October 2016

Market Report Why invest in the Saudi Equity Market now?

Highlights

A number of key developments have taken place in Saudi Arabia in 2016 featuring the government’s pledge

to implementing structural economic reform and austerity measures. Such measures will have a negative

impact on consumer spending which will mostly effect the retail sectors earnings on the short term. In April,

we witnessed the debut of the Saudi Vision 2030 and, more recently, we witnessed major changes on a

ministerial level. Crammed in between all these announcements was a similarly vital but perhaps less

publicized announcement by the Capital Market Authority (CMA), which will have a big impact on the Saudi

Stock Exchange (Tadawul). Though some of these amendments focused on relaxing previous guidelines and

rules on participation and ownership levels and percentages of qualified foreign institutional investors

(QFIs), another component of these reforms and restructurings introduced new styles of trading options

and settlement processes, in line with international standards.

2

TASI

Below you’ll find [Figure 1] the cumulative companies earnings in green, and the Tadawul All Share Index

values in red, demonstrating that the market is undervalued based on historical relationship between the

two. Followed by [Figure 2] Tadawul All Share Index returns in comparison to its compounded annual

growth rate (CAGR) another indicator that the market has an attractive upside potential.

Source: Tadawul

Source: Tadawul

Figure 1

Figure 2

3

Capital Markets Performance

[Figure 4] shows the year-to-date performance of TASI as well as international markets.

Historical TASI P/E

[Figure 3] illustrates TASI returns against TASI PE. The three red lines marks three different boundaries that

TASI trades at in the past 10 years. The highest boundary shows where the market is overpriced at such

levels. The average boundary shows that the market is fairly priced at such levels. The lowest boundary

illustrates that the market is underpriced and rarely trades below such levels. The market currently is

trading below the lowest boundary and it’s an indication to enter the market.

P/E = 19.10x

P/E = 14.6x

Average P/E = 16.62x

Figure 3

Source: Tadawul, SKFH

Figure 4

4

Top 5 TASI movers

Fundamental Analysis

The CAGR for revenues increased by 7.00% (the last 5 years) with an average net margins of 17.6%.

Moreover, long-term debt for listed companies in the same period have decreased by 3%. We project a

slight decrease in net margins in the near future mainly in the petrochemical sector due to the volatility of

commodity prices.

6%

12%

18%

24%

2010 2011 2012 2013 2014 2015

Capex to Sales

50.00%

55.00%

60.00%

65.00%

70.00%

2010 2011 2012 2013 2014 2015

Debt to equity

12.00%

14.00%

16.00%

18.00%

20.00%

2010 2011 2012 2013 2014 2015

Net Profit Margins

1,800.00

2,000.00

2,200.00

2,400.00

2,600.00

2,800.00

3,000.00

3,200.00

2010 2011 2012 2013 2014 2015

Sales per Share

CAGR of 7%

AlRajhi 11.0%

SABIC 9.2%

Jabal Omar 5.1%

NCB 4.3%

STC

3.3%

5

[Why invest in the market]

Robust Fundamentals and attractive multiples

Although TASI is taking a beating in the past couple of weeks, 2017 is set to be game changing year for Saudi

capital markets. TASI is currently trading at a PE of 14.15 and a price to book of 1.39. Moreover, there are

several profitable companies trading below their book value, in simple terms if a company defaults and

liquidates its assets, an investor would receive back his shares with a profit, given he had bought them when

the share price was below the book value. Another point to emphasize on, TASI’s multiples are trading at a

discount comparing to indices in the region as well as in emerging markets.

MSCI Emerging Market Index inclusion

The Kingdom of Saudi Arabia is on course to join MSCI Inc.’s emerging markets index in 2018, according to

the chairman of the market regulator, after the kingdom offered qualified foreign investors greater access

to its almost $400 billion stock exchange.

CMA Amendments

CMA made announcement this year relates to the introduction of two major additions to Tadawul, moving

the bourse more in line with international best practices. The 1st of these measures is the movement from

current trade settlements of T+0 (same day settlement) to T+2 (Trade plus two settlement). The second of

these additions is the approval of securities lending and covered short selling, a huge step forward, which,

once initiated, would make Tadawul the first regional bourse to have such trading practices.

Steady Dividends

Despite the current rough market conditions, we screened several companies that pay healthy steady

dividends. Given that not all companies can maintain a high dividend yield in the short term due to the

downturn in the Saudi economy, resilient companies will continue to do so. The tables below highlight the

sectorial total dividend yield:

Sector Total Dividend

Yield

Banks and Financials 4.26%

Petrochemical 5.86%

Cement 11.82%

Retail 3.45%

Energy & Utilities 4.27%

Agriculture and food 3.43%

Telecom & IT 6.27%

Sector Total Dividend

Yield

Insurance 0.98%

Multi-Investment 4.56%

Industrial Investment 0.92%

Building & Construction 5.38%

Real Estate Development 1.07%

Transportation 6.24%

Media and Publishing 0.00%

Hotels & Tourism 2.80%

6

IPO market

Qualified investors can now participate directly in initially public offerings of local

companies.

Mohammed Al Jadaan, the CMA chairman, told Bloomberg that the Tadawul All Share

Index will be expanded to 250 companies from about 170 at present within seven years,

boosted by a series of government privatizations and private sector listings.

Tadawul is issuing a secondary market in early 2017, the new equity market is designed to

attract small and medium sized companies (SMEs) making it easier for them to list.

The CMA has recently approved more than 20 Public IPO fund.

Chart below shows the average returns for IPO’s since its commencement.

Sectors Multiples

Below are TASI sectors, their constituent sorted by the lowest P/E multiple. The rationale behind

using a 3-month comparison chart is to draw attention to the recent government austerity

measures and the overall sentiment of the market and observe how each sector reacted.

Source: Tadawul, SKFH, CMA

7

[Banks & Financial Services]

Key Highlights

According to SAMA data, banking sector profits YTD Aug-16 are up 4% Y/Y.

SAMA foreign assets have declined 15% Y/Y and 9% YTD in Aug-16.

KSA Banks trading at 30%+ discounts to regional and EM peers.

[Petrochemical Industries]

Key Highlights

Growth in global oil demand is expected to decline to 1.2 mbpd in 2017 from 1.3 mbpd in 2016.

OPEC decided on production cut to 32.5 to 33 mbpd.

Company P/E P/B Div Yield

AlJazira Bank 4.53 0.51 NA

ANB 5.14 0.67 6.58%

Saudi Hollandi Bank 5.24 0.82 1.37%

Saudi Fransi Bank 5.72 0.82 5.26%

SAAB 6.02 0.88 4.17%

SAIB 6.27 0.59 7.00%

SAMBA 6.69 0.86 5.20%

Riyad Bank 7.12 0.74 7.57%

NCB 7.73 1.22 4.34%

AlRajhi Bank 10.76 1.70 2.91%

AlInma Bank 11.14 0.95 4.21%

AlBilad Bank 12.69 1.43 NA

Company P/E P/B Div Yield

Alujain 7.78 0.81 NA

Petrochem 9.25 1.25 NA

SIIG 10.78 0.82 NA

Advanced 11.84 2.88 6.24%

SABIC 15.03 1.57 6.53%

YANSAB 15.34 1.82 4.11%

SAFCO 17.91 4.28 9.13%

Sahara Petrochemical 19.84 0.85 4.76%

Sipchem 27.67 0.82 4.56%

Saudi Kayan Negative 0.71 NA

Petro Rabigh Negative 1.05 4.95%

Nama Chemicals Negative 0.60 NA

Chemanol Negative 0.49 NA

TASNEE Negative 1.12 NA

8

[Cement]

Key Highlights

The sector is trading at a discount to GCC and EM peers.

Despite continuing pricing pressure and weak volume growth, the average dividend yield of the

Saudi Cement Sector [7.4%] is the highest among GCC [6.3%] and EM peers [4.7%].

Company P/E P/B Div Yield

Arabian Cement 5.81 1.08 12.61%

Yanbu Cement 6.56 1.37 17.24%

YSCC 6.62 0.97 16.95%

EPCCO 7.14 0.93 10.16%

Southern Cement 7.76 2.48 10.26%

Saudi Cement 8.53 2.66 11.94%

HCC 8.96 0.91 11.11%

City Cement 9.14 1.05 10.55%

Najran Cement 9.42 0.83 10.00%

Northern Cement 9.69 0.90 11.11%

QACCO 9.89 2.54 12.25%

Jouf Cement 12.08 0.56 NA

Tabuk Cement 13.40 0.87 8.04%

UACC Negative 1.64 NA

[Energy & Utilities]

Key Highlights

The dividend yield of the sector is one of the healthiest in the market.

The sector will most likely benefit from rising electricity consumption as well as rise in usage tariffs.

Company P/E P/B Div Yield

GASCO 13.24 1.77 5.47

Saudi Electricity 46.47 1.19 4.11

9

[Retail]

Key Highlights

During the first half of 2016, total group revenues showed modest, though encouraging, +1%

growth to SAR 41.3 billion.

After the government announcement of wages and allowances spending measures, we believe it

is reasonable to think retail will have most of the impact after such announcement. It will take three

months for PoS data to show the actual impact.

[Real Estate Development]

Key Highlights

The sector is witnessing a slowdown in overall property sales, a 6% drop.

Company P/E P/B Div Yield

L’Azurde 7.52 1.61 NA

AlHokair 8.87 1.92 NA

Aldrees 9.11 1.80 7.17%

Farm Superstore 9.58 1.61 5.43%

Jarir 10.47 4.84 9.07%

SACO 10.88 2.71 3.65%

Al Khaleej Training 13.53 1.17 6.97%

Saudi German Hospital 13.61 3.80 3.60%

A.Othaim Market 15.39 3.10 2.61%

Care 18.86 2.99 1.18%

Dallah Health 24.01 3.29 1.88%

Mouwasat 24.76 4.88 1.75%

Thimar 26.76 1.87 NA

SASCO 33.07 0.85 4.48%

Al Hammadi 34.56 2.73 2.45%

Extra Negative 1.26 5.25%

Fitaihi Group Negative 0.80 NA

Company P/E P/B Div Yield

Arriyadh Development 7.05 1.27 7.24%

Alandalus Property 10.16 1.09 3.61%

Taiba 17.75 1.46 5.71%

Real Estate Co. 17.99 0.60 5.88%

Dar Al-Arkan 21.83 0.29 NA

MCDC 44.60 1.80 2.87%

Emaar EC HIGH 1.30 NA

KEC Negative 1.48 NA

Jabal Omar Negative 5.43 NA

10

[Agriculture and Food]

Key Highlights

It is expected that food consumption will continue to grow and will reach 250 billion by the end of

2016.

It is expected that food sales in the kingdom will grow by 6.1% CAGR from the years 2016 to 2020.

Subsides cut will more likely to reduce gross profit margins that the sector usually enjoys.

[Telecom & IT]

Key Highlights

Number of subscribers are expected to reach 55.12 million subscribers by the end of 2016.

Local Telecom regulator is set to issue a unified license to authorized operators which will enable

operators to provide fixed-and-mobile services and will allow increased competition and subscriber

options through enhancing network efficiency and cutting costs.

STC has the largest market share in the market, Mobily second, and Zain Third.

Finger-prints database and ending the unlimited internet will affect the sectors profitability.

Company P/E P/B Div Yield

Al Jouf 8.68 0.98 3.46%

Catering 11.21 5.51 7.98%

Anaam Holding 11.77 1.27 NA

QACO 12.18 1.05 NA

Nadec 12.55 1.29 2.16%

HB 13.02 2.36 4.93%

Savola Group 13.06 1.57 6.64%

SADAFCO 13.77 3.79 3.27%

Herfy Foods 14.52 3.88 4.65%

Jazan Development 16.54 0.67 NA

Almarai 21.20 3.96 1.57%

Shaqiya Dev Co. Negative 2.99 NA

TADCO Negative 0.69 5.56%

SFICO Negative 2.77 NA

Wafrah Negative 1.76 NA

Company P/E P/B Div Yield

STC 12.98 1.86 7.27%

Etihad Etisalat Negative 0.96 NA

Zain Saudi Negative 1.09 NA

Atheeb Telecom Negative 1.16 NA

11

[Insurance]

Key Highlights

Claims ratio fell in the insurance sector by the end of 2015 to reach 77.7% compared to 82.9% at

the end of 2014.

The ROE ratio surged to 10.1% in Q3 2016 versus 8.0% in 2015 while ROA stood at 2.2%.

Net earned premiums to equity ratio posted 222% in Q3 2016 compared to 215% in 2015.

Company P/E P/B Div Yield

Sagr Insurance 3.81 1.47 6.41%

SAICO 8.53 1.28 NA

Arabian Sheild 9.28 1.34 NA

Gulf Union 9.46 1.41 NA

Buruj 10.14 1.61 NA

Tawuniya 14.25 3.33 1.21%

Bupa Arabia 14.26 5.56 1.72%

Walaa Insurance 16.79 1.74 NA

Al Rajhi Takaful 16.81 2.18 NA

ACE 17.98 1.37 NA

ATC 19.33 2.32 1.81%

Allianz SF 20.08 1.90 NA

Al Alamiya 20.44 2.23 NA

Solidarity 21.37 1.59 NA

ACIG 21.54 2.03 NA

AXA-Cooperative 22.78 1.08 NA

Amana Insurance 25.80 1.95 NA

Jazira Takaful 38.28 2.12 NA

Salama HIGH 1.37 NA

Gulf General Negative 1.31 NA

SABB Takaful Negative 1.95 NA

UCA Negative 1.58 NA

Alinma Tokio M Negative 2.45 NA

MetLife AIG Alarabi Negative 2.70 NA

AICC Negative 0.91 NA

Trade Union Negative 1.07 NA

Wataniya Negative 5.51 NA

Saudi Re Negative 0.63 NA

Wafa Insurance Negative 2.29 NA

Enaya Negative 1.53 NA

Al Ahlia Negative 1.44 NA

Malath Insurance Negative 1.98 NA

MEDGULF Negative 2.02 NA

12

[Hotel & Tourism]

Key Highlights

The sector will more likely to benefit from the National Transformation Plan 2030 and its big

allocation for local tourism, driven mainly by the growth in the religious tourism.

The sector may witness a slowdown in growth due to the government budget cuts on ministries

travel ticketing.

[Multi-Investment]

Key Highlights

Sector performance proves sturdy in times of market stress.

Company P/E P/B Div Yield

Al TAYYAR 5.96 1.11 NA

Al Hokair Group 9.60 1.99 9.10%

Dur 13.59 0.95 7.08%

Shams HIGH 2.34 NA

Company P/E P/B Div Yield

SISCO 9.22 0.94 3.68%

Kingdom HIGH 1.50 4.57%

Aseer Negative 0.73 7.14%

ADC Negative 0.98 2.93%

SAIC Negative 0.56 NA

SARCO Negative 1.27 NA

13

[Industrial Investment]

Key Highlights

The sector’s profitability might continue to be affected by lower commodity prices.

[Building & Construction]

Key Highlights

The sector is facing challenges due to the drop in number of construction contracts by MoF

contributions.

On the upside, the sector will benefit from real estate development due to fees on undeveloped

land.

Company P/E P/B Div Yield

Mepco 6.12 0.93 3.70%

SHAKER 8.10 0.74 NA

SCC 10.12 1.24 6.52%

Zoujaj 13.87 0.79 9.68%

AlAbdullatif 15.26 0.81 12.50%

Maadaniyah 16.28 1.22 2.79%

BCI 19.78 1.89 3.13%

Pharmaceutical 20.61 1.34 3.27%

FIPCO 24.17 1.69 NA

MAADEN HIGH 1.42 NA

SIECO Negative 2.36 NA

Takween Negative 2.52 NA

AlSorayai Group Negative 0.74 NA

SPM Negative 0.68 NA

Astra Indust Negative 0.62 NA

Company P/E P/B Div Yield

Zamil Industries 6.02 0.68 9.17%

Saudi Cermaics 6.55 0.68 7.84%

Al Babtain 6.63 1.31 8.44%

AL Yamamah Steel 6.67 1.78 NA

Bawan 8.59 1.26 6.30%

SVCP 9.30 3.50 9.34%

ASLAK 10.64 1.74 6.71%

Red Sea 15.45 1.46 3.14%

EIC 18.19 1.22 5.88

NGC 25.84 0.65 6.42%

Aminatit 26.65 0.49 11.02%

SSP 35.04 0.92 3.52%

MESC Negative 0.78 NA

AlKhodari Negative 0.52 NA

Saudi Industrial Negative 0.78 NA

SCC Negative 0.95 NA

APC Negative 0.98 NA

14

[Transportation]

Key Highlights

The sector is forecasted to benefit from increase in domestic trip activities.

[Media and Publishing]

Key Highlights

Tadawul changes Tihama’s status after losses offset.

SRMG subsidiary Taoq wins SAR 78 million contracts.

Company P/E P/B Div Yield

Bahri 5.85 1.36 7.67%

Budget Saudi 8.26 1.74 4.75%

SGS 10.41 2.63 5.07%

Mubarrad 13.37 2.47 NA

SAPTCO 17.96 1.02 4.12%

Company P/E P/B Div Yield

SPPC Negative 0.75 NA

Tihama Negative 4.22 NA

SRMG Negative 1.68 NA

15

Economic Indicators

Below you’ll find the kingdoms most important economic indicators their and frequency:

Overview Last Reference Previous Frequency

GDP Growth Rate 1.5% March 2016 1.8% Quarterly

Unemployment Rate 5.6% January 2016 5.6% Quarterly

Inflation Rate 3.3% August 2016 3.8% Monthly

Interest Rate 2% September 2016 3% Daily

Balance of Trade SAR 16,295 Million March 2016 SAR 22,467 Million Quarterly

Government Debt to GDP 5.9% December 2016 1.6 Yearly

Conclusion and projection

The above market overview and analysis concludes that the current direction of the market is

mainly driven by

1. the oil prices well-being. Such correlation is risky and this concern is being addressed by

focusing more on the non-oil sectors and products.

2. the geopolitical situation in the region.

3. the overall economy growth; the interest rate plays an important role in this segment.

We project the levels of the market to go either direction depending on the outcome of the

mentioned key forces.

16

This report is prepared by asset management department of Saudi Kuwaiti finance house (“SKFH”), an investment firm providing investment

banking, asset management, advisory and custody services. SKFH, might conduct business relationships with the company that is subject of

this report and/ or own its security.

This report is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should

not be relied on as such. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on

the fairness, accuracy, completeness or correctness of the information and opinions contained in this report.

This report is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This report

is not intended as an offer or solicitation with respect to the purchase or sale of any security. This report is not intended to take into account

any investment suitability needs of the recipient. In particular, this report is not customized to the specific investment objectives, financial

situation, risk appetite or other needs of any person who may receive this report. SKFH strongly advises every potential investor to seek

professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her

needs. Any investment recommendations contained in this report take into account both risk and expected return.

To the maximum extent permitted by applicable law and regulation, SKFH shall not be liable for any loss that may arise from the use of this

report or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding

future prospects contained in this report may not be realized. All opinions and estimates included in this report constitute SKFH’s judgment

as of the date of production of this report, and are subject to change without notice. Past performance of any investment is not indicative of

future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor

may get back less than what he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates

may have an adverse effect on the value, price or income of a security. No part of this report may be reproduced without the written

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