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Charlemagne's Gems: Saudi Arabia's hidden opportunities

by Julian Mayo on Mar 05, 2014 at 14:33

A further step, in a country where almost a third of the population are non-nationals (mainly from Asia or the West), has been the encouragement of private sector firms to hire Saudis, while women are also being encouraged to work.

Investment opportunities

This has all resulted in higher consumer spending, and this in turn provides attractive investment opportunities.  

One such example is Al Hokair, a fashion retailer, which distributes a number of well known high-end brands in Saudi Arabia and elsewhere in the GCC. Earnings are expected to grow by 15-20% over the next three years, yet the shares trade at a forward PE ratio of below 20x, which is a discount to similar retailers in emerging markets.

Another investment in the consumer theme is Saudi Airlines Catering, which supplies airlines flying from the country. 

The flag carrier, Saudia, is its main customer and controlling shareholder. Profit margins are high and the return on equity is over 40%. 

As capital spending is low, free cash flow generation is strong and dividends are high. Growth in traveller numbers to the holy cities of Mecca and Medina are driving earnings growth of around 15% for the next three years.

We do not like the construction sector, partly because of rising labour costs, while the petrochemical industry also provides good opportunities, given low input costs and expanding capacity.

Citywire A-rated Julian Mayo (pictured) is the co-portfolio adviser of the Magna Emerging Markets Dividend  fund and the co-chief investment officer of Charlemagne Capital.

According to Lipper, the fund returned 10.4% in the three years to 4 March versus a -11.2% loss in the benchmark.

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