EFG Positive On Q3 Earnings; Expects Q4 Market Rally; No UAE-Qatar MSCI Upgrade Though

The regional stock markets may be sending negative signals, but the Middle East listed companies are expected to see a 38% rise in earnings in the third compared to the same period last year, according to EFG-Hermes estimates.

“Materials sector earnings are driven by higher oil prices, lower provisioning and loan growth will likely drive earnings growth for the Saudi banks, and the UAE’s real estate sector will likely see a Y-o-Y turnaround after heavy losses from UP and Aldar in 2010, in our view. (Excluding UP and Aldar reduces earnings growth expectations to 16.8% Y-o-Y and 2.6% Q-o-Q). We believe Q-o-Q growth will be driven by Emaar and UP showing strong earnings growth, seasonally high earnings from SEC and Air Arabia due to the summer period, and OCI, which should benefit from strong fertiliser prices,” notes EFG.

MENA corporate earnings will rise nearly 21% year-on-year, according to the Egyptian bank.

Relative to 2011, EFG expects to see the strongest margin expansion from Saudi Arabia (materials and financials) and UAE (real estate), while its analysts expect Egyptian and Kuwaiti stocks to see aggregate margin contraction. “Relative to last quarter, we anticipate the highest margin expansion in Saudi Arabia, Egypt and Kuwait.”

Some selected earnings forecast:
OCI (Egypt) 29% (Q-on-Q)
GB Auto (Egypt) 58% (Q-on-Q)
Emaar (UAE) 66% (Q-on-Q)
Aldar (UAE) -66% (Q-on-Q)
Sabic (Saudi) -2% (Q-onQ)
Qtel (Qatar) 21% (Q-on-Q)
Kuwait Finance House (Kuwait) 55% (Q-on-Q)

FOURTH QUARTER PROSPECTS
The bank says that a sharp rally in global equity markets is a strong possibility in 4Q2011, with positive spill-over implications for MENA, but believe that we are still some way from the end of this bear market.

“MENA earnings revisions appear to be bottoming out after three years but, given global risks, we would prefer to see this trend cemented before becoming more positive. We therefore recommend that investors remain cautious. Local factors – such as pending 2011 dividend payouts, 3Q2011 earnings season and the approaching Egyptian elections – may also support MENA markets, which have become more correlated to global markets in recent months,” notes the bank, recommending being overweight on Qatar

MSCI Upgrade Unlikely
“The UAE andQatar are unlikely to be upgraded to EM status in December 2011, in our view, given the lack of progress in addressing MSCI’s concerns. Moreover, recently announced changes to MSCI’s foreign ownership rules are likely to see Qatar’s weight in the Frontier Market (FM) Index drop by c50% and the UAE’s by 10% as the new rules put IQ, CBQ, Emirates NBD, FGB and Sorouh at risk of being removed from the index. We see a limited, temporary negative impact from this move as FM investors usually have significant flexibility in investing off-benchmark.”