RoE – Back to Normalization Post

Return on Equity (RoE) is one of the most crucial ratios that should be understood by investors as it is used to measure the efficiency with which a company utilizes the equity capital. But why Muthanna chose RoE in current circumstances? In a plain vanilla essence, RoE tells you the rate of return the company is earning on the total funds that shareholders of the company have put in. The average ROE that a business earns over many years can tell you a lot about the profitability of the business. The maintenance of a strong ROE during good and bad times indicates a superior business model employed by the company, and can be a fabulous thing for the investors of the company provided that an exceptionally high price is not paid for buying a piece of that company. In this article, we shall discuss what RoE across the GCC, its 5-Years trend and 5 best performing stocks across the GCC counters. In our scanning, we considered only those companies which declared their 5 year financials (from 2007 to 2011), means that any company having an operational history of less than 5 year is automatically omitted from the process. Doing so, we formed a matrix of 564 companies across the 7 GCC counters. And indeed, in line to general perception; Qatar, Oman and Saudi Arabia looked quite promising and competing markets on the board. By the end of 2007, all markets shared a common platform by earning RoE varying between 17% to 21%, however the differentiating performance appeared only after the crisis era of 2008. (As shown in Table below)

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UAE, Bahrain and Kuwait witnessed a sharp drop in their profitability, and factually Kuwait produced negative return for investors in 2008 and Bahrain in 2009. Saudi Arabia too reported a lower profitability in 2008, however it recovered later with pronounced performance from 2009. In 5-years spell, Qatar and Oman remained the best performing markets, as they have never lost even a single time; their double digit profitability performance. Qatar remained the best market, in 4 years of 5 years era while Oman shared the best performer tag once in 2010. On an average, Qatar has rewarded 18.2% to its investors in past 5 years while Bahrain returned the lowest of 6.8% to its investors.Muthanna-logo

Should an investor start to build up portfolio with high RoE?
Talking straight, RoE is just a fundamental viewpoint which highlights stocks that are best in their businesses, but selecting a stock at right time and opportunity, depends upon various other aspects like valuation multiples like P/Ex, P/BVx with respect to market valuations, then Cash Generation capabilities, Debt levels, ongoing economic scenarios and many others. Our aim is to look out actively at the really good companies – those that generate lots of capital and allocate the capital for the benefit of their shareholders. One can surely argue that amid talks and implementation of quantitative easing(s) by many nations, is sure to move up equity price levels, but at Muthanna; we are of the opinion that it makes more sense to focus on fundamentals rather than get carried away with liquidity pushed euphoria across the counters.

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Prepared by:
Shoyeb Ali Vice President, [email protected]

Muthanna ResearchMuthanna-logo
For further enquiries, kindly contact us at:
Muthanna Investment Research
Safat Square, Baitak Tower, 32nd Floor, Kuwait
Tel: +965 2298 7000
mail: [email protected]

 

Appendix – Consistent Performers from GCC Markets
(Companies Highlighted in green)

Appendix:
Saudi Arabia (Tadawul All Share Index – TASI):

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