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Tehran Stock Exchange Market Overview - May 2011

Source: Iran Investment Monthly (Jun 2011 - Volume 5, No 57) - Turquoise Partners

The Tehran Stock Exchange (TSE) had a volatile performance in May. Following its strong performance over the past few months, the TSE began the month on a downward trajectory. The International Atomic Energy Agency's report on the Iranian nuclear programme and domestic political tensions were assessed as the main drivers of market behaviour.

Turquoise Investor Conference
Tehran Stock Exchange Trading Floor, Turquoise Investor Conference

The Tehran Stock Exchange (TSE) had a volatile performance in May. Following its strong performance over the past few months, the TSE began the month on a downward trajectory and the TSE All-Share index declined by 3% in Rial terms at the beginning of May. The downturn was also partly driven by the International Atomic Energy Agency's report on the Iranian nuclear programme. Also, some of the domestic political tensions, as discussed in the Country Overview section, contributed to the downturn. Subsequently, the TSE had a positive performance but declined again during the last week of the month. Overall, the TSE's performance remained negative over the month of May. This was the frst negative monthly performance for the TSE over the past six months.

Also, retail trade volumes declined by 40% in May in comparison to the previous month. This can be viewed as a sign of the cautious sentiment among investors, many of whom are preferring to wait for clearer market conditions to present themselves. Some experts perceive the current market condition as natural following the signifcant gains over the past few months and they expect the upward trend to reaccelerate during the summer.

Tehran Stock Exchange Index - May 2011
Tehran Stock Exchange Index - May 2011

Oil and Gas Extraction

Block trading by the major shareholders was signifcant over the past month, unlike retail investors who did not trade as actively. A 50% stake plus one share of Haffari Shomal (North Drilling Co.) was sold after one week of heavy competition among the bidders. Haffari Shomal's key business is the management and leasing of oil and gas extraction platforms in the Caspian Sea, to both Iranian and also foreign customers.

The block ended up being sold at the price of $728 million, for a valuation of double its current share price. The company has proftability of $92 million and a market capitalisation of $720 million.


In May, the automotive industry had its worst monthly performance over the past six months and the industry index fell by 5.4%. The negative performance can be largely attributed to the recent political interventions in the automotive industry. The parliament has formed an investigation group to scrutinise the ownership transfers in the automotive industry over the past year. Approximately 40% of the ownership has changed as a result of the trades by the major shareholders of Iran Khodro Co. and Saipa Co., the two largest automakers in Iran. The parliament believed that the companies had engaged in share repurchasing through some of their subsidiaries, which is not in line with the privatisation plans aimed at reducing state ownership.

The Parliament also repealed a 5% block transaction of Iran Khodro Co. during the month of May which added to the uncertainties around the future prospects of the listed automotive companies.

Base Metals

Base metals performed well in May and the industry index gained 7.3%. The government recently approved a 2% price increase for Mobarakeh Steel Co. products, which was the frst offcial price increase for steel in the past six months. Mobarakeh Steel Co., the largest steel producer in the Middle East, also outperformed its earnings forecasts for the fnancial year ending March 2011 by 10%. This made the company the best performer of the month with the share price increasing by 18.4%.

Mining shares also had a positive performance of 1.4% as the parliament repealed the 50% tariff on iron ore exports. Gol Gohar Co., which has the largest iron ore reserves in Iran, gained 8.9% as a result.

Also, the National Iranian Copper Industries Co. (NICIC) published its annual report for the fnancial year ending March 2011. The company's net proft reached an all-time high of $1.36 billion. As a result, NICIC shares attracted investors and gained 2.6%. Overall, the mining and metals industry had a positive performance and analysts expect a continuation of this trend in the coming weeks.

Machinery & Equipment

The machinery and equipment industry index experienced a sharp decline of 22%. The decline came after the publication of a new sanctions list by the European Union, which contained some of the machinery and equipment companies listed on the TSE. Also, Sadra, a major offshore construction company underperformed its earnings forecast. This further contributed to the negative performance of the industry index.

Banking and Insurance

In May, the Department of Justice announced a 100% increase in insurance blood money, the money paid out in case of accidental loss of life. This decision came as a surprise to the insurance companies, as they will have to pay double the amount they used to pay in the case of fatal accidents on behalf of third party policy holders. In addition, third party insurance premiums are regulated by the Central Insurance of Iran and, thus, are not expected to be increased accordingly in order for the insurance companies to be able to compensate for the higher level of payouts. Despite the news, the industry's performance was virtually fat and the market did not react strongly, hoping that the decision will be revised later on.

In banking, following the interest rate cuts at the beginning of the year by the High Council of Money and Credit, the Central Bank requested a revision in the monetary policy package. The request followed a wide level of discontent in the banking sector, as banks continued to insist that the newly-approved interest rates had made the banking business a loss-making proposition. The council, which has the fnal say in setting out monetary policy, rejected the revision request and kept the approved interest rates unchanged. Some experts believe that the interest rates cut will discourage depositors and channel more liquidity to alternative markets such as gold and foreign exchange.

Also in May, Sarmayeh Bank was listed on the Over-the-Counter (OTC) market. With a market capitalisation of $789 million, the bank came to be the smallest listed bank and its price to earnings (P/E) ratio stood at 8.4. Overall, the continued competition among the major shareholders of some of the listed banks led to a 4.6% increase in the industry index in May.

Real Estate & Construction

The developments in the real estate and construction industry over the past months indicate a possible ending to the long recession which has lasted for more than three years. The Realtors Association recently announced that the prices of residential properties have increased by 5 to 8% over the past two months. Furthermore, the unchanged housing prices over the past few years (which are in effect a decline in real prices due to infation) and the high increase in liquidity are expected to contribute to the start of a new uptrend in the housing sector. The listed real estate and construction companies have been out of favour with investors over the past few years and the average P/E ratio for the industry is 4.5, the lowest among all industries represented on the TSE. As such, some experts consider the industry an attractive investment opportunity.

Also, during the last week of May, Baghmisheh Co., a construction company, was IPO'd on the OTC market. The company was IPO'd at the P/E ratio of 4.6 and its market capitalisation stood at $200 million. Four other real estate and construction companies are in the pipeline to be listed in the next few months.

About Turquoise Partners: Turquoise is a boutique investment firm based in Iran with offices in Tehran and London. Turquoise creates financial products and offers financial services to select clients and investors who are interested in the Iranian market. Having a qualified and diverse management team based both in Europe and in Iran enables Turquoise to benefit from coupling local knowledge and presence with global expertise.
Turquoise Partners
No. 17 East Gord Alley, Bidar St., Fayyazi (Fereshteh) Ave.
Tel : +98 21 220 35 830 Fax : +98 21 220 49 260.

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