DUBAI/CAIRO: Gulf stock investors will focus on Saudi Arabia next week as its companies begin posting their 2011 earnings, with heavily weighted petrochemical firms likely to announce strong profit growth. But analysts say the profit figures may not be enough to support further rises in the stocks for now.
Sleiman Aboulhosn, assistant fund manager at Al Masah Capital, said the market’s general expectations at the end of the third quarter were for a more pronounced drop in oil product prices than has actually happened, so petrochemical makers probably outperformed earnings expectations in the fourth quarter.
But he added that strong product prices "are largely priced in to Saudi petchems." Other analysts said fourth-quarter earnings, while healthy, were unlikely to be quite as spectacular as they were in previous quarters.
Saudi Basic Industries Corp (SABIC), the biggest petrochemical stock, posted record earnings for two consecutive quarters in 2011; profit surged 54 percent from a year earlier to 8.2 billion riyals ($2.2 billion) in the third quarter. For the fourth quarter, Bakheet Investment Group expects SABIC to post slower year-on-year growth of 29 percent.
One moderately negative sign for the sector came on Wednesday when Advanced Petrochemical Co said it expected fourth-quarter net profit of 91 million riyals, a 2 percent increase over the same period of 2010. Bakheet had previously estimated APC would post a quarterly profit of 121 million riyals.
Investors’ caution over the sector is shown by the fact that despite the recent strength of the Saudi stock market, where the benchmark index rose 5.0 percent in the fourth quarter, the petrochemical index gained only 1.3 percent.
Saudi petrochemical stocks are not expensive; SABIC is at 9.4 times estimated 2011 earnings and 9.8 times projected 2012 earnings, according to Thomson Reuters data. That is much cheaper than 15 times in 2010 and 26 times in 2009. The Thomson Reuters global chemicals index is at 11.8 times estimated 2011 earnings.
But there are uncertainties ahead. State-run Saudi Aramco has not announced any change in its gas subsidies to Saudi petrochemical firms for this year, indicating their costs will remain minimal for now, but investors are uncertain about contract prices after 2012 — especially if Saudi Arabia decides to reform its wasteful energy system, which could involve reducing subsidies.
Another source of uncertainty is the euro zone debt crisis, and the possibility that it will hurt global economic growth severely this year.
"Anyone who wants to invest in these companies wants a future view," said Hesham Abo-Jamee, chief executive officer at Bakheet.
Egyptian equities could gain in the coming week as local institutions take tentative positions in a market which many say must surely gain in 2012, after halving in value last year when the overthrow of President Hosni Mubarak sent the economy reeling.
But with trading activity near multi-year lows, caution is the watchword among investors, especially before a march being called for Jan. 25 by pro-democracy groups. Protests against the ruling military council left 17 people dead in Cairo last month.
The benchmark EGX30 index slid to its lowest level since March 2009 last week.
"There are concerns over Jan. 25. People, mainly local investors, are waiting to see what will happen before taking action. They do not want to risk a re-run of what happened last time," said Ahmed Abu Taleb at brokerage Pharos.
However, he said the index could rise to around 3,900 points next week from around 3,650 now if the political backdrop did not worsen. Egyptians are voting this week in the third and final round of an election to the lower house of parliament.
"We should see a break-out on the upside with local institutions building positions," Abu Taleb said, although foreign portfolio investors who have mostly exited Egypt were likely to stay away.
"Stocks are at attractive levels but there’s the risk of an Egyptian pound devaluation, so maybe foreigners don’t want to keep their money in equities."