Bahrain shares have room to improve

The post war optimism and the high oil prices in 2003 - despite the expected fall in oil prices after the Iraq war- benefited the regional stock markets.

Given the liquidity in the system, lack of viable investment opportunities abroad and the prevalent low interest rate regime seems to have resulted in persistent investor interest in the regional stock markets in 2003.

The year 2003 was an exceptional year for stocks across the Arab World. However, the Bahrain stock market lagged behind its regional peers and was unable to emulate the impressive gains as it was up only 28.2%.

Overlooking its counterparts in the BSE index, insurance sector recorded outstanding performance in the year 2003 with the BSE insurance sector index gaining 58.3% over the previous year. Al-Ahlia insurance company was the highest gainer with stock appreciating by 82%.

The other two major gainers were Bahrain National Holding Company which rose by 56.4% and Bahrain Kuwait Insurance Company with a gain of 52.5%. The laggards in the sector were Arab Insurance Group which lost 21.6% despite its positive performance in the first three quarters of 2003.

Similarly, the banking stocks also recorded outstanding performance in the year 2003 with the BSE commercial banks index gaining 49.7% over the previous year. AUB, which recorded stellar performance in the third quarter of 2003 with its net profit rising by 52.4% to US$70.9mn, experienced a sharp increase in its stock as it rose by 75.8% in 2003.

The other notable gainer in the banking sector was Bahrain Islamic Bank, which notched up a gain of 54.3% in its stock price on the back of improved results in the first nine months of 2003.

At the same time the Bank of Bahrain and Kuwait up by 42.7% and National Bank of Bahrain gaining by 32.8%. The only loser in the sector was the Bahraini Saudi Bank (BSB) which lost 23.4% of its value in 2003. The BSB saw its net profit declined by 63% to BD1.42mn in the first nine months of 2003 as compared to the same period previous year.

We expect the banking sector to do well in 2004 as the interest rates start to edge up gradually in 2004 and the banks are expected to widen their spread though with an interval.

The top performers in the sector are expected to be AUB and BBK which are scouting for merger partners in the region followed by NBB and BISB. BSB is expected to be lag behind its peers in the sector in 2004 as it is still yet to recover from its past but may turn out to be a good recovery story.

The booming hotel and tourism sector also fared well with the sector index rising by 41.3% in 2003 over 2002. All the stocks in the sector ended in positive territory. National Hotels Company led the sector notching up a gain of 55% followed by Bahrain Hotels Company (37.2%), Bahrain Tourism Company (35.7%).

The year 2004 is expected to be a spectacular year for most of the stocks in the sector driven by tourism boom in the country as F1 race will attract international tourists. The industrial sector led by Bahrain Flour Mills Co. and Delmon Poultry Co. gain 25.7% in 2003.

The only laggards in the BSE were investment sector and services sector which gained only 12% and 15% respectively in 2003. The gains in the services sector were led by TRAFCO as it surged 99% followed by Bahrain Maritime & Mercantile International which gain 82.5% during the period. Batelco, which had to face competition from newly launched MTC-Vodafone network increased only by 6.8% as it witnessed heavy selling pressure at the end of the year.

The number of listed companies on the Bahraini stock exchange has gradually increased in 2003 and stood at 44 at the end of the year.

In September 2003, the second closed company Al Khaleej Development Company (Tameer) was listed on the Bahrain Stock Exchange. This is the first real estate company to be listed on the Bahraini Bourse.

A third closed company, United Paper Industries B.S.C. (Bahrain Pack) was listed on BSE in October 2003. The company involves in manufacturing all types of paper and cardboard products and packing materials. Its main products include types of corrugated boxes, corrugated rolls and corrugated sheets.

In another development, BSE witnessed the listing of the first Iranian Mutual Fund (The First Iran Fund) on the stock exchange. The fund was issued by Bank Saderat Iran and will invest indirectly in the securities of companies established or operating in Iran and neighboring countries. The total number of mutual funds listed on the Bahrain Stock Exchange is 29.

The trading activity on the BSE in 2003 and especially after the end of Iraq war has shown positive results. In 2003, the value of shares traded were up by 26.4% to BD98.3mn.

Maximum trading was seen in the last quarter of 2003 when the trading value reached BD27.6mn share. The commercial banking sector accounted for almost half of the value of shares traded which was followed by the services sector (36.6%) and the investment sector (8.9%). The trading activity also increased by 14.8% to 405.2mn share in 2003.

Due to increase in trading activities, the number of transactions increased by 13.8% from 12,757 in 2002 to 14,516 in 2003. The maximum transactions took place in the second quarter of 2003 just after the end of tension in the region.

In 2003, 27 stocks ended in a positive territory as compared to end-2002, while only 5 stocks declined during the same period. Amongst the gainers, General Trading & Food Processing Company (TRAFCO) posted an impressive performance improving by a substantial 99%.

Other notable stocks to end the year 2003 on a positive note were United Gulf Industries Co. (87.2%), BMMI (82.5%), Al-Ahlia Insurance Co. (82%), Ahli United Bank (75.8%), and Bahrain National Holding Company (56.4%), Bahrain Islamic Bank (54.3%) etc. During the same period the largest drop was experienced by Bahraini Saudi Bank which lost 23.4% followed by Arab Insurance Group (-21.6%), Bahrain & Middle East Bank (-16%), Shamil Bank (-10%) etc.

The total market capitalization of BSE increased by nearly 28.3% to BD3.657bn as of December 2003 compared to BD2.85bn recorded in December 2002. For the first time in the last few years, the commercial banking sector accounted for the largest pie of the market capitalisation on the BSE replacing investment sector from its top slot.

The commercial banking sector accounted for nearly 36.3% of the total market capitalization of all the listed stocks at BSE, closely followed by the investment sector (35.4%) and the services sector (22.8%).

Heavyweights Bahrain Telecommunications Company (Batelco) continued to dominate the total market capitalisation on the BSE accounting for 17.6% of the total though it declined from 21.1% recorded in 2002. AUB, with 15.54% acquired the second slot forcing Investcorp Bank to the third position with 12.37%.

But the improvement in the market in the year 2003 was not accompanied with the corresponding increase in its turnover. The total market turnover has dropped marginally from 2.73% in 2002 to 2.68% in 2003 with the investment sector registering the biggest drop in turnover from 1.66% in 2002 to 0.67% in 2003. At the same time, services sector experienced the biggest jump in its turnover rising from 2.64% in 2002 to 4.32% in 2003.

BSE presented a lackluster performance compared to the other GCC markets, appreciating by 28% in 2003 and it remains one of the cheapest markets in the region. The price/earnings multiple of around 17 for the Bahraini stocks is low in comparison with other GCC markets and very low internationally.

The US markets are currently trading at a P/E of 22. Such a low valuation for the Bahraini market simply does not reflect the profit outlook of the corporates in the next few years in Bahrain, which is one of the best managed economy in the region and which has recorded the highest GDP growth rate of 6.2% in 2002 as compared to its GCC counterparts. Thus there is much steam left in the Bahraini equities.

The availability of alternative investments opportunities, notably the real estate and construction sector has held back the Bahraini stock market in 2003. One thing that often happens in an investment boom is that other asset classes such as local equities get overlooked and thus become undervalued. We expect the reverse to happen in 2004.

Despite its unimpressive performance in 2003 as compared to other regional markets, Bahrain equities offer one of the highest dividend yield of around 5%, available in the region.

As the Bahraini Dinar is pegged to the US Dollar, interest rates in Bahrain echo those prevailing in the US. The US interest rates are expected to inch up, although marginally, in the middle of 2004 and the Bahraini rates would also follow suit.

There will be still substantial differentials between short-term deposit rates and dividend yields available in the Bahrain Stock markets that will continue to lure the investors. The market will continue to benefit from the increased liquidity in the system due to the low interest rate scenario.

The current low interest rate scenario and the healthy earnings outlook coupled with the attractive dividend yield point towards further upside potential for the Bahraini stock market.

While the valuations of some of the regional markets have now started to look expensive, some of the blue chip stocks on the BSE continue to trade at a discount to their historical valuation levels.

The medium term outlook for Bahrain does look more optimistic as the country's macro picture remains healthy even though the oil prices in 2004 are expected to fall from their 2003 levels.

We expect the increasing liquidity in the system will find its way into the stock market and the real estate sector, thus further providing a boost to the market. Other factors such as the progressive political and economic liberalisation in the country are clearly encouraging.