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MENA positioning | A guide to our top equity picks

GCC picks bottom-up based. Our recommendations are market-agnostic for the GCC, while we are Overweight on Egypt; valuations are low in context of growth (2018 P/E of 10.5x, 2017-19 EPS CAGR of c16%); interest rate cut expectations should be supportive, with scope to maximise USD-returns, in the scenario of EGP appreciation. The IMF’s second review backs our positive view. Policy risk heeds on the low side in Egypt (stability is likely ahead of presidential elections late-March) compared to the GCC, particularly Saudi, where conviction is hard to gather due to the extent of business risk from the corruption purge. We also await the government’s full settlement of ageing receivables, and consumption headwinds to pass.

Egypt: Highest upside found in financials and real estate. A rerating heavily hinges on looser monetary policy as inflation unwinds. CIB provides the best mix of strong liability management and top client exposure, trading on a 2018e P/E of 9.3x, in line with MENA peers, and a P/BV of 2.7x, cheaper than MENA banks on a risk-adjusted basis. Rate cuts are a precursor for improving EGX turnover (2017-20e CAGR of 38%); we expect EFG Hermes to hike its brokerage fees by 30% in 2018 (35% of total fee income). Within Egypt property, the upcoming leg of the cycle should benefit developers (SODIC stands out) more than landbank owners. The rest of our Egypt picks are: Ibnsina Pharma, MTI, and Oriental Weavers.

Saudi: Seek quality in financials, retailers set to gain market share. Saudi’s expansionary budget and tapping debt markets will ensure stable liquidity for banks during 2018, and we forecast consolidated loan growth of 1.9% in 2018 (vs. 1.0% in 2017e), picking up to 6.8% in 2019e. Al Rajhi offers the best mix of financial capacity (NPL=0.7%, coverage=326%) and growth (3.0% in 2018). At 14.2% of MSCI Saudi, it should also benefit the most from a potential Saudi market upgrade to EM, come June 2018. Elsewhere in Saudi, we believe the theme of unorganised retail displacement should strengthen by virtue of the step-increases in costs and government plans to formalise the retail sector. This, along with management efforts, leaves us flagging Al-Othaim Markets, SACO and eXtra.

Underperformers with value. Among our MENA picks are laggards, but we argue that value can be found. Tabreed lost 13% since the ENGIE deal, and it appears to us that the market fails to understand that its EBITDA is unaffected by utility tariff hikes. Mezzan Holding (38% upside) also notably underperformed, but we expect efforts to expand its regional platform, reroute trade to Qatar via Kuwait, and take advantage of Saudi manufactures’ absence in Qatar, to pave the way for 2018 recovery. Finally, Al Hammadi, which on a growth-adjusted P/E trades 35% below its local peers, had a series of drags to performance (MoH price cuts, Olaya hospital closure, and receivables collection), but these are now out the way.