Tadawul announces structural changes

The report discusses how the adoption of the free float methodology will see a significant change in the rankings of the top 10 companies and reduce market concentration of the top 5 companies to 35.5% (from 48.5% earlier).

Interestingly NCB Capital's research team computes that just 4.5% of turnover in the Saudi equity markets are attributable to corporates and mutual funds, validating that the institutional presence of the Saudi markets has tremendous scope for increase.

Additionally the report identifies that Saudi retail investors follow an aggressive trading pattern with a level of churn (defined as turnover divided by net investment) at over 118 times. In comparison Saudi corporates have a considerably lower level of churn at just 7 times.

Using Tadawul's data on free float of shares in each company, NCBC estimates that the Saudi equity markets has an aggregate free float market capitalization of SR657bn ($175.5bn) or 38.3% of its total unadjusted market cap weight. This compares favorably with the MSCI emerging market average of 31.7%.

The adoption of the free float methodology will see a significant change in the rankings of the top 10 companies. NCBC highlights that Sabic's weight drops a steep 9.4% to 16.4% within the TASI Index.

Banks emerge as key beneficiaries of the change and now comprise 6 of the top 10 companies by free float market cap. Within banks, Al Rajhi's weight climbs 2.3% to 9.5% overtaking STC to make it the second largest weight. Samba and Banque Saudi Fransi are other key gainers. Kingdom Holdings and SEC drop out of the top 10 given their low free floats. Petrochem, a newly defined sector, tops sectors with a weight of 32.5% followed by banking (31.7%) and telecom (7%).

According to Mr. Bryan D'Aguiar, Head of Equity Research at NCB Capital, "the change to a free float methodology will lead to a decrease in the concentration of companies in Saudi markets. The existing index has over 48.5% of the market concentrated in the top five companies. The revised free float index will have just 35.5% of its aggregate value derived from the top five companies".

The top 10 companies in the revised index in fact will be almost the same as the top five in the existing index. This would have important implications from the fact that the broader market will be driven more by the movements of a larger cross section of companies and become more representative of broader sentiment.

Exposure of Saudi equity funds, at just 2.2% of the broader market, is unlikely to materially impact sentiment due to portfolio rebalancing and NCB Capital advises that any weakness should be viewed as an opportunity to enter into high quality companies

Individual investors dominate turnover on the Saudi exchange at over 92.1% of aggregate turnover in the first quarter of 2008. Saudi individual investors made net investments of over SR11bn during that period while Saudi corporates sold SR6.7bn.

This is NCB Capital's second "In Focus" product which provides investors with independent analysis, views and opinions on key issues facing regional markets.