File 029460

From: Richard Kahn
Sent: 3/14/2018 4:51:41 PM
To: jeffrey E. [jeeyacation@gmail.com]
Subject: Fwd: Other ways to trade Saudi
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Importance: High
Richard Kahn
HBRK Associates Inc.
575 Lexington Avenue 4th Floor
New York, NY 10022
tel
fax
eel
Begin forwarded message:
From: "Ens, Amanda" <IIMM,>
Subject: Other ways to trade Saudi
Date: March 14, 2018 at 12:48:07 PM EDT
To: "rkahn">
Reply-To: "Ens, Amanda"
HOUSE OVERSIGHT 029458
GtObblE
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
• 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 & Intl debt issues
Saudi Fundamentals are strong (see Jean-Michel Saliba's report from Jan. 29th below):
• 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: IX/MAP (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 lmL+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.
• SIC: 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.
HOUSE OVERSIGHT 029459
• Jarir: We like Jarir for its potential to increase its market penetration having increased its store count by 13% since August 2017 while maintaining its premium
ROE of 53% and attractive dividend.
• Al Tayyar : Stock will see a slew of positive catalysts over the next two quarters, particularly a second tranche of substantial gov receivable recoveries in Ql.
130mn SAR loss from associates in 2017 is a one off and should make comps easier this year. Q1 earnings should see the first earnings growth after a very difficult 2
years. Makkah real estate REIT will also provide an uplift.
• Al Hokair: has massively under performed in Saudi index and consumer sector and should see substantial improvement in business in 2018 as LFL turns the
corner and the company businesses a beneficiary from social reforms in the country. Debt restructuring concerns likely behind us at this point, relief there would be
the main catalyst for the name.
• Malath / Alrajhi Takaful: 2 of the top motor insurers in Saudi secular growth trend in motor insurance sector over the next two years as the regulator clamps
down on more than 50% uninsured drivers while women driving to present multiyear volume growth story.
Cole Mackay, CFA, Director
Emerging Europe, Middle East & Africa Equity Sales
Bank of America Merrill Lynch
Office: *1 212 449 52711Cell: +1 917 678-9716
coleman.mackayPbaml.com
This material was prepared by Sales personnel of Bank of America Merrill Lynch and is subject to the terms available at the following
link: http://corp.bankofamerica.com/business/smb/landincilemaildisclaimer/americas/plobal-markets
"SALES VIEW ONLY**
Global Research
Bank of America
Merrill Lynch
GEMs Paper #31
Saudi Arabia: growth bull, fiscal bear
29 January 2018
Key takeaways
• Growth recovers as high oil prices allow looser fiscal, contain near-term deterioration. Mega-projects offer upside potential
HOUSE_OVERSIGHT_029460
• The oil price at which reforms now bring imbalances to low mid-single digit levels moves to US$60/bbl, from US$50/bbl before.
• Earnings momentum, index events make us positive Saudi stocks. Prefer banks, petchems. Top picks: Rajhi, Samba, Yansab, Sabic
Macro: sweet spot for now
Economic activity has bottomed out as high oil prices are allowing implementation of looser fiscal policy and containing near-term fiscal
deterioration. The government intends to support activity through a) a more gradual pace of fiscal reforms; b) introduction of Household/Cost of
Living Allowances and Private Sector Support programs; c) introduction of structural reforms; and, d) the launch of mega-projects. The latter
provides most upside potential to our average growth projections of 2.2-2.5(Yoyoy.
Fiscal reforms now need US$60/bbl to safeguard stability
The oil price threshold at which the macroeconomic adjustment brings imbalances to low mid-single digit levels moves to cUS$60/bbl, from our
previous assessmcni of cUS$50/bbl. The revised Fiscal Balance program exposes the budget to volatility in oil prices. Still, there are four ways in
which authorities can improve on fiscal dynamics: 1) front-loaded energy pricing reform; 2) privatizations; 3) proceeds from anti-corruption
crackdown; and, 4) phasing out of the Royal Order next year.
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. Our views are based on: (1) attractive valuation, with the Saudi market now trading at a mere 3% premium to GEMs versus a
historic premium of more than 30%; (2) improving macro fundamentals; (3) the prospect for accelerating earnings, FCF and dividend growth on the
back of reform programs, an expansionary budget and a more pedestrian pace of austerity implementation; and, (4) the potential twin index
inclusion events in 2018.
Prefer banks and petchems
Within the Saudi market, our preference lies with companies offering strong earnings and FCF momentum, attractive valuations and dividend
yields. In this regard, our sector preference is tilted towards the banks and petchems, who we see as key beneficiaries from the 2018 budget and
revised fiscal balance program. We highlight Al Rajhi & Samba as our top picks amongst the banks, Yansab & SABIC amongst the petchems.
Elsewhere, given the inflationary pressures on operating costs (e.g. expat levies, rising utility costs), we are more selective; focusing on names
that are least affected by the regulations and that have attractive company specific growth stories.
Commodities: As good as it gets for OPEC
HOUSE OVERSIGHT 029461
OPEC is succeeding at rebalancing the oil market. Our supply/demand balances reflect a faster-than-expected market tightening due to improving
cyclical conditions, cold winter, and OPEC compliance. A gradual OPEC+ deal exit would keep spot and forward prices in a range with the market
in backwardation, and preserve OPEC's long-run market share.
Contents
Macro: growth bull, fiscal bear
2018 budget expans ens don't come cheap
A US$20bn price tag for growth
Government stimu us in the pipe ins
Rev sed Fisca Ba ance program --- more growth, more r sk
Macro tab c
Equity strategy: opportunity abounds as momentum picks up
KSA trading in
ins w in GEMs -iesp te improving outlook
Banks & petchems preferred; select vs elsewhere
National Champions strategy remains attractive
2018 - the year of potential tw n index nclus ons
Banks: budget supports positive outlook
Saudi banks key beneficiary of ic)osened fiscal po
2018 shaping up to he a strong year for the Saud
ICY
banks
Consumer: factors align for a more positive outlook
Easing austerity, higher growth boost disposable income
Expat levies: uniform fees, d
fferentiated
mpact
Petchems: government support to continue for an extended duration
Delay in feedstock prices and electricity tariff hikes
Types of support for the sector from the government
Healthcare: no surprises
HOUSE OVERSIGHT 029462
Telecom: towards the end of the tunnel?
Utilities: a balancing fund to manage the transition
Commodities: as good as it gets for OPEC
Disclosures
Research Analysts
Jean-Michel Saliba 21
MENA Economist/Strategist
MLI (UK)
This report is intended for Coleman Mackay
Ba nk of Amer,
Merrill Lynch
From: Ens, Amanda
Sent: Wednesday, March 14, 2018 12:46 PM
To: Ens, Amanda
Subject: MEGA Trade --> Long Saudi...
Hootan Yazhari, CFA
Research Analyst
Merrill Lynch (DIFC)
HOUSE OVERSIGHT 029463
Opening New MEGA Trade:
Long Saudi Equities ( Buy M1SAP on Swap / Liquidity $100mm a Day)
- Potentially the EM Flow Story of 2018... if FTSE addition is announced on March 28th we expect an inflow of
$5bn on a basket which trades 100mm USD a day (50X ADV)... this is even before MSCI announcement in June
where inflows could be substantially higher
The Most Powerful Macro Trades are when Macro Fundemantals + Flow Meet... This is Saudi in 2018
Key Points:
1. Saudi has significantly underperformed Oil by 14% last 6 months. With the recent introduction of the citizens account programme,
subsidy cuts, pushing out the budget balance to 2023, and the news of increased handouts, Saudi should re correlate with oil and move higher
from here.
2. Saudi equities remain under-owned globally --) foreign ownership of Saudi equities is at 1.3% vs Russia 70%, Turkey 55%, South Africa
50%, Brazil 45%, UAE 20%, Qatar 10%
3. Good liquidity vs other EMs but volume trading at lows relative to history -4 Tadawul ADV close to all-time lows at $1bn (10yr range is
$1-8bn)
4. Major index events in 2018/19 with FTSE announcement on 28th March next catalyst-4 FTSE announcement could trigger inflows of up
to $5bn . Combined with the MSCI announcement later this year, potential active and passive inflows can total $15-$40bn. So the potential of at
least $20bn inflows on a basket which trades 100mm USD a day (200 Days Volume) ?
5. In comparison, during the MSCI UAE and Qatar inclusions, UAE was trading 10% below historic avg @14x PE and rerated to 22x into MSCI
EM inclusion with Dubai up +110% (vs +47% prey year). Qatar was trading inline with historic avg @11x PE and rerated to 18x MSCI EM inclusion
with Qatar up +60% (vs +9% prey year)
HOUSE OVERSIGHT 029464
6. Saudi risk indicators at 2015 pre-crisis levels 4 Saudi 5yr CDS is trading at 76 vs 40-210 3yr range; SAR 2yr fwd suggests market is less
worried about depeg fears and forward points can be used as a macro hedge
7. Valuations & dividend yields remain attractive 4 Market trades at a 10% discount (13.5x) to its historic PE (Saudi PE range is 10-
26x). Avg dividend yield is 3.6% with 45 stocks yield more than 4%.
Our Middle East Team ready for Calls - Ha mdy Hamoudi in London next week 19th-23rd March. Talal marketing in US 23rd-27th April. Marwan in
Trading
MAR disclosure
Saudi has underperformed both Oil and EM in the last 6 months
2015
Vant C.onlity BREXT Oa* Pirf Nkrylit 1
MIX DE4 V.
Last Price
Si COA Cormity (R1) 6447
X SASEIDX Index (I) 7775.73
Last Price
SASEIDX Index (LI) 7775.73
•UM US Equity (IZ1) 49.,42
c4,16,4
fr4wftbor, øc L.
14-14e-MIS
HOUSE_OVERSIGHT_029465
Saudi equities remain under-owned globally
Foreign Ownership
70
5.5
Ii
Russia Turkey south Brazil
Africa
1111 VAWAVOk
Qatar Saudi
Arabia
Risk indicators are back to 2015 pre-crisis levels. Saudi Syr COS down from 210 to 76 (note 40 was all time low)
HOUSE_OVERSIGHT_029466
low: 39.785
Hi: 209.030 Lt Price/6,36.5
H9h on 01/18/16 209.030
-4- Aver 94.021
. Low on 06/13/14 39.78.5
2013
2014
2015 2016 2017
rTS401107 esioriNcy (KSik tOS WE 51" 014) U441 23440.M11-111WMIS Capyrvhet 2016 aloombarst Noma• L. 13-
Valuations remain attractive — Saudi trading at 10% below historic PE; Saudi ERR now at 1.22 vs 0.4 in 2016
8
200
100
7114:40
HOUSE_OVERSIGHT_029467
06 07
2
i 4
6„
6
5
4
3
2
08.A. &Sena LyrAct* Goat§a
*3,,xt toutinvtalitayrus.orozielvzotr. $ower AWS,
Lstirre, GX0411"talktor
MEGA Open Trades
HOUSE OVERSIGHT 029468
Theme/Trade
We think Fed rates expectations
remain on the low side with just
marginally more than 1 hike priced,
We do not think the BoE will hike as
much as the Fed...................next year when marke
are pricing marginally more from the
BoE.
The risk for equities is a further rise in
yields led by higher real rates. Last time
lety real rates were here S&P was closer
to 2720.
We see asymmetry in EURGI1P.
expect EUR to react positively i
a y/Germarty is neutral/ positive tti
weekend and ECB pricing to tF
firmer. On GBP leg, UK politica
remain underpriced with odds
election in 2018 increas rt-
.
Trade Expression
Entry Date Expiry Entry Level Current Level Hit Ratio
Buy Dec18 Eurodollar
Futures (EDZ8) vs Sell
Dec19 Eurodollar
Futures (EDZ9)
07/02/2018
97.63/97.31 97.455/97.125
Buy Dec19 Short
Sterling futures (L Z9)
vs Sell Dec18 Short
Sterling Futures (L Z8)
07/02/2018
98.76/99.09 98.67/98.98
Long SPX Mar18
2640/2600 put spread
28/02/2018 16/03/2018
10
0.00
Long EURGBP 3m
0.91/0.94 call spread
02/03/2018
0.62%
0.45%
MEGA Closed Trades (Hit Ratio Closed Trades = 77%)
Theme/Trade
,
Trade Expression
Long FTSE Feb18
7550/7700 call spread
for 42 offer (7476 ref)
(rolled from Dec, 7460
ref)
Long SX7E Feb18 140
calls (rolled from Jan,
134 fut ref)
\ Buy Mar18 Eurodollar
Futures (EDH8) vs Sell
Entry Date   Close Date   Entry Level   Close Level Hit Ratio
02/11/2017   11/01/2018   42   100
24/10/2017   25/01/2018   0.9   3.3
11/01/2018   07/02/2018   98.18/ 97.535   98.12/97.31
HOUSE OVERSIGHT 029469
•
\\\:.....N 1 Dec19 Eurodollar
Futures (EDZ9)
N
\
,,,,,.,
,
\ ...
\ \\.\ \
Long equal weighted
basket of Telefonica;
lberdrola;
Enel; Unicredit &
Santander
Long SX7E Mar18 145
calls (40d, 142 ref)
Long equal weighted
basket of Russian Oil
names: Gazprom,
Lukoil, Rosneft
Long SX5E Mar18 3350
puts (35d vs 3406 ref)
Short FTSEMIB Index via
Mar18 futures (STH8
Index)
Long UKX Mar18 7375
calls
Long SPX Mar18
2750/2700 put spread
26/10/2017   15/02/2018   97.8   92.9
25/01/2018   22/02/2018   2.85   0.2
07/11/2017   22/02/2018   98.95   113.04
22/02/2018   02/03/2018   39   58.40
22/02/2018   02/03/2018   22505   22005
07/02/2018   02/03/2018   55   1.50   it
28/02/2018   02/03/2018   15   30.40
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HOUSE OVERSIGHT 029470
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Foreign Ownership
7i1
20
II
Russia Turkey South Brazil UAB
Africa
10
Saudi
Arabia
HOUSE OVERSIGHT 029471
2013
cT9463,07 CAorftw (K5ok
28
23
22
10
10
13
7
4
00 07 00
10 11 12 13 14
sources: sses„
2014
Pt SY NA
Hi   2.030   -a Lost Price   76.365
I High on 01/18/16   209.030
Ave/ ge   94.021
Low on 08/13/14   39.785
2015 2016 2017 2018
sity szoom2013.13.40A2ms r4,0,,,foss vocowjer9 visNte4. •1344,-2tlit
:MSC4 12m Food PE
12on Fold PE
Ar.eera9*
6004 use* vynort cloitet rtintimecA!
200
HOUSE OVERSIGHT 029472
201 m.2016
144411 nvw .,Z42014k ar* 29x1t=11. Sctin4eetisiMit.tt's4km anc, 40444
tAtem Lesam 04,14M RAIMAIWZI%
10000A
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2015 2016
cormay (pea MK firat bIUSaaiiWtVaily OLFEILVIS. 14RARIVIS
207
CgmyrOtt 201.8 liroomberfa Antesot
2018
X.riAt
it Prim
COA Conicity (R1) 6447
SkSEIDX Index (Li) nmrs
Last Price.
*SASE:1DX Wait (Li) 7775.73
a EEM US NAY" (RI) 49.42
1.1.•••••••••.'
00. 70
HOUSE OVERSIGHT 029473
• Global Equates
mt,,,uttaiott, g4x/tiy
Bank of America
Merrill Lynch
Bankof Anted
Merrill Lynch
HOUSE OVERSIGHT 029474