Riyadh – Mubasher: A recent report by EFG Hermes, an EFG Holding Company, indicated that the outlook for Saudi Arabia remains challenging, yet the market is believed to have decently corrected and is too cheap to be deemed ‘underweight’.
EFG Hermes stated: “We keep a ‘Neutral’ stance on the Saudi equity market.”
In 2025, the equity market in Saudi Arabia faced a very tough year, as big headwinds came to the market way earlier, led by a bearish turn in oil prices, following the start of the trade war and OPEC+’s decision to increase oil production.
The EFG Hermes report elaborated: “In a market that was already concerned about public spending cuts and seeing softer earnings growth, external headwinds almost immediately unleashed a major correction that still engulfs the market going into 2026. Underwhelming growth in earnings was another key drag on the market.”
Moreover, fierce competitive forces in the consumer space represented a challenge for margins, in line with an already soft consumption backdrop, weighing heavily on earnings growth.
In parallel, the petrochemicals sector faced challenges of global oversupply and low oil prices.
The property market was hit by confusion around various reform efforts, puzzling investors about their net impact on the sector. These included approval of the white land tax, release of the freeze on land plots in Northern Riyadh, approval of the Foreign Ownership Law and the implementation of a five-year rent freeze in Riyadh, and possible other cities in the Kingdom.
Furthermore, a bearish view on oil prices and uncertainty over government spending plans are likely to remain constraints on a near-term recovery in the equity market, in our view. The report noted that uncertainty is the largest challenge facing the market, weighing on sentiment and leaving local investors, in particular, in more of a wait-and-see approach.
EFG Hermes added: “Indeed, official data show locals have increasingly shifted their attention to international markets, particularly the US, where Saudi nationals increased their purchases of US equities in 9M25 by c90%, compared to 2024.”
Moreover, the drive for expansion of basic infrastructure upgrades and the spending requirements driven by events like 2027 Asian Cup, 2030 Riyadh Expo and 2034 FIFA World Cup will ensure a decent level of spending that will continue to drive favorable opportunities in the market.
Alone, core infrastructure projects are sufficient for the growth factor that the equity market is currently discounting, in our view.
“We, therefore, keep our focus on purely infrastructure plays, banks and property sectors,” according to EFG Hermes.
Top Pick list
The report covered the EFG Hermes’ Top Pick list, which started with ADES Holding, with the recent acquisition of Shelf Drilling bringing total jack-up rigs to 83, more than 20% of the global fleet. The company’s structural cost advantage sharpens the company’s competitive edge. Finally, the company trades at undemanding valuations of sub 7x 2026e EV/EBITDA (post-Shelf Drilling acquisition).
There are two picks in the infrastructure sector, namely East Pipes Integrated Company for Industry and Electrical Industries Company. Although the valuations of purely utility plays appear to be stretched, the highlighted names provide comparable exposure to the infrastructure theme at more attractive entry points.
East Pipes offers exposure to our most preferred infrastructure theme in Saudi Arabia: the water sector, with sizeable project awards being underway. While cyclical by nature, the stock’s sub-10× P/E multiple implies a trough-like valuation that fails to reflect its normalized earnings potential or the improving visibility on medium-term profitability.
As for Electrical Industries, the name offers an alternative and better-priced way to gain exposure to Saudi Arabia’s power sector, where most listed utilities names now trade at premium valuations. While the headline multiple at 18.4x P/E in 2026e appears fair, we still see room for further multiple expansion, on a 2024-29e EPS CAGR of 23%.
In the banking sector, EFG Hermes still likes Al Rajhi Bank, as the bank is well-placed for a rate-easing cycle, with around 65% of assets linked to fixed rates, thanks to its strong exposure to the retail segment. A pick-up in mortgage activity, with rate cut and white land tax initiative are both tailwinds. The bank is also a key beneficiary of a potential increase in foreign ownership limits (FOL).
The Saudi National Bank (SNB) is also a Top Pick, given its access to overseas funding, strong liquidity and robust capitalization.
As for the real estate sector, the Top Pick is Retal Urban development Company, as it fits the criteria of developers with strong brand equity in the Saudi middle-class segment and close ties to quasi-sovereign landowners. The company will benefit from potential new off-take agreements that offer attractive margins and implementation of foreign ownership regulations.
In the hospitality segment, the Saudi focus on expanding religious tourism remains an important driver for the sector. Operators with prime locations and already deployed capex stand to benefit most from rising Umrah and Hajj traffic, provided valuations offer attractive entry points.
EFG Hermes said: “We like Jabal Omar Development Company (uncovered), given its relatively lower valuation than peers, deleveraging and strong expansion plans.”
In the consumer space, the report mentioned: “We flag Almarai Company, with the potential of price hikes acting as the key catalyst for the stock. We also remain positive on car rentals where we like United International Transportation Company (Budget Saudi) as the market leader and fastest-growing in its sector.”
As for the healthcare sector, EFG Hermes’ Top Pick is National Medical Care Company (CARE), which is consistently delivering on its five-year strategy through capacity expansion and improving profitability. The stock is trading at a discount to peers, despite superior growth visibility and a de-risked balance sheet, following the settlement of legacy receivables.
It is worth noting that EFG Hermes highlighted Egypt as the best-performing market in the MENA region throughout 2025, as it perfectly rode the tide of positive sentiment around emerging markets.
