RDR Capital 2018 portfolio update (+8.8% in 2018, +25.0% since inception)

RDR Capital’s MENA portfolio is up 8.8% in 2018 and up 25.0% since inception (the portfolio was incepted on the 1st of October 2016). Our global portfolio is up 2.8% in 2018 in GBP terms (down 2.7% in USD terms) and up 14.7% since inception (the portfolio was incepted on the 1st of January 2017).

We have liquidated our MENA portfolio as at 31 December 2018  

We have decided to liquidate our Middle East and North Africa (MENA) portfolio as at 31 December 2018 as our outlook has turned quite negative over the medium term. In addition, we have decided to focus all our efforts on the global portfolio. As such, we will no longer comment on the MENA markets going forward.

2018 was a challenging year for our global portfolio

As per the above, we will focus all our efforts on our global portfolio going forward, and our commentary will be released on an annual basis.

Needless to say, 2018 has been a challenging year, with significant headwinds including a global slowdown in growth, spearheaded by a slowdown in growth in the Chinese economy and exacerbated by a fear of a trade war between the US and China. The slowdown in growth is occurring as central banks are reducing their ultra-loose policies, putting additional pressure on global liquidity.

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Selling our position in Alawwal Bank

We are selling our position in Alawwal Bank after the share price appreciated significantly over the past few days on the back of the bank’s merger with the Saudi British Bank (SABB). Alawwal’s share price is up 52.9% since we initiated our position. Our decision to sell is based on the fact that Alawwal shareholders are due to receive SABB shares in exchange for their holding in Alawwal Bank, and it is our view that the shares of SABB do not look attractive at current levels.

The above raises our cash levels to a significantly high 43.9%, reflecting our cautious view over the short term.

As of today, the RDR MENA portfolio is up 8.3% year to date (YTD) and 24.4% since inception (the portfolio was incepted on the 1st of October 2016).


Selling half of our positions in Jarir Marketing Co and National Commercial Bank

We are selling half of our positions in Jarir Marketing Co (Jarir) and National Commercial Bank (NCB) after the share prices of both companies appreciated significantly over the past few months. Jarir’s share price is up 105.9% and NCB’s is up 90.9% since we initiated our positions, hence it is our view that share prices reflect full valuation at current levels.

However, we have retained half of our positions in both companies as our fundamental view of both businesses remains positive, as well as our long term view of the Saudi economy in general.

The above raises our cash levels to a significantly high 40.7%, reflecting our cautious view over the short term.

As of today, the RDR MENA portfolio is up 3.9% year to date (YTD) and 19.4% since inception (the portfolio was incepted on the 1st of October 2016).


Initiating a position in Qatar National Bank

We are initiating a position in Qatar National Bank (QNBK QD). The position’s size is 5.1% of the portfolio. We have turned cautiously positive on the Qatari market as it shows some recovery potential despite the significant geopolitical risk.

Qatar National Bank (QNB) is the leading bank in Qatar with operations in Africa (through a 20% stake in Ecobank) and across the Middle East and North Africa region through subsidiaries and stakes in associates. Operations in Qatar represented 64% of the bank’s profits in 2017.

The bank’s valuation is compelling on both a price to book multiple (P/B) basis, as well as using a dividend discount model (DDM). QNB trades at a forward P/B multiple of 1.7x, coupled with a forward return of tangible equity (ROTE) of 21%.

The compelling valuation is supported by a strong balance sheet with a capital adequacy ratio (CAR) of 16.5%. The minimum requirement under Basel III and Qatar Central Bank guidelines is 10%. In addition, 46% of the loan book exposure is to government and government agencies, and 45% of investments are in Qatar treasuries. The strong and committed government support is key to the investment case.

It is fair to expect some increase in non-performing loans (NPLs) over the next few years, which we have included in our model, but that increase does not take away from the compelling valuation.

The investment case is also supported by a number of catalysts that should support the Qatari economy in the medium term, including the government spending on infrastructure and in preparation for the 2022 World Cup, as well as any improvement in the geopolitics in the region.


RDR Capital 2017 portfolio update (-0.9% in 2017, +14.9% since inception)

RDR Capital’s MENA portfolio is down 0.9% in 2017 and up 14.9% since inception (the portfolio was incepted on the 1st of October 2016). Our global portfolio is up 1.6% in 2017 in GBP terms (up 11.6% in USD terms) and since inception (the portfolio was incepted on the 1st of January 2017).

Geopolitics weighed (again) on the MENA portfolio’s performance during the fourth quarter of 2017

The Middle East and North Africa (MENA) portfolio was under pressure during the fourth quarter of 2017 mainly due to an increase in geopolitical risk in the gulf region, especially in Saudi Arabia, on the back of the arrests of senior Saudi political and business figures. Political stability in Saudi Arabia has always been taken for granted, not any more. The heightened risk was reflected in higher bond yields in Saudi Arabia and across the region.

We were defensively positioned during the 4th quarter of 2017 (4Q17) with a cash balance of c40%, which caused a significant cash drag at the end of the quarter when markets recovered in the region, especially in Saudi Arabia. The Saudi Tadawul benefited from a year-end rally on the back of positive news regarding next year’s expansionary budget. Our portfolio is well positioned to benefit from the improvement in consumer confidence in the kingdom in 2018.

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Selling our position in Al Hokair Group and initiating a position in Aldrees Petroleum

We are selling our entire position in Al Hokair Group (c1.5% of the portfolio). The recent news that a member of the Al Hokair family has been detained in Saudi Arabia’s corruption crackdown might negatively impact the entire family’s standing in the kingdom. This will in turn negatively impact the performance of the business which is dependent on consumer confidence and sentiment.

In addition, the group’s 3Q17 results were disappointing with a drop in revenues worse than expected, as well as a sharp drop in margins. It is not clear whether the drop in margins is due to a structural change in the company’s cost base or a transitory issue. If this drop is due to a structural change, then the company’s shares are overvalued at current levels according to our estimates (12-month target price of SAR18.9, or a downside of 20% from current levels). We will err on the side of caution and sell the entire position given the change in the overall investment case based on the above.

We are also initiating a position in Aldrees Petroleum and Transport Services Co (ALDREES:AB) of 4% of the portfolio. Aldrees operates petrol stations across Saudi Arabia and is well positioned to benefit from the expected increase in the number of cars in the kingdom now that women will be permitted to drive. The company also operates a transport business representing c21% of its net profit in 2016, with the balance from the petroleum business. Aldrees owns and operates over 1,200 truck heads and over 2,000 trailers.

The investment case is supported by a strong balance sheet (1.5x net debt to EBITDA at the end of 2016) and a solid dividend yield of c4% for 2017 on our estimates and at current share price levels. Capital expenditure (capex) requirements are undemanding at c2.5% of revenues, especially that the company is highly cash generative, with EBITDA more than adequate to cover both dividends and capex over the medium term.


RDR Capital 3Q17 portfolio update (+2.5% YTD, +18.9% since inception)

RDR Capital’s MENA portfolio is up 2.5% in the first nine months of 2017 (9m17) and up 18.9% since inception (the portfolio was incepted on the 1st of October 2016). Our global portfolio is down 1.5% in 9m17 in GBP terms (up 7.4% in USD terms) and since inception (the portfolio was incepted on the 1st of January 2017).

Geopolitics weighed on the MENA portfolio’s performance during the third quarter of 2017

The Middle East and North Africa (MENA) portfolio was under pressure during the third quarter of 2017 (3Q17) mainly due to the geopolitical crisis in the gulf region between Qatar on one side and a Saudi-led coalition that includes the UAE, Egypt and Bahrain on the other. The coalition imposed a land, sea and air embargo on Qatar. The crisis has put negative pressure on regional markets, especially the Qatari market, as liquidity exited. The International Monetary Fund (IMF) cut its non-hydrocarbon growth forecast for the Qatari economy in 2017 from 5.7% to 4.6%. It is reasonable to expect confidence to weaken and investment to drop the longer this crisis continues.

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Selling our position in Doha Bank

We are selling our entire investment position in Doha Bank on the back of the lingering geopolitical crisis in the gulf region. The crisis between Qatar and its gulf neighbours plus Egypt is now expected to last much longer than it was originally envisaged.

The crisis will have a negative impact on the economic performance of the Qatari economy, the extent of which is not yet clear, despite the Gulf nation’s immense wealth. This will most likely put pressure on consumer confidence, especially on non-Qatari residents. That will in turn have a negative impact on, especially, the retail component of local banks revenues. Doha Bank has a relatively large exposure to retail customers in Qatar and as such we expect the bank’s revenues to be negatively impacted by the crisis in the short and medium terms, hence our decision to sell our entire position in the bank.


RDR Capital 2Q17 portfolio update (+5.7% YTD, +22.6% since inception)

RDR Capital’s MENA portfolio is up 5.7% in the first six months of 2017 (1H17) and up 22.6% since inception (the portfolio was incepted on the 1st of October 2016). Our global portfolio is up 0.6% in 1H17 in GBP terms (up 6.3% in USD terms) and since inception (the portfolio was incepted on the 1st of January 2017).

The MENA portfolio rebounded during the second quarter of 2017

The Middle East and North Africa (MENA) portfolio rebounded during the second quarter of 2017, supported by a strong performance in Saudi shares on the back of a number of catalysts including a smooth transition in the succession process in Saudi Arabia, the potential of Saudi Arabia being added to the MSCI Emerging Markets index in June 2018, and the Saudi government’s reinstating of benefits to civil servants and military personnel. Saudi consumer shares including Almarai and Savola performed very well during the quarter as consumer confidence and business sentiment improved with the reversal of the pervious austerity measures. In addition, Samba and NCB performed well on the potential of the shares being included in the MSCI EM index next year. The banks were also supported by an easing in liquidity in the system and the potential of a boost in Net Interest Margins (NIMs) on the back of higher interest rates, in line with US interest rates.

Jarir’s share price was supported by strong 1Q17 results. Revenues grew by 20.3% YoY during the quarter, supported by both new store openings and like-for-like growth of old stores. We remain positive on the prospects of the well managed retailer. (more…)


Reducing our position in Almarai

We are reducing our investment position in Almarai by half. Our decision to reduce the exposure is based entirely on current valuation levels, hence our decision to retain the other half of our exposure. The share price is up 81.8% since we initiated our investment in the company.

Almarai remains one of the best managed companies in Saudi Arabia and indeed in the Middle East and North Africa (MENA) region, and it remains very well positioned for growth and for maintaining its market leading position.


RDR Capital 1Q17 portfolio update

RDR Capital’s MENA portfolio is down 0.5% in 1Q17 and up 15.4% since inception (the portfolio was incepted on the 1st of October 2016). Our global portfolio is up 0.9% in 1Q17 in GBP terms (up 3.0% in USD terms) and since inception (the portfolio was incepted on the 1st of January 2017).

The MENA portfolio struggled during the first quarter of 2017

The Middle East and North Africa (MENA) portfolio struggled during the first quarter of 2017, after a very strong performance in the previous quarter, as oil prices were under pressure during the quarter.

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Initiating a position in Savola Group

We have initiated a position in Savola Group (SAVOLA AB). The position size is c4.5% of our Middle East and North Africa (MENA) portfolio. Savola is a leading Saudi-based conglomerate with operations in the retail and food production sectors, as well as investments in leading companies most significant of which is a 36.52% stake in Almarai (ALMARAI AB), a leading dairy producer in the MENA region. The retail segment includes Panda supermarkets and the foods segment includes oil (Afia) and sugar production.

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RDR Capital 4Q16 portfolio update

RDR Capital’s MENA portfolio is up +16.0% in 4Q16 and since inception (the portfolio was incepted on the 1st of October 2016).

The MENA portfolio performed exceptionally well during 4Q16

The Middle East and North Africa (MENA) portfolio performed exceptionally well during the last quarter of 2016. A positive macro environment driven primarily by a rebound in oil prices during the quarter helped MENA markets recover from heavy losses earlier in the year.

Al Hokair Group (AATD AB) was the best performer during the quarter as consumer sentiment improved in Saudi Arabia. The shares were up 84.0% during the quarter, and as noted in our post dated 6 December 2016, we felt it was prudent to take advantage of the strong run and reduce our position accordingly.

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Reducing our positions in Samba and Al Hokair Group

We are selling half of our positions in Samba Financial Group (SAMBA AB) and Al Hokair Group (AATD AB). Both share prices have had a strong run over the past few weeks, therefore we feel it is prudent to take some profits on our positions.

In addition, we are concerned about Samba’s exposure to Oger Group, and whether the bank will have to take an additional provision for this exposure. However, Samba remains one of the best run banks in Saudi Arabia, with the most liquid balance sheet in the sector, hence our retention of half of our current position.

As for Al Hokair Group, the shares have had a very strong run, they are up c78% since we initiated our position. We have some concerns about the resilience of leisure-related consumer spending in Saudi Arabia, however we still view the Group as well positioned for growth, hence our retention of half of our current position.


RDR Capital 3Q16 portfolio update

This is our maiden post on the RDRcapital.com website. We plan to make regular quarterly updates on, initially, our Middle East and North Africa (MENA) portfolio and eventually on our global portfolio. In addition to the regular quarterly updates, we will publish market commentary on an ad hoc basis to discuss topics we view as relevant to our portfolios.

It is important to highlight that we do not actually invest in MENA markets. Rather, the purpose of the MENA portfolio is to demonstrate our investment philosophy and strategy, and to create a “virtual” track record. On the other hand, our global portfolio will have a verifiable track record; that is, it will reflect actual investments in the markets. (more…)