nbk capital mena infocus 06november2013

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November 6, 2013

nbkcapi ta l .com

MENAinFocus

Inside This Issue

In Focus 1: Recent Trends in Dubai Real Estate

In this section, we look at recent pricing trends in the Dubai real

estate market, and we outline what to expect in the near and

longer-term future. Recent pricing trends show an acceleration

in almost all categories of residential real estate in terms of both

sales and rents. The market for ofce space, despite continuing

high vacancies, seems to be picking up on the rental front

at least. Hospitality and retail remain very robust, supported

by strong tourism and trade. In the short term, the probable

awarding to Dubai of World Expo 2020 could provide additional

support, although we would argue that some of the recent

strength anticipates this. In the longer run, we believe Dubai’sstrong fundamentals will underpin a continuing recovery,

although there are continuing risks of short-term exaggerations

leading to corrections.

By: Loic Pelichet

In Focus 2: Bond/Sukuk Issuances in Saudi Arabia

In this section, we look at bond and Sukuk issuances in Saudi

Arabia and nd that companies are increasingly looking at issuing

more of these long-term instruments. We believe that this spurt

in issuance has come about through a desire to extend debtmaturity proles, benet from the low interest rate environment,

and possibly prot from the current narrower spreads. We also

analyze the case of Almarai – one of the businesses that has

recently been very active in tapping the Sukuk market – in order

to draw possible inferences for overall market activity.

By: Ashish Jain

Performance of Regional Indices

70

80

90

100

110

120

130

Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13

S&P Pan Arab Large/Mid Composite S&P GCC Large/Mid Composite MSCI Jordan+Egypt+Morocco

MENA Market Caps

0%

1%

1%

2%

2%

2%

5%

6%

10%

14%

16%

41%

0 100 200 300 400 500

Palestine

Tunisia

Lebanon

Bahrain

Oman

Jordan

Morocco

Egypt

Kuwait

Qatar

UAE

Saudi Arabia

(%) Share of MENA Market Cap Market Cap. (USD billion)

Performance Summary of MENA Indices

Index Level

as of

31-Oct-13% below

52-Week High

% over

52-Week Low

1-Month Period YTD

REGIONAL

S&P Pan Arab Large/Mid Composite 153 154 125 -0.8% 22.7% 2.0% 19.8% 570

S&P GCC Large/Mid Composite 135 136 111 -1.0% 21.0% 1.3% 18.0% 527

MSCI Jordan, Egypt & Morocco 879 962 717 -8.7% 22.5% 9.9% -2.2% 879

GCC

MSCI Bahrain 166 189 163 -11.8% 2.0% 0.6% -2.3% 16

MSCI Kuwait 582 587 527 -0.9% 10.3% 0.7% 6.3% 106

MSCI Oman 761 807 690 -5.8% 10.2% 0.7% 7.1% 24

MSCI Qatar 891 923 750 -3.5% 18.8% 1.6% 17.9% 146

S&P Saudi Arabia Large/Mid Composite 195 198 153 -1.7% 27.2% 1.4% 21.6% 431

MSCI UAE 348 352 212 -1.3% 64.4% 2.8% 59.7% 168

OTHER MENA

MSCI Egypt 1,256 1,282 992 -2.0% 26.6% 9.7% 5.7% 62

MSCI Jordan 192 235 172 -18.5% 11.2% 8.4% -12.9% 24

MSCI Morocco 291 314 247 -7.2% 17.8% 10.1% -1.9% 54

MSCI Lebanon 673 775 648 -13.2% 4.0% -2.9% -8.0% 8

MSCI Tunisia 1,296 1,446 1,293 -10.4% 0.2% -1.8% -4.8% 8

Palestine SE 479 490 451 -2.3% 6.3% 1.9% 0.3% 0

INDEX 52-Week High 52-Week Low

% ChangeMarket Cap

(USD

billions)

http://www.nbkcapital.com/





MENAinFocusNovember 6, 2013

nbkcapi ta l .com | 2

RECENT TRENDS IN DUBAI REAL ESTATE

In this section, we look at recent pricing trends in the Dubai real estate market, and we outline

what to expect in the near and longer-term future. Recent pricing trends show an acceleration

in almost all categories of residential real estate in terms of both sales and rents. The market

for ofce space, despite continuing high vacancies, seems to be picking up on the rental frontat least. Hospitality and retail remain very robust, supported by strong tourism and trade. In the

short term, the probable awarding to Dubai of World Expo 2020 could provide additional support,

although we would argue that some of the recent strength anticipates this. In the longer run,

we believe Dubai’s strong fundamentals will underpin a continuing recovery, although there are

continuing risks of short-term exaggerations leading to corrections.

3Q2013 pricing trends

We base our information on data from property consultant Asteco, which conducts the most

extensive survey of pricing in the residential and ofce segments. Our observations are based on

the company’s 3Q2013 report, which showed the following developments:

1. Residential: QoQ price increases leveling out for sales and slowing for rentals

a. Apartment sales prices rose by 3.4% QoQ on average (note that this is a simple average,

not weighted by development) after rising by 12% in the two previous quarters. No

surveyed development showed double-digit QoQ price increases, and two (DIFC and

Discovery Gardens) were unchanged QoQ. On a YoY basis, apartment prices rose by

42% on average (again, simple average), after increasing by +32.4% in 2Q2013 and

+27% in 1Q2013. In 1Q2013, only two of the eight developments surveyed had YoY

price increases of over 30%. In 2Q2013, only two experienced increases under 30%,

which was also the case in 3Q2013. YoY growth rate increases were evident at several

of Emaar’s developments: Prices at Downtown went from +38% YoY in 2Q to +42%

YoY in 3Q, while at Marina they went from +30% YoY in 2Q to +40% YoY in 3Q. Onlyone development (Jumeirah Beach Residences) saw a slowdown in the YoY growth of its

sales price.

b. Villa sales prices: Things were much quieter on this front, with sales prices essentially

unchanged QoQ and only one development (Green Community) showing signicant QoQ

growth (+6.3%). YoY growth in sales prices was essentially unchanged from 2Q, with the

exception of Green Community and Jumeirah Village. Average YoY price growth in 3Q

amounted to +26.1% after coming in at +24% in 2Q.

c. Apartment rentals: On a QoQ basis, price increases slowed somewhat in 3Q13 to an

average of 3.3% after rising +6.75% in 2Q and +3% in 1Q. The average YoY growth in

rental rates was +22.75%, compared to +20.4% in 2Q. Thus, there is price acceleration,

but it is slight. The catch-up effect of cheaper developments is abating slightly, with

Discovery Gardens (one of the most popular developments this year) unchanged QoQ,

although International City is up strongly. Overall, we remain within our comfort zone

here (dened as single-digit QoQ and +20% YoY).

d. Villa rentals: these were a bit frothier than apartment rentals, with an average QoQ rise of

4% following +5.9% in 2Q and +4% in 1Q. The average YoY growth in rental rates came

in at +19.1% after reaching +16.9% in 2Q and +21.2% in 1Q. The only development

that saw strong acceleration in YoY rental rate rises was Mirdiff, where the increase from

+13% in 2Q to +31% in 3Q accounted for most of the overall sector’s YoY improvement.

We believe this is again the case of a peripheral, cheaper development catching up.

As might be expected given the impact of seasonality and Ramadan, the ofce rental market wasvery quiet. We exclude ofce sales from our analysis, as transactions in the ofce sector remain

IN FOCUS 1

Loic Pelichet

T.+971 4365 2818E. [email protected]







too low to be signicant, with only one signicant transaction (an ofce tower in Tecom) occurring

in the quarter. Ofce rental rates were unchanged QoQ in all but the Jumeirah Lake Towers

development, and the average YoY rise in rental rates was +43.1%, unchanged from 2Q2013.

Although there has been no acceleration in the growth rate, the rate remains very high, especially

given the growing supply and the high (though admittedly diminishing) vacancy rates. Jones Lang

Lassalle (JLL) estimates the vacancy rate to be above 40% for the city as a whole and 30% forthe Central Business District.

Asteco does not track the hospitality and retail sectors, for which the third quarter is seasonally

the weakest quarter due to weather issues. However, recent reports from both property consultants

and hotel and mall operators, including Emaar Properties, all point towards record-high occupancy

rates for hotels and strong footfall for retail malls:

e. According to JLL, occupancy rates YTD 2013 in the hospitality sector in Dubai stood at

79%, an extremely high number given that it includes the seasonally weak 3Q. The rate

stood at 85% YTD in 2Q2013, which is extremely high by international standards. ADRs

remain rm at USD 235 on average, and the underlying indicators (number of tourists,

arrivals at Dubai airport), remain strongly supportive.

f. Meanwhile, vacancy rates for the retail segment as a whole in Dubai remain low at 13%.

Emaar Properties’ 2Q results saw a much-stronger-than-expected performance from its

retail assets, which we believe is sustainable. Again, underlying trends in tourism are

supportive.

Cityscape 2013

In search of further anecdotal evidence on the direction of the property market in Dubai, we visited

Cityscape. The main feeling was that this was much more comparable in size and atmosphere

to the Cityscapes of pre-crisis days, and very different from the last two we attended. The main

takeaways were:

1. Size and presenting companies: The show was much larger than in both 2011 and 2012,

with roughly double the space available. In fact, at 25,000 square meters of exhibition space,

this was the biggest Cityscape Dubai in four years. Whereas in the past two years the displays

were almost entirely related to Dubai, this year saw the return of international projects. Turkey

was heavily represented with roughly 30-40% of total showroom space. There were also

representatives from Qatar (Msheireb City, UDC, Barwa and Al Rayyan/Mall of Qatar), Egypt

(three companies including Amer Group, which was seeing more-than-decent interest in its

Porto projects) and Saudi Arabia. Interestingly, TDIC was the only Abu Dhabi exhibitor, and

it was advertising its Saadiyat Island development. In terms of Dubai, all the established

operators were there, and all were showcasing ambitious new projects: Damac was promoting

Akoya, Emaar was promoting The Lagoons, Meydan was promoting the Dubai Canal project,

and Meraas was promoting Bluewaters. Worryingly, there was also a number of completely

new, slightly dodgy-looking outts that were advertising smallish projects in remote locations,

mainly Dubailand and the edges of MBR City. MBR City itself featured prominently, with full

models for Phase I, as well as The Lagoons by Emaar and Dubai Properties, showing that this

is a project with genuine intent.

2. Attendance and atmosphere: The show was much better attended than in the two previous

years, although congestion did not quite reach pre-crisis levels. The atmosphere was very

sedate in 2011 and 2012, but this time it was much more animated, with a number of

companies engaging in aggressive, hard-sell tactics. Indeed, quite a few transactions appeared

to take place, whereas there were almost none in the last few years.

3. As per usual at Cityscape, there were numerous announcements, some of them reminiscent intone and content of the boom years:







a. Damac announced that it was so condent in the market and its Akoya project that it

said it would guarantee a 24% yield over three years (8% p.a.) to owners of apartments

in the rst phase of the project (to be delivered in 18-24 months). It also said that the

project’s timing would be cut from 10 years to ve years.

b. There were rumors (yet to be conrmed) that Nakheel would re-start the Palm Deira

project. This was to be the largest of the planned three Palm developments, although

only one – Palm Jumeirah – actually exists. This would represent a signicant addition

to supply.

4. Generally speaking, the extent of new projects announced points towards a steep rise in supply

in the coming years. It should be noted, however, that not all projects announced at Cityscape

get built and that there is always a certain amount of hype/froth around the event.

So where are we really?

The Dubai residential property market appears poised in a somewhat ambivalent position. On the

one hand, prices have recovered strongly from the recent troughs, and this recovery seems to be

gathering pace, in some cases almost alarmingly so (Downtown Dubai, Dubai Marina). On the

other hand, the market is still far from its 2008 peak.

Figure 1-1 Long-term pricing trends

0

500

1,000

1,500

2,000

2,500

3,000

2008 2010/2011 2013

Apartment Villa Office

A E D / s q . f t .

-61%

-56%

-62%

24%

27%

3%

Sources: Asteco and NBK Capital Research

The reference to peak prices, whilst intrinsically interesting, should not be taken as an absolute.

Prices did reach totally unsustainable levels at the peak of the market in 2Q2008, and the mere

fact that current prices remain below those of FY2008 should not in itself constitute a sign that

valuations are still low. Moreover, it could be argued that worldwide economic conditions have

deteriorated since 2008, rendering the reference even less relevant.

Nevertheless, the fact remains that prices mostly remain signicantly below recent peaks, giving

a measure of encouragement about the sustainability of recent rises. In our view, therefore, the

key to interpreting the current market trends lies in the rate of acceleration of price increases:

If the rate stabilizes at current levels (citywide), the recovery would in our view be sustainable,

but a continuing acceleration of sales and rental price increases could start setting alarm bells

ringing, as they could signal short-term overheating. In other words, we believe the underlying







fundamentals of the Dubai property market, and beyond this of the Dubai economy, are supportive,

but there is a risk of increased short-term volatility.

The situation in the ofce market is even more paradoxical. Here, we are seeing strong acceleration

in rental rates, especially in prime areas, despite signicant overcapacity. This can be explained

by the low overall quality of the existing ofce stock in Dubai that is leading to a “ight to

quality” and the low availability of high-quality, single-ownership ofce space. Eventually, though,

something will have to give.

Retail and hospitality are both at peak levels in terms of rental and occupancy rates, but this is

the direct result of the strong success of Dubai’s strategic positioning as a tourism and trade hub.

These two segments are underpinned by strong fundamentals, rendering comparisons with past

performances almost irrelevant.

Where do we go from here?

World Expo 2020

On November 27, 2013, the destination of World Expo 2020 will be announced, and Dubai isthe hot favorite to land it (other candidates include Yekaterinburg in Russia, Sao Paolo in Brazil

and Izmir in Turkey, which was runner-up for the 2015 Expo that was eventually won by Milan.

Dubai has been endorsed by such prominent countries as France, the UK and the US, whilst its

competitors have seen their bids overshadowed by internal events (political protests in Turkey,

massive demonstrations against the FIFA Confederation Cup and the FIFA 2014 World Cup in

Brazil, and rumors of delays in construction for the 2014 Sochi Olympic Games in Russia).

Should Dubai indeed carry the day, we estimate the city would have to spend as follows.

Figure 1-2 Total estimated Expo 2020 spend

AED billion USD billion

Capital Spending 25.9 7.1

of which metro 5.0 1.4

Operating cost 6.2 1.7

Total Bid Budget 32.1 8.7

Potential hotel capex 30.0 8.2

Spending on pavilions 3.7 1.0

Total Spend 65.8 17.9

Sources: The National and NBK Capital Research

We believe the consequences for the property market would be the following:

1. In the short term, the market is likely to get a further boost from a sentiment perspective,

particularly on the residential side (which would actually be a mixed blessing). This would also

be true for the equity market, with property companies and banks as the main beneciaries.

Our view is that the recent rises in both the property and equity markets in large part anticipate

a win and that any bounce should be of a short-term nature. Conversely, however, in the very

unlikely event Dubai does not win the right to host Expo 2020, we would anticipate a sharply

negative reaction in both the property and equity markets.

2. The main beneciaries will be the hospitality and retail market, as the event is expected to

attract 25 million visitors, most of whom will come from outside the UAE. We estimate that

about 45,000 additional hotel rooms will be needed, although part of these will be developed

in Abu Dhabi given that the Expo 2020 site at Jebel Ali is close to the Dubai-Abu Dhabi

border. Additional retail projects would also be launched. Indeed, the rate of announcements

of new retail projects has accelerated markedly in recent quarters (see below).







3. We expect the residential property sector to see announcements of further supply as well, with

specic plans for recently announced mega-projects such as MBR City. Indeed, Cityscape

2013 saw the rst two major launches of projects in MBR City. The additional supply will be

partly needed to house the staff needed to develop Expo 2020, so a risk of over-shoot clearly

exists.

4. The effects of Expo 2020 should be more muted in the ofce segment, as any additional

demand here will in our view be catered for by the existing idle capacity as well as by the

expected additional supply. The high-end segment may continue to benet from a sentiment

perspective, although again we would emphasize that a situation of rapidly rising prices in the

face of ongoing high vacancies is not sustainable.

Longer term, there is of course a risk of overhang once Expo 2020 is nished. This has been

almost impossible to quantify when looking at previous expos. A short-term reux is probable,

as Dubai’s bid is forecasting a much larger foreign (and therefore more transient) attendance

(70%) than has been the case with recent expos. On the other hand, the Emirate has existing

plans signicantly to increase its tourism arrivals (doubling to 20 million by 2020, regardless of

the Expo).

Overall, much of the long-term effect of Expo 2020 will depend on whether the market overshoots

the real expected demand.

Longer term

As we have noted above, the residential market in Dubai is at a crossroads.

Longer term, Dubai’s non-oil economy is expected to continue growing strongly, as the city cements

its role as a regional hub for tourism, retail, trade and corporate services. This should lead to a

steady increase in the population, expected to reach about 4% p.a. in the foreseeable future (ex

Expo). Given the current supply pipe-line (estimated at 45,000 units, or 12% of existing supply,

according to JLL, excluding Expo 2020), the market should continue growing nicely. There are,however, some risks to this scenario:

1. As we have seen above, the rate of price and rental increases is steadily accelerating and has

already reached barely sustainable levels in select developments. Sentiment could push this

higher, increasing the risk of a short-term overshoot in terms of pricing, irrespective of the

solid long-term fundamentals.

2. Dubai Land Department’s gures for 1H2013 show that over 80% of transactions relating to

apartments and villas were cash-based, while just under 5% were mortgage-based. This is a

very high gure even for Dubai, and it points towards high activity from foreign purchasers

and/or, more worryingly, local and international speculators. Part of this is undoubtedly due to

the continuation of Arab Spring-related troubles, the effects of which will eventually subside,

although it seems fair to assume that this will not happen any time soon.

3. A combination of strong market sentiment and an Expo 2020 win could drive supply into

overdrive. Indeed, a number of very ambitious projects have been announced or outlined,

although as ever part of it is announcement effect.

Overall, we still believe that the market is underpinned by strong long-term fundamentals and that

current prices are sustainable on a citywide basis, but we do see risks of short-term overshooting.

The direction of the rate of price and rental increases and the number of new launches need to be

carefully watched in coming quarters.

The hospitality segment should continue to benet from Dubai’s extremely successful tourism

strategy. Occupancy rates will eventually decline as the effects of Arab Spring-related troubles

subside, but current new supply trends (16% additional room supply within the next two years,according to JLL) seem compatible with the continued strong performance of the sector.







The same reasoning should apply to the retail sector, but here we are slightly more circumspect

about future supply. Whereas expected supply trends had been essentially at to slightly up until

recently, a spate of new announcements has changed Dubai’s retail supply prole recently.

Figure 1-3 Future Retail Supply

2,6492,775

2,817 2,817

2,865

2,889

3,057

4824

167

200

2,200

2,400

2,600

2,800

3,000

3,200

3,400

2010 2011 2012 2013 2014 2015 2016

Completed Under construction

G L A i n 0 0 0 ' s o f s q . m .

Sources: JLL and NBK Capital Research

The announced projects are mainly retail developments targeted at the local population. We

note, however, that the gures do not include major retail projects outlined in recently launched

master plans, which include a mall that could be even larger that the Dubai Mall to be launched

in MBR City. Thus, the risk of an overshoot in retail, the most successful segment in the Dubai

property market in recent years, has in our view increased, especially if Dubai wins Expo 2020.

In the medium term, the rate of increase in rental values could tail off sharply. Also, there may be

a realignment of the pecking order of malls, with the malls that are currently leading the market

starting to lose the very high premium they command. Indeed, this happened following the launch

of the Dubai Mall, which is itself now the most likely to suffer if a new mega-mall is launched.







IN FOCUS 2 BOND/SUKUK ISSUANCES IN SAUDI ARABIA

In this section, we look at bond and Sukuk issuances in Saudi Arabia and nd that companies are

increasingly looking at issuing more of these long-term instruments. We believe that this spurt in

issuance has come about through a desire to extend debt maturity proles, benet from the low

interest rate environment, and possibly prot from the current narrower spreads. We also analyzethe case of Almarai – one of the businesses that has recently been very active in tapping the

Sukuk market – in order to draw possible inferences for overall market activity.

Increasing activity on the debt market

The Saudi bond/Sukuk market has been expanding steadily, and some companies are gradually

increasing their issuances of long-term investments at the expense of traditional shorter-term

bank borrowings.

Figure 2-1 Bonds/Sukuk Issued in Saudi Arabia

10,550

24,690

17,488

6

9

7

2011 2012 2013 YTD

Total value (SAR million) Total number of deals

Sources: Thomson Reuters and NBK Capital

Below, we show the average maturity (simple average in years) and the average current coupon

rate for the securities issued (simple average of both xed and oating coupon rates) in each year.

Although coupon rates vary among issuers for a variety of reasons, we present the simple average

in order to allow quick reference.

Figure 2-2 Average Maturity in Years Figure 2-3 Coupon Rates (Simple Average)

8.4

6.4

8.8

2011 2012 2013 YTD

I n

Y e a r s

Sources: Thomson Reuters and NBK Capital

2.45%

2.27%

2.61%

2011 2012 2013 YTDAshish Jain

T. +965 2259 5115

E. [email protected]

The increasing number of

transactions and value of

issuances indicate that

corporates are taking

advantage of the evolving bond

market in Saudi Arabia

Maturity is much longer

than that of traditional bank

borrowing…

…and coupon rates are

relatively low


mailto:ashish.jain%40nbkcapital.com?subject=

mailto:ashish.jain%40nbkcapital.com?subject=






We think that one of the probable reasons for the increasing number of issuances, other than

extending debt maturity, is the current benign interest rate environment. From the highs of 2008,

benchmark interest rates have dropped to very low levels. In addition, ample liquidity, lower

credit risk, and robust economic growth could have, in our view, contributed to narrower spreads.

Therefore, we feel that corporates are trying to reduce their funding costs by opting for longer-term

instruments, thereby locking in the current low spreads for a relatively long duration.

Figure 2-4 LIBOR and SAIBOR

0.0%

1.5%

3.0%

4.5%

6.0%

Jan-08 Sep-08 Jun-09 Feb-10 Nov-10 Jul-11 Apr-12 Dec-12 Sep-13

LIBOR 6M SAIBOR 6M

Source: Bloomberg

Almarai – a classic case of how companies are benefitting from raising long-

term debt in Saudi Arabia

We analyzed the case of Almarai to see how the company has benetted recently from raising

long-term Sukuk. The company has embarked on a very aggressive capex program to diversify

into new consumer segments and support its future growth. The company’s total projected capex

for 2013-17 stands at around SAR 15.7 billion. Beyond operating cash ows, Almarai’s primary

source of funding is debt nancing. Historically, Almarai relied on bank borrowings to manage

its funding requirements. However, after the launch of its ambitious capex program in 2012, the

company has been primarily looking at issuing long-term Sukuk. So far, the company has raised a

total of SAR 4 billion in four different Sukuk issuances.

Figure 2-5 Almarai Sukuk Issuances

Mar-12 1,000 7 years SAIBOR 6M + 100bps

Mar-13 787 5 Years SAIBOR 6M + 100bps

Mar-13 513 7 years SAIBOR 6M + 100bps

Sep-13 1,700 Perpetual SAIBOR 6M + 200bps for 1st 5 years

Total 4,000

Issue date Amount (SAR miilion) Maturity Estimated pricing

Sources: Almarai, Thomson Reuters, and NBK Capital

Both the LIBOR and SAIBOR

are low compared to pre-

crisis levels







Perpetual Sukuk – rst of its kind in the region

Almarai has recently raised SAR 1.7 billion with a perpetual Sukuk issuance. The Sukuk are

callable after ve years, and will have a coupon of 6 month-SAIBOR + 200 bps for the rst ve

years and a xed 750 bps prot rate thereafter. The company will be treating the Sukuk as a form

of equity funding, as they do not have any stated maturity dates. Thus, these perpetual Sukuk

have helped the company improve its net debt-to-equity ratio from 116% in June 2013 to 76%

in September 2013.

Almarai has marketed all its Sukuk to local “sophisticated investors”, and according to the company,

its Sukuk program has seen strong demand from investors. We believe this clearly indicates the

growing appetite for long-term Sukuk among local investors. In addition, the successful issuance

of the perpetual Sukuk highlights that the market is showing signs of acceptance of new and

innovative debt instruments.

Figure 2-6 Almarai’s Total Debt Progression (SAR millions) Figure 2-7 Almarai’s Debt Maturity Progression

6,925

8,655

11,893

Dec-11 Dec-12 Sep-13*

*Including the SAR 1.7 billion perpetual Sukuk. Sources: Almarai and NBK Capital

We estimate that a large portion of the decline in the company’s net funding costs has been driven

by the increasing contribution of relatively cheaper Sukuk compared to costlier bank borrowings.

Figure 2-8 Almarai Net Cost of Funding (Including Capitalized Interest) and SAIBOR

3.07%

3.40%

3.12%

0.88%0.77%

0.98%

2010 2011 2012

Almarai net interest cost Average SAIBOR

Sources: Almarai and NBK Capital

17% 16% 15%

41%31%

18%

41%

39%

26%

0%

14%

40%

Dec-11 Dec-12 Sep-13*

<1 year 1 to 2 years 2 to 5 years >5 years

Almarai’s debt profile

continues to improve, with

long-term debt representing

around 40% of total debt at

the end of September 2013

compared to almost none at

the end of 2011

Net effective cost of funding

has been declining







We feel that the benets of issuing xed income instruments include being able to extend the

average duration of liabilities compared with bank borrowing, ensure less restrictive covenants,

and, sometimes, lower funding costs. At the same time, investors are also hungry for relatively

high-yielding instruments in the midst of historically low interest rates, domestically as well as

globally. This, in our opinion, could help further expand the bond/Sukuk market in Saudi Arabia.







COMPANIES UNDER COVERAGE (PRICES AS OF OCTOBER 31, 2013)

2012 2013 2014 2012 2013 2014

Banking

Abu Dhabi Commercial Bank UAE AED 5.00 23-Oct-13 4.50 Hold 9.7 9.3 9.1 1.1 1.0 1.0

Abu Dhabi Islamic Bank UAE AED 4.70 29-Oct-13 4.20 Hold 9.3 8.8 8.2 0.9 0.9 0.8

Arab National Bank Saudi Arabia SAR 29.30 10-Oct-13 31.70 Hold 10.5 10.2 9.6 1.4 1.3 1.2BankMuscat Oman OMR 0.60 09-Oct-13 0.64 Hold 9.3 9.4 8.4 1.2 1.0 1.0

Banque Saudi Fransi Saudi Arabia SAR 32.20 09-Oct-13 33.50 Hold 9.7 10.3 9.3 1.3 1.2 1.1

Commercial International Bank Egypt EGP 42.65 21-Oct-13 49.80 Buy 11.5 9.2 7.4 2.4 2.1 1.8

Credit Agricole Egypt Egypt EGP 12.63 09-Oct-13 13.90 Hold 7.7 5.6 5.3 1.6 1.3 1.2

Doha Bank Qatar QAR 55.00 22-Oct-13 52.30 Hold 10.9 10.3 9.4 1.9 1.5 1.5

First Gulf Bank UAE AED 16.20 29-Oct-13 16.40 Hold 11.7 10.8 10.1 1.6 1.6 1.5

National Bank of Abu Dhabi UAE AED 12.50 24-Oct-13 11.40 Hold 12.3 10.8 10.5 1.6 1.4 1.3

National Bank of Oman Oman OMR 0.30 23-Oct-13 0.26 Hold 8.2 8.7 8.2 1.1 1.0 1.0

Qatar Islamic Bank Qatar QAR 67.70 21-Oct-13 67.00 Hold 12.9 10.4 9.0 1.4 1.3 1.2

Qatar National Bank Qatar QAR 166.00 09-Oct-13 156.80 Hold 13.9 12.5 11.0 2.5 2.2 2.0

Riyad Bank Saudi Arabia SAR 28.20 07-Oct-13 30.00 Hold 12.2 11.5 10.7 1.3 1.3 1.2

Samba Financial Group Saudi Arabia SAR 49.80 08-Oct-13 58.00 Hold 10.4 10.0 9.1 1.4 1.3 1.2

Saudi Hollandi Bank Saudi Arabia SAR 39.00 08-Oct-13 36.60 Hold 12.4 10.7 9.6 1.9 1.7 1.5

The Commercial Bank of Qatar Qatar QAR 66.30 31-Oct-13 78.50 Hold 8.2 8.3 7.5 1.1 1.1 1.0

The Saudi British Bank Saudi Arabia SAR 39.00 08-Oct-13 41.40 Hold 12.0 10.7 9.5 1.9 1.7 1.5

Union National Bank UAE AED 5.05 31-Oct-13 5.60 Hold 7.9 7.6 7.1 0.9 0.8 0.8

2012 2013 2014 2012 2013 2014

Building Materials

Lecico Egypt EGP 8.24 22-Oct-13 8.70 Hold 10.5 7.2 6.3 5.1 4.1 3.8

Oman Cement Co. Oman OMR 0.79 31-Oct-13 0.84 Hold 14.9 15.1 11.7 11.2 11.1 8.8

Qatar National Cement Co. Qatar QAR 102.30 06-Nov-13 108.50 Hold 11.8 11.3 10.5 8.8 8.6 8.0

Raysut Cement Co. Oman OMR 2.00 31-Jul-13 1.33 Sell 16.3 12.2 10.5 12.8 10.9 9.7

Yamama Cement Saudi Arabia SAR 53.50 06-Oct-13 52.70 Hold 13.3 12.3 12.8 9.2 9.0 9.3

Contractors

Arabtec UAE AED 2.74 22-Oct-13 2.00 Sell 30.9 29.8 27.4 16.9 11.4 9.9

DEPA UAE USD 0.59 04-Sep-13 0.42 Hold n/m 8.1 9.6 n/m 6.3 7.4

Drake and Scull UAE AED 1.25 06-Nov-13 1.03 Hold 30.3 16.8 12.5 16.4 10.6 8.7

Consumer Goods and Retail

Abdullah Al Othaim Markets Saudi Arabia SAR 133.25 28-Oct-13 141.00 Hold 17.4 14.7 12.8 13.4 11.5 10.3

Agthia UAE AED 4.08 29-Oct-13 4.50 Hold 19.6 14.4 13.1 13.7 10.7 9.6

Alhokair* Saudi Arabia SAR 123.50 28-Oct-13 130.00 Hold 20.9 18.0 14.3 18.7 14.3 11.5

Almarai Saudi Arabia SAR 56.00 27-Oct-13 67.00 Buy 23.3 22.8 17.9 18.6 16.1 13.4

GB Auto Egypt EGP 29.99 03-Nov-13 38.50 Buy 17.8 20.5 10.5 6.1 6.2 4.4

Juhayna Egypt EGP 12.70 16-Sep-13 8.60 Hold 27.6 23.0 18.9 17.1 14.9 11.1

Oriental Weavers Egypt EGP 30.00 20-Oct-13 39.50 Buy 9.9 6.2 4.6 5.7 4.3 3.8

Savola Saudi Arabia SAR 55.25 24-Oct-13 56.00 Hold 19.7 16.5 14.6 14.0 11.1 10.6

Petrochemicals and Oil

National Petrochemical Company Saudi Arabia SAR 23.60 21-Oct-13 19.80 Sell n/m n/m 13.4 n/a 20.6 9.5

Saudi Arabian Fertilizer Co. Saudi Arabia SAR 147.75 20-Oct-13 143.60 Hold 12.7 15.5 14.3 10.8 13.1 12.3

Saudi Basic Industries Corp. Saudi Arabia SAR 99.75 27-Oct-13 109.10 Hold 12.1 11.4 10.5 6.8 109.1 6.2

Sa udi Industrial Investment Group Saudi Arabia SAR 30.10 27-Oct-13 27.40 Hold 24.8 17.3 12.0 n/m 21.5 9.9

Saudi Kayan Petrochemicals Saudi Arabia SAR 13.55 20-Oct-13 10.40 Sell n/m n/m 11.9 24.4 16.5 9.6

Yanbu National Petrochemicals Saudi Arabia SAR 64.75 27-Oct-13 61.60 Hold 14.9 12.8 11.8 8.7 8.0 7.8

Industries Qatar Qatar QAR 159.50 22-Oct-13 162.50 Hold 11.4 11.4 11.0 10.7 10.9 9.3

Real Estate

Emaar UAE AED 6.08 27-Oct-13 6.88 Hold 17.5 16.0 15.0 17.5 12.9 11.9

Mabanee Kuwait KWD 1.220 29-Aug-13 1.10 Hold 25.7 14.5 15.3 25.8 13.1 13.7

Palm Hills Developments Egypt EGP 2.49 27-Aug-13 n/a n/a n/a n/a n/a n/a n/a n/a

Salhia Real Estate Co. Kuwait KWD 0.380 29-Aug-13 0.39 Hold 23.6 21.0 21.1 14.0 14.0 14.5

Sodic Egypt EGP 24.04 29-Sep-13 29.61 Buy 8.7 7.3 5.9 7.3 5.9 4.3Talaat Mustafa Group Egypt EGP 5.53 05-Mar-13 6.16 Buy 20.9 17.2 8.1 12.9 9.5 5.0

Telecommunications

Batelco Bahrain BHD 0.33 29-Sep-13 0.38 Hold 8.7 8.5 8.3 4.4 3.5 3.4

du UAE AED 6.40 02-Oct-13 3.90 Sell 14.8 15.5 15.5 7.2 6.5 5.8

Etisalat UAE AED 11.70 10-Oct-13 13.40 Hold 13.7 12.4 11.5 5.0 4.4 4.3

Mobily Saudi Arabia SAR 84.25 09-Jul-13 87.10 Hold 10.8 10.0 9.5 8.4 7.6 7.2

Nawras Oman OMR 0.54 08-Oct-13 0.58 Hold 9.5 11.9 10.8 4.0 4.0 3.9

Omantel Oman OMR 1.56 08-Oct-13 1.71 Hold 10.0 9.9 9.6 5.0 4.9 4.8

Qatar Telecom Qatar QAR 137.50 09-Jul-13 143.10 Hold 15.0 13.0 10.8 4.4 4.3 4.1

Saudi Telecom Saudi Arabia SAR 49.90 07-Jul-13 47.80 Hold 13.6 11.4 9.8 5.1 6.4 6.2

Telecom Egypt Egypt EGP 13.65 08-May-13 14.40 Hold 10.9 10.5 10.4 4.7 4.9 5.0

Vodafone Qatar* Qatar QAR 9.08 01-Oct-13 9.60 Hold n/m n/m n/m 59.8 18.6 13.2

Transportation & Logistics

Air Arabia UAE AED 1.45 06-Aug-13 1.05 Sell 16.1 15.4 15.1 12.9 9.3 7.7

Aramex UAE AED 2.71 29-Oct-13 3.30 Buy 13.4 11.7 9.9 8.0 6.9 6.1

DP World UAE USD 16.90 29-Oct-13 15.50 Hold 25.3 24.7 21.0 12.0 11.7 10.7

Jazeera Airways Kuwait KWD 0.490 28-Oct-13 0.575 Hold 14.8 10.9 9.5 11.0 8.9 7.8

Others

El Sewedy Electric Egypt EGP 26.79 04-Sep-13 22.50 Hold 51.4 12.3 9.0 8.2 7.0 5.9

Maridive Group Egypt USD 1.10 09-Sep-13 1.22 Hold 27.2 45.9 12.0 9.7 11.6 6.5

Secto r Country Currenc yClosing

Price

Date of Last

Report

12-Month

Fair ValueRecommendation

PE PB

Secto r Country Currenc yClosing

Price

Date of Last

Report

12-Month

Fair ValueRecommendation

PE EV/EBITDA

*Fiscal year ends in March







RISK AND RECOMMENDATION GUIDE

RECOMMENDATION UPSIDE (DOWNSIDE) POTENTIAL

BUY MORE THAN 20%

HOLD BETWEEN -15% AND 20%

SELL LESS THAN -15%

RISK LEVEL

LOW RISK HIGH RISK

1 2 3 4 5

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