The region’s capital markets had a tumultuous year in 2009. In the Gulf, investors have been scared, encouraged and then shaken again by a succession of surprise turns of event. Having finally accepted that the region was not, as initially hoped, protected against the global recession and that falling real estate prices were inevitable, regional investors were shocked further in March by the announcement of a major corporate scandal involving Saudi Arabian conglomerates Saad Group and Ahmad Hamad al-Gosaibi & Brothers. Once soothed by government pledges of financial aid to support local economies, investors were rocked again in November 2009 when Dubai World announced that it wanted a standstill on its $26bn debt pile.

Rising revenues

Despite all this, however, MEED’s ranking of the Middle East and North Africa (Mena) region’s 100 largest companies by market capitalisation indicates that, in general, revenues and share prices are rising, supported by strengthening economic fundamentals. Regional markets have different drivers, but in the Gulf, which hosts 69 of the region’s largest 100 companies, the recovery in the oil price, lower interest rates, increased bank liquidity and a reduction in distressed selling by shareholders scrambling to meet their debt obligations, have all had a positive impact on prices.

The aggregate market capitalisation of the MEED 100 companies at the start of March 2010 was $644.3bn, up 37 per cent on the $470.3bn from last year’s ranking. Although the figure is still a long way off the $863bn recorded in 2008, the increase reflects investors’ belief that markets bottomed out last year and the worst of the financial crisis could be over.

The improvement has been strongest in Saudi Arabia, which accounts for almost a third of the list. The combined market capitalisation of Saudi firms included in the survey was just less than half the aggregate market capitalisation at $291.6bn. Five of the 10 largest companies, are from the kingdom and buoyancy on the Saudi Stock Exchange (Tadawul) overshadowed investor nervousness elsewhere in the region. The Saudi Arabian index closed 2009 up 27.5 per cent, an increase beaten only by exchanges in Egypt, Iraq, Lebanon and Tunisia.

Of the eight companies that retained their previous ranking, Sabic kept the top slot with a market cap of $70.8bn

Outside the kingdom, concerns about the Dubai government and its related entities’ ability to meet debt obligations undermined confidence in UAE markets. However, the number of Dubai firms included on the MEED 100 list remains steady at seven. The number of Kuwaiti companies rose by two on last year’s results to 10 despite diminished confidence in listed stocks due to a number of debt restructurings.

Of the eight companies that retained their previous ranking, most significantly, Saudi Basic Industries Corporation (Sabic) kept the top slot with a market capitalisation of $70.8bn, up from $39.1bn last year. Sabic outperformed the Tadawul, benefiting from an upturn in the global economy. Its share price rose from SR51.5 ($13.7) at the end of 2008 to SR88.5 in March 2010. Sabic alone accounted for more than 10 per cent of the MEED 100’s combined market capitalisation.

The kingdom’s Al-Rajhi Banking & Investment Company and Saudi Telecom Company (STC) switched places this year to come second and third respectively. Overall, regional companies remain relatively small. About 80 per cent of the largest 100 companies in the region have an individual market capitalisation of less than $8bn, and the last 10 sit in the $1.9-2.2bn range.

Samba Financial Group is the other Saudi Arabian bank in the top 10. Earlier in 2009, the performance of the Saudi banking sector was hampered by fears that exposure to indebted local conglomerates would result in significant provisioning. However, these fears appear to have been calmed by Saad Group’s debt settlements with local banks. The contrast between Sabic’s share price rise over the year and Samba’s, which remained largely unchanged, is indicative of their relevant sector’s performance.

Telecoms sales

Telecoms is the best represented sector among the region’s largest companies. In addition to STC, the UAE’s Etisalat, Casablanca-listed Maroc Telecom and Kuwait’s Zain Group are among the top 10.

Zain had a particularly active year. In September, shareholders announced the sale of 46 per cent of the company for $13.7bn, but that failed. Then in March, Zain announced the sale of its African unit, Zain Africa, to Indian firm Bharti Airtel. Bharti, which is 32 per cent owned by Singapore Telecommunications, will pay a total of $9bn to Zain including $700m to be paid one year after the conclusion of the deal. The Indian firm will also assume $1.7bn of debt through Zain Africa. The sale of Zain Africa does not include Zain’s operation in Sudan or its investment in Morocco.

In a second transaction, according to reports, negotiations have resumed for Zain’s acquisition of Palestine Telecommunications Company, a deal which was formally cancelled in November.

Qatar National Bank (QNB) has risen from 18 and now sits just outside the top 10 at 12. The banking sector in Qatar received strong government support in 2009 in the wake of the global recession. The Qatar Investment Authority took equity stakes of up to 10 per cent in local banks to boost their capital levels and bought into their local investment and real estate portfolios to mitigate impairments. At $82.9bn, the combined market capitalisation of Qatari companies in the top 100 comes second only to Saudi Arabian firms.

While other regional economies find their feet again, Qatari companies will benefit from QNB’s forecast of an 18 per cent growth in gross domestic product in 2010. This forecast is based on rising oil prices and expectations that the emirate will reach its liquefied natural gas export target of 77 million tonnes this year.

There are 14 new entrants to the list for 2010, concentrated in the smallest 15 per cent of companies

The largest movers in the rankings were Qatar’s Ezdan Real Estate Company and National Iranian Copper Industries Company, which increased by 52 and 50 places respectively. A further eight companies increased their rankings by 20 or more places, including Saudi petrochemicals firm National Industrialisation Company (Tasnee).

Commodities prices have started to recover stimulating trading in petrochemicals. Interest in petrochemicals is expected to be carried through to next year when Yanbu National Petrochemical Company (Yansab), Saudi Kayan Petrochemical Company and Rabigh Refining & Petrochemical Company launch commercial production, boosting both their earnings and those of Sabic, which holds significant stakes in Yansab and Saudi Kayan. All three moved up the list this year.

Stock market performance

Government spending has supported Tadawul companies. Saudi government investment funds the General Organisation for Social Insurance increased its stake in food manufacturer Savola Group, which moved 23 places up the rankings to 38. Riyadh has also announced plans to spend a record $ 144bn this year.

Perhaps surprisingly, given the troubles of its parent company Dubai World and the decrease in container volumes globally, Dubai-based ports operator DP World was another company to climb up the table. It moved from 44 to 27 with a market capitalisation of almost $7bn at the end of 2009. The company tracks the Baltic Dry Index that bottomed out at the end of 2008, one banker said.

Nasdaq Dubai-listed DP World announced in January 2010 that it is seeking a dual listing on the London Stock Exchange (LSE) to boost its stock market performance. A decision has yet to be made on a secondary offering of shares to seed its LSE listing. But should this take the form of a new share offering, the company would enhance its position as one of the region’s largest listed entities.

There are 14 new entrants to the list for 2010, most of them in real estate and banking, mainly concentrated in the smallest 15 per cent of companies. Dubai-based Mashreq Bank re-entered the list in the top half. Lebanon’s Bank Audi debuted at 62. Kuwait’s Gulf Bank rejoined the list at 65, following a $1.3bn rights issue that doubled its capital. The new shares were issued to cover losses incurred through foreign currency derivatives trading in late 2008.

Next year, corporates seeking to raise financing are expected to turn to the capital markets as banks remain cautious about lending. If done through equity issues, a number of companies will experience an increase in their market capitalisation. Kuwait’s Burgan Bank, which was a fraction too small to appear in the MEED 100 this year, is a candidate for next year’s list. The bank has received approval for a KD36m ($125m) share capital increase.

Middle East bourses are still behind their mature, and even emerging market, counterparts

Dubai Financial Market-listed Arabtec Holding is another company that could break into next year’s ranking. Abu Dhabi fund Aabar Investments plans to take a 70 per cent stake in the contractor through the issue of a $1.7bn mandatory convertible bond by Arabtec to Aabar. Arabtec has said it will use the invested funds to make acquisitions, indicating that its market capitalisation could grow even further.

Aabar sits just outside the MEED 100 following an almost identical transaction in which Abu Dhabi’s International Petroleum Investment Company took a 71 per cent stake in the investment company through the mandatory conversion of a $1.7bn bond.

Public offerings

No newly established firms have made it on to this year’s list. This is indicative of the absence of large initial public offerings (IPOs) that fired the market in previous years. Tadawul-listed Zain Saudi Arabia, Saudi Arabian Mining Company and Alinma Bank all held huge IPOs that propelled them into the list last year. Newly incorporated Vodafone Qatar, which did stage an offering, listing on the Qatar Exchange in July 2009, just missed out on being included.

Another potential entrant in 2010 could be the merged Qatar Shipping Company and Qatar Navigation. In late January, the boards of both approved the merger. Based on their share prices at the time, the deal would create an entity with a combined market capitalisation of $2.3bn, among the largest in the region. On their own, neither company is large enough to feature in the MEED 100.

Of the 11 companies that exited the ranking, most had only entered last year, among them three Iranian firms: Saipa Group – an automobile manufacturer, Omid Investment Company and mining company Chador Malou.

Abu Dhabi’s Arkan Building Materials Company made the most dramatic exit. The company featured in the top half of the table last year but did not feature in this year’s results. Its share price has plummeted from a 2009 peak of AED8.9 ($2.42) in February to AED2 at the end of December.

Kuwait Projects Company (Kipco) was the only Kuwaiti blue-chip to drop out this year. The holding company of largely financial services firms has suffered from the high cost of funding. Even before worries crystallised about Dubai World subsidiary Nakheel’s ability to repay a $3.5bn convertible sukuk due in December, the company sold $500m-worth of bonds priced at a hefty 608 basis points over US dollar mid-swaps.

Six financial services firms dropped off the list, including Arab Banking Corporation (ABC) and a clutch of Abu Dhabi-listed banks. However, ABC’s recent $1.1bn rights issue and its return to profitability are likely to increase its market capitalisation.

Banks featured prominently among the 40 companies that ranked lower than they did last year. This reflects the high number of financial institutions on regional bourses. However, one of the most significant decliners was Lebanon’s Blom Bank, which fell from half way up the list to near the bottom.

Telecommunications companies also appeared among decliners. Zain Saudi Arabia, Bahrain Telecommunications Company (Batelco) and Oman Telecommunications Company (Omantel) all appeared with a noticeably lower ranking.

Finding difficulties

Zain Saudi Arabia is in talks with creditors over missed loan payments and reported a net loss of SR3.1bn in 2009. Batelco is a pillar of the illiquid Bahrain Stock Exchange, which closed the year almost 18 per cent down. Both Batelco and Omantel were slated for stake sales in 2008, which were later cancelled. According to reports, Muscat may revive plans to sell 30 per cent of its majority stake in the Omani operator.

Making smaller drops, National Mobile Telecommunications Company (Wataniya) lost six places, while Telecommunication Company of Iran (TIC) slid down six places in the list with a market capitalisation of $8.6bn. TIC has suffered from a decreased demand for fixed-line services in the face of increased mobile use, analysts say. The company is also slated to appear on a new US sanctions list, according
to reports.

The global recession hit regional companies later than their international counterparts and indices lagged accordingly. Middle East bourses are still behind their mature, and even emerging, market counterparts that began to rally sooner. But as the cycle bottoms out, earnings are picking up and regional markets are strengthening as a result.

However, for companies looking for capital, funding will not be cheap, particularly in Dubai, where the emirate’s debt crisis continues to affect confidence in state-related entities and worry stock market investors. Inevitably any rise in the cost of funding will cut into earnings with an impact on share prices.

In February, Saudi real estate developer Dar al-Arkan raised $450m in the first international issue from the Gulf Arab region since the Dubai debt crisis, though in a sign of the lack of confidence afflicting the sector, this was below the reported $600m that the issuer had sought to refinance.