Net income of Saudi listed companies declined 2.1 per cent year-on-year (y-o-y) during the third quarter (Q3) of 2016, but remained almost flat sequentially on an aggregate basis indicating resilience in view of the current economic challenges, a report said.

Nevertheless, the underlying story seems to be different as performance of most domestic oriented sectors has been worse than what the aggregate numbers suggest with75 per cent of 130 companies used in our analysis registering a y-o-y decline in the first nine months (9M) 2016 net profit, added the report titled “Barring exceptions, reality seems harsher” from Al Rajhi Capital, of the leading providers of ¬financial services in Saudi Arabia.

The report highlights the disconnect between the seemingly benign aggregate numbers and the weaker results of most domestically driven sectors.

A deeper look into results shows that the performance of heavyweight sectors such as banking and petrochemical and stellar performance of Saudi Electricity Company (apparently benefiting from increase in electricity prices) have overshadowed the weaker underlying performance of most sectors and companies with the exception of insurance sector.

Al Rajhi Capital sees the performance of domestically driven sectors as a better indicator of the challenges the economy and the broader market faces as the Kingdom passes through a period of transformation and uncharted territories.

Excluding Saudi Electricity Company, which reported its best quarterly profit in a decade, aggregate net profit declined 17 per cent y-o-y during 9m 2016.

Excluding the performance of heavy weight (petrochemical and banking), insurance and energy sectors, net profit was down 25 per cent y-o-y during 9M 2016. This in our view is an indication of the underlying trend in the profitability of listed companies and broader market.

Al Rajhi Capital views Q3 results as an affirmation of the views they had highlighted in their earnings preview note, as most domestic oriented sectors continue to face challenges with the initial impact largely being felt by smaller companies with less operating and financial leverages.

At the same time, the sharp decline in share prices has also given bargain hunters an opportunity to look for companies trading at attractive valuations, supported by seemingly resilient aggregate numbers (discussed earlier) and success of recent Sovereign international bond offering.

Nevertheless, with earnings remaining under pressure, the reports cautions investors while evaluating historical valuation ratios of certain companies, given further potential for downside in the coming quarters.

“As seen in Q3 results and highlighted in our preview note, we continue to believe that the large cap companies with stable business models and diversified revenue streams will fare better and show resilience in times of uncertainty,” the report said.

“As we approach Opec output freeze meeting scheduled for November and budget announcement, the broader market is likely to remain volatile suiting more risk seeking investors who can ride the turbulent times with a long term investment horizon.” – TradeArabia News Service