Corporate earnings for GCC companies have been disappointing as they continue to face headwinds from plummeting oil prices which has resulted in slower economic growth for the region and reduced government spending. Corporate profits and net margins, at an aggregate level, have been on a clear downtrend for most sectors in the region. However, the aggregate profit margin conceals a broad divergence of trends among various sectors, according to Marmore MENA Intelligence, research subsidiary of Kuwait Financial Centre “Markaz” that recently released a report highlighting industries that enjoy high net profit margins across GCC.
Interestingly, the net profit margins of large cap stocks (5yr average of 17.5%) in GCC were much higher than those of mid cap (5yr avg, 9.9%) and small cap stocks (5yr avg, 5.8%). Outperformance is possible as most large caps such as SABIC, Qatar Industries and Emaar Properties often enjoy extra government patronage in terms of contracts, access to raw materials and funding. Profit margins in sectors such as basic materials, industrials, energy, utilities and telecommunication services were affected by various factors. Subdued activity in infrastructure space, softening real estate activity as evidenced by stagnating sales and prolonged working capital cycle has eroded margins for contractors, construction material providers such as cement and steel companies and infrastructure firms by 200bps to 800bps over the past five years.
On the other hand, there are sectors that have bucked the trend and successfully expanded their margins as well. Firms in technology, financials – particularly Non-Banking Financial Corporations (NBFCs), healthcare and consumer non-cyclical sectors have all done well in the past five years. Margins for firms providing financial services such as loans, working capital, insurance, wealth management products and leasing solutions have expanded by 980bps in the past five years. Lower cost of capital, ample liquidity and regulations that call for mandatory purchase of insurance have aided in their stellar growth.
Food processing firms, retailers, wholesale distributors and traders for whom the consumer demand is resilient to vagaries of business cycle have also done well. Favourable demographics, rising per capita incomes and a lifestyle which is consumption-driven have benefitted the consumer non-cyclical sector whose margins have increased by 480bps since 2011. Going ahead, the report said, “we expect margin pressures to continue in basic materials (2015 – 11.1%), industrials (11.2%) and energy (8.3%) sectors as oil price is not expected to rebound any time soon and restrained government spending could lead to stalled infrastructure projects. Poor labour productivity would continue to squeeze margins in labour intensive sectors while increasing interest rates and liquidity problems could pose as a headwind for financials.”
As originally appeared in http://www.wealth-monitor.com/