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Global Equities
International Today
Merrill Lynch
Saudi trade continues to gain momentum as we head into March 28 FTSE decision, followed by MSCI in June.
Our base case is for a positive outcome for both EM index reviews.
Tadawul +5% past 3 sessions printing new 3 year highs, Foreign inflows YTD at $1.35bn
Recent headline on Aramco: Saudi Aramco likely to be delayed to 2019. Delay not all together surprising giving complexity of the transaction, delays in choosing
the trading venues, as well as to better align the IPO with potential MSCI / FTSE index inflow timelines
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Crown Prince MBS will appear on '60 Minutes' on March 18th, one day before he lands in the US for a 10 day tour, meeting Trump on the 20th.
Reform agenda picking up speed: Women Driving; Entertainment/Movie Theaters; Welfare Programs; Market access reforms & Int'l debt issues
Saudi Fundamentals are strong (see Jean-Michel Saliba's report from Jan. 29th below):
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Growth has bottomed out
OPEC is succeeding at rebalancing the oil market. Fiscal adjustment now sufficient to safeguard stability at cUS$60/bbl.
Equity strategy: remain positive, outlook gains momentum - We retain our positive view on the Saudi market as we see strong earnings
momentum as well as increasing appetite for Saudi equities amongst global investors:
Best way to access the trade: M1SAP (MSCI Saudi Provisional Index)
32-name MSCI-owned index, that will rebalance into the full MSCI EM index upon inclusion
Trades $90m/ day based on bottleneck liquidity
Tradable on swap at 1mL+90bps, std comm applies; also accessible on fully funded Luxembourg-listed warrant (MERRI1DT LX)
10 single stock names to own in Saudi.
Al Rajhi: BAML Top pick for 2018 >> Largest bank in Saudi >> Reflation trade beneficiary >> We see the bank continuing to deliver strong earnings momentum on
the back of: (1) Stand out NIM expansion given a unique cost of funding position and further policy rate hikes (2) a continued normalization in asset quality
driving CoR lower; (3) Higher loan growth than peers as it benefits from consumer loan growth (particularly housing) whilst taking share in the corporate market and
(4) Al Rajhi is set to be a key beneficiary from the potential forthcoming Saudi index inclusions.
NCB: We see NCB as a key beneficiary from the economic diversification program the Government has introduced. Its large balance sheet and resulting ability to
finance mega projects should allow it to capture market share in the coming years. Further support will come from having the PIF as a major shareholder. We also see
a sublime margin outlook given NCB's ability to benefit from rising interest rates and bond yields.
SABIC: Expect strong earnings momentum in FY18E driven by robust product prices as well as solid plant operations. View company's intent to expand
internationally as a catalyst for unlocking balance sheet value. The company is expected to be the largest constituent of Saudi MSCI EM Index (~16%). Shares trade at a
2018E EV/EBITDA of 7.4x, ~20% discount vs global peers.
Yansab: Given robust MEG pricing outlook (40% of profits, prices up 18% YTD) providing a healthy tailwind to earnings this year, we expect an attractive dividend
yield of 6% (top quartile globally) in FY18E/19E well supported by FCF yields of 9% and a net cash position.
STC: One of the main beneficiaries of index inflows into Saudi. STC has finally improved management representation to investors with the departure of the
previous IR, and new team in place. Significant government receivables recovery to drive stock price for next two quarters, while Careem stake can provide some
positive headline risk on valuations.
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