LHV Persian Gulf Fund made its first investments to Saudi Arabia

Last week LHV Persian Gulf Fund made its first investments to Saudi Arabia, a state with one of the world’s largest oil reserves. According to the central bank of Saudi Arabia, in 2011 the real GDP growth will be +5.1% and the budget surplus 9.1% of GDP.

Until now LHV Persian Gulf Fund had investments in Qatar, United Arab Emirates, Oman and Kuwait, who are all Gulf Cooperation Council (GCC) member states. Now Saudi Arabia has been added to the list (also a member of GCC) of countries where the fund has investments. After the demonstrations of the Arab spring in Northern-Africa and Middle-East, Saudi Arabia has announced several financial packages. The aim of those packages was to remarkably improve the welfare of the citizens. Despite the commitment that will cost more than $100 billion over the years to come, the country’s budget still remains in a surplus. Revenues from the oil production have been sufficient to support the economic growth and the development of various industries, but also to accumulate reserves for the long run. Also positive, besides that the government injects money to the economy, is the fact that state is being modernized, liberalized (in 2011 it was announced that women will have the right to vote) and Saudi Arabia is moving up in global competitiveness reports. I wrote the last article about Saudi Arabia and the announced financial packages back in spring – link here.

Our first investment into Saudi Arabia was Samba Financial Group. Samba Financial Group is one of the biggest financial corporations in Saudi Arabia. They have over 60 branches and nearly 500 ATM’s across the country. Financial Times’ financial magazine ‘’The Banker” named Samba Financial Group the best bank in Saudi Arabia in 2011. The company was elected sixth time in a row as the best bank in Saudi Arabia in 2011 by “Global Finance” magazine (link here). The bank was also nominated as the safest bank in Saudi Arabia and one of the safest banks in the world. At the current price level the forward looking ratios for 2012 are the following: the dividend rate 4.3%, P/B 1.3x, P/E 8x and ROE 17%. Considering the safety and the reputation of the bank in a growing Saudi Arabian economy, the previous ratios mentioned seem rather inexpensive.  

One can find many other interesting opportunities for investing in Saudi Arabia – for example the largest integrated dairy foods company in the Middle East, Almarai, and a petrochemical company, Saudi Basic Industries (SABIC).

Almarai’s IPO took place in 2005 and their brand is one of the best in the Arab world. The sales revenue in 2011 is expected to increase by 14% in 2011, 16% in 2012 and another 14% in 2013. The expected dividend rate for 2012 is 2.5%, P/B 2.9x, P/E 15x and ROE 21%. Such a price level (or even higher) is quite reasonable for the best known brand in the Arab world.

SABIC is one of the world’s leading producers of chemicals, fertilizers, industrial polymers and metals. The company was founded in 1976, when the use of natural gas, then a valueless by-product of oil drilling, became popular in the industry. Before that natural gas was simply burnt near the oil wells. Today SABIC is one of the largest exporters of fertilizers, polymers and chemicals in the world. They are also one of the largest steel producers in the Middle East. SABIC trades at 9.5 times of its profit forecast for 2012, ROE is over 20% and the dividend rate remains between 4% and 5%.

The last 10 years’ movement of the Saudi Arabia stock exchange 

LHV Persian Gulf Fund is rated as a 5 star (out of maximum 5) fund in the category of „Africa and the Middle East“. Only ca 10% of the funds in one category receive the maximum 5 star rating. The higher the rating, the better risk-reward ratio the fund has compared to other funds in the same category. Link to the Morningstar website is here.

Best regards,

Joel Kukemelk – Fund manager of LHV Persian Gulf Fund