estimates
17 Financials Sector
THE YEAR AHEAD - 2018
Figure 3: Financials – Key themes for 2018 per country (to be continued) Country Key themes Top picks/Top Sell ideas Asia
• Strong loan growth to sustain in 2018, as banks continue to grow their retail books MBB: i) Scope for higher EPS • Upward revision in foreign ownership (FO) limits. In Vietnam, FO of banks is currently limited consensus like-for-like, our 2018 to 30%, but there have been some suggestions from the regulator that they may be open and 2019 EPS est. are 21% and to increasing this limit. A decision to increase FO limits would be a big positive for all banks. 59% above consensus, due to our On the current domestic/foreign splits in ownership, we would note that ACB, MBB and expectation for MBB’s risk charge VCB are currently 70/30, 80/20 and 79/21, respectively to fall to 0.36% by 2019 from • Lower loan loss provisions in 2018: most banks looking to fully provide for their VAMC 1.35% in 2016; ii) good corporate Vietnam exposures in 2017 governance: its broad beneficial • ROE expansion in 2018e to 16% from 12% in 2017e, on the back of continued growth in ownership structure has prevented the balance sheet, stable margins, cost control and lower provision concentration of power in a few hands, and this is reflected on the structure of its Board: only four of the 11 members are insiders, and the chairman is an independent
• Loan growth momentum has been unaffected by the political instability, as China-Pakistan MCB: Merger with NIB should drive Economic Corridor (CPEC) continues to drive credit demand, while banks push for consumer strong revenue and cost synergies, and SME lending to mitigate spread pressure while NIB's NPL book provides • significant potential for recoveries, Pakistan Spread pressure should ease gradually as the majority of the asset book reflects the current low interest rate environment amongst the most well-capitalised • Recovering loan growth and maturity of government securities would put pressure on bank in the country capital ratios; we expect banks to raise capital ratios through non-dilutive capital issues
Source: EFG Hermes estimates
18 Financials Sector
THE YEAR AHEAD - 2018
Figure 4: Financials – Key themes for 2018 per country (to be continued) Country Key themes Top picks/Top Sell ideas Africa
• Net interest margins peaked in 2017: we expect margin compression in 2018 of c30bps. CIB: High ROE (c30%, and Decline in rates will be gradual, and full normalisation of margins will take place over a declining only moderately to c207). period of at least three years A key play on loan growth recovery • Delay in the recovery of capex loans to 2019; we expect 2018 loan growth to be driven by in Egypt. We also like: short-term/working capital loans CAE (highest ROE in the sector, at Egypt • Credit quality has been very resilient, so far, but we expect banks will continue to add conservative provisions, as long as we remain in a high interest rate environment. Cost of c34% in 2018e) risk should normalise starting 2019 Baraka offers room for re-rating, with the bank trading at a P/E of just 3x, c20% discount to BV and ROE of c24%
• Credit growth momentum improving on higher investment loans and the end of the ATW: Leading franchise in retail deleveraging of real estate developers. The recovery is unlikely to bring loan growth rates and corporate segments. Above- beyond the 4-6% range sector average ROE. Recent • Risks for net interest margins on the downside as recovery in lending demand will drive acquisition of Barclays Egypt is Morocco some tightening in liquidity, and as competitive pricing pressures continue, particularly in the accretive to returns and EPS corporate segment • NPL ratios in the domestic market have peaked: we expect only a slight decline in provisioning costs in 2018, as Central Africa poses a downside risk to credit quality
• Asset quality deterioration. Although international investors now have access to FX, not all Zenith Bank: Dominant market domestic corporations and households have access share should enable it to continue • Return of loan growth. In 2018e, we forecast loan growth of 7.2% Y-o-Y (vs. -0.3% Y-o-Y earning strong margins (we in 2017e). The bulk of this growth will be driven by the re-pricing of FX loan from the estimate an average of 6.1% over official to the NAFEX rate the next five years). The bank is in • Macro challenges. Oil revenues contribute more than 65% of total govt. revenue. Non-oil an ideal position to benefit from revenue collection of less than 3% of GDP. Nigeria is over-reliant on oil revenues because any potential turnaround in top- Nigeria the informal sector contributes 65% to GDP, the highest in SSA. Moreover, despite its low line growth due to a reduction in debt-to-GDP (16.8% as at 2016), Nigeria has a very high debt service ratio (66% in 2016) its operational leverage, after the due to low non-oil revenue generation. This makes the raising of external debt very implementation of successful cost challenging, which will limit the ramp-up in infrastructure development projects rationalisation strategies • Wide valuation gaps. Tier-1 bank valuations range from 0.4x (FBNH) to 2.5x forward BV implemented over a three-year (Stanbic IBTC). With the risks of a systemic default in these banks behind us, we see value in period the discounted banks
• Radical policy shift. The current administration has presided over a structural clean-up, driven CRDB: We project a strong by: i) aggressive anti-corruption drive; ii) stricter tax collection; iii) clean-up of public sector recovery in earnings (33% p.a., institutions through the termination of civil service workers with inadequate qualifications, 2017-21e) from the normalisation termination of senior ministerial/local govt. officials for incompetency or corruption, and, of impairments (cost of risk of finally, detailed internal audits 1.3% by 2021e vs. 3.5% in • Policy shift has resulted in a deterioration in asset quality. Encouragingly, we see 2017 as the 2017e), an improvement in Tanzania peak in the deterioration of bank asset quality operating performance (cost-to- • Strong potential structural growth. Banking penetration ranks the lowest in our frontier income ratio to improve to 62% by universe. With a 2016 total assets/GDP ratio of 29%, asset penetration in Tanzania is the 2021e from 65% in 2017e) and an third lowest in our frontier universe and is only 20pps higher than the most underpenetrated attractive valuation (2017e P/B of banking system (Uganda, 27%). According to IMF, Tanzania’s real GDP growth rates 0.6x vs. target price multiple of (between 2016 and 2021 at 7%) are amongst the highest in our frontier universe, reflecting 1.03x) the country’s growth trajectory from a low base
Source: EFG Hermes estimates
19
Financials Sector
THE YEAR AHEAD - 2018
Figure 5: Net interest margins – 2018e Figure 6: Earnings growth – 2018e
10.0% 160.0% 9.0% 140.0% 8.0% 120.0% 7.0% 6.0% 100.0% 5.0% 80.0% 4.0% 60.0% 3.0% 40.0% 2.0% 1.0% 20.0% 0.0% 0.0% UAE UAE Qatar Egypt Qatar Egypt Oman Kenya Oman Kenya Nigeria Kuwait Nigeria Kuwait Pakistan Vietnam Pakistan Lebanon Vietnam Tanzania Morocco Lebanon Tanzania Morocco Saudi Arabia Saudi Arabia
Source: Company data, EFG Hermes estimates Source: Company data, EFG Hermes estimates
Figure 7: Return on average assets – 2018e Figure 8: Return on average equity – 2018e
3.5% 30.0%
3.0% 25.0% 2.5% 20.0% 2.0% 15.0% 1.5% 10.0% 1.0% 0.5% 5.0%
0.0% 0.0% UAE UAE Qatar Egypt Kenya Oman Qatar Egypt Kenya Oman Nigeria Kuwait Nigeria Kuwait Pakistan Vietnam Lebanon Pakistan Tanzania Morocco Vietnam Lebanon Tanzania Morocco Saudi Arabia Saudi Arabia
Source: Company data, EFG Hermes estimates Source: Company data, EFG Hermes estimates
20
Consumer Sector
THE YEAR AHEAD - 2018
Consumer Sector
Saudi Arabia: Cautious on outlook, with VAT, expat levy and subsidy reforms looming… Structural demand growth remained weak in 2017 as consumers faced a new reality of subsidy reforms and limited wage growth. The reversal of public sector pay cuts (announced in April and implemented in September) created some positive sentiment for consumption in 2Q17, but did not have a substantial impact on spending trends. We are cautious on the 2018e outlook, with more headwinds anticipated, including: i) Imposition of 5% VAT across the GCC starting 1 Jan (c85% of the consumer basket will be exposed to it) ii) Continued implementation of the expat levy – first-time imposition of levy on dependents (cSAR100 a month in July 2018, rising to cSAR400 in 2020e) has reportedly been driving a decline in the expat population, which will likely affect food names more than retailers (where the bulk of clientele are nationals). Most corporates did not bear the expat levy on dependents, but will incur extra costs as additional and new levies are introduced for expat employees in 2018e iii) More subsidy reforms, with some looming further hikes to fuel pump prices
…and market consolidation being the theme to watch
Market consolidation could be a key driving force, however, as evidenced in the electronics retail sector (our top pick for 2017, with eXtra and Jarir delivering strong earnings growth and share price performance on the back of this), which benefitted from the closure of c3k mobile retailers that could not meet 100% of the Saudisation requirement imposed in end-2016. We expect a similar theme to play out for car rental franchise Budget Saudi, as car rental offices will be required to employ only locals in 2Q18e. Other sectors to watch out for a potential consolidation theme are grocery retail and fuel retail.
M&A activity also picked up for food names in end-2017, with two pending transactions (a first for both companies): i) National Agriculture Development Company (Nadec) and Al Safi Danone (ASD) are looking to merge (estimated valuation of SAR1.5-1.6bn), which could nearly double the former’s market share ii) SADAFCO is completing due diligence to acquire a controlling stake in Polish company Mlekoma (specialised in milk-powder production), in an effort for vertical integration
Top picks: Budget Saudi, Al Othaim and SADAFCO; in other GCC countries, we highlight Humansoft
- Budget Saudi should benefit from the abovementioned market consolidation in its short-term rentals segment and, to a lesser extent, from women being granted the right to drive (good for used-car sales). Moreover, free cash flow generation has been strong, with the possibility of a dividend surprise
- The second largest Saudi Arabian grocery retailer, Al Othaim, has continued to deliver positive like-for-like (LFL) sales, while expanding its network, with signs of operating cost pressures subsiding in 2017
- Leading long-life milk producer SADAFCO should benefit from an improving SMP (Skimmed Milk Powder) cost outlook and is the least exposed KSA food producer to subsidy reform risk, with valuation remaining amongst the lowest relative to global dairy peers
In non-KSA GCC, our top pick is Kuwait’s Humansoft, the leading private university operator in a severely undersupplied market with a best-in-class profitability profile
21
Consumer Sector
THE YEAR AHEAD - 2018
Figure 1: Only electronics retailers eXtra and Jarir (market consolidation) and grocery retailer Al Othaim (continued positive LFLs) delivered Y-o-Y revenue growth Y-o-Y revenue growth for Saudi companies under coverage
2016 9M17 60% 50% 50% 40% 30% 19% 14% 20% 7% 10% 7% 13% 10% 3% 0% 2% 1% 0% 0% -10% -3% -3% -3% -2% -1% -2% -6% -1% -2% -5% -7% -4% -7% -4% -8% -20% -13% -30% -20% -40% -50% -38% Jarir Farm Herfy eXtra Nadec Savola Shaker Aldrees Almarai Catering Halwani Al Othaim Al Hokair* SADAFCO* Budget Saudi
*showing calendar year figures for SADAFCO and Al Othaim as fiscal year ends in March Source: Company data
Figure 2: Same names staged strongest earnings growth trends, as well as Almarai and Al Hokair on better margins Y-o-Y recurring earnings growth
2016 9M17 200% 146% 150% 100% 18% 40% 38% 41% 50% 17% 21% 17% 8% 10% N/M 3% 9% 3% 13% 7% N/M 0% -4% -8%-7% -5% -8% -6% -6% -8% -50% -32% -34% -38% -44% -100% -65% Jarir Herfy eXtra Nadec Savola Shaker Aldrees Almarai Catering Halwani Al Othaim Al Hokair* SADAFCO* Budget Saudi Farm Superstores
*showing calendar year figures for SADAFCO and Al Othaim as fiscal year ends in March Source: Company data
22
Consumer Sector
THE YEAR AHEAD - 2018
Egypt consumption on the mend; margins to normalise
We prefer Egyptian food names heading into 2018e, as they are set to show earnings recovery after overcoming hurdles brought on by the EGP floatation in Nov 2016. Sticky pricing and volume recovery (some signs evident in 3Q17) should drive accelerated net profit growth, particularly as prices were set with restoring 2015 gross margin levels in mind. Falling interest rates, wage increases in 1Q18 and possible EGP strengthening should support a re-rating for most Egypt consumer stocks, especially food producers. Our top picks for Egypt are: - Monopoly cigarette producer Eastern Co., as we expect earnings growth momentum to remain strong on several rounds of price increases (the latest of which was post another tax change in Nov 2017), which should support continued narrowing of large valuation discount to global peers. A key catalyst for 2018 includes FTSE and MSCI EM inclusions (flows of cUSD80-90mn in 1H18 as a result) - Leading dairy and juice player Juhayna is set for strong earnings recovery momentum as volumes normalise and promotions ease, especially with the bulk of list price increases out of the way. We see similar earnings recovery stories for other listed food producers - In contrast, carpet and rug exporter Oriental Weavers (our top pick for 2017) should show more normalised growth in 2018 as the EGP floatation benefits wear out. Leading automotive company, GB Auto, will likely face a lengthier recovery, given the effect of price hikes and relatively high ticket price vs. other staple producers and a stretched balance sheet (high leverage and working capital needs)
Figure 3: Strong price-driven revenue growth in 2017e as Figure 4: Robust recurring earnings growth for exporter OW companies looked to offset devaluation related cost pressures and cigarette producer EC, while food producers stumbled
2016 9M17 2016 9M17 70% 65% 200% 54% 163% 60% 52% 150% 128% 50% 100% 40% 32% 37% 44% 50% 31% 30% 24% 25% 10% 22% 23% N/M 18% 0% 20% 15% 12% -1% 9% -50% -22% 10% -37% -47% 0% -100% -77% Domty Eastern Edita GB Auto Juhayna OW Domty Eastern Edita GB Auto Juhayna OW Co.* Co.*
*showing calendar year figures as fiscal year ends in June *showing calendar year figures as fiscal year ends in June Source: Company data Source: Company data
23
Consumer Sector
THE YEAR AHEAD - 2018
Frontier: Prefer Indus Motor, Pak Electron in Pakistan and Mobile World in Vietnam
Pakistan passenger car sales have grown 18% Y-o-Y (until Oct 2017), resulting in relatively robust profit growth for the sector. Looking forward, as new-model-launch euphoria eases, capacity constraints come into play and margins normalise as competition increases, we expect earnings growth momentum to moderate from 2018e onwards. For the year ahead, while we remain bullish on demand dynamics, we are cognizant of potential FX devaluation denting profitability, while competitive forces are also likely to heat up in 2019e as Hyundai and Kia make inroads. Consequently, we maintain our preference for the highest quality stock in the sector: Indus Motor.
Figure 5: Robust Y-o-Y passenger car sales growth, on the Figure 6: Capacity constraints and margin normalisation to back of new model launches (%) moderate Y-o-Y earnings growth in 2018-19e*
Y-o-Y growth (%) Indus Motor Company Pak Suzuki Motor Company 3m moving average Y-o-Y (%) Honda Atlas Cars 80% 60% 70% 50% 60% 50% 50% 42% 40% 40% 30% 20% 30% 10% 20% 16% 0% 12% 14% -10% 10% 10% 7% 6% 7% -20% -30% 0% Jun-16 Jun-17 Oct-15 Oct-16 Oct-17 Feb-16 Feb-17 Apr-16 Apr-17 Dec-15 Dec-16 2018e 2019e Aug-15 Aug-16 Aug-17 2017a/e
*Growth rates have been calendarised on a pro-rata basis to harmonise the different year ends Source: PAMA Source: Company data, EFG Hermes estimates
We also like Pak Elektron as a beneficiary of continued improvement in home appliance penetration rates and higher sales of power distribution equipment, as electricity production continues to ramp up. The company has disappointed on 3Q17 numbers (higher-than-anticipated cost escalations affecting margins negatively) and will lead to a downward revision of our earnings estimates. However, we maintain our long-term thesis on the stock, where Pakistan’s electrification will be the main growth driver. In Vietnam, our favourite consumer stock is Mobile World Investment (MWG), a street-level retailer, primarily selling smartphones, accessories and white goods, while experimenting with a fresh-food urban grocery concept and planning new categories, such as pharmacies. We estimate MWG will grow its store count 3.3x to 4,185 locations by 2021, driving a five-year revenue and EBITDA CAGR of 29% and 26%, respectively. A key transaction was the on-market acquisition of an 8.9% stake in leading dairy company Vinamilk by Jardine Cycle & Carriage at a 14% premium to market price, with a full consumer-themed deal pipeline in line for 2018, including the auction/strategic sales in breweries Sabeco (c51%) and Habeco (83%).
24
Materials Sector
THE YEAR AHEAD - 2018
Petchems: Oil supportive in 2018, but spreads to compress further; stay defensive, Buy Yansab on strong cash return profile Ferts: Price outlook positive as markets rebalance, OCI NV our top pick, given high operating leverage Cement: Saudi market to recover gradually, stick to yield and value, City Cement our top pick
Petchems 2018 outlook: Oil to lift floor prices, but spreads will continue to compress
We expect 2018 to play out very similarly to 2017, whereby prices could see a slight improvement on higher oil prices, but spreads are likely to compress as more supply continues to trickle down to the market. That said, fundamentals should remain healthy, and, while we expect spreads to decline, we do not see a major correction. The biggest upside risk investors should keep in mind is any potential supply cuts or operating restrictions caused by China’s more stringent environmental laws, which could push Chinese imports beyond our expectations.
Polyethylene: PE spreads, in particular, are more vulnerable, given that they remain relatively high from a historic perspective (USD650-700/tonne vs. USD550-560/tonne historical average). Supply additions for PE exceeded demand in 2017, which drove a c10% correction in spreads, though overall prices ended up almost flat Y-o-Y as higher oil prices lifted floor prices, offsetting the compression in spreads. Supply is expected to exceed demand once again in 2018, which we believe will drive another 5-10% correction in spreads, though prices should gain 2-3% on rising Brent prices. HDPE is the best-positioned in 2018, with demand expected to easily outpace supply, while LDPE and LLDPE are likely to see significantly more supply growth.
Polypropylene: PP spreads were flat to slightly down in 2017, despite supply additions comfortably outpacing demand growth. While growth in demand should exceed that of supply in 2018, we expect only a marginal improvement in spreads (+2%) as some of the supply added in 2H17 is unlikely to be fully felt until 2018 and as higher propane prices in 1H18 could add further pressure. Overall, we expect prices to gain c5% in 2018.
MEG: Prices have performed exceptionally in 2017 (+25% Y-o-Y), partially helped by delays in the startup of some new plants and several unexpected shutdowns in the market. While downstream polyester demand has been surprisingly strong, with still substantial supply additions in the pipeline, we do not expect the strong momentum to continue and believe prices would only rise by c5-6% in 2018, driven mainly by higher oil and ethylene prices.
Methanol: The methanol outlook remains positive, given improved oil prices, and as demand growth remains exceptional, which has offset the impact of increasing supply. 2018 should see a continuation of these trends, and we expect utilisation to see another slight improvement. We expect methanol to track oil relatively closely in 2018, with prices rising around 4%.
Figure 1: PE supply to exceed demand again in 2018 Figure 2: PE spreads peaked in 2016 LHS: capacity/demand in mn tonnes; RHS: operating rates in % PE spreads to naphtha in USD/tonne
Capacity Demand OR - Inlcuding delays 800 140 85% 700 120 84% 600 100 83% 500 80 82% 400 60 81% 300 40 80% 200 20 79% 100 0 78% 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 YTD
Source: IHS, EFG Hermes estimates Source: IHS
25 Materials Sector
THE YEAR AHEAD - 2018
Propane prices higher than normal in 1H18; LT feedstock price risk another concern
Propane prices have surged in 4Q17 on a combination of: i) lower-than-normal inventory levels in the US for this time of year (-28% Y-o-Y) as restocking activities started later than normal this year; and ii) production disruptions caused by Hurricane Harvey, which caused a further rundown in inventories and affected exports. With the peak winter demand likely to last late into 1Q18, inventory levels are unlikely to normalise until mid-2018, in our view, which should keep propane prices elevated in 1H18, hurting the margins of Saudi Arabian producers that utilise propane as feedstock.
While we do not expect any changes to how feedstock products in Saudi Arabia will be priced in 2018, this remains a risk in the longer term, in light of how low prices remain from a global perspective, and as the country continues to guide for more subsidy cuts over the coming years to rebalance the budget.
Figure 3: US propane inventory as of October are down 24% Figure 4: US propane exports have plummeted Y-o-Y In thousand barrels In thousand barrels per day
120,000 1,200
100,000 1,000
80,000 800
60,000 600
40,000 400
20,000 200
0 0 3Q2010 1Q2011 3Q2011 1Q2012 3Q2012 1Q2013 3Q2013 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017 Sep-2012 Sep-2013 Sep-2014 Sep-2015 Sep-2016 Sep-2017 May-2012 May-2013 May-2014 May-2015 May-2016 May-2017
Source: US Energy Information Administration Source: US Energy Information Administration
We expect the year ahead to present some challenges for MENA’s petrochemical producers despite an improving oil price environment (we forecast USD57/bbl for 2018), as spreads are likely to compress on higher propane prices and increased supply for the majority of products produced by MENA could drag on prices.
As such, our top two picks remain defensive in nature. We like Yansab, as we believe the company is likely to boost dividends substantially in 2H18 (+67% Y-o-Y, 8-9% annualised yield), at which point, the company’s debt will have been essentially fully paid down. We also like Advanced Petrochemicals, despite our concerns on propane prices, in light of the strong management track record and attractive dividend yield (6%+).
We also like Sahara, albeit to a lesser extent, as the company’s cash flow outlook has improved, with Al Waha now operating at high levels (thus, more dividends upstreamed), and as valuation is undemanding (10-11x P/E). However, the company’s loss-making acrylates and chlor-vinyl businesses is still a source of concern, especially as debt repayment will escalate starting 2019, which could force Sahara and its JV partners to inject additional liquidity into these operations.
While we are Neutral on Sipchem, we think valuation is very interesting at current levels, especially as we believe the majority of the company’s products have troughed in 2016-17 (e.g. methanol and VAM). That said, the company remains highly levered, and operations have been very volatile, so we would like to see some consistency in operating rates before turning more positive on the name.
26
Materials Sector
THE YEAR AHEAD - 2018
Nitrogen Fetilisers: Market has bottomed, but volatility will remain elevated
The urea market has been under severe pressure for the past few years, mainly as substantial capacity has been brought online. According to CF Industries, net capacity additions between 2015 and 2017 amounted to c25mn tonnes, substantially more than 10-15mn tonnes of demand growth witnessed during that period. We are of the view, however, that the market has bottomed in 2017, and that things are likely to improve from here as: i) China continues to cut capacity and reduce exports, a trend which we expect to sustain; ii) capacity additions in the coming years are much lower than in previous years; iii) coal prices are also improving, as China reduces its coal capacity, which should be supportive of urea floor prices; and iv) fertiliser affordability, relative to crop prices, is quite low, from a historical perspective, which is likely to encourage healthy demand. That said, we expect the market to remain volatile, given availability of spare capacity.
Figure 5: Urea and ammonia prices Figure 6: Demand growth is set to outpace supply In USD/tonne In mn tonnes
Urea Ammonia Net capacity Additions Annual demand growth 800 18 700 16 600 14 500 12 10 400 8 300 6 200 4 100 2 0 0 2015 2016 2017 2018 2019 2020 2021 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 May-12 May-13 May-14 May-15 May-16 May-17
Source: Bloomberg Source: CF industries
Fertiliser stocks could be very interesting in 2018
With prices having seemingly bottomed, 2018 could be the year for fertiliser stocks to finally flourish after years of declining margins and profitability. In MENA, OCI NV is our top pick given its strong growth outlook (2018-2020 EPS CAGR of 33%), substantial leverage to nitrogen fertiliser prices and undemanding valuation. We also like MOPCO and Abu Qir in Egypt on attractive valuation (2018 P/E of c9x), as well as their strong gearing to urea prices. While we are Neutral on SAFCO, we think the stock is one to keep an eye on, given: i) historically, it has had the highest correlation to urea prices among our coverage, due to the company’s substantial operating leverage; ii) the stock trades at a 2018 P/E of 13x, which is not too demanding vs. peers (peer average of 17-18x, though peers have a more attractive growth profile) nor the stock’s historical average forward P/E of more than 15x; iii) we expect a substantial hike in dividends (+125% Y-o-Y), as cash flow should enhance substantially with the pick-up in prices; and iv) the company should be a large beneficiary of potential FTSE flows in 2018.
We would avoid DAP producers in 2018, as we expect the market to remain oversupplied for the foreseeable future, which will likely keep prices in check. For our Pakistani coverage, we believe the fertiliser sector is well-positioned to benefit from continued government support; thus, ensuring demand is sustained at strong levels. In addition, we believe international urea prices have likely bottomed out in 2017, which should support domestic pricing going forward. We expect the sector to post earnings growth of c20% Y- o-Y during 2018e, which, given relatively attractive dividend yields on offer, should result in continued price performance. Our top pick in the sector is Fauji Fertilizer Company (FFC), where, given its c43% urea market share and a diversified investment portfolio, the company is well-positioned to grow earnings sustainably (7% CAGR over 2018e-22e).
27
Materials Sector
THE YEAR AHEAD - 2018
Saudi Arabia cement sector: A consolidation year ahead After two years of consistent drops in cement demand in Saudi Arabia, we believe 2018 to be a consolidation phase, as we expect the improved oil price scenario – along with government’s new initiative to build economic and tourism projects and an expected expansionary budget in 2018 – to improve the project awards gradually in the Kingdom. We estimate cement demand to flatten out at current levels over 1H18 and improve marginally over the second half of the year as construction activities pick up. Nevertheless, we believe the current prevailing cement price to be at an unsustainable level (average cement price fell to SAR160/tonne in 3Q17); hence, we expect a marginal increase to SAR180/tonne over 2018 (although it still remains well below historical average: SAR240/tonne).
Figure 7: New project awards in KSA dropped 35% Y-o-Y… Figure 8: …but strong project pipeline ahead New project awards in USDmn In USDmn
Chemical Construction Gas Industrial 250,000 Oil Power Transport Water 40000 35000 200,000 30000 150,000 25000 20000 100,000 15000 10000 50,000 5000 0 0 1Q 2018 2Q 2018 3Q 2018 4Q 2018 1Q 2019 2Q 2019 3Q 2019 1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016 4Q 2016 1Q 2017 2Q 2017 3Q 2017
Source: MEED Source: MEED
Figure 9: Sales volume to plateau over 2018 Figure 10: Cement prices bottomed out in 2017 Sales volume for covered names in mn tonnes In USD/tonne
Combined sales volume Y-o-Y growth Avg. selling price Y-o-Y growth 8% 60 6% 6% 10% 250 10% 5% 5% 5% 6% 50 5% 2% 3% 3% 5% 200 0% 0% 40 -4% 0% -8% -5% 150 30 -5% -10% -10% 100 20 -10% -19% -15% 50 -16% 10 -20% -15% 50 46 37 39 41 44 46 49 232 210 176 180 190 195 200 200 0 -25% 0 -20% 2015 2016 2017e 2018e 2019e 2020e 2021e 2022e 2015 2016 2017e 2018e 2019e 2020e 2021e 2022e
Source: Yamama Cement, EFG Hermes estimates Source: Yamama Cement, EFG Hermes estimates
We expect cement demand to remain resilient in the western and central regions compared to other regions, as these are high-demand areas with major infrastructure spending. We remain positive on: i) Arabian and Yanbu from the west; ii) Saudi and Eastern from the east; and iii) City Cement from the central region. Key investment themes to our top picks are: i) attractive valuation (2018e average P/E of 13.5x, dividend yield of 6.6% vs. sector average of 14.5x and 6.4%); ii) strong balance sheets, with excess cash balance/no debt; iii) spare capacity to capture any growth; and iv) strong FCF yield in excess of 10% to support dividend payout. A key risk factor that could impact cement demand over the short term is the introduction of VAT in Saudi Arabia from Jan 2018 (although it will not affect companies’ financials directly, as the cost will directly pass on to end consumers), as it will inflate construction costs and could weigh on any recovery.
28
Real Estate Sector
THE YEAR AHEAD - 2018
MENA property: Focus on value plays
In the UAE, we expect a slowdown that would be pressured by increased supply hitting the market; market leaders to outperform. Implementation of VAT might take its toll on commercial lease portfolios (Aldar and Emirates REIT, in our coverage) In Egypt, price stability and muted growth in contracted sales will dominate the scene. Land cost will continue to be a burden that might spur some mergers and acquisitions amongst smaller players MENA property ideas: Favour EMG and MNHD; Damac and ERC the least preferred
UAE property market: Market softness and impact of VAT implementation likely to dominate the scene going into 2018
Dubai’s property market, in general, has seen a good year in 2017, with increased activity across all segments that started to show its signs in 4Q16 and early 2017. 1Q17 was a very strong quarter in the secondary market, with transaction values up 43% (Y-o-Y) and the market witnessing improved activity in the sales of off-plan units. This trend has slowed down in 2Q-3Q17; however, sales’ transactions remain strong when compared to 2015-16 levels. We expect the market to soften over the coming 12 months, with the increase in supply of units hitting the market, which – in turn – might increase pressure on new launches by developers. We expect no major changes in the buyers’ mix in the coming two years, despite the increase in contribution coming from Chinese buyers. As for Abu Dhabi, 2017’s soft market conditions will continue to prevail over the coming year, in our view, with government spending still under pressure, thus placing pressure on rental rates for both the residential and office markets. For the development residential market, we see more project launches in the middle-income segment, with market leader Aldar expanding its presence further in this segment.
Implementation of the 5% value added tax (VAT) starting Jan 2018 is coming new to the formula amidst such market softness. We highlight that the main guidelines for the tax implementation were lately announced, with residential properties to be subject to zero tax rate for the first three years after construction. VAT will be applicable on commercial assets, which would be borne by the tenant. Both Aldar and Emirates REIT have a commercial lease portfolio; however, we think the quality of tenants for the majority of the assets for both companies would indicate that the negative impact on occupancies and net rental yields would be limited (if any).
Figure 1: After a hike in market activity in 1Q17, sales slowed Figure 2: …despite supply-demand forces indicating that the down in the following two quarters, a trend we expect to market will continue to be ‘theoretically’ in shortage continue in 2018… In AEDbn
Land Residential Office Others Supply Demand 50 30,000 45 40 25,000 35 20,000 30 25 15,000 20 15 10,000 10 5,000 5 0 0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 2017e 2018e 2019e
Source: REIDIN, EFG Hermes Source: REIDIN, EFG Hermes estimates
29
Real Estate Sector
THE YEAR AHEAD - 2018
Egypt property market: Market stability; we see no further major price hikes, while land costs will remain a burden
Although we are still positive on long-term sector fundamentals, we see 2018 as a year of stability in selling prices for new launches and in the number of units offered and sold, where affordability concerns are increasing in significance, in our view. We note that demand forces would weaken compared to 2017 levels, which were driven by demand from Egyptians living abroad (increased in significance in all company portfolios in 2017). We expect developers to extend payment terms to attract more demand, which will place some pressure on companies’ cash flow, especially in the current land-inflationary cost environment, with implied land cost representing a burden on total development costs. We still see land costs and access to prime-location plots as the main challenges for developers seeking to expand, which might lead to a wave of mergers and/or acquisitions that would be more evident amongst smaller players.
Figure 3: Egypt developers in our peer group have a current Figure 4: We expect muted growth pace in contracted sales development portfolio size +EGP200bn, which is mainly starting 2018, with outperforming companies involved mainly concentrated in East Cairo in new project launches and/or commercial sales
Secondary MNHD SODIC PHD TMG 18% 35,000 30,000 25,000
City 12% 20,000 15,000 East 61% 10,000 West 9% 5,000 0 2015 2016 2017e 2018e 2019e 2020e
Source: Companies’ data, EFG Hermes estimates Source: Company data, EFG Hermes estimates
Preferred plays: Emaar Malls Group (EMG) in the UAE and MNHD in Egypt…
Amongst our property coverage in the UAE, we prefer Emaar Malls Group (EMG). We believe the stock will outperform in 2018, where we see a number of positive stock triggers, including: i) the opening of the long- awaited Fashion Avenue expansion; ii) further growth coming from Namshi and potentially contributing positively to net income (although insignificant, in our numbers); and iii) announcement of further acquisitions to expand TDM. As for Egypt, we favour value plays with our preferred exposure through MNHD. We think the stock would outperform in 2018, with investors increasingly appreciating value stocks with premium-location land bank amidst the stability in market conditions with less demand for new property launches. Positive stock triggers would also include: i) acquisition of new land in West Cairo and/or other governorates; ii) new successful launches, in terms of size; and iii) new lucrative agreements to be concluded with third-parties, thus speeding up the pace of monetisation.
…while we expect Damac (UAE) and ERC (Egypt) to underperform Our least preferred ideas are Damac (UAE) and ERC (Egypt). We are cautious on Damac against a backdrop of expectations of continued market softness in the overall market. We estimate contracted sales to come in flat Y-o-Y in 2018. The drops in the company’s annual contracted sales in 2015-16 will have a negative impact on reported numbers and, in turn, on cash flow, which, accordingly, will place some pressure on the company’s ability to pay out its lucrative dividend, in our view. ERC’s stock price outperformance in 2017 was not supported by improvement in the company’s operational and financial performance; rather, it was spurred primarily by news regarding major shareholders’ plans to exit their investments in the company, which created speculation over the selling prices at which these transactions will close. Thus, we see some pressure from current stock price, especially that our numbers assume no major change in the company’s operational outlook.
30
Telecom Sector
THE YEAR AHEAD - 2018
Growth to remain suppressed by aggressive competition, macroeconomic challenges and regulatory pressure Data monetisation will be more focal, but data growth will still be offset by weakening in traditional businesses Operators will continue to seek earnings growth and value creation through: i) deleveraging; ii) more asset-light strategies; and iii) operating cost efficiency Top ideas: Stick to better-quality dividend plays with lower risk profiles; dividend-paying stocks will outperform We like STC and Zain Group (despite their valuations), TE, and – to a lesser extent – Ooredoo Group. Keep an eye on Zain KSA after restructuring. Outside Telecoms, we like Raya Contact Center
Operating scene will continue to be challenging in 2018
Last year, we expected the Telecoms sector to come broadly under pressure throughout 2017 as a result of various challenges across the region, mainly stemming from a weak macro picture – which led regulators to introduce new licences and governments to increase taxation and/or royalties – and the maturity cycle the sector is undergoing. The sector continues to suffer from slowing growth in traditional businesses (voice, SMS, etc.) that is partially offsetting growth in the higher-margin and faster-growing data and ICT businesses. Moreover, operators continue to explore ways to monetise investments in data networks, a challenge that remains global, as well as regional. We had most of our covered stocks on Neutral ratings to reflect our concerns, and the majority of stocks, covered and not covered, have declined YTD.
Figure 1: YTD stock performance for MENA Telecoms (covered and not covered); we highlight in green the names we expect to outperform the sector in 2018 20% 10% 6% 10% 3% 0% -1% -10% -4% -7% -9% -9% -10% -20% -13%-14% -18%-19%-19%-19% -30% -27% -27%-29% -40% -35% -50% -45% TE du STC VFQ GTH RCC OTMT Mobily Batelco Viva KW Zain Gp. Omantel Zain KSA Maroc Tel. Jordan Tel. Etisalat Gp. Ooredoo KW Ooredoo Gp. Ooredoo OM Etihad Atheeb
Source: Bloomberg
While the above figure suggests there are ample opportunities across the sector, we expect there will be more pressure to come in 2018 as a result of four main themes:
1- Ongoing macroeconomic and political challenges (e.g. KSA, Oman, Iraq, Algeria, Tunisia) 2- Further aggressive price-based competition (e.g. KSA, Kuwait, Algeria, Tunisia) 3- More pressure from regulators (e.g. KSA, Oman) 4- Ongoing data monetisation challenges across the board
In figures 2 and 3, we summarise our views on expected risks based on the first three themes mentioned above. We use a simple index scoring methodology to illustrate the respective risk heat map for each of the stocks we cover, as well as for each of the main markets that these companies operate in. The riskiest markets in 2018, we conclude, will be the following: 1- KSA: More fiscal consolidation (fuel price hike, VAT) will push inflation to a five-year high, further pressuring consumers’ sentiment and spending on telecoms. Dependents’ fee is an issue, as expats’ purchasing power could be pressured, and some may opt for getting their families out of KSA. On
31 Telecom Sector
THE YEAR AHEAD - 2018
the regulatory side, there are various issues (ongoing impact of biometric campaign, unblocking of VoIP, lifting of fair usage on some bundles, MTR cut) that will lead to ongoing aggressive competition, in addition to the market’s imbalance due to STC’s dominant revenue share (c70%)
2- Oman: Economic pressure will likely start catching up with subscribers’ telecom spending; this is further aggravated by the government’s hike in taxes and royalties in 2017. While the competition environment was one of the most benign over the past few years, it could soon begin to deteriorate as a result of the government’s plan to introduce a third mobile operator, which could be value-destructive in a mature market like Oman, we believe
3- Algeria: Despite healthy growth in data since the launch of 3G and 4G, telecom usage will likely face some pressure in 2018, as a result of ongoing economic challenges and need for further restructuring. For foreign operators, revenues/profits from Algeria will likely be affected by further weakening in the local currency, as the country’s Central Bank recently returned to devaluing the currency deliberately in order to curb imports. Moreover, competition will remain aggressive, we expect, as Djezzy presses ahead with its restructuring and the regulator imposes MTR symmetry
Figure 2: Risk heat map for stocks under our coverage Figure 3: Risk heat map for key telecom markets in which (approximate risks for each one’s blended footprint) stocks under our coverage operate Score index: Low = 1, Medium = 2, High = 3 Score index: Low = 1, Medium = 2, High = 3 Avg. Avg. Stock Competition Macro/polit. Regulatory Country Competition Macro/polit. Regulatory score score
Etisalat Grp. Low Low Low 1.00 UAE Low Low Low 1.00 STC Medium High Medium 2.33 KSA High High High 3.00 Ooredoo Grp. Medium Medium Medium 2.00 Qatar Medium Medium Medium 2.00 du Low Low Low 1.00 Kuwait High Low Medium 2.00 Zain Grp. Medium Medium Medium 2.00 Oman Medium High High 2.67 Mobily High High High 3.00 Egypt Medium Medium Medium 2.00 Omantel Medium High High 2.67 Morocco Medium Medium Medium 2.00 GTH High Medium Medium 2.33 Algeria High High Medium 2.67 Ooredoo KW High Medium Medium 2.33 Tunisia High High Medium 2.67 TE Low Medium Low 1.33 Iraq Medium High Medium 2.33 Zain KSA High High High 3.00 Sudan Medium High Medium 2.33 OTMT Medium High High 2.67 Pakistan High Medium Medium 2.33 RCC Medium Medium Low 1.67 Indonesia High Low Medium 2.00 Source: EFG Hermes estimates Source: EFG Hermes estimates
How to play the sector in 2018
Based on the abovementioned challenges and risks, we recommend investors should strategically position their exposure to telecoms on stocks that meet the following criteria: 1- Those that have stable dividend payment abilities with relatively superior earnings visibility and clear dividend policies 2- Those that have solid balance sheets and larger cash balances and are focusing on deleveraging 3- Those that do not have significant exposure to risky markets, except if they have a significant competitive advantage in those markets (e.g. STC in KSA) 4- Those that are focusing on efficiency at both opex and capex levels 5- Those that might surprise with M&A activity, including potential tower sales 6- Those with stronger focus on data monetisation and where the data opportunity is more sizeable
32
Telecom Sector
THE YEAR AHEAD - 2018
Figure 4: Significant potential in mobile data growth as 4G Figure 5: The technology mix in MENA today is geared mostly adoption in MENA countries remains low, while smartphone towards 2G; migration towards 4G in the coming years will be adoption paves the ecosystem for migration to 4G supportive for faster growth in data
4G adoption Smartphone adoption 2016 2020e 80% 60% 68% 52% 70% 50% 47% 60% 40% 40% 50% 33% 41% 40% 36% 30%
30% 20% 20% 20% 20% 8% 10% 8% 10% 3%
0% 0% GCC Arab states North Africa Other Arab states 2G 3G 4G
Source: GSMA Intelligence Source: GSMA Intelligence
New theme materialising: Deleveraging
At the onset of 2018, and due to the slowing top-line growth across the board, we expect several players in the region – particularly in GCC – to take tangible steps towards deleveraging their balance sheets. Many have already announced plans to cut debt levels, supported by: i) a decline in capex spending; and ii) balance sheet efficiency, mostly by selling towers or idle assets/investments. In the past few years, operators in the region have mostly considered a net-debt-to-EBITDA of 2.0-2.5x as the benchmark range, but now we are increasingly hearing management of various companies talking about 1.5-2.0x as the targeted level.
Figure 6: A decline in capex spend for MENA telcos (ex. GTH Figure 7: …will partially lead to more deleveraging as FCF and OTMT)… pressure decreases (ex. GTH and OTMT) Capex-to-sales (proportionate wherever relevant) Net-debt-to-EBITDA
2016a 2017e 2018e 2016a 2017e 2018e 45.0% 10 40.0% 8 35.0% 30.0% 6 25.0% 4 20.0% 15.0% 2 10.0% 0 5.0% 0.0% (2) TE TE du du STC STC Avg. Avg. Mobily Mobily Omantel Omantel Zain KSA Zain KSA Zain Grp. Zain Grp. Etisalat Grp. Etisalat Grp. Ooredoo KW Ooredoo KW Ooredoo Grp. Ooredoo Grp.
Source: Company data, EFG Hermes estimates Source: Company data, EFG Hermes estimates
33
Telecom Sector
THE YEAR AHEAD - 2018
Our preferred stocks – why we think they will outperform
STC: Despite a challenging backdrop in KSA (difficult macroeconomic conditions, aggressive price-based competition, challenging regulatory environment), STC enjoys a solid, cash-rich balance sheet and has a stable attractive dividend yield. The company has one year left in its three-year dividend policy of SAR1.00/quarter/share, making it the only dividend-paying telco in KSA so far. Management has not yet decided what the dividend policy will be after the current policy expires, but we expect it to continue with a generous pay-out ratio. This is supported by STC’s dominant position in the market, with c70% revenue share.
Zain Group: Its problematic units (Iraq, Sudan) appear to be stabilising, which we expect could lead to a gradual improvement in FCF generation and bring about better dividends. Moreover, the company is on track to sell towers in Kuwait and KSA, as well as restructure its ailing KSA unit; all of this will ultimately lead to deleveraging at the group level, which is a key catalyst, in our view. Kuwait’s potential upgrade to MSCI EM is another key catalyst, given that Zain would be one of the largest beneficiaries of passive flows.
TE: With strong growth in fixed broadband demand in Egypt and a surprisingly strong rollout of mobile services, driven by mobile broadband, TE is positioning itself as the leading integrated telecom provider in Egypt. In just two months since its mobile launch in mid-Sep 2017, the company surprisingly attracted 1.6mn subscribers, far exceeding our expectation, which could possibly result in a higher-than-expected valuation for the mobile business. This could also result in stronger-than-expected growth in the broadband business (both mobile and fixed). TE is increasing leverage to fund expansions in the mobile business, but remains committed to a minimum dividend pay-out of 50% for 2017 and 2018.
Ooredoo Group: The stock’s valuations appear to be penalised for reasons not related to the company, but rather due to concerns over Qatar’s diplomatic row. The company’s capex is declining, as most of its network upgrades are behind us, while EBITDA is broadly stabilising, owing to improvements in the performance of some units (e.g. Iraq, Ooredoo Kuwait Group). This is leading to increasing FCF generation that is likely to be used for a mix of deleveraging and increasing dividends, which would act as a good catalyst for the stock.
RCC: A unique story offering higher growth than Telecoms, RCC is a leading BPO company in MENA. It has an inherent cost advantage of serving offshore clients (foreign-currency-denominated revenue), mostly from facilities located in Egypt (mostly EGP-denominated cost base), leading to a unique currency mismatch. The company is expanding quickly with facilities across Egypt, UAE, and Poland, and will soon deploy IPO proceeds to acquire a facility possibly in sub-Saharan Africa to serve the French-speaking market. The stock is cheap vs. global peers, while it offers higher growth, margins and returns.
34
Healthcare Sector
THE YEAR AHEAD - 2018
MENA Healthcare
Saudi Arabia: Structurally improving
Opportunities for the private sector in the medium term: i) increased private sector participation; ii) wider insurance coverage; and iii) geographical diversification Key challenges: i) exposure to MoH referrals – cut in prices and late payments; ii) economic conditions and competition; and iii) workforce availability and cost Players with low MoH exposure are in a better ST position, as MoH has applied a fixed price list for its referrals and has been slow in paying its late dues Companies with high MoH exposure hope to receive overdue receivables in 4Q17-18, which would improve working capital, margins (on lower provisions) and dividend distribution Our top picks are: i) Mouwasat – offers sustained high profitability and payout, with a prudent and diversified expansion plan; and ii) Al Hammadi – recovery story with ample capacity; its share price overly reflects its MoH exposure
Opportunities for the private sector in the medium term: Private Sector Participation (PSP) programme: Government aims to increase private share and efficiency of public resources, targeting nine main domains: primary care, radiology, laboratory, pharmacy, long-term care, rehabilitation, homecare, hospital commissioning and medical cities. Extended care is likely the easiest to assign to the private sector.
Wider insurance coverage: We expect wider coverage in the medium term, as the establishment of a universal insurance programme received the King’s approval in Jul 2017 – a key catalyst if it utilises private sector resources. Also, recent requirements by private sector employers for a unified policy for all employees will increase services covered by insurance companies.
Geographical diversification: Private sector penetration outside major cities is low due to lower per-capita income and smaller private business communities. We expect listed companies may take advantage of the PSP across the Kingdom, and a universal insurance act would encourage extending their networks into currently less attractive cities.
Figure 1: Number of beds in Saudi Arabia Figure 2: Concentration of private healthcare services in a few places Bubble size represents population size, 2016
Government Private Share of private beds 80,000 35% 25% Riyadh 70,000 30% Eastern 21% 25% Jeddah 60,000 25% Other 50,000 21% 20% 19% 40,000 15% 30,000 Aseer 10% Madinah 20,000 5% Ha'il Makkah 10,000 0% 0 0% 5% 10% 15% 20% 25% 30% 35% 2002 2009 2016 share of population
Source: Ministry of Health Source: Ministry of Health, SAMA
35
Healthcare Sector
THE YEAR AHEAD - 2018
Figure 3: Number of insured at private sector Figure 4: GWP In mn In SARbn
Insured Saudi Insured Expat 14 20 12.1 18 12 10.8 16 9.6 10 14 7.9 12 8 10 6 4.8 8 6 4 4 2 2 0 0 2008 2011 2014 2015 2016 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Council of Cooperative Health Insurance (CCHI) Source: Council of Cooperative Health Insurance (CCHI)
Key challenges: Exposure to MoH referrals: i) changes in prices – MoH set a fixed price list for services provided to patients it refers to private hospitals over 2016-17. This had a negative impact on some companies, but it will reduce the risk of downward changes going forward; and ii) accumulation of government receivables.
Workforce: Expats account for over 95% of physicians and nurses hired in the private sector; hence, availability of medical staff and changes in regulations (Saudisation and expat fees) are key concerns.
Economic conditions and competition: Any sharp downsize in workforce by the private sector would have a negative impact on the number of insured persons, which would increase competition in cities seeing large capacity additions (such as Riyadh). Wider insurance coverage would gradually compensate for this.
Figure 5: Receivables for listed hospitals Figure 6: Healthcare workforce adequacy Days on hand 2016
2013 2014 2015 2016 Per Bed % Expats 300 259 259 3.00 100% 90% 250 234 2.50 80% 2.00 70% 60% 200 1.50 50% 40% 1.00 30% 150 0.50 20% 10% 0.00 0% 100 90 83 Private Private Private 50 Government Government Government 0 Physicians Nurses Allied Health Al Hammadi CARE Dallah MEAHCO Mouwasat Personnels
Source: Company data Source: Ministry of Health
36
Healthcare Sector
THE YEAR AHEAD - 2018
Watch out for: Capacity additions and impact of MoH exposure
Figure 7: CAGR of number of beds* Figure 8: Annual revenue growth Volatility in annual growth rates depending on launch of new capacities, exposure to changes in MoH prices in 2016-17 2014-16 2017-21e 2016 2017e 2018e 2019e 35% 30%
30% 25%
25% 20%
20% 15%
15% 10%
10% 5%
5% 0%
0% -5% Al Hammadi CARE Dallah MEAHCO Mouwasat Al Hammadi CARE Dallah MEAHCO Mouwasat
*2015-16 CAGR for MEAHCO to exclude impact of corporate restructuring Source: Company data, EFG Hermes estimates Source: Company data, EFG Hermes
Figure 9: EBITDA margin Figure 10: Earnings CAGR Affected by changes in MoH prices in 2015-16, impairments in 2016 and launch of new hospitals
2015 2016 2017e 2014-16 2017-21e 35% 40%
30% 30%
25% 20%
20% 10%
15% 0%
10% -10%
5% -20%
0% -30% Al Hammadi CARE Dallah MEAHCO Mouwasat Al Hammadi CARE Dallah MEAHCO Mouwasat
Source: Company data, EFG Hermes estimates Source: Company data, EFG Hermes estimates
37
Healthcare Sector
THE YEAR AHEAD - 2018
Egypt: Largely resilient, despite inflationary pressure post EGP floatation
Healthcare stocks broadly showed resilient performance YTD, as companies largely passed on inflationary pressure to end-consumers. This had muted the impact of a softening/slower growth in volume, which we believe is temporary until the market absorbs price increases. M&A activities have substantially increased in 2016-17; we expect this trend to continue in the medium term.
Integrated Diagnostics Holding (IDH): Management applied moderate price increases to limit pressure on volume. EBITDA margin contraction (estimated to be around 3pp in 2017) was compensated by revenue growth and absence of FX loss, leaving earnings growth solid in 2017. We expect volume and margins to improve in 2018 as FX rate stabilises and as IDH continues to increase prices. Faster growth in demand, margin recovery and new investments are key catalysts.
EIPICO: Jan 2017 price increase (+50% for bestselling products), exports and low-cost inventory all offset the impact of inflationary pressure on costs. The use of raw materials purchased prior to EGP floatation boosted margins and earnings growth in 2017, but margins started to normalise in 3Q17. We expect local revenue to grow further in 2018, driven by a gradual recovery in volume and as price increases started to reflect substantially on revenue in 3Q17. Further increase in prices is a key catalyst, but it is still debatable.
Cleopatra (coverage suspended): Price increases and cost efficiency boosted revenue and margins in 9M17. Moreover, volumes returned to growth in 3Q17. Cleopatra has signed a definitive agreement to acquire a leading hospital (92 beds) in West Cairo, and it is in advanced due diligence on a 170-bed hospital in a major city with high urban density north of Cairo, which will be financed by IPO proceeds, EGP700mn rights issue and internal funds. It has also signed an MoU to enter into a JV brownfield hospital project in Beni Suef (200 beds) south of Cairo, expected to be operational in 2019.
Figure 11: Revenue growth Figure 12: EBITDA margin
2015 2016 9M2017 2015 2016 9M2017 35% 50% 45% 30% 40% 25% 35% 30% 20% 25% 15% 20%
10% 15% 10% 5% 5%
0% 0% IDH EIPICO Cleopatra IDH EIPICO Cleopatra
Source: Company data Source: Company data, EFG Hermes estimates
38 Country Analysis
Egypt 40 Qatar 64
Kenya 45 Saudi Arabia 69
Kuwait 50 UAE 74
Nigeria 55 Vietnam 79
Pakistan 60 Country Analysis
THE YEAR AHEAD - 2018
Egypt: Lower rates and earnings recovery keep Egypt as top pick (OW)
Focus turns to falling interest rates and earnings recovery, especially for non-banks We see a lasting rally in Egypt; market cap to GDP at just 17% is the lowest in EM/DM… …supported by an improved macro backdrop, and new listings MENA Top 20 list picks: COMI, EAST, MNHD, JUFO and ESRS
USD-EGP has peaked, with some slight appreciation recently, concluding the theme of stocks that purely benefitted from devaluation. Our focus now turns to falling interest rates (our economist is expecting 300- 400bps cut over the next 12 months, and T-bill yields have already dropped) which, in our view, will support companies with high local currency debt (Ezz Steel and Juhayna) and in second round effects (possibly with a lag); this will lead local money to rotate out of CDs and T-bills and into real estate (positive for listed real estate names) and high-yielding equities (SKPC). Banks will continue to be profitable, but falling rates will mean the sector could still lag behind the wider market; as such, we are UW on the sector, but we still like COMI as a play on higher private sector credit growth, as falling rates should support capex.
Figure 1: Egypt - Falling yields and interest rates should be Figure 2: Egypt multiple is in line with average of 10x, room supportive for equities and for multiple expansion for expansion possible EGX30 Index (LHS), 12-month Tbill yield (RHS) MSCI Egypt IMI 12-month forward P/E (x) (LHS), market cap to GDP (RHS)
EGX30 (EGP) P/E Ratio (Blended 12 Months) 12-month Tbill Yield Egypt market cap to GDP (%) 15,000 23% 16 60%
14,500 22% 14 50% 14,000 21% 12 13,500 40% 13,000 20% 10 12,500 19% 8 30%
12,000 18% 6 11,500 20% 17% 4 11,000 10% 10,500 16% 2 10,000 15% 0 0% Jul-17 Jan-17 Jun-17 Oct-17 Feb-17 Apr-17 Sep-17 Dec-16 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Mar-17 Aug-17 May-17 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Source: Bloomberg, EFG Hermes Source: Bloomberg, EFG Hermes
We still believe Egypt is amidst a multi-year rally, supported by broad reforms, with many catalysts ahead, including: i) falling interest rates; ii) some EGP appreciation and recovery in real wages; iii) continued recovery in tourism; and iv) increased gas output. Egypt has already posted the strongest earnings growth in MENA YTD, and we expect this will continue going forward as non-banks earnings recover, led by industrials and materials as capacity utilisation picks up, supported by stronger economic growth in 2018 (our economist sees 4.8% vs. 3.8% in 2017 – with potential for upside to our estimates with the recent GDP print of +5%) and increased gas availability.
Egypt’s market cap to GDP stands at 17% vs. an EM weighted average of 68%, we see this as a clear sign that Egypt is trading at very attractive valuations with big potential ahead, which could be supported by more IPOs and privatisation efforts. Egypt’s peak market cap to GDP was 100%; this is unlikely anytime soon, given that many big names were delisted, but a move closer to MENA and EM averages is likely in the medium term.
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Country Analysis
THE YEAR AHEAD - 2018
Over time, we expect Egypt’s weight in EM to increase, as there are three companies in the investable universe with a market cap above USD1bn: EAST, SWDY and TMGH. EAST will likely join MSCI Egypt first, should the number of constituents drop below three, while TMGH and SWDY will need to get closer to the USD2bn+ level before this happens.
Figure 3: Egypt - Earnings growth was the sole driver of total Figure 4: …Earnings recovery should continue for non-banks return YTD… EGX30 drivers of total return (using positive earnings) Rolling TTM ROE for listed Egyptian equities
EPS Growth Dividend Multiple Banks Non-Banks FX Total Return USD 35% 100% 30% 50.9% 25% 50% 30.2% 16.9% 20.6% 20% 0% -22.2% -27.1% 15% -49.5% -50% 10%
5% -100% 0%
-150%
2011 2012 2013 2014 2015 2016 2017 4Q2004 3Q2005 2Q2006 1Q2007 4Q2007 3Q2008 2Q2009 1Q2010 4Q2010 3Q2011 2Q2012 1Q2013 4Q2013 3Q2014 2Q2015 1Q2016 4Q2016
Source: Bloomberg, EFG Hermes calculations Source: Bloomberg, EFG Hermes calculations
41
Country Analysis
THE YEAR AHEAD - 2018
2018: A year of relief, but not without challenges
We see the Egyptian economy enjoying a period of economic relief in 2018, led mainly by the kick-off of an easing monetary cycle as sharp inflationary pressures subside. This will be complemented with other supporting factors, including a sharp increase in natural gas production (providing support to overall economic growth, as well as industrial activity), continued recovery in tourism, which remains well below its peak and gradual recovery in consumption as the shock impact slowly normalises. The gradual nature of reduction in rates and pick-up in consumption are likely to drive an investment recovery, more so in 2019.
Inflation moderation to allow for monetary easing
A favourable base effect, in the absence of major fiscal measures in 2H17/18, is likely to send inflation to mid-teens by mid-2018, providing room for the Central Bank of Egypt (CBE) to commence a much-awaited easing cycle. We believe CBE – which is increasingly stressing its role to anchor inflation expectations – is likely to keep a margin of positive real interest rates in the range of 1-2%, in our view; hence, we expect rate cuts between 300-400bps over the coming 12 months, likely to commence in early 2018.
Figure 5: Inflation deceleration set to allow 3-4% cut in rates Figure 6: Gas production at five-year high even before Zohr Headline inflation, mid-point CBE’s policy rates In mn of tonnes
Headline Corridor Production Y-o-Y change (RHS) 35% 3.5 40%
30% 30% 3.0 25% 20%
20% 10% 2.5 15% 0%
10% -10% 2.0 5% -20%
0% 1.5 -30% Jul-16 Jul-17 Jul-17 Jul-16 Jul-15 Jul-14 Jan-16 Jan-17 Jan-18 Jan-17 Jan-16 Jan-15 Jan-14 Sep-16 Sep-17 Oct-16 Oct-15 Oct-14 Apr-17 Apr-16 Apr-15 Apr-14 Nov-16 Nov-17 Mar-16 Mar-17 Mar-18 May-16 May-17 May-18
Source: CAPMAS, CBE and EFG Hermes estimates Source: CAPMAS
Gas provides growth and external dividends
Higher gas production as new fields enter operation will provide another source of relief for the economy in 2018. Production at West Nile Delta field already commended production in Mar 2017, sending production to a five-year high of 5.2bcf/d. This is set to rise to 6bcf/d by mid-2018 when the super-giant gas field’s first stage of production is ramped up; second stages of production of the two fields are set to further boost production in 2019. By end-2018, additional production will: i) provide a major boost to economic growth (whether directly or indirectly by boosting industrial activity); and ii) almost entirely cover imports of liquefied natural gas, thereby shaving around 12-15% of the current account deficit.
42
Country Analysis
THE YEAR AHEAD - 2018
Tourism – still ample room for recovery
The sector enjoyed a strong rebound after the devaluation and lifting of travel bans/warnings by various European countries, with arrivals rising 53% Y-o-Y and revenues doubling in 9M17. Revenues are likely to hit USD7bn in 2017, going back to 2014 levels, but remaining well below 2010’s peak of USD12.5bn. The Russian travel ban (since 2015) is a key factor behind the sector’s underperformance, relative to history. The removal of the Russian travel ban would provide additional revenues of USD2-2.5bn and remains, therefore, a key upside risk for 2018.
Figure 7: Tourism revenues doubled in 9M17… Figure 8: …despite Russian travel ban Tourism revenues in USDbn Arrivals in thousands
Russia Ex-Russia 4 800
3 600
2 400
1 200
0 0 Jul-15 Jul-16 Jul-17 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Jan-15 Jan-16 Jan-17 Sep-15 Sep-16 Nov-15 Nov-16 Mar-15 Mar-16 Mar-17 May-15 May-16 May-17
Source: CBE Source: CAPMAS
One final, and major, subsidy cut left
Government is yet to push for its final subsidy cut within the IMF programme in mid-2018, likely after the Presidential elections. The target is to reduce the bill by 56% to USD4bn (1.3% of GDP). The rise in oil prices represents a risk for yet a larger subsidy cut, with risks to inflation and growth outlook, in our view.
Figure 9: External adjustment on track Figure 10: Energy subsidies to decline sharply in 2018/19 Current account in USD bn (LHS), in % of GDP (RHS) Energy subsidies in EGP bn (LHS), in % of GDP (RHS)
CA excl grants % of GDP (RHS) Fuel Electricity In % of GDP 0 0% 160 7%
-1% 140 6% (4) 120 -2% 5% (8) 100 -3% 4% 80 -4% 3% (12) 60 -5% 2% 40 (16) -6% 20 1% (20) -7% 0 0% 2013/14 2014/15 2015/16 2016/17 2013/14 2014/15 2015/16 2016/17 2017/18b 2018/19b 2017/18b 2018/19b
Source: CBE, EFG Hermes estimates Source: Ministry of Finance, EFG Hermes estimates
43 Country Analysis
THE YEAR AHEAD - 2018
Egypt Macroeconomic Indicators (Year-end Jun)
2015a 2016a 2017e 2018e 2019e Real Sector Nominal GDP (USDbn) 332.2 332.3 247.6 265.5 307.8 Real GDP growth 4.4% 4.3% 3.8% 4.4% 5.2% Population (mn) 89.0 90.9 92.9 95.0 97.0 Per capita GDP (USD) 3,734 3,655 2,665 2,796 3,171 CPI inflation (%, Avg.) 11.0% 10.2% 23.3% 20.9% 10.5% External Sector Trade balance (USDbn) (39.1) (38.7) (35.4) (36.5) (35.8) Services balance (USDbn) 10.7 6.5 6.8 9.0 11.7 Tourism (USDbn) 7.4 3.8 4.4 6.2 8.4 Suez canal (USDbn) 5.4 5.1 4.9 5.2 5.3 Private transfers (net) (USDbn) 19.2 16.7 17.3 18.2 19.1 Current account balance (USDbn) (12.1) (19.8) (15.6) (14.1) (10.8) Current account balance (% of GDP) -3.7% -6.0% -6.3% -5.3% -3.5% FDI (USDbn) 6.2 6.8 7.7 9.3 10.8 Fiscal Sector Tax revenues (USDbn) 41.6 43.2 33.6 36.0 40.3 Subsidies (USDbn) 20.4 17.0 15.1 14.5 12.6 Primary balance (% of GDP) -3.5% -3.5% -1.2% -0.3% 0.4% Fiscal balance (USDbn) (38.0) (41.7) (26.2) (23.1) (18.8) Fiscal balance (% of GDP) -11.4% -12.5% -10.6% -8.7% -6.1% Net domestic budget sector debt (% of GDP) 76.4% 84.4% 69.0% 60.3% 55.6% Gross external government debt (% of GDP) 14.1% 18.3% 33.9% 27.6% 22.3% Monetary Sector NFAs in the banking system (USDbn) 7.2 (9.8) 2.4 4.4 7.4 Foreign reserves (USDbn) 20.1 17.5 31.3 36.4 39.8 Exchange rate versus USD (Avg.) 7.36 8.15 14.83 17.45 17.50 Benchmark lending interest rate (end of period) 9.8% 12.8% 17.8% 17.3% 14.8% Broad money growth 16.4% 18.6% 38.4% 18.3% 17.2% Private sector credit growth (%, eop) 16.7% 14.2% 37.9% 19.5% 19.5% Private sector credit (% of GDP) 25.5% 26.3% 26.7% 25.3% 26.0% Source: Central Bank of Egypt, Ministry of Finance, CAPMAS and EFG Hermes estimates
44 Country Analysis
THE YEAR AHEAD - 2018
Kenya – Not cheap enough, given growth, asset quality questions
Outperforming FEM peers in 2017, despite politics and macro slowdown Valuation looks attractive, relative to history, but macro environment is at a turning point Can government afford to buy a recovery in 2018? If not, what else could drive growth? Kenyan stocks have performed in line with EM, but have outperformed FEM peers in 2017, a surprising outturn, given political noise, signs of credit stress, and a clear slowdown in the economy – MSCI Kenya rose 34% in USD terms YTD (MSCI EM up 34%, MSCI FEM up 20%). The rise was seen across the market – Safaricom rose more than 50%, and financials also recovered strongly after the rate cap shock in 2016.
Figure 11: Strong 2017 performance on rising turnover… Figure 12: …though foreign appetite suffered in 2H17 Kenya index performance (USD terms), monthly turnover (USD mn) Net monthly foreign buying (USD mn), share in total turnover
Turnover (RHS) NSE Allshare Net foreign buying MSCI Kenya Foreign share in turnover (RHS) 140 250 140 90% 120 80% 130 100 200 70% 80 120 60% 150 60 40 50% 110 20 100 40% 0 100 30% (20) 50 20% 90 (40) (60) 10% 80 0 (80) 0% Jul-16 Jul-17 Jan-16 Jan-17 Jun-16 Jun-17 Oct-16 Oct-17 Feb-16 Feb-17 Apr-16 Sep-16 Apr-17 Sep-17 Dec-15 Dec-16 Nov-16 Jul-17 Jul-16 Jul-15 Jul-14 Jul-13 Mar-16 Mar-17 Aug-16 Aug-17 May-16 May-17 Jan-17 Jan-16 Jan-15 Jan-14 Jan-13 Oct-16 Oct-15 Oct-14 Oct-13 Oct-12 Apr-17 Apr-16 Apr-15 Apr-14 Apr-13
Source: Bloomberg, NSE Source: NSE
Kenyan stocks trade at a slight discount to FM and EM aggregates on a PE basis, but high PB multiples assume consistently high ROEs, and we do not think the market is adequately pricing in risks to growth and the banking system in 2018. The political backdrop improved in late 2017, but the government is facing a real dilemma for 2018 – Kenyans are clamouring for growth after a difficult year, but money is tight. Typically, post-election years see contractions in government spending after expansions ahead of the polls – wages increased 17% Y-o-Y in the year ending Jun 2017, but are set to rise just 1% in the current year (Fig. 16). High debt-to-GDP ratios – flagged as a concern by the IMF in November 2017 – are a constraint on further growth in government spending, though the rate cap has boosted banks’ demand for government paper. Further external borrowing, taking debt-to-GDP ratios above 60%, is likely in 2018.
Officials have indicated that they want to relax restrictions on interest rates introduced in 2016. However, the caps are unlikely to be repealed altogether, and we think that bank loan books are still vulnerable. Newsflow and corporate earnings in 2017 have pointed to problems of overcapacity and/or poor management in some sectors of the Kenyan economy – in this sense, the rate cap is not necessarily the cause of economic stress, but rather the catalyst for a long-overdue reckoning for some companies and sectors. Consolidation in a number of sectors and debt restructurings are likely to continue in 2018.
45 Country Analysis
THE YEAR AHEAD - 2018
Figure 13: PB multiple is still elevated… Figure 14: …but consensus ROE estimates look high Trailing P/B multiple for MSCI Kenya Index with average +/- 1 SD Trailing and expected ROEs for MSCI Kenya Index
5.0 ROE Trailing ROE Expected 40% 4.5
4.0 35% 3.5
3.0 30% 2.5
2.0 25%
1.5
1.0 20% Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-17 Jul-16 Jul-15 Jul-14 Jul-13 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-17 Jan-16 Jan-15 Jan-14 Jan-13 Oct-17 Oct-16 Oct-15 Oct-14 Oct-13 Apr-17 Apr-16 Apr-15 Apr-14 Apr-13
Source: Bloomberg Source: Bloomberg
The outlook is not entirely bleak. Some private sector activity that has been on hold during the extended election season should resume in 2018, and base effects will ensure that agriculture is not such a drag on growth in 2018. Nevertheless, we think that consensus estimates for 2018 are still too high, with banks being a weak link, and, accordingly, we think some contraction is in still-high price-to-book multiples – close to 3.8x PB for the MSCI Kenya aggregate – is necessary to accommodate lower short- and long-term ROE expectations, particularly for banks. We note that EPS momentum has weakened sharply after a strong start to 2017, and we think downside risks to banks earnings, in particular, are likely to weigh on the market in 2018. Within our Kenya coverage, our top strategy pick is Kenol, a high ROE business (28% for 2018e ROAE at 1.5x 2018 PB) that is well-hedged against KES weakness and oil price inflation.
Figure 15: Can Kenya maintain earnings momentum… Figure 16: …given contraction in budgeted spending? 3m change in 12m forward earnings expectations (MSCI Kenya) Gov’t. spending (KESbn) with Y-o-Y change – election years are highlighted
Gov't. spending YoY change (RHS) 15% 2,500 45% 40% 10% 2,000 35% 5% 30% 25% 1,500 0% 20% 15% 1,000 -5% 10% 5% -10% 500 0%
-15% -5% 0 -10% Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18* Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 May-13 May-14 May-15 May-16 May-17 * June-2018 is budgeted spending Source: Bloomberg, EFG Hermes calculations Source: National Treasury
46 Country Analysis
THE YEAR AHEAD - 2018
Slowly recovering from 2017’s political turbulence
The gradual return of political stability, following the win of Uhuru Kenyatta in the presidential election, was confirmed by the Supreme Court and is likely to lead the way for a gradual economic recovery, following a notable slowdown in economic activity in the last few months of 2017. The gradual nature of the recovery will also be dictated by slow growth in the agricultural sector – given the poor raining season – and rising NPLs (likely to leave banks more risk-averse towards lending), which has already been on a decelerating trend. The government also needs to balance its plans for fiscal stimulus to boost economic growth, following the elections, with the rising level of debt and risk for further weakening of the shilling.
Economy to recover gradually from political stalemate
Kenyatta received a major boost when his presidential win received the blessing of the Supreme Court, and there were hints towards a de-escalation of the political turbulence, which has weighed heavily on the country’s confidence and economic activity. While the opposition maintained a defiant tone, we do not see it possessing the tools to extend that tone for long, especially when it comes to financial resources. As such, we think the government is in a position to take initiatives to gradually restore political stability.
Figure 17: Economy activity hit a multi-year low as a result of the political stalemate PMI index; readings below 50 indicate contraction
60
55
50
45
40
35
30
25 Jul-16 Jul-17 Jan-17 Jan-16 Jun-16 Jun-17 Oct-16 Oct-17 Feb-17 Feb-16 Apr-16 Sep-16 Apr-17 Sep-17 Dec-16 Nov-16 Mar-17 Mar-16 Aug-16 Aug-17 May-16 May-17
Source: Bloomberg
Drought, rising NPLs also ensure gradual recovery
In addition to political uncertainty, the economy has also been recently shaken by two key factors: i) a drought that has highly affected agricultural production; and ii) rising NPLs. The agriculture sector, which forms 40% of the economy and employs 30% of the labour force, is likely to continue posting poor growth numbers up until mid-2018, given a poor raining season. Moreover, farmers were discouraged by political uncertainty, which has had an impact on the normal planting season; this should now be reversed as political stability sets in.
In addition, the outlook for credit growth is likely to remain dented, given the continued existence of the rate caps and continuing sharp rise in NPLs. Some big corporates were still falling behind schedule to pay their debt, leading to a further rise in NPL ratio at banks, which already stood at nearly a 10-year high of 9.3% at end-2016. Banks’ increased risk-aversion will likely maintain weak credit growth dynamics.
47 Country Analysis
THE YEAR AHEAD - 2018
Figure 18: Poor raining season weighed on agriculture Figure 19: Rising NPLs to weigh on credit growth Agriculture production growth Non-performing loans
8% 10%
6% 8%
4% 6%
2% 4%
0% 2%
-2% 0% 2010 2011 2012 2013 2014 2015 2016 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Source: Central Bank of Kenya Source: Central Bank of Kenya, EFG Hermes estimates
Fiscal policy – need to balance rising debt and risks of further shilling devaluation
Keeping the aforementioned macro challenges to growth in mind, and taking into consideration a willingness to take initiatives to establish the regime’s position in power further, we see the government likely to continue its expansionary fiscal policy. While such stimulus is needed, we believe the government will likely need to pay attention to building macroeconomic imbalances, which its expansionary fiscal stance has been creating.
Public debt levels have been on the rise, reducing the fiscal space available for more productive, investment- led government spending. Moreover, the government also needs to balance its expansionary fiscal stance, given the building pressure on the shilling. This is especially the case with rising oil prices putting pressure on external balances and risk of higher inflation.
Figure 20: Rising public debt, driven primarily by external debt Public debt in KES trn, in % (RHS)
Domestic External % of GDP (RHS) 5 60%
55% 4
50% 3 45% 2 40%
1 35%
0 30% 2012 2013 2014 2015 2016 Sep-17
Source: Central Bank of Kenya, IMF
48 Country Analysis
THE YEAR AHEAD - 2018
Figure 21: Kenya Macroeconomic Indicators
2013 2014 2015 2016 2017 2018 2019
Nominal GDP (KWSbn) 4,745 5,402 6,261 7,159 8,142 9,142 10,269 Nominal GDP (USDbn) 55.1 61.5 64.0 70.5 78.4 86.0 93.7 Real GDP growth, % 5.9 5.4 5.7 5.8 5.0 5.5 6.0 Population (mn) 41.8 43.0 44.2 45.5 46.7 48.0 49.4 Per Capital GDP, USD 1,319 1,431 1,448 1,552 1,678 1,790 1,898 Annual inflation (average), % 5.7 6.9 6.6 6.3 8.0 5.2 5.0 Primary fiscal balance, % of GDP (3.3) (4.8) (5.3) (5.7) (5.1) (3.2) (2.3) Fiscal balance, % of GDP (5.7) (7.4) (8.1) (8.7) (8.4) (6.6) (5.6) General government gross debt 44.0 48.6 51.6 52.6 56.2 56.0 52.5 Current account balance (USDbn) (4.8) (6.4) (4.3) (3.7) (4.8) (6.0) (6.5) Current account balance, % of GDP (8.8) (10.4) (6.8) (5.2) (6.1) (7.0) (6.9) Source: IMF
49 Country Analysis
THE YEAR AHEAD - 2018
Kuwait: Outperformance should continue in 2018 (OW)
Az-Zour IPO, FTSE inclusion, changes on the frontier remain key themes for Kuwait in 2018 Macro position remains solid, with lowest budget breakeven in the GCC Key catalysts: FTSE flows in Sep 2018; potential addition to MSCI watch list in Jun 2018 MENA Top 20 list picks: NBK, Zain, and Humansoft
Kuwait was the best-performing market in MENA in 2017, delivering a total return of c18% (peak total return was 35% around end-Sep 2017), compared to 1% return for MENA. We still see Kuwait as a top performer in 2018, largely due to the inflows from FTSE trackers expected in Sep 2018 and Mar 2019 (our base case is the event splitting over two phases, which will be confirmed in Mar 2018 by FTSE).
Figure 22: Kuwait outperformed MENA and was in line with Figure 23: The market is trading in line with MENA and EM EM before a sharp pullback. This upside is on the table for 2018 MSCI indices rebased to 100 = 31 Dec 2016 MSCI indices next year P/E (x)
Kuwait EM MENA Kuwait EM MENA 140 15 135 14 130 125 13
120 12 115 11 110 105 10 100 9 95 90 8 Jul-16 Jul-17 Jul-17 Jan-16 Jan-17 Jun-13 Jun-14 Jun-15 Oct-13 Oct-14 Oct-15 Feb-14 Feb-15 Apr-14 Apr-15 Sep-16 Sep-17 Jan-17 Dec-13 Dec-14 Jun-17 Nov-16 Oct-17 Feb-17 Mar-16 Mar-17 Sep-17 Apr-17 Aug-13 Aug-14 Aug-15 Dec-16 May-16 May-17 Mar-17 Aug-17 May-17
Source: Bloomberg, MSCI, EFG Hermes Source: Bloomberg, MSCI , EFG Hermes
We think the story still has more room to run in 2018, and the fact that the market took a breather lately is a good sign, in our view, as opposed to overheating following the FTSE upgrade decision. The macro story remains solid, the lowest budget breakeven in the GCC, and recent news on government resignation does not seem to be a major event and is in line with the history of Kuwaiti politics and the dynamic between government and Parliament. We are still comfortable with the macro in general and are encouraged by the pick-up in project awards and capital spending we have seen since 2013. Foreign institutions are still net Buyers, and their level of participation and that of GCC investors is at a multi-year high. We think there is still upside in the banks (NBK is our top pick), and we like select names – like Humansoft. Zain (the largest telco) had a great run, largely driven by the Omantel hefty premium, but has given up a lot of gains recently; however, it remains attractive from a yield perspective and is not particularly pricey when compared to other MENA telcos.
There are a few developments to look forward to for the market itself in 2018: i) technical listing of Az Zour power plant (a power and water PPP project) set for 1Q18 (which may bring around USD200mn in new liquidity into the market, we think); ii) potential listing of Boursa Kuwait itself (for which there is no set date); iii) FTSE EM Upgrade set for Sep 2018 (the number of phases for the event will be confirmed in Mar 2018. Our base case is two phases, Sep 2018 and Mar 2019, with Kuwait accounting for 0.5% of FTSE EM, cUSD800mn+ of passive inflows); and iv) potential upgrade of Argentina (bigger weight for Kuwait on MSCI FM) in Jun 2018 by MSCI and potential addition of Kuwait to the watchlist for a potential EM upgrade, following the market reforms implemented in 2017 and others scheduled for 4Q17/early 2018.
50 Country Analysis
THE YEAR AHEAD - 2018
Figure 24: Multi-year high GCC and foreign inflows in 2017 Figure 25: Argentina upgrade could also support Kuwait Net institutional flows in USDmn by citizenship up to Oct 2017 MSCI FM Index weights (%)
Foreign GCC 1000 25%
800 20%
600 15%
400 10%
200 5%
0 0% (200) OMAN SERBIA KENYA TUNISIA NIGERIA KUWAIT JORDAN ESTONIA SENEGAL CROATIA BAHRAIN VIETNAM LEBANON SLOVENIA (400) ROMANIA SRI LANKASRI LITHUANIA MAURITIUS MOROCCO ARGENTINA BANGLADESH KAZAKHSTAN IVORY COAST 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Boursa Kuwait, EFG Hermes estimates Source: MSCI, EFG Hermes estimates
We note the estimates for FTSE flows below are subject to change, depending on liquidity from Dec 2017 to Jun 2018, and FTSE’s decision in Mar 2018 on whether or not the event will be done in phases. Our view is that the upgrade will be done in two phases. Should the event be done over only one phase, the total flows estimates would be cut by half as some key names, such as NBK, might not pass liquidity requirements; this, however, is not our base case scenario.
Figure 26: FTSE Kuwait’s EFG Hermes estimated list, assuming a two-phase inclusion Using prices as of end-Nov 2017, liquidity tested from Dec 2016 to Nov 2017 assuming two phases Est. FTSE China A inclusion Est. flows 3MADVT Flows / ADVT Ticker index weight (%) (USDmn) (USDmn) (x) NBK KK 0.13% 231 7.1 32.5 KFIN KK 0.10% 171 9.2 18.5 ZAIN KK 0.07% 117 12.2 9.6 AGLTY KK 0.04% 63 3.3 19.3 GBK KK 0.02% 40 2.8 14.1 MABANEE KK 0.02% 38 1.0 37.8 BOUBYAN KK 0.02% 32 1.0 33.1 HUMANSFT KK 0.02% 28 1.4 19.3 BURG KK 0.01% 22 0.7 32.0 NIND KK 0.01% 15 2.1 7.4 ALIMTIAZ KK 0.01% 14 4.5 3.1 KIB KK 0.01% 12 1.2 10.4 WARBABAN KK 0.01% 11 0.6 19.4 MEZZAN KK 0.01% 10 0.4 23.8 Total 0.5% 805 47.48 17.0 Source: FTSE, EFG Hermes estimates
.
51 Country Analysis
THE YEAR AHEAD - 2018
MENA’s most stable growth story
We expect Kuwait to maintain its position as one of MENA’s most stable – though not strongest – growth stories, thanks to a strong fiscal position that is enabling the government to continue expanding investment spending, even at time of low oil prices. Growth composition, however, is likely to be tilted more towards consumption, which is showing a good recovery. Investment is likely to slow down, compared to the previous couple of years, due to delays in a number of key projects. The return of an unhealthy relation between the National Assembly and the government is also likely to weigh slightly on confidence and postpone fiscal reforms.
Stable growth outlook
We expect Kuwait to maintain its stable growth outlook, albeit with increasing weight of consumption in driving growth. Private consumption has been recovering in 2017, and we expect this trend to continue, aided by low inflation and real growth in wages. The fact that fiscal measures, mainly value-added tax (VAT) and, to a lesser degree, excise taxes will not be implemented until end of year will also support consumption growth.
Figure 27: Consumption is showing good recovery… Figure 28: …aided by favourable inflation environment Annual change in value of transactions by plastic cards Headline inflation
20% 5%
15% 4%
10% 3%
2% 5%
1% 0%
0% -5% Jul-17 Jul-16 Jul-15 Jul-14 Jan-17 Jan-16 Jan-15 Jan-14 Oct-16 Oct-15 Oct-14 Apr-17 Apr-16 Apr-15 Apr-14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: Central Bank of Kuwait Source: Central Statistical Bureau
Investment is likely to continue driving growth, albeit at a slower pace than the previous two years, largely due to delays and revisions of a few government projects. Project awards dropped 41% Y-o-Y in 10M17, on top of a 35% decline in 2016, though partially due to some large one-off project awards in 2014/15.
Key amongst the delayed project was the USD2.5bn Al Zour Phase II (Al-Zour North 2 independent water and power project), resulting in a major hit to awards this year. The project was presumably pulled out because of technical and legal deviations. The Kuwait Authority for Partnership Projects is now planning to integrate Al Zour North 2 and 3 into one project. An initial date has been set in April.
Nevertheless, some other important projects have been awarded, including Kuwait’s new airport, a couple of power plants and oil and gas projects. These projects are set to ensure a stable credit growth outlook for the banking sector of 4-6%.
52 Country Analysis
THE YEAR AHEAD - 2018
Figure 29: Delays in some projects weighed on project awards Figure 30: Gov’t investment slowed because of delays Project awards in USD bn Public investment in KWD bn (LHS), Y-o-Y % change (RHS)
30 Public inv Y-o-Y change (RHS) 2.5 16% 25 12% 2.0 20 8% 1.5 15 4% 1.0 10 0% 0.5 -4% 5
0.0 -8% 0 2012 2013 2014 2015 2016 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 10M16 10M17
Source: MEED Projects Source: Ministry of Finance
Strong fiscal position ensures stability
Kuwait has maintained the strongest fiscal position in the GCC, and rising oil prices only mean further support to the strong fiscal position. The country maintains one of the GCC’s lowest budget break-even oil price at USD58 in 2018 (number inflated in 2017/18, given lower oil production as part of OPEC agreements), with overall fiscal balance set to turn into surplus starting 2019.
The government embarked on cost-saving initiatives that, together with lower oil prices, resulted in cUSD10bn in savings in the past two years. These included raising fuel prices and cutting some transfers, especially to expatriates (including the universal health insurance). Government has also recently adopted a KWD20bn expenditure ceiling over the next few years in order to instate fiscal discipline.
The government is still, however, expected to face major funding needs over the coming few years, given its reliance on a narrower definition of fiscal balances, which excludes 10% of revenues for the Future Generations Fund and excludes investment income. According to this presentation, the treasury is set to print double-digit deficits in the next two-three years. IMF recently estimated that gross financing needs would stand at USD100bn in the next five years, which are expected to be financed through a mix of local and external debt, as well as drawing from the General Reserve Fund.
Domestic and regional politics may weigh on sentiment
Political risk has returned to the forefront of Kuwait’s outlook, with renewed tensions between Parliament and government – leading to the first resignation by a government in a few years – as well as escalation in regional tensions between Saudi Arabia and Iran.
While the economy has become, over the years, relatively immune to such tensions between the executive and legislative powers, these are still likely to weigh slightly on sentiment. As for regional tensions, Kuwait’s demographics, where its population is composed of 20-30% Shi’ites, also raises risks for political stability, an issue that has been seriously considered by the Emir when he recently asked Members of Parliament to avoid any speech that could inflame tensions.
53 Country Analysis
THE YEAR AHEAD - 2018
Kuwait Macroeconomic Indicators (Year-end Dec)
2014a 2015a 2016e 2017e 2018e Real Sector Nominal GDP (USDbn) 162.6 114.0 106.2 119.8 132.8 Real GDP growth 0.5% 1.8% 4.5% -0.8% 2.6% Real non-oil growth 4.8% 3.5% 3.3% 3.5% 3.5% Population (mn) 4.1 4.2 4.4 4.5 4.6 Per capita GDP (USD) 39,728 26,894 24,297 26,606 28,610 Oil price (Brent, USD/b Avg.) 98.9 52.3 44.1 55.0 60.0 CPI inflation (%, Avg.) 2.9% 3.3% 2.7% 2.5% 2.5% External Sector Trade balance (USDbn) 77.4 28.0 21.7 29.3 33.1 HC exports (USDbn) 97.5 48.8 42.5 50.9 56.6 Non-HC exports (USDbn) 7.2 6.5 5.5 5.7 6.0 Services balance (USDbn) (16.9) (17.8) (16.8) (17.7) (19.0) Net transfers (USDbn) (20.6) (16.5) (16.0) (16.3) (17.4) Current account (USDbn) 53.8 8.5 2.1 7.3 9.6 Current account (% of GDP) 33.1% 7.4% 2.0% 6.1% 7.3% FDI (USDbn) (13.7) (5.2) (1.5) (2.0) (2.5) Fiscal Sector HC revenues (USDbn) 79.0 40.1 35.0 41.8 46.6 Other revenues (USDbn) 23.2 18.5 14.6 15.9 18.3 Spending (USDbn) 74.1 60.6 53.3 55.8 62.3 Primary balance (% of GDP) 17.3% -2.1% -4.2% 0.6% 0.9% Fiscal balance (USDbn) 26.5 (2.0) (3.8) 2.0 2.5 Fiscal balance (% of GDP) 17.3% -1.8% -3.6% 1.7% 2.0% Budget breakeven oil price (USD/b) 69.0 77.3 66.9 73.6 77.4 Net domestic claims on government (% of GDP) -8.0% -15.0% -17.1% -16.2% -15.5% Gross external government debt (% of GDP) 22.9% 35.2% 43.0% 40.8% 39.3% Monetary Sector NFAs in the banking system (USDbn) 54.5 51.5 58.5 67.5 75.1 Est. sovereign wealth assets (USDbn) 592.0 592.0 596.5 600.6 605.4 Exchange rate versus USD (Avg.) 0.28 0.30 0.30 0.30 0.30 Benchmark lending interest rate (end of period) 2.0% 2.0% 2.5% 3.0% 3.0% Broad money growth 2.9% 1.7% 2.0% 3.7% 2.5% Private sector credit growth (%, eop) 6.2% 8.0% 7.8% 7.8% 8.0% Private sector credit (% of GDP) 20.1% 31.0% 35.9% 34.2% 33.5% Source: Central Bank of Kuwait, Ministry of Finance, IMF and EFG Hermes estimates
54 Country Analysis
THE YEAR AHEAD - 2018
Nigeria – The glass is half full: oil price recovery helps; clarity needed on macro
NGN move reduced pressure in 2017, but market is out of steam Earnings momentum is strong, and ROEs should rise in 2018 Looking for clarity on reforms and unified FX rate, ideally before 2019 elections Nigerian stocks lost momentum in 2H17 after a very strong start to the year. MSCI Nigeria rose 30%, in USD terms, in 1H17, following the introduction of the investors/exporters FX window in April, but fell slightly in 2H17, underperforming the MSCI EM and FEM aggregates. This has left the market, once again, trading at a wide discount to peers. Our aggregate valuation measure – combining dividend yield, PB, and trailing and forward PE multiples – shows Nigerian stocks trading at roughly half a standard deviation below their long-term discount to EM peers. Strong performance by Vietnamese stocks in late 2017 has left Nigeria trading at an even deeper discount to FEM peers.
Figure 31: A re-rating rather than a rally in 2017… Figure 32: ...leaves Nigeria looking cheap on a relative basis MSCI Nigeria Index, 10-day ADVT (RHS) MXNI premium to MXEF: composite of PEs, PB & DY, with avg. and +/- 1SD
ADVT (USDmn, RHS) MSCI Nigeria 1.4 210 20
190 18 1.2 16 170 14 1.0 150 12 0.8 130 10 8 110 0.6 6 90 4 0.4 70 2 50 0 0.2 Jul-12 Jan-09 Jan-16 Jun-15 Oct-10 Oct-17 Feb-13 Jul-16 Jul-17 Sep-13 Apr-14 Dec-11 Nov-14 Mar-10 Mar-17 Aug-09 Aug-16 Jan-16 Jan-17 May-11 Sep-16 Sep-17 Nov-15 Nov-16 Nov-17 Mar-16 Mar-17 May-16 May-17
Source: Bloomberg Source: Bloomberg, EFG Hermes calculations
We think that the market ran out of steam in 2H17 because reform momentum is still weak, and there is unlikely to be clear guidance on government policy until after elections in 2019. The change in FX policy in 1H17 was a welcome step, but there is still no fully unified NGN rate. It is notable that the strong recovery in oil prices (Brent is up 30%) in 2H17 has not been reflected on equity prices, despite the implied improvement in CA dynamics and asset quality. MSCI Index performance was dragged down by heavyweight Nigeria Breweries, which was dropped from the MSCI FM100 Index in November, but even the performance of heavyweight banks Guaranty and Zenith (the two largest in the MSCI Nigeria) was uninspiring for much of 2H17.
55 Country Analysis
THE YEAR AHEAD - 2018
Figure 33: Breweries drag index lower in 2H17 Figure 34: 2017 FX move brings REER back to long-run average 2017 performance (100 = 31 Dec 2016) – MXNI, NB, major banks Real Effective Exchange Rate (official NGN and NAFEX) with LT avg. +/- 1SD
MSCI Nigeria NB Guaranty+Zenith Official NAFEX 190 130
170 120 110 150 100
130 90
110 80 70 90 60
70 50 Jul-17 Jul-01 Jul-06 Jul-11 Jul-16 Jan-17 Jun-17 Oct-17 Oct-17 Feb-17 Sep-17 Apr-17 Jan-99 Jan-04 Jan-09 Jan-14 Dec-16 Nov-17 Mar-17 Sep-00 Sep-05 Sep-10 Sep-15 Aug-17 May-17 May-17 Nov-99 Nov-04 Nov-09 Nov-14 Mar-03 Mar-08 Mar-13 May-02 May-07 May-12 May-17
Note: Guaranty+Zenith – equal-weights of two largest banks in MSCI Nigeria Source: Bloomberg, EFG Hermes calculations Source: Bloomberg, EFG Hermes calculations
However, earnings momentum has been strong for most of 2017, with the three-month change in consensus 12m forward EPS running at 10% in recent late 2017. Expected ROEs appear to have bottomed out at end-2016 and have been on a sustained uptrend throughout the year to reach around 20% (up from 15% at end-2016). The improved outlook has left the market trading at attractive levels, and we recommend buying selected banking stocks at current levels to benefit from an improvement in asset quality in 2018. Our picks are First Bank, where we think that falling NPLs will reduce the risk of dilution and drive further re-rating in 2018, and Zenith Bank, where we see resilient NIMs in 2018 and a strong capital base that could support future growth.
Figure 35: Solid momentum in earnings expectations in Figure 36: …driving expected ROEs above 20% 2017… Three-month change in 12m forward consensus EPS for MSCI Nigeria Trailing and forward ROE for MXNI Index
ROE Trailing ROE Expected 20% 30%
10% 25% 0%
-10% 20%
-20% 15% -30%
-40% 10% Jul-17 Jul-16 Jul-15 Jul-14 Jul-13 Jul-17 Jul-16 Jul-15 Jul-14 Jul-13 Jan-17 Jan-16 Jan-15 Jan-14 Jan-13 Oct-17 Oct-16 Oct-15 Oct-14 Oct-13 Jan-17 Jan-16 Jan-15 Jan-14 Jan-13 Apr-17 Apr-16 Apr-15 Apr-14 Apr-13 Oct-17 Oct-16 Oct-15 Oct-14 Oct-13 Apr-17 Apr-16 Apr-15 Apr-14 Apr-13
Source: Bloomberg, EFG Hermes calculations Source: Bloomberg, EFG Hermes calculations
56 Country Analysis
THE YEAR AHEAD - 2018
Some upside risks, but not yet out of the woods
Macro conditions are set for further improvement in 2018, aided by a number of factors, including: i) picking up of oil production (pending continued gains on the security side); ii) rising oil prices; and iii) decelerating inflation, which is likely to make room for monetary easing. Such improvement, however, is still confined, in light of limited signs of willingness to press ahead with much-needed structural reforms, predominantly a conversion of various FX rates in the country, boosting non-oil revenues and increasing public investment spending. Delays in tackling these issues will continue to limit upside risks to Nigeria’s economy.
Higher oil prices, production positive for growth
The recent rise in oil production, with room for additional gains, pending further improvement in security conditions, aided by the recent increase in oil prices, are likely to provide a much-needed boost for Nigeria’s macro conditions. This, and the increasingly active foreign exchange window for portfolio investors, have indeed boosted the country’s foreign reserves. In addition, the government is planning next year to rely more on foreign borrowing, which would reduce borrowing costs and boost foreign reserves. As such, we expect further improvement in liquidity conditions to filter through into the real economy.
Figure 37: Crude oil production recovered in 2017, but still Figure 38: Higher oil production, prices and portfolio investors way below potential window boost FX reserves Crude production in thousands of barrels Foreign reserves in USD bn
Crude production 2004-2014 avg 2200 40
2000 30 1800
1600 20
1400 10 1200
1000 0 Jul-14 Jul-15 Jul-16 Jul-17 Jan-14 Jan-15 Jan-16 Jan-17 Jul/17 Jul/16 Jul/15 Jul/14 Oct-14 Oct-15 Oct-16 Oct-17 Apr-14 Apr-15 Apr-16 Apr-17 Jan/17 Jan/16 Jan/15 Jan/14 Oct/16 Oct/15 Oct/14 Apr/17 Apr/16 Apr/15 Apr/14
Source: OPEC Source: Central Bank of Nigeria
Room for limited rate cuts in 2018
Further disinflation should also be another positive factor for the economy going into 2018. Inflation peaked at 18.7% Y-o-Y in Jan and has been on a sustained slowdown since then. Monthly inflation eased to 0.9% so far in 2H17 vs. 1.5% in 1H17. The pace of disinflation, however, has been quite slow, largely as a result of rising food prices for most of 2017 (annual food inflation accelerated to 20.3% in Oct vs. 17.8% in Jan).
With further disinflation, aided partially by stabilising FX conditions, following the introduction of NAFEX, expectations are rife for some degree of monetary easing in 2018, likely in the range of 100-150bps. The magnitude of rate cuts will be clearly limited by the Central Bank’s key monetary policy target of maintaining the Naira’s stability.
57 Country Analysis
THE YEAR AHEAD - 2018
Figure 39: Inflation on a moderate trend Figure 40: Weak GDP recovery dominated by the oil sector In % In weighted % change
M-o-M Y-o-Y Oil Non-oil Total 3.0% 20% 8% 18% 2.5% 16% 6% 14% 2.0% 4% 12%
1.5% 10% 2% 8% 1.0% 6% 0% 4% 0.5% 2% -2% 0.0% 0% -4% Jul-15 Jul-16 Jul-17 Jan-15 Jan-16 Jan-17 Sep-15 Sep-16 Sep-17 Nov-15 Nov-16 Mar-15 Mar-16 Mar-17 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 May-15 May-16 May-17
Source: National Bureau of Statistics Source: National Bureau of Statistics
Major macro improvement will only be linked to structural reforms
Despite gradual improvement in the country’s macroeconomic conditions, we are unlikely to see major improvements that could bring the economy closer to its potential growth. Indeed, non-oil growth continued to contract in 2017, despite some general macro gains. This is mainly due to the absence of a strong will to tackle the country’s structural economic problems, most notably resolving the severe misalignment in the foreign exchange regime. Maintaining a policy of stable Naira has been clearly the main drag on economic activity since oil prices collapsed in 2014.
Structural fiscal reforms are key to helping the economy realise its growth potential. The state needs to boost non-oil revenues to provide fiscal flexibility amidst low oil prices. So far, efforts have notably underperformed any promises, especially at the level of tax collection. The state has also been unable to boost capital expenditure, as it promised, and provide much-needed countercyclical spending, thereby contributing a heavily depressed growth environment.
Figure 41: Government failed to boost non-oil revenues… Figure 42: …and underperformed on investment spending In Naira trillion, in % change (RHS) In Naira bn, in % change (RHS)
Non-oil revenue Y-o-Y change (RHS) Public inv Y-o-Y change (RHS) 4 20% 1000 20%
10% 800 3 10% 0% 600 2 0% -10% 400 -20% 1 -10% 200 -30%
0 -20% 0 -40% 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2016P 2016P
Source: IMF Source: IMF
58
Country Analysis
THE YEAR AHEAD - 2018
Figure 43: Nigeria macroeconomic indicators
2013 2014 2015 2016 2017 2018 2019
Nominal GDP (NGNbn) 81,010 90,137 95,178 102,575 120,192 140,331 163,349 Nominal GDP (USDbn) 515.0 568.5 493.8 405.4 394.8 460.7 536.3 Real GDP growth, % 5.4 6.3 2.7 (1.6) 0.8 1.9 1.7 Population (mn) 169.3 173.9 178.7 183.6 188.7 193.9 199.2 Per Capital GDP, USD 3,042 3,268 2,763 2,208 2,092 2,376 2,692 Annual inflation (average), % 8.5 8.0 9.0 15.7 16.3 14.8 14.3 Primary fiscal balance, % of GDP (2.3) (2.1) (3.4) (4.7) (5.0) (4.5) (4.3) Fiscal balance, % of GDP (1.3) (1.1) (2.4) (3.5) (3.9) (3.2) (3.0) General government gross debt 12.4 12.5 13.2 17.6 21.3 22.8 23.8 Current account balance (USDbn) 19.0 0.9 (15.8) 2.7 7.7 4.7 5.0 Current account balance, % of GDP 3.7 0.2 (3.2) 0.7 1.9 1.0 0.9
Source: IMF
59 Country Analysis
THE YEAR AHEAD - 2018
Pakistan – More optimistic for 2018, but awaiting catalysts
Upgrade experience matched the playbook – MXPK down 28%YTD, 34% from 2017 peak Valuations looking better at 1.4x PB, 8.5x 12m forward earnings, implying big country risk premium… … politics and FX are still the main hurdles – accumulate HBL, MCB, OGDC and INDU As expected, 2017’s MSCI upgrade was not the happiest experience for the Pakistani market, which followed the typical upgrade cycle in delivering a 34% drop in USD prices in the period following the upgrade, having risen 17% in USD terms in the period between the upgrade decision date and effective date. In our view, pre-upgrade rallies tend to leave markets vulnerable to a sell-off – the reasons for post- upgrade disappointment are different, but the general pattern is the same. In Pakistan’s case, catalysts for the correction included an aborted PKR devaluation, political turmoil and a significant fine paid by HBL. 2017 performance relative to EM and FEM aggregates has been dismal, and we now believe downside for Pakistan stocks is relatively limited.
Figure 44: Pakistan followed typical post-upgrade pattern… Figure 45: …leaving MXPK at a deep discount to EM MSCI UAE, Qatar & Pakistan (rebased 100 on MSCI EM effective date = 0) MXPK premium to MXEF – composite of PEs, PB & DY, with avg. and +/- 1SD
UAE Qatar Pakistan 1.0 120 0.9 110
100 0.8
90 0.7 80 0.6 70
60 0.5
50 0.4 40 0 Jul-12 Jan-09 Jan-16 Jun-15 Oct-10 Oct-17 Feb-13 30 60 90 Sep-13 Apr-14 Dec-11 Nov-14 Mar-10 Mar-17 Aug-09 Aug-16 (90) (60) (30) May-11 120 150 180 210 240 270 300 330 360 (360) (330) (300) (270) (240) (210) (180) (150) (120)
Source: Bloomberg Source: Bloomberg, EFG Hermes calculations
The sell-off has left Pakistani stocks trading at a deep discount to peers, on the basis of our compound valuation measure, bringing the market back to levels last seen in 2012. The discount to EM is now roughly one full standard deviation below long-term averages, with the MXPK trading at 8.5x 12m forward earnings, in spite of strong expected earnings growth. Recent underperformance, relative to peers, has been driven by the PML-N government’s perceived weakness, crystalised in ongoing investigations into PML-N officials and government’s showdown with the Tehreek-i-Labaik party in Nov 2017.
With the market now trading at its lowest levels since 2009 on a P/B basis, we think that investors should begin to accumulate large-cap names, while keeping an eye on political and FX (in a press release issued on 8 Dec, the central bank stated that it is looking to devaluation to reduce pressure from the rising current account deficit) developments. We recommended four stocks for local investors – HBL, MCB, OGDC and INDU – in mid-October 2017, and we keep these picks going into 2018. Banks will be the major contributors to earnings growth for our coverage in 2018 and 2019, and they offer reasonable value at these levels. Base effects explain a lot of this growth in 2018 after HBL’s fine in 2017, but earnings growth across the sector will be supported by strong credit growth and rising interest rates (we assume SBP rates rising 25bps in 2018 and 50bps in 2019). OGPC is supported by oil prices and offers a hedge to PKR weakness, while INDU is the best-in-class car assembler.
60 Country Analysis
THE YEAR AHEAD - 2018
Figure 46: ROEs have likely bottomed out with HBL fine in Figure 47: Financials drive earnings & ROE recovery in 2018-19 2017 Trailing and forward ROE for MXPK Index Drivers of 2018 and 2019 earnings growth for EFG Hermes coverage
ROE Trailing Financials Energy Materials ROE Expected Discretionary Industrials Total 35% 25%
20% 30% 15%
25% 10%
5% 20% 0% 15% -5%
10% -10%
-15% Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 2017 2018 2019
Source: Bloomberg, EFG Hermes calculations Source: EFG Hermes estimates
While ROEs have bottomed out and earnings growth looks relatively strong for 2018 and 2019, we think the market will take time to recover from the 2017 sell-off because issues that helped to trigger the post- upgrade sell-off have not been resolved. The BoP remains under pressure: Pakistan’s REER is 13% above its longer-term average, and the recent rise in oil prices is a source of downside risk to the trade balance. Foreign investors are likely to await a decisive FX move before buying the market.
Pakistan’s political overhang has not gone away. The ruling PML-N appears determined to fight the 2018 election with key figures still in place, but a hung Parliament appears to be an increasingly likely scenario. We think difficult decisions on the economy may have to wait, at least until the transitional government is in place in mid-2018. Moreover, we think that, barring any major improvement in BoP dynamics, the longer an FX move is delayed, the bigger such a move is likely to be.
Powerful multi-year macro themes are still in place in Pakistan: rising power generation above all, but also better infrastructure and improved security. However, we do not believe the market can price in such themes until political and FX hurdles are cleared. We are Neutral on the Pakistan market in an FEM context.
Figure 48: Foreigners are still wary despite the sell-off… Figure 49:...but the FX situation has finally been recognised by the State Bank of Pakistan MSCI Pakistan (rebased 100 = June 2016), monthly foreign buying (USD mn) 12m non-oil trade balance (USD bn), Real Effective Exchange Rate (RHS)
Foreign Net Buying (RHS) MSCI Pakistan Non-oil trade REER (RHS) 5 130 130 200 150 120 0 100 120 110 50 (5) 100 0 110 90 (10) (50) 80 (100) Currency 100 (15) getting 70 (150) stronger 60 (200) (20) 90 Jul-17 Jul-16 Jul-15 Jan-17 Jan-16 Jan-15 Feb-10 Feb-13 Feb-16 Sep-17 Sep-16 Sep-15 Nov-17 Nov-16 Nov-15 Nov-07 Nov-10 Nov-13 Nov-16 Mar-17 Mar-16 Mar-15 Aug-08 Aug-11 Aug-14 Aug-17 May-17 May-16 May-15 May-09 May-12 May-15
Source: Bloomberg, KSE Source: SBP, Bloomberg
61
Country Analysis
THE YEAR AHEAD - 2018
Political tensions delaying much needed macro reforms
Pakistan is set to maintain a favourable growth outlook underpinned by investments in the China Pakistan Economic Corridor (CPEC) and a low interest rate environment which is set to continue boosting strong domestic demand growth. The economy is likely to face key headwinds in 2018, most notably political tensions/uncertainty ahead of elections, rising interest rates as well as rising oil prices. In the meantime, these political uncertainties are likely to delay tackling rapidly building macro imbalances – especially an overvalued currency – as politicians await election results before taking action.
Strong growth fundamentals…
Healthy domestic demand and investments in infrastructure – mostly thanks to CPEC – is driving a buoyant growth environment. Growth accelerated to a decade-high of 5.7% in FY 2016/17 and is largely expected to maintain this strong performance in the medium-term (though conditional on some macro adjustment reforms discussed below).
A strong growth outlook is also underpinned by tame inflation, likely to continue remaining in single digits in 2018 and a low interest rate environment. The latter is likely to continue driving a multi-year high credit expansion that is mostly concentrated in manufacturing and construction. Improved access to electricity is also boosting industrial production and private consumption.
Figure 50: Economy delivering strong levels of growth Figure 51: Double-digit credit growth Weighted growth of real GDP In Y-o-Y % change Private cons Public cons Investment Credit to private sector Businesses Net exports Real GDP Households 25% 10%
8% 20% 6%
4% 15%
2% 10% 0%
-2% 5% -4% 0% 2011/12 2012/13 2013/14 2014-15 2015-16 2016-17P Jul-17 Jul-16 Jul-15 Jul-14 Jul-13 Jan-17 Jan-16 Jan-15 Jan-14 Jan-13 Oct-16 Oct-15 Oct-14 Oct-13 Apr-17 Apr-16 Apr-15 Apr-14 Apr-13
Source: State Bank of Pakistan Source: State Bank of Pakistan
…But macro imbalance clock is ticking
Pakistan’s rapid economic growth has been also accompanied by an unhealthy combination of a sharp widening in twin deficits and an inflexible monetary policy. The current account deficit doubled in FY 2016/17 to USD4bn, driven by double-digit growth in imports, stagnant exports and remittances’ inflows. In parallel, the fiscal deficit also widened to a four-year high of 5.8% of GDP in FY 2016/17, largely because of an underperformance in tax collection and double-digit expansion in expenditure.
The government has been plugging the external deficit through short-term external borrowing, while keeping the PKR pegged to the USD has made the currency one of the most expensive in Frontier and Emerging markets. The SBP, however, on 8 December started a much-awaited currency adjustment, allowing the currency to start finding a new equilibrium. We expect such adjustments to last a few weeks until the USD-PKR leads to more balanced external balances. 62 Country Analysis
THE YEAR AHEAD - 2018
Figure 52: Fiscal deficit highest in four years Figure 53: Current account deficit doubled in 2016/17 Primary and fiscal balances in % of GDP In USD bn, in % of GDP (RHS)
Primary balance Fiscal balance Current account balance % of GDP (RHS)
0% 0 0%
(2) -2% -1% (4) -4% (6) -2%
-6% (8) -3% (10) -8% -4% (12)
-10% (14) -5% 2011/12 2012/13 2013/14 2014-15 2015-16 2011/12 2012/13 2013/14 2014-15 2015-16 2016-17P 2016-17P
Source: Ministry of Finance Source: State Bank of Pakistan
Short-term headwinds: Political tensions, rising oil prices
The favourable growth outlook is likely, though, to face a number of headwinds in 2018. Key amongst those are political tensions as we approach general elections in the summer of next year. The impeachment of Nawaz Sharif has raised uncertainty about PML-N’s likelihood in winning a majority in next year’s elections. The party is now subject to internal struggles between a camp that wants to keep Sharif at the helm of the party and another looking for his successor to keep good chances for the party to win in the upcoming elections.
We expect this period of uncertainty to sustain up to the election period. While we do not expect major impact on economic activity during that time, we do not foresee any major structural reforms by the current administration in order to not lose popularity ahead of elections.
Rising oil prices is another headwind to face the country with negative implications on an already-widening external deficit and inflation. With risks to the latter mainly tilted to the upside – considering widening deficits and an overvalued currency – we expect a higher interest rate environment going into 2018.
Figure 54: Pakistan macroeconomic indicators
2013 2014 2015 2016 2017 2018 2019
Nominal GDP (PKR bn) 22,386 25,169 27,443 29,103 31,862 35,305 39,391 Nominal GDP (USD bn) 231.2 244.4 270.6 278.9 N/A N/A N/A Real GDP growth, % 3.7 4.1 4.1 4.5 5.3 5.6 6.0 Population (mn) 183.6 186.2 189.9 193.6 197.3 201.2 205.1 Per Capital GDP, USD 1,260 1,312 1,425 1,441 N/A N/A N/A Annual inflation (average), % 7.4 8.6 4.5 2.9 4.1 4.8 5.0 Primary fiscal balance, % of GDP (3.9) (0.3) (0.5) (0.1) (1.4) (1.6) (1.1) Fiscal balance, % of GDP (8.4) (4.9) (5.3) (4.4) (5.7) (5.4) (5.5) General government gross debt 63.9 63.5 63.3 67.6 68.0 68.7 68.5 Current account balance (USD bn) (2.5) (3.1) (2.7) (4.9) N/A N/A N/A Current account balance, % of GDP (1.1) (1.3) (1.0) (1.7) (4.0) (4.9) (4.6) Source: IMF
63 Country Analysis
THE YEAR AHEAD - 2018
Qatar: No clear catalysts in sight; boosting FOLs could drive flows (UW)
Hard to see strong GCC and active foreign bid without political resolution despite low valuations Increasing FOLs to 49% for key names could catalyse the market with cUSD1.25bn passive inflows MENA Top 20 list picks: QEWS and QNBK. Keep an eye on QATI and QGTS for Index events in 1H18
The Qatari market is at a multi-year low after a 20% drop in DSM in 2017. Valuation is the most attractive in some time; however, a strong and lasting recovery from current levels is unlikely without an improvement in the political environment with the rest of the GCC, in our view. Bloomberg’s consensus and our estimates for companies under our coverage expect 12% earnings growth in 2018 – 12-month forward EPS for the DSM Index was revised down 9% in 2017 YTD. Qatar has enough reserves to sustain the embargo for now, but it is not without a cost. In the long term, the market can benefit from higher LNG production (and a healthy demand in the LNG market), but this is not a 2018, or even 2019, story. In the meantime, non-oil growth ahead of WC2022 should remain supportive but is well below the desired level, as capital spending is not as strong as initially anticipated. This – combined with a lack of GCC investors’ interest in the market and long-standing UW position by active foreign investors – leaves the Qatari market with very few clear catalysts in 2017. Having said that, there is a guaranteed bid option in the hands of some Qatari corporates by raising FOLs to 49%.
Figure 55: Qatar lost 24% YTD underperforming MENA and Figure 56: Qatar trading at c20% discount to EM and MENA EM massively on next year’s earnings, a discount not seen in a while MSCI indices rebased to 100 = 31 Dec 2016 Index next year P/E (x)
Qatar EM MENA Qatar EM MENA 145 18
135 17 16 125 15 115 14 13 105 12 95 11
85 10 9 75 8 Jul-16 Jul-17 Jan-16 Jan-17 Jun-13 Jun-14 Jun-15 3-Jul-17 Oct-13 Oct-14 Oct-15 Feb-14 Feb-15 Apr-14 Apr-15 Sep-16 Sep-17 Dec-13 Dec-14 Nov-16 Mar-16 Mar-17 Aug-13 Aug-14 Aug-15 May-16 May-17 3-Oct-17 2-Apr-17 26-Jul-17 23-Jan-17 10-Jun-17 26-Oct-17 15-Feb-17 10-Sep-17 25-Apr-17 31-Dec-16 18-Nov-17 10-Mar-17 18-Aug-17 18-May-17
Source: Bloomberg, MSCI, EFG Hermes Source: Bloomberg, MSCI, EFG Hermes
Some opportunities opening up: QNBK, QEWS, QATI and QGTS
The Qatari market is more than 20% down in 2017, taking PE multiples to c10x vs. c12x for MENA and EM. Qatar has not traded at such a discount to peers since at least the EM upgrade in 2013. This opens up value in names like QEWS and QNBK, and pushes the yield higher for QGTS (uncovered, down c40% YTD) close to 7% up from 4% previously. QGTS could face further weakness in 2018, if it remains outside the coverage target area of 90% on cumulative free-float market cap weights for MSCI Qatar, as it will mean a downgrade to small-caps and cUSD80mn outflows. After the move down in 2017, further pressure could create a good opportunity in the stock. Similarly, QATI fails liquidity requirements for FTSE on our numbers for the Mar 2018 review (potential for cUSD50mn outflows) – and further downward pressure, however, could create a buying opportunity.
64 Country Analysis
THE YEAR AHEAD - 2018
Qatar has an option to boost FOLs to 49% and benefit from USD1.25bn passive inflows At the moment, five key Qatari names that are part of EM benchmarks still have FOLs of 25% instead of 49%: QNBK, IQCD, QEWS, QIBK and BRES. All these names could boost their FOL to 49% and benefit from cUSD1.25bn passive inflows from FTSE and MSCI trackers. Passive holdings in Qatar account for 40-50% of total foreign institutional holdings; hence, a boost to active allocations, as a result of FOL increases, could double estimated flows. QNBK would be the largest beneficiary from such a move – cUSD717mn of total passive inflows. We believe a basket of QNBK, IQCD and QEWS is the best way to position for this scenario.
The probability of these changes happening based on previous experiences is low; however, it is worth noting that there seems to be a push for Qatari companies to improve corporate access (we saw increased attendance from Qatari companies at the EFG Hermes London Conference earlier last month).
Figure 57: How much inflows will Qatar receive if existing benchmark names lift FOLs to 49%? Est. passive / Est. flows MSCI Est. flows FTSE Total est. passive 3M ADVT Ticker ADVT (USDmn) (USDmn) (USDmn) (USDmn) x QNBK QD Equity 539 178 717 9 76 IQCD QD Equity 114 93 207 3 75 QIBK QD Equity 107 36 143 1 113 QEWS QD Equity 78 30 108 2 54 BRES QD Equity 53 18 71 2 46 Source: MSCI, FTSE, EFG Hermes estimates
65 Country Analysis
THE YEAR AHEAD - 2018
Outlook still challenged by embargo
While the economy has managed to gradually overcome the economic impact of the embargo, we still expect economic growth to slow down in 2018, given the lasting impact on tourism and transportation. In parallel, we expect the state to carry the burden of funding economic growth, as inflows are likely to slow down, given an elevated risk environment. This remains a manageable burden though, given a current account surplus and a peaking investment cycle that will ease funding requirements going forward.
Government to carry burden of funding growth
The economy is likely to rely increasingly on state funding for growth, reversing a funding model in the past couple of years, where non-resident deposits were the key source of funding. The state pumped USD34bn – whether in the form of public sector deposits or running down foreign reserves – in the four months to September to reverse the impact of outflows from both non-residents and the private sector.
In our base case scenario, we expect the state will have to inject USD45bn in the next two years to fund growth. While not likely to significantly affect the sovereign's asset base, it will weigh on the country’s external asset position; thereby, risking further sovereign downgrades.
Figure 58: Gov’t pumped USD34bn between Jun and Sep… Figure 59: …as well as running down reserves by USD10bn Monthly change in deposits in USDbn Total foreign reserves in USDbn
Non-resident Private sector Public sector NIR Other FC assets 15 50
10 40
5 30
0 20
(5) 10
0 (10) Jul-17 Jan-17 Jun-17 Oct-16 Feb-17 Sep-16 Apr-17 Sep-17 Dec-16 Nov-16 Jul-17 Mar-17 Aug-17 May-17 Jan-17 Jun-17 Oct-16 Feb-17 Sep-16 Sep-17 Apr-17 Dec-16 Nov-16 Mar-17 Aug-17 May-17
Source: QCB Source: QCB
Pressure balance with current account surplus, maturing investment cycle
We also single out two key factors that are likely to ease the pressure on the size of funding needed by the Qatari state to fund economic growth, namely: i) running current account deficits; and ii) nearing the peak of the investment cycle as we approach the 2022 FIFA World Cup.
Higher oil and gas prices and a fiscal retrenchment that is weighing on imports ensure the current account will return to surplus starting 2017. This is a major area of support for external balances at a time of pressures to fund growth. We forecast a nearly balanced current account in 2017, followed by a 1% GDP surplus in 2018 and 2.3% in 2019.
We also forecast investment spending to peak in 2018 before beginning a declining trend in 2019 as the investment cycle for most of the larger projects will be finalised.
66 Country Analysis
THE YEAR AHEAD - 2018
Figure 60: We expect public investment to peak in 2018 Figure 61: Higher oil and gas prices sends CA back into surplus Public investment in USD bn (LHS), in Y-o-Y % change (RHS) Current account in USD bn (LHS), in % of GDP (RHS)
Public investment Y-o-Y change (RHS) CA In % of GDP 100 35% 60 30%
30% 25% 80 25% 40 20% 20% 60 15% 15% 20 10% 10% 40 5% 5% 0 0% 20 0% -5% -5% 0 -10% (20) -10% 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019
Source: QCB, IMF and EFG Hermes estimates Source: QCB, EFG Hermes estimates
Growth to slow down further
We expect non-oil real GDP growth to decelerate to 4.0% in 2017 and 4.5% in 2018 from 5.6% in 2016. Key to deceleration are continued fiscal consolidation and weaker activity in the tourism and transportation sectors. Weakness in tourism is particularly apparent, with the market losing most of its largest client base, namely Saudi Arabia and the United Arab Emirates.
Population numbers are also a clear indicator of a slowing economy, with the population growth slowing to more than a five-year low towards end-2017. We expect this decelerating trend to continue as a number of big projects are coming towards their end, opening the door for an increasing number of foreign labour to leave.
Figure 62: Population growth slowing to five-year low Figure 63: GDP growth was already slowing before embargo In three-month average Y-o-Y change Real non-oil GDP growth
14% 10%
12% 8% 10%
8% 6%
6% 4% 4% 2% 2%
0% 0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 May-12 May-13 May-14 May-15 May-16 May-17
Source: MDPS Source: MDPS
67 Country Analysis
THE YEAR AHEAD - 2018
Qatar Macroeconomic Indicators (Year-end Dec)
2015a 2016a 2017e 2018e 2019e Real Sector Nominal GDP (USDbn) 164.6 152.5 169.5 184.1 193.6 Real GDP growth 3.6% 2.2% 2.3% 2.5% 2.5% Real non-oil growth 8.2% 5.6% 4.0% 4.5% 4.5% Population (mn) 2.4 2.6 2.8 2.9 3.0 Per capita GDP (USD) 68,004 58,699 61,576 63,695 64,389 Oil price (Brent, USD/b Avg.) 52.3 44.1 55.0 60.0 60.0 CPI inflation (%, Avg.) 1.7% 2.8% 0.9% 2.0% 2.0% External Sector Trade balance (USDbn) 48.8 25.4 35.7 37.4 40.3 HC exports (USDbn) 64.5 46.7 52.7 58.3 63.9 Non-HC exports (USDbn) 12.8 10.6 11.7 11.8 11.8 Services balance (USDbn) (15.8) (16.4) (17.0) (16.5) (15.8) Net transfers (USDbn) (15.7) (16.2) (16.5) (17.0) (18.0) Current account (USDbn) 13.8 (8.3) 0.2 1.9 4.5 Current account (% of GDP) 8.4% -5.5% 0.1% 1.0% 2.3% FDI (USDbn) (3.0) (7.1) (5.9) (6.2) (5.5) Fiscal Sector HC revenues (USDbn) 66.8 42.9 44.7 45.4 48.1 Other revenues (USDbn) 3.6 3.2 3.6 5.1 6.0 Spending (USDbn) 68.4 53.8 55.7 58.1 59.3 Primary balance (% of GDP) -1.2% -21.2% -19.8% -19.6% -14.7% Fiscal balance (USDbn) 2.0 (7.7) (7.4) (7.7) (5.2) Fiscal balance (% of GDP) 1.2% -5.1% -4.4% -4.2% -2.7% Budget breakeven oil price (USD/b) 68.1 51.9 53.1 53.7 53.5 Net domestic claims on government (% of GDP) 22.1% 35.6% 37.9% 37.8% 39.6% Gross external government debt (% of GDP) 12.2% 22.7% 27.6% 30.2% 32.0% Monetary Sector NFAs in the banking system (USDbn) 13.0 (16.3) (17.5) (11.5) (6.5) Est. sovereign wealth assets (USDbn) 250.5 230.0 210.0 200.0 205.0 Exchange rate versus USD (Avg.) 3.64 3.64 3.64 3.64 3.64 Benchmark lending interest rate (end of period) 4.5% 4.5% 2.3% 2.3% 2.3% Broad money growth 3.4% -4.6% 7.4% 6.3% 4.7% Private sector credit growth (%, eop) 19.7% 6.5% 7.0% 14.0% 14.0% Private sector credit (% of GDP) 70.5% 81.1% 78.0% 81.9% 88.8% Source: Qatar Central Bank, Ministry of Planning and Statistics, IMF and EFG Hermes estimates
68 Country Analysis
THE YEAR AHEAD - 2018
Saudi Arabia: Growth should pick up, but local sentiment is key (Neutral)
Market did not correct, following anti-corruption arrests on local institutional support We need more clarity on the 2018 budget and growth before changing our stance on the market Index inclusion is a clear catalyst ahead, but how much supply will there be? MENA Top 20 list picks: RJHI, SAMBA, AOTHAIM, BUDGET, YANSAB and TAWUNIYA
Domestic political developments in Saudi Arabia, related to the corruption crackdown, adds another layer of uncertainty to the investment case for Saudi Arabian equities. While some might see the crackdown as positive, in terms of reforms, it might affect local HNWIs and IPIs sentiment; thereby, reducing their activity in the local market or turning them into bigger Sellers of local equities. We upgrade Saudi Arabia to Neutral from Underweight, but we refrain from taking an overweight stance as we await: i) details of the 2018 budget and economic stimulus planned for 2018; ii) the impact of rising expat levy/Saudisation on both corporates and expatriate population; and iii) clarity that the buy orders pre-validation moving to the executing brokers from Jan 2018 will not be an issue that prevents a nod from index providers for EM status in 2018.
Tadawul is currently trading in line with EM and at a historically high discount to US equities. Multiples contracted in 2017 to 12.5x on a 12-month forward basis. Earnings have recovered in 2017, and recovery could continue in 2018, driven again by banks and petchems.
Figure 64: Mutual funds above-average buying amounted to Figure 65: GCC and foreign investors were heavy Sellers in cUSD4bn in 2017 in the weeks around Mohamed bin Salman’s both instances, in addition to local individual investors appointment as Crown Prince and corruption-related arrests Tadawul Index (LHS), mutual funds buying as % of total (RHS) Net cumulative flows for GCC and foreign investors in USD mn for 2017
Tadawul Index GCC Mutual Funds Gross buying as % of total foreign 7,600 40% 900 800 35% 7,400 700 30% 600 7,200 500 25% 400 7,000 20% 300 200 15% 6,800 100 10% 0 6,600 5% (100) (200) 6,400 0% 5-Jul-17 Jul-17 5-Jan-17 5-Jun-17 5-Oct-17 5-Feb-17 Jan-17 5-Apr-17 5-Sep-17 Jun-17 Oct-17 Feb-17 5-Nov-17 Apr-17 Sep-17 5-Mar-17 5-Aug-17 Nov-17 5-May-17 Mar-17 Aug-17 May-17
Source: Tadawul, EFG Hermes Source: Tadawul, EFG Hermes
The Saudi Arabian market has a handful of catalysts ahead for 2018. We are expecting an expansionary budget that will improve non-oil growth. The clearer catalyst would come in the form of index inclusion, with announcement from FTSE expected in Mar 2018 and MSCI in Jun 2018. Saudi Arabia could account for 2.7% of FTSE EM and 2.2% of MSCI EM, leading to passive inflows of USD4.5bn and USD8.5bn, respectively. Active inflows could be multiples of this, but these will depend on active positioning – an allocation similar to that seen in the UAE would mean cUSD30bn inflows, and one similar to Qatar would mean cUSD10bn. The listing of Aramco could add a boost, but we will not factor this in our estimate until we get more clarity on the timeline and size of the IPO.
69 Country Analysis
THE YEAR AHEAD - 2018
Mutual fund holdings in the market have increased from USD11.7bn in Aug 2015 to cUSD45bn currently. This was driven by cUSD13bn of net buying in the market by mutual funds in three phases: i) 4Q16 (cUSD9bn); ii) around the appointment of Mohamed bin Salman as Crown Prince in June (cUSD2.5bn); and iii) crackdown on corruption in Nov (cUSD1.5bn). The remainder came from a cUSD20bn transfer of GREs holdings during the week ending 21 Sep 2017 to mutual funds, but we have no clarity on the reason behind that particular transfer. It could be the result of the segregation of GREs’ strategic holdings from non-strategic holdings, given during the week ending 12 Oct mutual funds’ transfer of cUSD2.3bn worth of ALMARAI holdings to GREs, which translated into a Tadawul disclosure that PIF owns such a stake in ALMARAI. Anecdotal evidence suggests that when mutual funds act in the market on behalf of GREs, the focus is on index heavyweights – in this case, NCB, ALMARAI, MAADEN and RJHI among others – which explains how the Index remains supported during these episodes despite increased local individuals’ net selling and decent outflows from foreign and GCC investors.
Figure 66: Saudi Arabia is trading in line with EM and at the Figure 67: KSA ROEs have recovered in 2017 on higher banks largest discount to SPX in a while, but will multiples expand and petchems; higher rates and oil prices may continue this amidst the political uncertainty? 16x is the previous peak, trend in 2018 c28% from here 12-month forward P/E (x) Tadawul 12-month forward ROE (%)
Saudi EM S&P500 25% 20 18 20% 16 14 15% 12 10 10% 8 6 4 5% 2 0 0% Jun-15 Jun-12 Jun-09 Sep-17 Sep-14 Sep-11 Sep-08 Dec-16 Dec-13 Dec-10 Dec-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Mar-16 Mar-13 Mar-10 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Source: Bloomberg, EFG Hermes Source: Bloomberg, EFG Hermes
Earnings growth in 2018e for Saudi Arabian stocks within our coverage is expected to be around 12%, driven largely by financials (mainly banks) and materials, where we expect earnings growth of 13% and 12%, respectively. Our top picks in Saudi Arabia are a combination of value, flows and thematic-driven names. In the banks, we favour RJHI and SAMBA as both are index heavyweights that will benefit from flows, while offering attractive and dividend yield. SAMBA fares better on valuation than RJHI. Mouwasat is our top pick in the healthcare sector. For insurance, we favour plays on the motor segment and our top pick is Tawuniya, which is also a beneficiary of MSCI/FTSE flows. We favour staples over discretionary names in 2018 as we believe the recovery in discretionary is mostly behind us, and our top pick is AOTHAIM. Finally, in the chemicals sector, we prefer YANSAB (also a beneficiary of index flows), where we see the potential for DPS growth as deleveraging continues.
70 Country Analysis
THE YEAR AHEAD - 2018
A mixed year between macro headwinds and stimulus
All eyes will be on the Saudi Arabian budget to be released later in 2017, with government announcing it is phasing out its fiscal consolidation as it aims to ease pressure on economic growth. The target of a balanced budget is likely to be pushed three years, largely by increasing fuel prices over a longer period of time, as well as increasing spending. We, nevertheless, expect the economy to remain under pressure – at least in 1H18 – because of the implementation of the value-added tax (VAT) and prospective fuel price hikes.
Broadest-based VAT in GCC to weigh on consumption
Fiscal measures this year are likely to comprise: i) a fuel price hike; ii) introduction of VAT; and iii) second round of expat levy. We expect VAT to represent the largest pressure on disposable incomes, given its broad base; authorities took the decision to include private health, private education and local transportation under the tax umbrella, unlike the UAE. We expect inflation to accelerate to 3.5% in 2018, assuming a 2.5pp price increase affecting c85% of the consumer basket (assuming businesses would only partially pass on the tax hike to consumers, given weak market conditions).
Government is planning to roll out a cash handout programme – the Citizen Account – which will compensate lower-income groups for the fiscal measures. The original outlined plan suggests the two lowest quantiles, in terms of income, would receive a 4% and 1% average boost to incomes, while compensation for the remaining three quantiles will fall short of the expected fiscal income. Given the programme’s limited support to incomes, we still expect the measures – on a net basis – to weigh negatively on consumers.
Figure 68: Consumer sentiment at low point ahead of fiscal Figure 69: Consumer spending affected negatively by measures sentiment and reduced expat labour force IPSOS consumer sentiment index In three-month moving average Y-o-Y change
POS - 3-month avg ATM cash withdrawals - 3-month avg
70 30%
25%
65 20%
15%
60 10%
5%
55 0%
-5%
50 -10% Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-17 Jul-16 Jul-15 Jul-14 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-17 Jan-16 Jan-15 Jan-14 Oct-13 Oct-14 Oct-15 Oct-16 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Oct-16 Oct-15 Oct-14 Apr-17 Apr-16 Apr-15 Apr-14
Source: Reuters Source: SAMA
We note that these measures come at a time when consumer sentiment is at its low. Indeed, the government’s decision to restore allowances, which boosted incomes by an annualised USD2.5bn, has failed to boost sentiment, and consumption indicators continued to show weakness. Introduction of the expat levy in July, as well as Saudisation policies – which have indeed shed some 95,000 expat jobs – have also likely contributed to a weak consumer sentiment. These factors are likely to be recurring in 2018.
71
Country Analysis
THE YEAR AHEAD - 2018
Stimulus: Both size and form matter
Government’s plan to phase out fiscal consolidation matches, to a great extent, policy recommendations outlined by the IMF in its latest Article IV report. The fund recommended: i) smaller fiscal adjustment in 2017-20 and then larger in 2021/22; ii) slightly shifting the composition of the consolidation towards wage restraint and operational expenses; and iii) adopting new spending initiatives to boost growth.
This scenario results in overall spending growth of 5% per annum, which is more than twice the 2% originally planned in the Fiscal Balanced Program. This translates into additional spending of 2% of non-oil GDP over the coming three years (see Fig. 10).
Figure 70: IMF advice called for tamer deficit cuts… Figure 71: …driven mostly by nearly double rate of spending Fiscal deficit in USD bn Y-o-Y change in public expenditures
FBP IMF FBP IMF 40 10%
20 8%
0 6%
(20) 4%
(40) 2%
(60) 0%
(80) -2%
(100) -4%
(120) -6% 2017 2018 2019 2020 2016 2017 2018 2019 2020
Source: Ministry of Finance, IMF Source: Ministry of Finance, IMF
With 2017 budget being already slightly expansionary and growth nevertheless remaining depressed, the design of the package to target important sectors in the economy, most notably the construction sector, is likely to be as important, if not more, than just the mere size of the stimulus.
Figure 72: Some recovery in investment spending in 2017… Figure 73: …failed to spur non-oil growth Public investment in SAR bn (LHS), in Y-o-Y % change (RHS) Real non-oil GDP growth
Public investment Y-o-Y change (RHS) 7% 400 30% 6% 350 20% 300 5% 10% 250 4% 0% 200 -10% 3% 150 -20% 2% 100
50 -30% 1%
0 -40% 0% 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018
Source: Ministry of Finance, EFG Hermes estimates Source: General Authority for Statistics, EFG Hermes estimates
72 Country Analysis
THE YEAR AHEAD - 2018
Saudi Arabia Macroeconomic Indicators (Year-end Dec)
2015a 2016a 2017e 2018e 2019e Real Sector Nominal GDP (USDbn) 651.8 639.6 676.2 726.2 752.7 Real GDP growth 4.1% 1.4% -1.3% 1.9% 3.0% Real non-oil growth 3.2% 0.2% 1.6% 1.8% 2.2% Population (mn) 31.5 32.3 33.0 33.7 34.3 Per capita GDP (USD) 20,678 19,798 20,487 21,570 21,955 Oil price (Brent, USD/b Avg.) 52.3 44.1 55.0 60.0 60.0 CPI inflation (%, Avg.) 2.2% 3.5% -0.1% 4.0% 1.2% External Sector Trade balance (USDbn) 47.1 54.3 104.2 120.7 126.5 HC exports (USDbn) 155.8 139.4 169.8 189.7 197.7 Non-HC exports (USDbn) 50.6 42.7 46.3 50.6 55.3 Services balance (USDbn) (73.6) (55.7) (60.0) (70.0) (80.0) Net transfers (USDbn) (44.7) (43.4) (36.1) (34.4) (32.8) Current account (USDbn) (53.9) (29.0) 24.6 33.7 32.0 Current account (% of GDP) -8.3% -4.5% 3.6% 4.6% 4.2% FDI (USDbn) 2.8 (1.2) 2.0 4.0 6.0 Fiscal Sector HC revenues (USDbn) 119.1 87.7 107.5 120.2 125.3 Other revenues (USDbn) 44.2 53.1 67.9 79.5 90.2 Spending (USDbn) 260.8 249.3 247.3 254.4 263.3 Primary balance (% of GDP) -15.1% -17.2% -11.1% -8.1% -7.3% Fiscal balance (USDbn) (97.6) (108.5) (72.0) (54.6) (47.7) Fiscal balance (% of GDP) -15.0% -17.0% -10.6% -7.5% -6.3% Budget breakeven oil price (USD/b) 82.8 72.1 69.7 66.6 63.4 Net domestic claims on government (% of GDP) -44.0% -29.1% -19.0% -13.7% -9.5% Gross external government debt (% of GDP) 0.0% 4.3% 7.2% 9.5% 11.8% Monetary Sector NFAs in the banking system (USDbn) 669.0 567.5 538.3 522.7 513.6 Est. sovereign wealth assets (USDbn) 608.9 528.6 495.5 477.1 465.4 Exchange rate versus USD (Avg.) 3.75 3.75 3.75 3.75 3.75 Benchmark lending interest rate (end of period) 2.0% 2.0% 2.5% 3.0% 0.0% Broad money growth 2.4% 3.6% 2.0% 2.8% 3.4% Private sector credit growth (%, eop) 9.2% 2.4% -1.0% 3.0% 5.0% Private sector credit (% of GDP) 56.1% 58.6% 54.9% 52.6% 53.3% Source: SAMA, General Authority for Statistics, IMF and EFG Hermes estimates
73 Country Analysis
THE YEAR AHEAD - 2018
UAE: We like the macro, but markets need depth (Neutral)
Valuation and yields are attractive, but where are the catalysts? IPO pipeline should help, but we need to see more diversified listings, as RE and banks dominate Expo 2020 remains supportive of Dubai’s economy; Abu Dhabi could boost spending in 2018 MENA Top 20 list picks: DIB, FAB, ALDAR and DPW
The UAE is one of our top macro picks in the MENA region. Dubai’s economy continues to show decent growth in the aviation, tourism and trade sectors, and demand in the primary real estate market is solid (albeit raising supply concerns in the coming few years). Despite the backdrop and recovery in oil prices, the UAE market failed to perform strongly in 2017, with total returns for MSCI UAE and MSCI UAE IMI driven largely by dividends and not price action.
We attribute this to a numbers of factors: i) UAE is the most-owned market in the region by GCC and foreign investors, which means incremental bids in well-owned names are hard to come by. It also means that when a negative shock hits the region, there is usually a decent GCC and foreign sell-off (as we saw in November, following the Saudi corruption crackdown); ii) local sentiment seems to be weak, as evident from liquidity and margin levels in the Dubai market; and iii) the market is in need of new listings in sectors outside of banking and real estate, in order to catalyse fresh sizeable foreign and GCC inflows into the market.
Figure 74: UAE is trading at a discount to EM and MENA; justifiable? 12-month forward P/E (x)
UAE EM MENA 25
20
15
10
5
0 31-Mar-09 31-Mar-10 31-Mar-11 31-Mar-12 31-Mar-13 31-Mar-14 31-Mar-15 31-Mar-16 31-Mar-17
Source: Bloomberg, EFG Hermes
The market is cheap and is currently trading at a discount to both EM and MENA, which we think is unjustified; however, we fail to see clear catalysts for the market that would make us change our Neutral stance. One catalyst for an Index heavyweight next year is the potential removal of the 0.5 adjustment factor that is currently applied by MSCI to FAB UH. This could catalyse cUSD250mn inflows but not until Nov 2018. However, countering that could be the risk of removal/weight reduction for Etisalat, should MSCI choose to delete companies exhibiting unequal voting structures from its indices (although there will be a lead time for such an action). This would reduce UAE’s weight in EM substantially, possibly affecting active allocations to the wider market as well.
74
Country Analysis
THE YEAR AHEAD - 2018
Figure 75: Volumes are weak in the UAE, as margin activity Figure 76: We believe market liquidity could benefit from IPO remains subdued despite recent pick-up flows, especially if they lead to more depth in the market Gross weekly margin buying on DFM in USD mn (LHS), DFMGI Index (RHS) % of market cap
Gross Weekly Margin buying (USDmn) Financials Real Estate Industrials DFMGI Index (RHS) Telcos Others 700 3,900 100%
600 3,700 90% 80% 500 3,500 70% 400 3,300 60% 300 3,100 50%
200 2,900 40% 30% 100 2,700 20% 0 2,500 10% 0% Jul-16 Jul-17 Jan-16 Jan-17 Sep-16 Sep-17 Nov-15 Nov-16 Mar-16 Mar-17 May-16 May-17 ADSMI DFMGI
Source: Bloomberg, DFM, EFG Hermes Source: Bloomberg, EFG Hermes
One interesting observation is that EM and UAE were performing in line until end-Jan 2017, but the UAE has lagged substantially thereafter. We believe the drop in oil prices explains the lag in 1H17, and regional political developments explain the lag in 2H17. A catch-up with EM requires improved sentiment towards MENA and fresh inflows.
Figure 77: UAE has decoupled from EM in early 2017; regional developments are partly to blame MSCI Indices rebased to 100 = 31 Dec 2015
MXAE Index MXEF Index 150
140
130
120
110
100
90
80 Jul-16 Jul-16 Jul-17 Jan-16 Jan-16 Jan-17 Jun-16 Jun-17 Jun-17 Oct-16 Oct-17 Feb-16 Feb-17 Feb-17 Apr-16 Sep-16 Sep-16 Apr-17 Apr-17 Sep-17 Sep-17 Dec-16 Dec-16 Nov-16 Nov-17 Nov-17 Mar-16 Mar-16 Mar-17 Aug-16 Aug-17 May-16 May-16 May-17
Source: Bloomberg, MSCI, EFG Hermes
75
Country Analysis
THE YEAR AHEAD - 2018
Dubai remains driver of favourable growth outlook
The UAE remains our top macro pick for the second year in a row, thanks to a balanced growth-risk outlook. We expect Dubai to continue leading a favourable growth outlook, driven by investments related to Expo 2020 as the event date approaches, as well as continued healthy growth in the tourism sector, while Abu Dhabi continues to lag, given a conservative fiscal stance.
Expo projects, tourism to drive faster growth in 2018
We expect UAE to enjoy another strong year of economic activity in 2018 as the economy benefits from a diversified structure. Government’s focus on Expo-2020-related projects, as the event’s date approaches, is likely to support economic growth. Continued recovery in the tourism sector is also likely to be another supporting factor for economic growth.
Growth will also be supported by a strong pipeline of projects in the key property sector. While prices are still relatively softening, construction activity is clearly picking up, and we expect this trend to continue, given significant off-plan sales over the last couple of years. Dubai is also benefitting from a recovery in global trade, which is driving higher volumes at Jebel Ali. Transit trade is clearly compensating for weaker demand from the GCC, a trend we expect to continue in 2018.
Figure 78: External demand pulling economic activity upwards Figure 79: Tourism showing broad-based recovery Index (readings below 50 indicate contraction) Arrivals in mn (LHS), In Y-o-Y % change (RHS)
PMI New orders New export orders Arrivals Y-o-Y change (RHS) 70 5 14% 12% 65 4 10%
60 8% 3 6% 55 4% 2 2% 50 0% 45 1 -2% -4% 40 0 -6% Jul-15 Jul-16 Jul-17 Jan-15 Jan-16 Jan-17 Sep-15 Sep-16 Sep-17 Nov-15 Nov-16 Mar-15 Mar-16 Mar-17 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 May-15 May-16 May-17
Source: Markit Source: Dubai Department of Tourism
Credit growth, which has been running at depressed levels in 2017 (3.5% average YTD), is likely to see some acceleration in 2018 as the Expo projects kick in, though Abu Dhabi’s slow pace is likely to be still weighing on credit growth. Higher interest rates might also pose some challenges for a recovery in credit.
Abu Dhabi lags on conservative fiscal stance
Abu Dhabi is continuing its conservative fiscal policy, where the government is limiting current spending and is pushing most GREs to raise their own capital to fund new investments. During this transitory period, we expect Abu Dhabi to continue underperforming Dubai for the second consecutive year. Efficiency gains from fiscal retrenchment – partly through mergers of entities, which is leading to job losses – is likely to continue, though at a slower pace.
76 Country Analysis
THE YEAR AHEAD - 2018
Figure 80: Dubai to outpace Abu Dhabi’s growth for the second year in a row Real non-oil GDP for Abu Dhabi; real GDP for Dubai
Dubai Abu Dhabi 8%
7%
6%
5%
4%
3%
2%
1%
0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Source: Dubai Statistics Center, SCAD
VAT to weigh on consumption growth
UAE’s favourable growth outlook is not without challenges, which are likely to be centred primarily around: i) the introduction of the value-added tax on 1 Jan 2018; and ii) geopolitical risks.
VAT is set to drive a one-off inflationary wave in 2018; therefore, we expect slower private consumption growth in 2018. We have, accordingly, recently reduced our non-oil GDP growth for the UAE to 3.2% from 3.5%. This is largely as the tax authority chose to include all food items in the tax base; thereby, widening the share of the consumer basket subject to the tax to nearly 70%.
We expect the tax, therefore, to add a significant 2.8-3.2pp to headline inflation next year. Some upside risks exist to our inflation forecast in case businesses decide not to fully pass the cost to consumers, at least in the initial phase of implementation of the new tax.
Figure 81: VAT to drive second inflation wave in two years Figure 82: VAT to boost tax take by 1.5% of GDP Headline inflation Taxes share in GDP
5% 4%
4% 3%
3%
2% 2%
1% 1%
0% 0% 2013 2014 2015 2016 2017 2018 2019 Jul-13 Jul-14 Jul-15 Jul-16 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-13 Oct-14 Oct-15 Oct-16 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17
Source: FCSA Source: FCSA, EFG Hermes estimates
77 Country Analysis
THE YEAR AHEAD - 2018
UAE Macroeconomic Indicators (Year-end Dec)
2015a 2016a 2017e 2018e 2019e Real Sector Nominal GDP (USDbn) 358.2 349.0 375.9 407.5 427.1 Real GDP growth 3.8% 3.0% 1.1% 2.8% 3.4% Real non-oil growth 3.2% 2.7% 3.0% 3.2% 3.6% Population (mn) 9.6 9.9 10.1 10.4 10.7 Per capita GDP (USD) 37,386 35,408 37,073 39,066 39,735 Oil price (Brent, USD/b Avg.) 52.3 44.1 55.0 60.0 60.0 CPI inflation (%, Avg.) 4.1% 1.8% 2.5% 5.5% 2.0% External Sector Trade balance (USDbn) 76.6 68.4 71.0 89.6 103.5 HC exports (USDbn) 61.5 50.9 51.8 69.1 80.4 Non-HC exports (USDbn) 239.2 248.0 259.0 274.5 294.9 Services balance (USDbn) (22.0) (19.8) (19.2) (17.9) (16.6) Net transfers (USDbn) (39.7) (39.5) (41.5) (43.5) (45.5) Current account (USDbn) 16.7 11.2 11.9 29.6 43.0 Current account (% of GDP) 4.7% 3.2% 3.2% 7.3% 10.1% FDI (USDbn) (7.9) (4.6) 3.5 1.5 (2.0) Fiscal Sector HC revenues (USDbn) 54.7 45.2 46.0 61.4 71.5 Other revenues (USDbn) 52.8 52.6 53.7 59.2 63.8 Spending (USDbn) 105.2 106.7 108.1 111.0 113.7 Primary balance (% of GDP) 0.4% -2.9% -2.6% 2.0% 4.7% Fiscal balance (USDbn) 2.2 (9.0) (8.4) 9.6 21.6 Fiscal balance (% of GDP) 0.6% -2.6% -2.2% 2.4% 5.1% Budget breakeven oil price (USD/b) 58.9 61.6 63.8 59.6 55.7 Net domestic claims on government (% of GDP) 5.2% 4.4% 3.9% 3.7% 3.6% Gross external government debt (% of GDP) 66.8% 73.9% 68.3% 63.7% 60.8% Monetary Sector NFAs in the banking system (USDbn) 68.8 72.4 69.0 64.3 62.4 Est. sovereign wealth assets (USDbn) 902.0 899.6 893.9 903.9 918.9 Exchange rate versus USD (Avg.) 3.67 3.67 3.67 3.67 3.67 Benchmark lending interest rate (end of period) 1.0% 1.0% 1.8% 2.5% 2.5% Broad money growth 4.0% 3.3% 2.8% 5.1% 4.5% Private sector credit growth (%, eop) 8.3% 5.8% 6.5% 8.0% 8.0% Private sector credit (% of GDP) 79.1% 85.9% 84.9% 84.6% 87.2% Source: Central Bank of UAE, IMF and EFG Hermes estimates
78 Country Analysis
THE YEAR AHEAD - 2018
Vietnam: Recovery story is intact, but market is overheating
Strongest growth in FEM dependent on exports, FDI and strong credit growth Surge in late 2017 does not allow for much ST upside, thought banks’ story is intact Looking for some market consolidation – IPO flow, FOL changes key for 2018 Vietnamese stocks have outperformed EM and FEM peers in 2017 YTD, thanks to the recent strong rally, in which indices have delivered exponential performance. This leads us to be cautious going into 2018. Many elements of the macro story – high growth and investment, improving asset quality in the banking system – are intact. However, price action and anecdotal evidence suggest that large recent gains are due to retail investors driving low-float stocks, such as Sabeco, GAS, BID and CTG, as well as ROS (a recent entrant to the MSCI Vietnam Index) and VinGroup.
Figure 83: Investible stocks catch up in late 2017… Figure 84: …thanks to consumer stock outperformance MXVI, MXEF & VNIndex (rebased to 100 = 31 Dec 2015, USD terms) Breakdown of major Vietnam indices
MSCI Vietnam VNIndex MSCI EM Staples Financials RE Industrials 180 Utilities Materials Energy Discretionary 100% 160
80% 140
120 60%
100 40%
80 20% 60
0% Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 MSCI VN30 VN Allshare
Source: Bloomberg Source: Bloomberg, EFG Hermes calculations
Liquid large-cap names had underperformed the broader Index until recently, with the float-weighted MSCI Vietnam Index finally catching up with the local VN30 Index (market-cap weighted) and all-share VNIndex (price-weighted) in late 2017. Consumer stocks (principally VNM, but also Masan, which will list its banking associate, TechomBank, in 1H18) have a far greater weight in the MSCI Vietnam Index – the local indices have a broader mix and a far heavier weighting for financials.
Recent performance has left the MSCI Vietnam Index trading at very rich multiples – at 22x 12-month forward PE and 5.1x book (MSCI EM is trading at 12.3x 12m forward PE, 1.8x PB; MSCI FEM is slightly richer at 13.4x 12m forward PE, 1.9x PB). Our composite valuation measure – which combines PB, DY, and trailing and forward PE multiples – shows that Vietnam is trading at more than one standard deviation above its LT average premium to EM and FEM aggregates. Typically, such valuations, combined with rapid rallies, leave markets vulnerable to a correction.
79 Country Analysis
THE YEAR AHEAD - 2018
Figure 85: Vietnam re-rates quickly in late 2017 Figure 86: Will earnings revisions justify the rally? MXVI premium to MXEF – composite of PEs, PB & DY, with avg. and +/- 1SD Three-month change in 12m forward MXVI EPS
2.5 40%
30% 2.0 20%
10% 1.5 0%
1.0 -10%
-20%
0.5 -30% Jul-12 Jan-09 Jan-16 Jun-15 Oct-10 Oct-17 Feb-13 Sep-13 Apr-14 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Dec-11 Nov-14 Mar-10 Mar-17 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Aug-09 Aug-16 May-11 May-13 May-14 May-15 May-16 May-17
Note: Series break in late 2016 due to VNM addition to MSCI Vietnam Index Source: Bloomberg, EFG Hermes calculations Source: Bloomberg, EFG Hermes calculations
Our Vietnam coverage trades at a small premium to our target prices, with consumer stocks having re-rated rapidly in late 2017. Drivers of consumer earnings are intact, but short-term growth looks priced in. Elsewhere, we still expect a strong earnings recovery for banks, but we think this is more than priced in for the largest of the banks under our coverage (and the only one in the MXVI), VCB. Other market drivers include further IPOs and new secondary listings (see consumer section) and steps that can lift Vietnam to MSCI EM, including increasing FOLs and improving disclosure (see index section).
We think that up to 50% of retail investor interest in the market is on margin. This increases the risk of a rapid sell-off, and also means future performance is vulnerable to any rise in interest rates – Y-o Y inflation averaged 3.3% in the three months to October 2017, and real rates are still low. Local investors are also focused on yield, but this year’s equity market rally has left the earnings yield for the closely tracked VNIndex at 5.1%, with a 2017 DY of just 2%. Finding investible stocks is tricky now – we recommend MWG, for which foreign investors usually pay a premium.
Figure 87: No change in ROEs to justify 2017 PB expansion Figure 88: Rising inflation could reduce margin appeal Trailing and expected ROEs for the MXVI Index
ROE Trailing ROE Expected 12m T-bill yield CPI inflation 35% 8% 7% 30% 6% 5% 25% 4% 3% 20% 2% 1% 15% 0% -1% 10% Feb-14 Feb-15 Feb-16 Feb-17 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Jul-12 May-13 May-14 May-15 May-16 May-17 Jan-16 Jan-09 Jun-15 Oct-17 Oct-10 Feb-13 Sep-13 Apr-14 Dec-11 Nov-14 Mar-17 Mar-10 Aug-16 Aug-09 May-11
Source: Bloomberg, EFG Hermes calculations Source: Bloomberg, HNX
80 Country Analysis
THE YEAR AHEAD - 2018
Looking for stable growth environment
Vietnam is likely to maintain a stable and broad-based economic growth outlook, thanks to relative recovery in global trade and strong domestic demand. The key manufacturing sector – especially the export-oriented labour-intensive industries – is likely to continue attracting high levels of FDIs. The sustainability of such a strong growth environment, though, remains dependent on key structural reforms, including re-building fiscal buffers, recapitalising banks and SOEs and further liberalisation of key sectors in the economy.
Positive, balanced growth outlook
IMF forecasts Vietnam to maintain a stable and balanced economic growth environment. Growth is set to remain at 6.3% in 2018, underpinned by healthy domestic demand and a strong external environment. FDIs in the country’s competitive manufacturing sector – mostly labour-intensive export-oriented manufacturing – is likely to continue driving growth, benefitting from relative improvement in global trade growth.
Tourism also contributes to strong external demand, with double-digit growth in 1H17 likely to continue. Strengthening growth comes despite a significant contraction in oil production, which authorities are aiming to reverse by pushing Petro Vietnam to ramp up production by at least an additional 1mn tonnes.
Figure 89: Vietnam likely to maintain strong growth outlook, thanks to strong domestic demand and improved external demand Real GDP growth
7%
6%
5%
4%
3%
2%
1%
0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Company data, EFG Hermes estimates
Widening fiscal deficit and oil are key macro risks
Maintaining the strong economic growth outlook depends on pressing ahead with further structural reforms. Key amongst these is fiscal reform that aims to increase the economy’s buffers, which has been thinned in the past few years where fiscal deficits remained above 6% since 2012 and public debt increased by 10pp of GDP, approaching 65%.
Authorities aim to reduce the deficit to below 3.5% of GDP by 2020, largely through strengthening tax and customs administration, as well as liberalising administered prices. Government is opening up the healthcare and education sectors to the private sector while cutting public social and capital expenditures. Proceeds from the privatisation of state-owned enterprises (SOEs) is also set to boost revenues, compensating for lower oil and trade revenues.
81
Country Analysis
THE YEAR AHEAD - 2018
Figure 90: Fiscal deficits to narrow gradually… Figure 91: …to slow down pace of accumulation of debt Fiscal balance in % of GDP General government gross debt in % of GDP
0% 65%
-1% 60% -2%
55% -3%
-4% 50%
-5% 45% -6%
-7% 40% 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019
Source: IMF Source: IMF
Faster pace of banking reforms are needed
The IMF assesses that some notable progress has been made, but progress has been uneven in tackling NPLs amongst state-owned commercial banks with still a few private banks accounting for a significant share of impaired loans. Moreover, the sector’s profitability remains low compared to other emerging markets due to higher provisioning needs.
As such, the IMF recommends authorities need faster recognition of NPLs, recapitalisation of state-owned banks (by directly injecting capital rather than relying on a slow build-up of provisions) and reaching a final resolution to non-viable banks.
Figure 92: Credit growth remains well in double-digits… Figure 93: …driving further credit depth into economy Annual growth in credit to economy Credit in % of GDP
25% 140%
120% 20%
100% 15% 80%
10% 60%
40% 5% 20%
0% 0% Jul-16 Jul-15 Jul-14 Jul-13 Jul-12 2012 2013 2014 2015 2016 2017 2018 Jan-17 Jan-16 Jan-15 Jan-14 Jan-13 Jan-12 Oct-16 Oct-15 Oct-14 Oct-13 Oct-12 Apr-16 Apr-15 Apr-14 Apr-13 Apr-12
Source: Bloomberg Source: IMF
82 Country Analysis
THE YEAR AHEAD - 2018
Figure 94: Vietnam macroeconomic indicators
2013 2014 2015 2016 2017 2018 2019
Nominal GDP (VNDbn) 3,584,262 3,937,856 4,192,862 4,502,733 4,965,383 5,485,615 6,058,316 Nominal GDP (USDbn) 170.6 185.9 191.5 201.3 216.0 234.7 255.7 Real GDP growth, % 5.4 6.0 6.7 6.2 6.3 6.3 6.2 Population (mn) 89.8 90.7 91.7 92.7 93.6 94.6 95.5 Per Capital GDP, USD 1,900 2,049 2,088 2,172 2,306 2,482 2,677 Annual inflation (average), % 6.6 4.1 0.6 2.7 4.4 4.0 4.0 Primary fiscal balance, % of GDP (5.9) (4.6) (4.2) (4.4) (3.8) (3.5) (2.9) Fiscal balance, % of GDP (7.4) (6.3) (6.2) (6.6) (5.8) (5.8) (5.3) General government gross debt 51.8 55.1 57.3 60.7 61.5 63.6 64.0 Current account balance (USDbn) 7.7 9.1 (0.1) 8.2 2.8 3.4 2.3 Current account balance, % of GDP 4.5 4.9 (0.1) 4.1 1.3 1.4 0.9 Source: IMF
83 Coverage Table
Egypt Oman
Jordan Pakistan
Kenya Qatar
Kuwait Saudi Arabia
Lebanon Tanzania
Morocco UAE
Nigeria Vietnam EFG Hermes Coverage THE YEAR AHEAD - 2018
Egypt Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (EGP) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017 Consumer Arab Cotton Ginning 5.6 5.5 Neutral 17.4 1.6 0.1 50.0 6.8 9.6 0.9 3.6 Arabian Food Industries (Domty) 10.1 12.2 Buy 54.8 0.3 0.2 75.5 37.6 16.0 5.2 0.9 Eastern Company 385.6 580.0 Buy 177.5 2.9 2.2 26.7 12.4 10.3 5.1 3.0 Edita Food Industries 16.0 21.5 Buy 10.1 0.8 0.7 41.2 33.5 20.2 9.7 1.6 GB Auto 4.0 2.6 Neutral 23.8 0.9 0.2 21.6 N/M 19.0 1.2 0.0 Juhayna* 9.9 13.5 Buy 60.6 0.6 0.5 N/M 50.3 18.7 4.3 1.5 Oriental Weavers 17.1 26.0 Buy 10.7 0.7 0.4 13.6 9.5 8.3 1.1 8.2 Energy ADES International Holding** 13.8 25 Buy (16) 0.2 0.6 16.5 8.4 5.0 1.7 8.2 Maridive** 0.3 0.6 Buy 3.8 0.1 0.1 5.8 6.7 5.4 0.3 0.0 Financials Abu Dhabi Islamic Bank - Egypt 14.7 17.5 Buy 109.0 0.4 0.2 7.1 4.8 3.0 1.3 0.0 Al Baraka Bank Egypt 13.0 15.2 Buy 50.1 0.0 0.1 4.0 3.1 2.8 0.8 0.0 CIB 72.7 91.5 Buy (0.5) 6.1 4.7 15.7 12.4 10.1 3.1 1.0 Credit Agricole Egypt 44.7 52.3 Buy 23.2 0.3 0.8 11.3 7.9 7.4 3.0 4.5 Egyptian Gulf Bank 0.8 0.9 Neutral (16.1) 0.1 0.3 12.1 10.4 8.0 1.7 0.0 EK Holding 0.8 1.0 Buy 39.7 1.0 0.8 13.3 6.9 7.2 1.7 4.9 Faisal Islamic Bank of Egypt 1.1 1.2 Neutral (5.9) 0.0 0.4 2.5 5.1 4.6 1.0 3.9 Housing & Dev. Bank 46.3 53.6 Neutral 90.6 0.1 0.3 9.2 5.0 5.7 1.6 6.0 Healthcare EIPICO 125.0 115.0 Neutral 42.9 0.5 0.6 22.4 15.7 11.8 4.6 3.2 IDH** 5.19 3.4 Neutral 55.0 0.2 0.8 39.6 38.4 30.1 6.2 2.7 Industrials Alex. Containers and Goods 165.8 220.0 Buy (11.1) 0.3 1.4 19.2 11.9 11.4 5.3 5.4 Canal Shipping 12.9 15.0 Buy 86.4 0.4 0.1 47.3 16.6 12.5 4.4 4.7 Elsewedy Electric 135.6 125.0 Buy 82.9 3.0 1.7 8.1 6.1 8.6 2.2 8.8 General Silos 49.8 60.0 Buy 72.2 0.1 0.0 6.0 7.0 5.1 2.2 4.0 Giza General Contracting 2.0 1.7 Sell 33.8 0.2 0.0 7.1 6.6 6.3 1.3 0.0 Lecico Egypt 6.1 5.0 Neutral 55.4 0.0 0.0 N/M 23.2 11.2 0.6 16.4 Orascom Construction Limited 142.1 115.6 Neutral 33.5 1.2 0.9 19.1 9.6 8.4 2.3 0.0 Upper Egypt Contracting 0.8 0.5 Sell (0.3) 0.2 0.0 6.5 8.9 7.9 0.7 0.0 Materials Abu Qir Fertilizers 19.0 24.5 Buy 173.1 0.3 1.3 27.5 12.5 11.1 5.6 5.5 Al Ezz Dekheila 655.5 1,300.0 Buy 40.0 0.0 0.5 21.5 7.3 4.4 1.4 11.4 AMOC 13.0 12.0 Neutral 75.3 1.0 0.6 25.6 10.1 9.1 3.7 6.6 Arabian Cement Company (Egypt) 8.0 10.0 Buy 17.6 1.1 0.2 12.4 17.7 30.9 2.3 4.2 EFIC 16.6 22.0 Buy 90.0 0.3 0.1 11.2 7.3 5.9 1.0 6.0 Egyptian Chemical Industries 8.3 6.5 Sell 102.4 1.1 0.3 48.8 23.6 60.7 1.4 0.0 Ezz Steel 19.4 26.5 Buy 9.2 2.3 0.6 64.9 N/M 17.6 1.9 0.0 MOPCO 88.4 120.0 Buy 168.1 0.4 1.1 28.5 24.0 8.0 1.6 3.4 OCI NV*** 19.0 22.5 Buy 16 12.6 4.8 23.8 N/M 8.9 3.4 0.0 Sidi Kerir 20.3 25.0 Buy 18.6 0.4 0.6 8.3 10.8 7.5 3.6 8.4 South Valley Cement 5.4 6.5 Buy 3.3 0.4 0.1 12.6 61.7 N/M 0.8 0.0 Real Estate & Hospitality Egyptian Resorts Company 1.5 1.3 Neutral 39.8 1.6 0.1 20.2 38.2 36.0 1.6 0.0 Heliopolis Housing 29.5 41.0 Buy 18.8 1.2 0.7 32.7 36.9 27.6 19.0 0.0 Nasr City Housing 10.1 14.2 Buy (1.9) 1.4 0.6 6.6 9.5 8.8 3.7 0.0 Palm Hills 4.0 3.6 Buy 29.0 2.1 0.5 14.4 10.2 7.8 1.2 0.0 Porto Group 0.4 0.4 Neutral 32.7 0.9 0.1 12.4 5.4 4.6 2.0 0.0 SODIC 19.5 20.0 Buy 29.2 1.4 0.4 13.7 12.3 9.1 1.5 0.0 TMG Holding 10.0 15.0 Buy 9.9 3.6 1.2 25.0 17.2 13.2 0.7 1.5 Telecom Services OTMT 0.7 0.5 Sell (14.3) 1.2 0.2 4.5 7.9 8.7 0.8 0.0 Telecom Egypt 13.5 15.7 Buy 15.2 1.2 1.3 12.1 6.5 8.0 0.7 7.4 Information Technology Raya Contact Center 14.5 19.8 Buy N/A 0.0 0.1 13.2 9.3 8.7 4.1 5.4
*Price as of 10 December 2017 **Currency in USD ***Currency in EUR Source: Company data, EFG Hermes estimates 85 EFG Hermes Coverage THE YEAR AHEAD - 2018
Jordan Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (JOD) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017 Financials Arab Bank 5.3 7.2 Buy (14.7) 1.9 4.8 6.9 6.5 6.0 0.6 5.7 Bank of Jordan 2.9 2.5 Neutral 1.4 0.3 0.8 13.1 12.3 11.6 1.6 5.8 Cairo Amman Bank 1.5 2.0 Neutral (18.4) 0.3 0.4 7.7 7.2 6.6 0.8 6.0 Housing Bank For Trading & Finance 8.4 5.0 Sell 12.5 0.0 3.7 20.8 21.0 19.2 2.7 3.8 Materials Jordan Phosphate Mines 2.6 2.9 Neutral 22.4 0.1 0.3 N/M N/M 63.2 0.3 0.0 Source: Company data, EFG Hermes estimates
Kenya Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (KES) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017 Energy KenolKobil Group 15.0 22.6 Buy 0.3 0.2 0.2 9.1 7.7 6.0 1.8 3.2 Total Kenya 24.3 46.4 Buy 42.6 0.0 0.0 6.8 5.8 4.9 0.4 5.1 Financials Co-operative Bank of Kenya 16.0 12.8 Sell 45.5 0.2 0.9 6.1 7.7 7.0 1.4 5.0 Equity Group Holdings 40.5 38.2 Neutral 35.0 0.8 1.5 9.2 8.3 7.2 1.6 4.9 KCB Group 42.3 33.2 Sell 47.0 0.6 1.2 6.6 6.3 7.3 1.2 7.1 Stanbic Holdings Limited 82.0 66.8 Sell 16.3 0.0 0.3 7.3 8.4 5.2 0.8 6.4 Materials ARM Cement 13.0 7.4 Sell (49.2) 0.0 0.1 N/M N/M N/M 0.4 0.0 Bamburi Cement Co. 178.0 142.2 Sell 11.3 0.1 0.6 12.3 17.4 20.7 2.1 2.9 East African Portland Cement Co. 33.3 16.8 Sell 41.5 0.0 0.0 0.7 N/M N/M 0.2 0.0 Source: Company data, EFG Hermes estimates
Kuwait Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (KWD) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017 Consumer Humansoft 3.5 6.0 Buy 29.2 1.4 1.4 17.6 15.0 13.1 12.6 5.4 Mezzan Holding 0.8 1.2 Buy (18.1) 0.7 0.8 13.8 12.6 11.0 2.2 4.4 Financials Burgan Bank 0.3 0.4 Buy 6.4 0.2 2.2 11.1 10.1 8.9 0.9 2.3 Commercial Bank of Kuwait 0.4 0.4 Neutral 7.3 0.1 2.2 11.9 11.2 9.9 1.0 4.5 Kuwait Finance House 0.6 0.6 Buy 14.7 8.3 10.8 19.6 17.6 15.4 1.8 2.8 National Bank of Kuwait 0.7 0.9 Buy 14.7 4.5 13.9 14.8 13.7 12.1 1.5 4.2 Industrials Combined Group Contracting 0.5 0.5 Neutral (12.4) 0.0 0.2 14.9 31.9 19.3 1.6 2.1 Telecom Services Ooredoo Kuwait 1.1 1.6 Buy (12.3) 0.0 1.7 10.0 9.5 9.2 0.7 9.5 Zain Group 0.4 0.5 Buy 6.6 4.6 5.6 10.8 10.0 9.7 1.0 6.9 Source: Company data, EFG Hermes estimates
86 EFG Hermes Coverage THE YEAR AHEAD - 2018
Lebanon Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (USD) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017 Financials Bank Audi GDR 5.6 7.2 Buy (13.8) 0.0 2.2 5.4 4.6 4.2 0.8 8.0 BLOM Bank 11.8 14.7 Buy 6.8 0.2 2.5 5.3 4.8 4.1 0.9 8.1 Byblos Bank 1.6 1.6 Neutral (7.1) 0.0 0.9 7.3 7.5 6.4 0.7 9.0 Source: Company data, EFG Hermes estimates
Morocco Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (MAD) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017 Financials Attijariwafa Bank 479.1 416.6 Neutral 16.0 2.9 10.3 20.3 17.9 16.3 2.4 2.5 BCP 301.0 230.8 Neutral 5.7 0.5 5.8 20.9 19.5 17.6 1.9 1.9 BMCE Bank 205.3 225.5 Neutral (8.0) 0.4 3.9 16.0 12.9 11.8 1.9 2.7 Source: Company data, EFG Hermes estimates
Nigeria Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (NGN) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017 Financials Access Bank 11.0 10.8 Neutral 87.1 0.8 1.0 10.3 5.0 10.3 0.6 5.9 FBN Holdings 9.0 12.4 Buy 169.0 1.3 1.0 22.9 8.3 5.4 0.5 1.7 Guaranty Trust Bank 42.0 41.4 Neutral 70.1 2.3 3.9 9.0 8.1 7.9 2.0 6.0 Stanbic IBTC Holdings 42.5 46.5 Buy 183.3 0.2 1.4 17.2 9.6 8.0 2.5 4.4 United Bank for Africa 10.9 13.1 Buy 142.7 1.5 1.2 8.5 7.9 8.5 0.8 6.9 Zenith Bank 27.5 31.6 Buy 86.4 4.5 2.7 6.7 5.8 6.3 1.1 8.2 Source: Company data, EFG Hermes estimates
87
EFG Hermes Coverage THE YEAR AHEAD - 2018
Oman Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (OMR) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017
Energy
Renaissance Services 0.3 0.2 Neutral 10.8 0.3 0.3 N/M N/M 20.2 1.2 0.0 Shell Oman Marketing Co 1.7 2.2 Neutral (15.0) 1.2 0.4 10.7 11.4 10.9 3.6 6.6 Financials
Bank Dhofar 0.2 0.1 Sell (6.1) 0.0 1.1 10.3 11.2 9.1 0.8 3.3 Bank Muscat 0.4 0.4 Buy (13.2) 1.0 2.7 5.8 6.4 6.0 0.6 5.7 Bank Sohar 0.2 0.1 Sell 6.6 2.2 0.7 14.3 10.7 9.5 0.9 2.8 National Bank Of Oman 0.2 0.2 Neutral (10.1) 0.1 0.8 6.6 7.2 6.4 0.7 6.7 Industrials
Al Anwar Ceramics 0.1 0.2 Buy (25.4) 0.1 0.1 20.7 17.7 14.2 1.0 5.1 Galfar Engineering & Contracting 0.1 0.1 Sell (18.1) 0.2 0.1 N/M N/M N/M 0.6 0.0 Oman Cables Industry 1.2 1.8 Buy (24.8) 0.0 0.3 7.0 8.3 7.6 1.0 7.2 Materials
Al Jazeera Steel Products 0.3 0.3 Neutral 10.2 0.1 0.1 9.7 10.5 9.9 0.8 6.2 Oman Cement 0.4 0.5 Neutral (13.5) 0.0 0.4 10.5 13.5 11.8 0.8 6.1 Raysut Cement 0.8 1.1 Buy (44.6) 0.0 0.4 7.9 11.1 9.1 1.0 7.2 Telecom Services
Omantel 1.2 1.4 Neutral (20.1) 0.2 2.4 7.8 8.8 8.5 1.5 9.5
Source: Company data, EFG Hermes estimates
88
EFG Hermes Coverage THE YEAR AHEAD - 2018
Pakistan Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (PKR) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017
Consumer
Engro Foods 76.4 71.0 Sell (60.2) 0.1 0.6 24.5 N/M 84.9 5.9 0.0 Honda Atlas Cars 530.6 662.2 Buy (20.7) 0.3 0.7 21.0 12.9 8.9 5.8 2.5 Indus Motor Company 1,750.0 2,103.7 Buy 8.4 0.4 1.3 12.2 9.6 9.5 4.1 7.1 Pak Suzuki Motor Co. 509.4 548.0 Buy (16.9) 0.5 0.4 15.0 10.6 9.3 1.4 1.9 Energy
Oil & Gas Development Co. 153.5 180.7 Buy (7.1) 1.6 6.3 11.0 10.3 9.6 1.3 3.9 Pakistan Oilfields 590.4 538.3 Buy 10.4 0.8 1.3 19.3 14.8 12.7 4.5 5.9 Pakistan Petroleum 191.5 209.4 Buy 1.8 1.4 3.6 21.9 11.5 10.0 1.8 4.4 Pakistan State Oil Co. 292.2 422.9 Buy (19.3) 1.7 0.9 9.3 5.2 4.8 0.9 6.7 Financials
Bank Alfalah 38.2 49.0 Buy 0.5 0.2 0.6 7.5 7.0 6.1 0.9 0.0 Habib Bank 152.4 235.0 Buy (44.2) 2.3 2.1 6.6 20.4 5.9 1.2 4.6 MCB Bank 195.8 245.0 Buy (17.7) 1.0 2.2 9.9 10.2 8.3 1.4 7.7 Meezan Bank 64.6 72.5 Neutral (3.2) 0.0 0.7 10.5 10.4 8.9 1.7 3.1 United Bank 163.4 228.0 Buy (31.6) 1.2 1.9 7.2 7.3 6.7 1.2 8.0 Industrials
Pak Elektron 50.5 101.7 Buy (29.2) 1.6 0.2 6.7 5.9 4.9 0.9 6.8 Materials
Cherat Cement Co. 90.2 142.0 Buy (48.2) 0.2 0.2 11.3 8.1 7.1 1.5 5.0 D.G. Khan Cement 130.9 190.0 Buy (41.0) 0.7 0.5 6.5 7.2 7.4 0.8 5.7 Engro Fertilizers 65.7 74.0 Buy (3.3) 0.9 0.8 9.7 11.1 10.1 2.1 7.8 Fauji Cement Co. 25.3 33.0 Neutral (44.0) 0.5 0.3 6.5 13.3 9.5 2.0 3.6 Fauji Fertilizer Bin Qasim 34.1 38.5 Neutral (33.5) 0.2 0.3 23.8 30.9 10.4 2.4 1.5 Fauji Fertilizer Company 76.6 107.0 Buy (26.6) 0.5 0.9 8.3 10.1 8.9 3.2 7.8 Kohat Cement Co. 126.3 179.0 Buy (56.7) 0.0 0.2 4.4 5.5 5.2 1.3 11.1 Lucky Cement 491.7 796.0 Buy (43.2) 1.4 1.5 N/M N/M N/M N/M 0.0 Maple Leaf Cement Factory 68.1 76.0 Neutral (44.9) 0.5 0.4 7.4 7.5 8.4 1.5 5.5 Pioneer Cement 58.2 106.0 Buy (59.0) 0.1 0.1 5.3 4.5 4.9 1.1 11.2
Source: Company data, EFG Hermes estimates
89
EFG Hermes Coverage THE YEAR AHEAD - 2018
Qatar Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (QAR) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017
Consumer
Al Meera Consumer Goods 139.0 141.0 Neutral (20.8) 0.5 0.8 14.0 17.1 16.8 2.3 6.5 Financials
Commercial Bank of Qatar 26.3 30.0 Neutral (15.2) 1.8 2.9 37.7 55.6 8.1 0.6 1.0 Doha Bank 26.5 27.3 Neutral (21.4) 1.9 2.3 9.0 9.3 9.6 0.8 9.4 Masraf Al Rayan 34.0 33.8 Neutral (9.5) 4.0 7.0 12.3 12.2 11.4 2.2 6.3 Qatar Insurance Co. 43.4 50.2 Buy (41.1) 1.7 3.3 10.1 22.0 8.9 1.5 1.8 Qatar Islamic Bank 93.0 95.0 Neutral (10.5) 2.7 6.0 10.9 10.4 10.3 1.6 5.1 Qatar National Bank 118.6 139.9 Buy (19.9) 12.9 30.1 9.0 8.4 7.8 1.7 3.0 Materials
Industries Qatar 88.5 106.0 Neutral (24.7) 4.1 14.7 18.1 15.6 12.1 1.6 5.1 Telecom Services
Ooredoo Group 82.0 118.0 Neutral (19.4) 2.1 7.2 10.2 8.6 7.6 0.9 6.1 Utilities
Qatar Electricity & Water 167.5 250.0 Buy (26.2) 3.0 5.1 11.9 10.5 12.1 2.0 4.8
Source: Company data, EFG Hermes estimates
90 EFG Hermes Coverage THE YEAR AHEAD - 2018
Saudi Arabia Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (SAR) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017 Consumer Al Hassan Ghazi Ibrahim Shaker 11.3 14.0 Neutral (32.6) 1.6 0.2 8.9 8.7 7.8 0.6 6.6 Al Hokair 33.1 44.0 Buy (10.2) 2.8 1.9 11.3 17.7 12.4 2.4 0.0 Al Othaim 125.0 130.0 Buy 26.5 0.7 1.5 22.3 20.6 19.0 4.1 2.4 Almarai 56.1 52.0 Neutral 2.4 7.5 15.0 26.0 24.4 23.6 4.7 1.4 Budget Saudi 24.7 36.0 Buy (14.5) 1.9 0.5 10.1 10.8 9.8 1.8 6.1 Halwani Brothers 47.2 46.0 Sell (23.9) 0.6 0.4 13.2 16.5 14.8 2.2 4.8 Herfy 49.0 73.6 Buy (12.5) 1.7 0.8 14.6 13.7 12.6 3.8 4.7 Jarir Marketing Co. 143.3 184.0 Buy 24.1 1.6 3.4 17.4 15.5 14.2 8.6 5.9 NADEC 33.0 22.5 Neutral 37.8 2.9 0.7 21.7 25.2 30.1 1.8 1.4 SADAFCO 127.2 164.0 Buy 2.1 0.8 1.1 15.9 13.2 15.8 3.7 3.9 Saudi Airlines Catering (Catering) 75.5 105.0 Neutral (26.8) 8.2 1.6 10.8 10.6 10.2 5.2 9.3 Saudi Marketing (Farm Superstores) 23.2 34.0 Buy (27.3) 0.9 0.3 11.6 11.8 11.0 1.6 4.3 Savola 39.4 45.0 Neutral (1.9) 3.3 5.6 25.9 23.3 18.5 2.2 0.0 United Electronics Company 48.3 50.0 Buy 113.6 2.7 0.5 63.3 17.3 15.8 3.5 3.1 Energy Aldrees Petroleum. 26.8 32.0 Neutral (13.9) 1.7 0.4 14.5 19.0 13.3 2.1 3.0 Financials AL Rajhi Bank 63.8 66.0 Neutral 1.1 53.7 27.6 14.3 13.9 12.0 2.0 3.7 Al Rajhi Insurance 59.5 58.0 Neutral 54.1 1.5 0.6 26.8 15.1 15.5 4.1 0.0 Alawwal Bank 11.7 12.5 Neutral (16.2) 0.5 3.6 12.5 9.9 7.1 1.0 0.0 Arab National Bank 24.3 20.0 Neutral 10.1 0.3 6.5 10.7 11.0 10.0 1.0 1.2 Bank Albilad 19.0 16.5 Sell (7.8) 1.9 3.0 14.1 13.0 11.4 1.5 2.1 Bank Aljazira 12.3 12.5 Neutral 13.0 3.9 1.7 7.4 10.0 9.3 0.8 3.1 Banque Saudi Fransi 28.4 34.0 Buy 9.3 2.1 9.1 10.7 9.7 9.0 1.1 7.3 Bupa 99.5 104.9 Neutral (24.3) 1.2 2.1 15.2 17.4 16.1 3.4 2.0 Buruj Cooperative Insurance Company 32.4 48.0 Buy 34.3 3.8 0.2 9.8 9.7 8.6 2.1 1.8 Malath Insurance 13.7 14.0 Neutral 0.9 5.7 0.2 N/M 22.8 12.5 1.4 0.0 Riyad Bank 12.0 11.3 Neutral 3.8 1.3 9.6 14.1 11.5 10.1 1.0 6.6 SAIB 14.7 14.0 Neutral 3.4 0.2 2.9 9.8 8.9 8.3 0.8 4.1 Samba Financial Group 22.3 26.0 Neutral (8.3) 3.1 11.9 10.1 10.2 9.3 1.0 6.8 Saudi British Bank 26.9 30.0 Buy 7.6 2.2 10.8 11.5 10.7 9.7 1.2 5.3 Tawuniya 92.7 118.0 Buy 6.8 1.5 3.1 15.8 17.5 15.5 3.6 2.9 Wala'a Insurance 32.2 50.0 Buy 43.6 5.6 0.3 11.9 9.3 8.7 2.2 0.0 Healthcare Al Hammadi Co. 35.6 45.0 Buy (14.4) 1.1 1.1 58.5 40.7 35.3 2.9 1.3 Dallah Healthcare Holding Company 104.0 125.0 Neutral 9.6 1.2 1.6 27.3 21.4 20.6 3.6 2.4 Middle East Healthcare Co. (MEAHCO) 51.7 78.0 Buy (29.6) 1.5 1.3 13.1 16.0 14.0 2.8 3.9 Mouwasat 159.3 187.0 Buy 7.7 2.6 2.1 31.0 25.9 22.8 5.5 1.9 National Medical Care Company 41.1 47.0 Neutral (37.7) 2.2 0.5 36.6 23.5 17.7 1.9 1.0 SPIMACO 28.8 40.5 Buy (29.6) 1.5 0.9 11.0 21.4 16.9 1.1 3.5 Industrials Abdullah A. M. Al-Khodari Sons Co. 8.3 7.1 Sell (36.8) 6.6 0.1 N/M N/M N/M 0.7 0.0 National Industrialization Company 14.6 18.0 Neutral (16.3) 6.3 2.6 46.9 18.3 10.6 1.1 0.0 Saudi Ceramics 25.2 29.2 Buy (24.1) 1.7 0.3 51.4 N/M 53.4 0.7 0.0 Source: Company data, EFG Hermes estimates
91 EFG Hermes Coverage THE YEAR AHEAD - 2018
Saudi Arabia (continued) Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (SAR) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017 Materials Advanced Petrochemicals 46.2 53.0 Buy 0.6 1.8 2.4 12.4 13.6 12.6 3.0 6.1 Al Jouf Cement Company 8.2 6.7 Sell 0.1 3.3 0.3 16.3 28.5 20.2 0.7 0.0 Arabian Cement Company (Saudi) 33.0 41.2 Buy (26.1) 1.9 0.9 6.7 16.2 12.7 1.1 11.5 Chemanol 8.8 4.0 Sell 10.2 12.2 0.3 N/M N/M N/M 1.0 0.0 City Cement Company 10.3 12.5 Buy (32.3) 1.6 0.5 9.1 18.9 13.2 0.9 4.8 Eastern Province Cement Company 22.7 28.1 Buy (34.3) 0.7 0.5 8.6 14.8 12.5 0.9 5.5 Maaden 53.2 42.0 Sell 36.5 4.0 16.6 N/M 55.3 37.4 2.4 0.0 Northern Region Cement Company 9.9 8.3 Sell (23.2) 1.0 0.5 12.8 33.8 20.8 0.9 2.0 Qassim Cement Company 44.8 46.1 Neutral (33.4) 0.7 1.1 9.8 15.8 14.3 2.3 5.8 SABIC 101.5 105.0 Neutral 10.9 119.7 81.2 17.0 14.9 14.2 1.8 4.9 SAFCO 62.0 60.5 Neutral (16.9) 4.5 6.9 25.0 22.4 13.3 3.5 3.2 Sahara Petrochemicals 14.8 19.0 Buy 0.6 4.3 1.7 15.7 12.1 10.6 1.1 6.7 Saudi Cement Company 39.9 47.1 Buy (43.9) 2.3 1.6 6.8 13.3 13.3 2.1 7.0 SIPCHEM 16.1 18.5 Neutral (15.0) 2.9 1.6 84.1 17.1 12.6 0.7 0.0 Southern Province Cement Company 48.1 45.2 Neutral (41.5) 1.2 1.8 7.6 20.7 18.2 2.2 4.2 Tabuk Cement Company 12.8 11.2 Sell 0.6 2.0 0.3 21.1 N/M 52.6 1.0 0.0 Yamama Cement Company 16.2 16.0 Neutral (28.9) 0.9 0.9 9.0 26.3 19.2 1.0 2.5 Yanbu Cement Company 26.0 30.9 Buy (35.8) 1.7 1.1 7.4 15.9 13.8 1.2 5.8 YANSAB 59.5 65.0 Buy 10.0 5.5 8.9 14.7 14.1 12.7 2.0 5.9 Telecom Services Etihad Etisalat 14.0 24.5 Neutral (41.6) 8.7 2.9 N/M 41.6 27.7 0.7 0.0 Saudi Telecom Company 69.5 68.3 Neutral (4.2) 3.1 37.1 16.4 14.8 14.7 2.2 5.8 Zain KSA 7.1 6.6 Neutral (14.8) 9.6 1.1 N/M N/M N/M 1.8 0.0 Source: Company data, EFG Hermes estimates
Tanzania Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (TZS) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017 Financials CRDB Bank 160.0 300.0 Buy (36.0) 0.1 0.2 5.6 6.2 4.0 0.6 6.3 National Microfinance Bank 2,750.0 2,665.0 Neutral 0.0 0.0 0.6 8.8 26.1 7.3 1.7 1.3 Materials Tanga Cement Co. 1,200.0 622.3 Sell (25.0) 0.0 0.0 17.7 N/M N/M 0.4 0.0 Tanzania Portland Cement Co. 1,460.0 1,639.5 Neutral (36.2) 0.0 0.1 6.6 11.9 10.5 1.4 10.9 Source: Company data, EFG Hermes estimates
92
EFG Hermes Coverage THE YEAR AHEAD - 2018
UAE Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (AED) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017
Consumer
Agthia 5.0 6.3 Neutral (29.2) 0.7 0.8 11.1 13.3 13.0 1.7 3.0 Financials
AD Commercial Bank 6.7 8.2 Neutral (2.6) 2.4 9.5 8.7 8.3 7.5 1.3 6.7 AD Islamic Bank 3.7 4.1 Neutral (2.1) 0.1 3.2 7.2 6.8 6.5 1.1 6.3 Commercial Bank of Dubai 4.1 3.9 Sell (21.2) 0.2 3.1 11.6 10.6 9.7 1.3 5.5 Dubai Islamic Bank 6.0 7.6 Buy 7.7 7.6 8.1 10.4 8.5 7.8 1.8 7.5 Emirates NBD 8.1 10.1 Buy (4.6) 2.9 12.3 6.8 6.6 6.1 1.0 5.6 First Abu Dhabi Bank 10.2 11.3 Neutral 1.6 6.2 30.1 10.2 10.2 9.4 1.3 6.1 RAK Bank 4.7 5.6 Buy (5.1) 0.1 2.1 11.9 9.2 8.2 1.2 7.4 Union National Bank 3.8 4.5 Neutral (15.4) 0.5 2.9 7.0 6.4 6.5 0.6 5.9 Industrials
Air Arabia 1.2 1.2 Neutral (6.8) 1.5 1.6 14.7 13.9 13.3 1.1 6.5 Aramex 4.7 5.1 Neutral 16.0 0.8 1.9 16.2 16.1 13.9 2.8 3.6 DEPA 0.3 0.5 Buy (8.9) 0.0 0.2 15.8 5.9 12.7 0.6 4.3 DP World** 24.4 27.5 Buy 39.3 5.9 20.2 18.0 16.5 15.4 2.1 1.6 RAK Ceramics 2.6 2.8 Buy 6.1 2.6 0.6 N/M 11.9 10.6 0.8 7.7 Real Estate & Hospitality
Aldar Properties 2.2 2.8 Buy (17.1) 2.8 4.7 6.2 6.8 6.2 0.7 5.0 DAMAC Properties 3.3 2.6 Sell 31.2 2.1 5.5 5.4 6.1 6.0 1.4 7.5 DXB Entertainments 0.7 0.7 Neutral (49.7) 2.1 1.4 N/M N/M N/M 0.8 0.0 Emaar Malls Group* 2.1 3.0 Buy (20.2) 1.6 7.4 14.5 13.7 11.6 1.6 4.8 Emirates REIT (CEIC) Limited** 1.0 1.3 Buy (15.7) 1.3 0.3 6.1 4.8 8.8 0.6 8.2 Telecom Services
du 5.0 6.1 Neutral (19.8) 0.5 6.2 13.0 12.5 12.6 2.8 6.8 Etisalat 16.5 18.6 Neutral (12.5) 6.0 39.0 16.4 16.1 15.5 2.8 4.9
*Price as of 10 December 2017 ** Currency in USD Source: Company data, EFG Hermes estimates
Vietnam Price as of 7 December 2017 Company Price TP Rating YTD Perf. ADVT MCap P/E (x) P/B (x) DY (%) (VND) (%) (USDmn) (USDbn) 2016 2017 2018 2017 2017
Consumer
Mobile World Investment Corp 128,700.0 138,150.0 Buy 65.0 3.8 1.7 42.9 24.3 17.6 7.0 1.7 Vietnam Dairy Products 186,000.0 187,200.0 Neutral 48.1 7.3 11.9 29.6 24.4 22.0 10.8 3.2 Financials
Asia Commercial Bank 36,200.0 30,577.6 Buy 105.7 3.6 1.6 28.0 19.9 14.0 2.3 0.0 Bank For Foreign Trade 47,600.0 30,962.5 Sell 34.3 4.3 7.5 30.4 25.3 18.3 3.4 2.3 Military Commercial Joint 24,700.0 25,592.6 Buy 85.2 6.7 2.0 16.1 16.1 11.0 1.6 2.3
Source: Company data, EFG Hermes estimates
93 Contacts & Disclaimer
Research Contacts
Sales Contacts
Disclaimer NAME POSITION E-MAIL DIRECT NUMBER
Ahmed Shams El Din Managing Director - Head of Research [email protected] +20 2 35356143
Macro Team
Mohamed Abu Basha Director, Head of Macroeconomic Analysis [email protected] +20 2 36361157
Mohamed El Kholy Analyst, Macro-Strategy [email protected] +20 2 35356179
Strategy Team
Simon Kitchen Managing Director, Head of Strategy [email protected] +20 2 35356129
CONTACTS Mohamed Al Hajj Vice President, Head of MENA Strategy [email protected] +971 4 364 1903
Vinita Kotedia Associate, Strategy [email protected] RESEARCH TEAM CONTACTS
Farah Abousamra Analyst, Strategy [email protected] +20 2 35356289
Chemicals & Materials
Yousef Husseini Vice President, Chemicals [email protected] +02 2 35356013
Sameer Kattiparambil Vice President, Materials [email protected] +968 2476 0023
Dina Hicham Analyst, Materials [email protected] +20 2 35356049
Omar El Gharabawi Analyst, Chemicals [email protected] +02 2 35356145
Consumer & Retail
Hatem Alaa, CFA Director, Head of Consumer & Retail [email protected] +20 2 35356156
Nada Amin Vice President, Consumer & Retail [email protected] +20 2 35356385
Mirna Maher Analyst, Consumer & Retail [email protected] +20 2 35356141
Seif Rageh Analyst, Consumer & Retial [email protected] +20 2 35356103
Financials
Elena Sanchez-Cabezudo, CFA Managing Director, Head of MENA Financials [email protected] +971 4 363 4007
Shabbir Malik Director, Financials [email protected] +971 4 363 4009
Rajae Aadel Associate VP, Financials [email protected] +971 4 363 4003
Ahmed El Shazly Analyst, Financials [email protected] +20 2 35356570
Healthcare
Wafaa Baddour, CFA Managing Director, Head of Healthcare [email protected] +20 2 35356163
Adham El Badrawy Analyst, Healthcare [email protected] +20 2 35356581
Industrials / Small & Mid-Caps
Ahmed Hazem Maher Associate VP, Industrials / Small & Mid-Caps [email protected] +20 2 35356137
Alaa Saleh Aly Analyst, Industrials / Small & Mid-Caps [email protected] +20 2 35356563
Real Estate & Construction
Mai Attia Director, Head of Real Estate & Construction [email protected] +20 2 35356434
Karim Mahmoud Sherif Analyst, Real Estate & Construction [email protected] +20 2 35356152
Telecommunications
Omar Maher Vice President, Telecommuncations [email protected] +20 2 35356388
Lara Aboul Dahab Analyst, Telecommunications [email protected] +20 2 35356268
95 NAME POSITION E-MAIL DIRECT NUMBER
Frontier
Kato Mukuru Managing Director, Head of Frontier Research [email protected] +971 43641904
Murad Ansari Managing Director, Financials [email protected] +971 553436101
Ronak Gadhia Director, Sub-Saharan Banks [email protected] +44 2075182905
Fahad Shaikh Vice President, South Asian Consumer [email protected] +971 43634005
Moses Waireri Njuguna Associate VP, Cement / Consumer [email protected] +254 203743038
Muammar Ismaily Associate VP, Financials [email protected] +254 203743036
Rebia Qadri Associate, Fertilizers / Conglo. / Consumer [email protected] +92 2135141100-04 RESEARCH TEAM CONTACTS
Saleem John Associate, Data mangement [email protected] +92 2135141100-04
Shahmir Kurd Associate, Power / Steel / Pharma / Textile [email protected] +92 2135141100-04
Silha Rasugu Associate, Utilities / Telcos / Oil & Gas [email protected] +254 203743037
Danish Owais Analyst, Oil & Gas [email protected] +92 2135141100-04
Jawad Shamim Analyst, Cement / Bank support [email protected] +92 2135141100-04
Editing Team
Russell Curtis Director, Supervisory Analyst [email protected] +971 43641902
Rehab El Kobtan Vice President, Editor [email protected] +20 2 35356179
Amr Shehata Associate VP, Editor [email protected] +20 2 35356284
Production & Distribution
Haidy Samir Vice President, Head of Production & Distribution [email protected] +20 2 35352180
David Nasr Associate, Production & Distribution [email protected] +20 2 35356500
Sandra Azer Analyst, Production & Distribution [email protected] +20 2 35356469
Quantitative Research
Ahmed Difrawy Director, Head of Quantitative research [email protected] +20 2 35356144
Yousef Mourad Associate, Quantitative research [email protected] +20 2 35356572
Ahmed Abdelmeged Analyst, Quantitative research [email protected] +20 2 35356065
Retail
Refaat Mahmoud Vice President, Retail [email protected] +20 2 35356095
Sandra Raef Vice President, Retail [email protected] +20 2 35356059
Ahmed Nabil Sarhan Retail Strategist [email protected] +20 2 35356442
Doaa Mansour Project Coordinator [email protected] +20 2 35356174
Admin
Fuyumi Archer Executive Support Manager, Research [email protected] +971 43634008
Nermeen Abdel Khalek Senior Executive Assistant, Research [email protected] +20 2 35370939
96 SALES CONTACTS Junaid Iqbal Karachi Office Muathi Kilonzo Nairobi Office Miljana Asanovic Karim Baghdady New York Office Ali Khalpey Sruti Patel London Office Ayah AbouSteit Ramy ElEssawy Dubai Office Carol Aziz Yasser Waly Wael ElTahawy Mohamed Aly Cairo Office Institutional Sales NAME Bassam Nour Individual Sales Loay AbdelMeneam Rami Samy Hany Ghandour Hatem Adnan GCC HighNetWorth Sales [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] E-MAIL [email protected] [email protected] [email protected] [email protected] [email protected] 97 +92 2135141122 +254 2037433032 +1 2123151373 +1 2123151292 +44 7818444210 +44 2075182903 +971 43634091 +971 43634093 +20 235356312 +20 235356339 +20 235356359 +20 235356052 DIRECT NUMBER +20 235356069 +966 548800544 +971 43634099 +20 235356007 +20 235351083 DISCLAIMER the longer-term stock’s fundamental rating. relative securities tootherstockswithintheirwiderpeergroup. Short-termtradingrecommendations maytherefore differ equity from of valuation relative and expectation return total longer-term a both things, other among reflects, this report. Short-termtradingideasandrecommendations are different from ourfundamental equityrating,which event thatwouldhaveashort-termpriceimpactontheequity securitiesofthecompanyorcompanies’subject This report maycontainashort-ormedium-termrecommendation ortradingidea,whichunderscores anear-term that bypurchasing suchsecurities,includingGDRs,theyeffectively assumecurrency risk. of exchange may affect the value or income of any security mentioned in this report. Investors should therefore note and levelsoftaxationmaychangewhichwouldimpacttheexpected returnfrom suchsecurities. Foreign currency rates therefore Basis may fluctuate. price or value their and securities, fromsuch Income risk. liquidity and risk default risk, Investment inequitiesorothersecuritiesare subjecttovariousrisks,including,among others,marketrisk,currency document prepared andissuedinconnectionwiththeoffering. based onlyonpublicinformationsuchsecurityand/or madeavailableintheprospectus oranyother The decisiontosubscribeorpurchase securitiesinanyoffering shouldnotbebasedonthisreport andmustbe connection therewith. loss howsoeverarising,directly orindirectly, from anyuseofsuchinformationoropinionsotherwisearisingin contained withinthisreport andnoliabilitywhatsoeverisacceptedbyEFGHermesoranyotherpersonfor EFG Hermesdoes complete. or accurate not be may not represent it orwarrant,eitherexpressly orimplied,theaccuracycompleteness oftheinformationoropinions and information such verified independently not have we Although theinformationinthisreport hasbeenobtainedfrom sources that EFGHermesbelievestobereliable, report constituteourjudgment asofthisdateandare subjecttochangewithoutnotice. estimates andstatementsregarding future prospects maynotberealized. 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99 GUIDE TO ANALYSIS EFG Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and regional economic environment.In special situations, EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the corresponding fair value. For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms:
Rating Potential Upside (Downside) % DISCLAIMER Buy Above 15% Neutral (10%) and 15% Sell Below (10%)
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