GCC Equities - Quarterly Result Preview

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1. 2Q17 July 04th , 2017 GCC Equities – Quarterly Result Preview 6% YoY decline in earnings growth again led by Petrochemicals SICO Research GCC Equities Quarterly Results Preview Our GCC coverage universe aggregate 2Q17 earnings are expected to decline 6% YoY again led by Saudi Petrochemicals, especially, SABIC. Nishit Lakhotia, CFA, CAIA +973 1751 5021 Nishit.Lakhotia@sicobahrain.com  Banks – GCC banks to report another modest core earnings performance in 2Q17. We expect KSA banks to witness a mild uptick in NIM, which however would be offset by higher provisioning charges. We would not be surprised to see strong non-interest income growth in growth as markets were upbeat. Increased competition and deposits growth would negatively impact UAE banks in the quarter. We expect a weak quarter for Qatar as they struggle to manage their liquidity and may witness higher delinquencies. We expect Bahrain banks to deliver modest results, with higher provisioning expected by NBB and stronger fee income by BBK. Results boost- DIB (TP: AED 7.2), NCB (TP: SAR 48), Al Rajhi (TP: SAR 63) Results drag- QNB (TP: QAR 165), CBQ (TP: QAR 30)  Petrochemicals– On an aggregate level, we forecast earnings to decline 16% YoY and 20% QoQ led by lower product prices and multiple shutdowns across the sector. Product prices are in a down trend, average/median product prices for a basket of major products declined 11% / 9% QoQ but gained 7% / 6% YoY.  Real estate – Expect growth in property development segments of Emaar and Aldar on acceleration in revenues recognition from under construction properties which should support core earnings growth YoY. Seasonal slowdown in hospitality and leisure sub segments to impact sectors earnings QoQ. For DXBE, we estimate park arrivals to pick up 7% QoQ however revenues are estimated to fall 8% sequentially on aggressive ticket price discounts. Preferred Pick: Emaar (TP: AED 8.7)  Building Materials & Industrials– Another weak quarter with high double digit YoY declines for the building materials sector (cement/ceramics/steel) due to prevailing weakness in the construction sector and seasonal slowdown due to Ramadan/Eid. Within industrials, Ma’aden should report strong YoY growth (+140%) led by recovery in commodity prices and solid cost control. Saudi Electricity should see seasonal strength but YoY results are not comparable due to accounting changes.  Telecom – We expect STC and Ooredoo to deliver better YoY while Zain to be weak due to Sudanese pound affect YoY earnings. Results drag - STC (TP: SAR 73),  Consumers – For Agthia, Delta consolidation to benefit YoY but no pallet sales to Abu Dhabi Government in 2Q unlike last year to have an effect on earnings along with impact from partial subsidy removal.  Logistics and Transportation - Expect continued growth in Aramex core earnings supported by growth from international express. For Agility, margin expansion on higher contribution from infrastructure segment to drive YoY earnings. Eid in June to benefit Air Arabia and Jazeera airways for the month of June but otherwise macro weakness and lower yield to pressure the earnings YoY.  Healthcare - Expect double digit YoY earnings growth in Dallah, Mouwasat and Hammadi. Banks Petrochemicals Real Estate Building Materials Industrials Telecom Consumer Logistics & Transportation Healthcare Total No. of Mcap Revenue Growth companies USD bn YoY QoQ YoY QoQ 21 11 6 7 4 9 2 5 5 70 231.2 128.1 30.9 9.2 47.1 108.9 1.1 9.2 7.4 573.1 -2% -3% 8% -33% 3% -4% -5% -8% 1% -3% 0% -7% -1% -15% 33% 1% 0% -8% -4% 0% -2% -16% -12% -57% 11% 2% -25% -41% -4% -6% -1% -20% -8% -30% -64% 1% -3% -24% -18% -13% Note: Total interest income used as a proxy to revenue for banks © SICO 2017 All Rights Reserved Attention is drawn to the disclaimer and other information in the end Net Income Growth
2. SICO RESEARCH GCC Equities - 2Q17 Results Preview Banks Companies Net Market interest Cap income Net Profit Country Currency Al Rajhi KSA SAR mn 29 .6 2,891 5% 0.2% 2,241 9% 0.9% 232,862 Alinma Bank KSA SAR mn 6.1 817 38% 0.3% 434 6% 3.0% Arab National Bank KSA SAR mn 5.9 1,071 -1% 0.2% 812 Saudi Fransi KSA SAR mn 10.0 1,117 6% 0.5% NCB KSA SAR mn 28.6 3,414 1% Riyad Bank KSA SAR mn 8.9 1,427 Samba KSA SAR mn 13.7 SABB KSA SAR mn ADCB UAE Dubai Islamic Bank USD bn 2Q17E YoY QoQ 2Q17E Loans YoY QoQ 2Q17E Remarks YoY QoQ 4% 1.5% Al Rajhi's earnings growth to be supported by lower provisioning charges, offsetting the impact of lower fee income 74,645 12% 1.5% Alinma would continue to capture loan market share. However NIM expansion would offset the impact of higher provisioning charges -1% 5.7% 117,200 -1% 1.0% Weaker earnings would be driven by lower non-interest income. 1,081 3% -2.1% 130,123 0% 0.8% Expect the bank to moderately increase its loan-to-deposit ratio in 2Q17, which will support its net interest income growth 1.3% 2,627 8% -2.8% 256,745 -3% 1.0% Pick up in non-interest income to offset higher provisioning in the quarter. Balance sheet growth to moderately rise. 5% 0.1% 1,113 -3% 6.2% 142,043 -8% 0.8% Higher provisioning charges and lower non-interest income to continue to impact earnings. 1,360 2% 0.1% 1,292 -2% 5.0% 125,509 -4% 1.0% High provisioning to impact YoY earnings 10.6 1,256 6% 0.4% 1,028 -11% -0.8% 120,924 -8% 1.2% Higher provisioning charges and lower non-interest income to impact YoY earnings in 2Q17. AED mn 9.9 1,662 9% 1.9% 1,134 1% 2.6% 160,601 4% 0.5% Strong YoY balance sheet growth to support net interest income, to offset the impact of higher operating expenses and provisioning charges UAE AED mn 7.6 1,266 12% 2.8% 983 6% 98,339 11% 1.0% Strong lending book growth along with flat NIM to boost net interest income, which would be partially offset by higher provisioning charges Emirates NBD UAE AED mn 12.1 2,481 -3% -0.2% 1,897 -1% 1.3% 296,771 4% 0.5% NIM compression and decline in other income will lead to a flattish revenue growth. Lower opex and provisioning charges YoY to support profits First Abu Dhabi Bank UAE AED mn 30.7 1,840 0.5% 1,276 -7% -4.0% 203,038 0% 1.2% Merger with FGB in the quarter makes the earnings incomparable with 2Q16 Union National Bank UAE AED mn 3.4 647 2% -0.8% 450 -4% Qatar QAR mn 3.2 597 -3% -0.2% 112 Commercial Bank of Qatar 0% -2.5% 0.1% 73,138 4% -0.5% High provisioning to impact YoY earnings -47% 22.5% 80,389 4% -2.0% We expect an overall weak performance across line items in 2Q17 2
3. SICO RESEARCH Companies GCC Equities - 2Q17 Results Preview Net Market interest Cap income Net Profit Country Currency Doha Bank Qatar QAR mn 2 .5 509 -3% -2.4% 305 Qatar Islamic Bank Qatar QAR mn 5.7 830 23% 5.9% 528 -6% Qatar National Bank Qatar QAR mn 31.3 4,131 -26% -1.1% 2,992 -12% USD bn 2Q17E YoY 2Q17E YoY QoQ -14% -16.3% 2Q17E Remarks YoY QoQ 58,280 5% -2.0% We expect an overall weak performance across line items in 2Q17 98,514 2% -1.0% Higher provisioning charges and lower non-interest income to offset the impact of higher net interest income. -6.6% 525,055 6% -2.0% QNB's earnings to decline on high base of 2Q16, when the bank merged Finansbank Turkey -4.9% Ahli United Bank Bahrain USD mn 5.7 205 0.6% 150 3% -5.7% 18,975 -3% 0.5% Lower provisions to support earnings National Bank of Bahrain Bahrain BHD mn 2.0 17 6% -0.4% 14 -1% -6.3% 1,164 13% 4.0% BBK Bahrain BHD mn 1.1 22 -2% -1.1% 16 2% 3.5% 1,805 4% 2.0% We expect the bank to continue booking high provisions which would impact it earnings in 2Q17. We expect fee income to be lower as well. Earnings growth to be supported by strong fee income growth. Oman OMR mn 2.6 70 45 -3% 2.1% 8,085 6% 1.0% Bank Muscat 0% QoQ Loans 3% 0.7% Weaker earnings on the back of a decline in fee income and higher provisioning expected 3
4. SICO RESEARCH GCC Equities - 2Q17 Results Preview Petrochemicals Companies Market Cap Country Currency USD bn 2Q17E YoY QoQ 2Q17E YoY QoQ 2Q17E YoY QoQ KSA SAR mn 82 .24 35,200 2% -5% 7,722 11% -8% 4,374 -8% -16% Lower product prices sequentially to negatively impact earnings Qatar QAR mn 15.47 1,100 -14% -1% 151 -64% -5% 798 -37% -14% Lower product prices sequentially to negatively impact earnings Tasnee KSA SAR mn 2.56 2,531 -34% 2% 383 11% 12% 129 24% 25% Expect slight sequential improvement due to higher titanium dioxide prices Yansab KSA SAR mn 8.19 1,133 -40% -36% 347 -53% -44% 324 -53% -47% 21 day shutdown to weigh on earnings Sipchem KSA SAR mn 1.38 762 -13% -36% 126 28% -45% 37 43% -60% Multiple shutdowns to weigh on earnings Advanced Petrochem KSA SAR mn 2.40 539 -1% 2% 114 -40% -2% 136 -27% 10% 2Q (PP- naphtha) spread is down 1.7% YoY but flat QoQ Alujain KSA SAR mn 0.41 281 -21% -29% 18 -79% -73% 4 -89% -86% 25 day shutdown to weigh on earnings SAFCO KSA SAR mn 7.11 895 26% 6% 331 34% -16% 344 15% -19% Weak urea prices to weigh on earnings Saudi Kayan KSA SAR mn 3.61 2,433 13% -9% 443 52% -20% 198 117% -26% Lower product prices sequentially to negatively impact earnings SIIG KSA SAR mn 2.39 1,485 -10% -12% 392 -28% -38% 145 -33% -53% Multiple shutdowns (SCP and Saudi Polymers) to weigh on earnings Petrochem KSA SAR mn 2.31 1,485 -10% -12% 246 98% -30% 115 -45% -32% 14 day shutdown to weigh on earnings SABIC Industries Qatar Revenue EBIT Net Profit Remarks 4
5. SICO RESEARCH GCC Equities - 2Q17 Results Preview Telecom Company Country Currency Market Cap Revenue USD bn 2Q17E YoY QoQ 2Q17E YoY QoQ 2Q17E YoY QoQ EBITDA Net Profit Remarks Saudi Telecom KSA SAR mn 40 .59 12,898 -5% 1% 4,514 -3% -2% 2,454 32% -3% YoY discontinuation of loss from Oger and benefit from venture investments. Mobily KSA SAR mn 4.22 2,861 -13% 0% 877 -22% -4% (173) NM NM Lower revenue and insufficient EBITDA margins to impact net earnings; also possible impact from lower expats post amnesty scheme during 2Q Etisalat UAE AED mn 41.20 12,725 -5% 2% 6,490 -5% 2% 2,189 -5% 5% Impact from possible write-off of AED 200mn relating to Etisalat Nigeria Du UAE AED mn 6.61 3,171 3% 0% 1,249 -8% 2% 373 -16% 2% Weakness due to pressure in mobile segment and costs relating to Virgin start up Zain Kuwait KWD mn 5.95 247.5 -10.0% 0% 107.1 -19.0% 0% 36.8 -17.8% -4% Sudanese pound devaluation to be negative but upside from Zain KSA Viva Kuwait KWD mn 1.30 66.7 -4.0% 0% 31.6 -4.1% 0% 9.8 2.8% -1% High competitive pressure to sustain in 2Q Batelco Bahrain BHD mn 1.06 90.2 -2% 1% 32.0 -11% -1% 8.7 -34% 6% Pressure from Jordan and lower Gross margins YoY Ooredoo Qatar QAR mn 7.93 8,186.4 2.0% 1.8% 3,356.4 6.4% 2.8% 642.8 10.2% 10.0% Expect growth in Qatar, Algeria and Indonesia. Zain Bahrain Bahrain BHD mn 0.096 15.6 -1.0% -14.7% 5.7 -6.4% 1.3% 0.55 -40.3% 9.8% YoY impact from revenue pressure and lower margins 5
6. SICO RESEARCH GCC Equities - 2Q17 Results Preview Real Estate and Construction Companies Country Currency Market Cap Revenue Operating profit Net Profit USD bn 2Q17E YoY QoQ 2Q17E YoY QoQ 2Q17E YoY QoQ Remarks Emaar Properties UAE AED mn 15 .26 4,069 9% 0% 1,283 5% -2% 1,305 3% -6% Estimate YoY earnings to rise 3% YoY on higher property development and hospitality segment revenues. Sequentially earnings to be lower by 6% on lower lease and hospitality segment revenues. Aldar UAE AED mn 4.94 1,599 -6% 1% 544 4% -11% 632 -4% -1% Earnings forecast to fall 4% YoY on lower land sales and other income. Sequentially earnings to fall 1% where some weakness from residential lease portfolio will be compensated by higher property development revenues. DXB Entertainment UAE AED mn 1.64 147 nm -8% (304) NM 22% (361) NM 24% We estimate 2Q17 revenues of AED 147mn – down 8% QoQ on lower realized ticket prices although we estimate footfall to grow 7% sequentially; estimate loss of 361mn – higher by 24% QoQ. Emaar Malls UAE AED mn 8.65 817 4% -2% 551 9% -6% 503 10% -7% Profitability to rise by 10% YoY on slight rise in base rentals and lower opex. Sequential earnings to fall 7% on lower turnover revenue and increase in opex. Seef Properties Bahrain BHD mn 0.30 4.323 23% -2% 2.385 39% 11% 2.494 9% 7% We estimate earnings to rise by 8.7% YoY with the growth largely due to higher share in Muharraq Mall JV (increase in shareholding to 72.5% from 50% in 4Q16). Sequentially we estimate earnings to fall by 7.3% on lower hospitality and leisure segment revenues. Nass Corp. Bahrain BHD mn 0.08 36.836 30% -8% 0.374 -63% NM 0.284 -82% NM We conservatively expect margin pressure in 2Q led by higher material costs and some more provisioning on its receivables 6
7. SICO RESEARCH GCC Equities - 2Q17 Results Preview Building Materials and Industrials Companies Country Currency Market Revenue Cap Operating profit Net Profit Remarks USD bn 2Q17E YoY QoQ 2Q17E YoY QoQ 2Q17E YoY QoQ Building Materials Yanbu Cement KSA SAR mn 1 .35 222 -36% -28% 72 -54% -41% 70 -56% -43% Weak demand, pricing pressure, seasonality Yamama Cement KSA SAR mn 0.95 224 -20% 2% 77 -21% 60% 80 -31% 57% Weak demand, pricing pressure, seasonality Arabian Cement KSA AED mn 0.97 200 -45% -27% 62 -58% -37% 56 -60% -44% Weak demand, pricing pressure, seasonality Saudi Cement KSA SAR mn 2.13 266 -47% -23% 110 -57% -35% 108 -57% -34% Weak demand, pricing pressure, seasonality Southern Province Cement KSA SAR mn 2.02 264 -46% -13% 85 -67% -20% 83 -69% -21% Weak demand, pricing pressure, seasonality Qassim Cement KSA SAR mn 1.20 159 -28% -17% 65 -44% -20% 55 -52% -32% Weak demand, pricing pressure, seasonality Rak Ceramics UAE AED mn 0.58 634 -16% -7% 38 -48% -29% 28 -50% -51% Weak demand, pricing pressure, seasonality KSA SAR mn 16.36 2,880 13% 6% 793 142% 10% 329 148% 19% Bahrain BHD mn 1.82 174 5% -9% 11 -37% -59% 11 -34% -58% Recovery in commodity prices and strong control over costs. Production loss due to power outage incident to result in lower volumes and subsequently lower earnings Yamama Steel Saudi SAR mn 0.37 314 -33% -16% 44 -50% -28% 34 -49% -30% Seasonal weakness + weak demand Saudi Electricity Saudi SAR mn 28.55 13,573 3% 52% 1,767 39% -255% 1,518 6% NM Industrials Maaden Aluminium Bahrain Seasonally stronger QoQ. YoY numbers not comparable due to accounting changes 7
8. SICO RESEARCH GCC Equities - 2Q17 Results Preview Consumer , Transportation and Healthcare Companies Country Currency Market Revenue Cap Operating profit Net Profit Remarks USD bn 2Q17E YoY QoQ 2Q17E YoY QoQ 2Q17E YoY QoQ Transportation Air Arabia UAE AED mn 1.28 910 2% 12% 107 4% 51% 96 -24% -1% Benefit from Eid in June but QoQ absence of derivatives gain. Aramex UAE AED mn 2.11 1,158 5% 5% 123 14% 7% 98 -22% 6% We estimate core earnings (adjusted for AED 42mn FV reval gain in 2Q16) to grow by 16% YoY; driven by the international express segment. Seasonality to drive QoQ earnings. Agility Kuwait KWD mn 3.30 328 6% 2% 21 21% 5% 16 5.6% 8.9% Jazeera Airways Kuwait KWD mn 0.31 13.6 6% 35% 1.5 -18% NM 1.6 -19% NM Seasonality from Eid traffic but yield pressure to be there KSA SAR mn 2.22 713 3% 11% 172 -14% 11% 170 -13% 10% Revenue to benefit from increased traffic during Eid but margins to be under pressure Agthia UAE AED mn 0.88 525 -6% 1% 54 -25% 34% 57 -27% 8% Delta consolidation to benefit YoY but no pallet sales to govt in 2Q unlike last year. Bahrain Cinema BHD BHD mn 0.24 4.83 3% -7% 0.80 -11% -28% 0.91 -8% -41% Care KSA SAR mn 0.56 203 -22% 0% 17 -71% NM 18 -70% NM Mouwasat KSA SAR mn 1.97 347 16% -4% 82 16% -12% 73 17% -14% Better operating efficiency at existing assets should improve YoY earnings Dallah KSA SAR mn 1.70 297 3% -2% 67 12% -22% 64 18% -24% Better operating efficiency at existing assets should improve YoY earnings Hammadi KSA SAR mn 1.31 163 18% -10% 32 21% -8% 25 18% -11% Ramp up at Olaya hospital to positively impact YoY earnings performance Middle East Healthcare KSA SAR mn 1.87 402 -2% -5% 85 9% -16% 81 6% -23% Better operating efficiency at existing assets should improve YoY earnings, Receivable provisioning is the risk Saudi Ground Services We forecast earnings to grow by 5.6% YoY on higher revenue contribution from the infrastructure segment. Seasonal uptick to drive sequential earnings. Consumers Lower earnings growth on higher fixed cost expenses and lower other income Healthcare Receivable provisioning is the risk 8
9. GCC Equities – 2Q17 Results Preview SICO RESEARCH NOTES Contact Details BMB Centre, 1 Floor P.O Box 1331, Diplomatic Area Manama Kingdom of Bahrain st Investment Research research@sicobahrain.com Head of Research Nishit Lakhotia, CFA, CAIA Tel: (Direct) +973 – 17515021 Brokerage Fadhel Makhlooq Tel: (Direct): +973 – 17515202 Visit us at www.sicobahrain.com Disclaimer This report does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for any securities. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness and are subject to change without notice. Investors must make their own investment decisions. Past performance is not necessarily a guide to future performance. Nothing in this report should be construed as investment or financial advice or as an advice to buy or sell the securities of the company referred to in this report. SICO and/or its clients may have positions in or options on the securities mentioned in this report or any related investments, may affect transactions or may buy, sell or offer to buy or sell such securities or any related investments. The analyst(s) who is (are) responsible for producing the report certifies(y) that he (she) or any of their close relative have no beneficial ownership in the company’s stock at the time of publishing the report. Any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Additional information on the contents of this report is available on request. Among stocks under our coverage, Ahli United Bank and National Bank of Bahrain owns 11.9% and 12.5% respectively in SICO. SICO does market making in Aluminum Bahrain (ALBA) and Zain Bahrain’s shares. Copyright Notice © Securities and Investment Company 2017. This report is being supplied to the recipient for information and not for circulation and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part. 9