Robust Momentum

Chief Financial Officer's review

Evaluation of the fortunes and performance of the Tadawul Group to itself and the Kingdom necessarily involves looking through multiple lenses; the core of the Exchange - the market, permanence of the Exchange, IT infrastructure and capabilities, the collective knowledge and expertise of the human capital, and the contribution the Exchange provides to sustainability.

The background

The COVID-19 pandemic had a devastating financial and economic impact globally, regionally, and locally. The pandemic has a three-fold impact on the Saudi Capital Market; on corporate profitability and performance, market performance and liquidity. Corporate profitability fell by 50% year-on-year in the first nine months of 2020. There were however a few sectors, such as telecommunications, food, healthcare, and retail, which were relatively unscathed. Interest rates were depressed which made stocks a more attractive investment, which was a factor in the massive increase in Tadawul's year-on-year profitability.

Soon after the pandemic broke out, we decided on an aggressive strategy of managing controllable costs and cost optimisation. At that point we could not be sure what direction the market could take. Therefore, we decided on a strategy of planning for alternative scenarios - three possible outcomes for the market were simulated and we developed contingency plans for each of them. While we curtailed certain costs, optimisation was practised to ensure certain essential procurements such as equipment necessary for distanced working was made available.

The final outcome was that the market performed extremely well. Due to interest rates, locally and globally being extremely low, the securities market became the preferred investment destination. This drove up our revenues and increased liquidity.

Performance summary - 2020

In the face of the adverse situation, Tadawul registered a commendable financial performance in many respects. Operating revenues recorded a 91% growth over 2019, driven by higher trading commissions arising from increased trading value. On the other hand, costs did not show a significant increase notwithstanding a number of new initiatives and projects, as a result of the cost control and cost optimization measures that were introduced. This enabled us to ensure the financial stability of the Company. An internal benchmarking exercise was also carried out to assess Tadawul's financial performance vis-a-vis
its peers.

Investment income however dropped by nearly 60% due to the lower interest rates prevailing in the market. The other side of the coin was that it also drove market trading. Increased foreign inflows into the market caused greater liquidity. Foreign buying amounted to SAR 115 Bn for January-September 2020. Costs were satisfactorily controlled, which together with increased revenues, resulted in higher net income.

Five year summary

Summary of income and expenditure 2016 - 2020

	2020 SAR	2019 SAR	2018 SAR	2017 (Restated) SAR	2016 SAR
Operating revenue	1,079,635,090	564,747,899	583,280,040	545,449,550	312,579,703
Operating costs	(356,484,493)	(326,128,116)	(298,503,938)	(295,466,902)	(200,858,490)
Gross profit	723,150,597	238,619,783	284,776,102	249,982,648	111,721,213
General and admin expenses	(180,244,860)	(196,960,609)	(210,520,277)	(192,528,380)	(180,469,349)
Operating profit	542,905,737	41,659,174	74,255,825	57,454,268	(68,748,136)
Investment income	38,797,145	94,343,939	79,211,522	87,188,113	39,012,995
Share of net loss of equity accounting investee	(2,101,685)	(1,610,095)	(6,629,084)	(2,409,809)	-
Other income	4,478,947	18,900,768	1,348,402	3,070,137	437160
Non-operating income	41,174,407	111,634,612	73,930,840	87,848,441	39,450,155
Profit for the year	584,080,144	153,293,786	148,186,665	145,302,709	(29,297,981)
Zakat expense	(83,561,274)	-	-	-	-
Net profit for the year	500,518,870	153,293,786	148,186,665	145,302,709	(29,297,981)

 

Statements of Financial Position 2016 - 2020

	2020 SAR	2019 SAR	2018 SAR	2017 (Restated) SAR	2016 SAR
Non-current assets
Property and equipment	21,381,712	13,693,404	18,321,065	26,137,061	30,442,804
Intangible assets	179,552,282	176,516,175	114,622,164	81,184,289	56,569,437
Equity-accounted investee	378,895,293	40,996,978	42,607,073	49,236,157	81,846,474
Investments	101,267,886	231,554,876	306,327,691	1,113,741,772	1,446,118,292
Right-of-use assets	19,856,726	11,271,347	-	-	-
Projects under progress	-	-	-	-	29,144,844
	700,953,899	474,032,780	481,877,993	1,270,299,279	1,644,121,851
Current assets
Investments	3,103,518,964	2,660,288,572	2,616,337,849	1,479,115,490	1,582,072,800
Account receivables	57,364,818	41,179,879	38,594,342	26,916,210	9,720,714
Prepaid expenses and other current assets	102,271,835	102,841,000	31,959,881	24,939,387	41,655,768
Deposits with SAMA	32,177,558	-	-	-	-
Cash and cash equivalents	96,798,376	268,487,867	363,178,918	613,057,827	109,398,138
	3,392,131,551	3,072,797,318	3,050,070,990	2,144,028,914	1,742,847,420
Total assets	4,093,085,450	3,546,830,098	3,531,948,983	3,414,328,193	3,386,969,271
Equity
Share capital	1,200,000,000	1,200,000,000	1,200,000,000	1,200,000,000	1,200,000,000
Statutory reserve	376,963,633	326,911,746	311,582,367	296,763,700	283,786,867
General reserve	1,114,180,214	1,114,180,214	1,114,180,214	1,114,180,214	1,114,180,214
Unrealized gain/(loss) on available-for-sale investments	-	-	-	9,360,408	(3,156,708)
Retained earnings	943,478,532	618,313,284	608,896,618	567,428,470	577,878,210
Total shareholder's equity	3,634,622,379	3,259,405,244	3,234,659,199	3,187,732,792	3,172,688,583
Non-current liabilities
Employees' end-of-service benefits	91,024,046	77,294,401	72,059,827	91,824,969	74,665,719
Provision for specific obligations	-	-	17,430,875	17,430,875	17,430,875
Lease liability	4,658,348	-	-	-	-
	95,682,394	77,294,401	89,490,702	109,255,844	92,096,594

 

	2020 SAR	2019 SAR	2018 SAR	2017 (Restated) SAR	2016 SAR
Current liabilities
Margin deposits from clearing participants	19,030,340	-	-	-	-
Members' contribution to clearing house funds	3,147,217	-	-	-	-
Lease liability	9,128,643	4,263,087	-	-	-
Account payables	95,314,671	105,383,866	87,268,042	51,116,941	60,730,640
Balance due to Capital Market Authority	32,758,785	22,330,201	56,661,001	11,881,482	16,258,958
Deferred revenue	3,223,464	3,134,967	4,733,107	5,829,797	2,649,570
Accrued expenses and other current liabilities	116,616,283	75,018,332	59,136,932	48,511,337	42,544,926
Zakat payable	83,561,274	-	-	-	-
Total current liabilities	362,780,677	210,130,453	207,799,082	117,339,557	122,184,094
Total equity and liabilities	4,093,085,450	3,546,830,098	3,531,948,983	3,414,328,193	3,386,969,271

 

Revenue and profitability

Over the period 2016-2020 operating revenue has recorded a CAGR of 36%. The corresponding figures for operating cost and gross profit have been 15% and 60% respectively. However, it is significant that the near-doubling of operating revenue has largely resulted from the 141.3% increase in trading commission from 2019 to 2020. This, coupled with a relatively small increase in operating cost over the same period, has caused the 203% increase in gross profit.

The operating revenue increased by 91.1% from 2019 to 2020, which reflects the increase in value traded of 137.21%. The increase in operating cost (from SAR 326.1 Mn to SAR 356.5 Mn) has been only 9.3%. This reflects improvements in trading efficiency. As a result, the gross profit increased by 203%.

 

 

The trading commission increased as a percentage of total operating revenue from 56.3% to 71.0%. In absolute terms it has increased by 141.3%. This also reflects the increase in both the volume and the value traded.

The general and administrative expenses remained more or less flat and have returned to its 2016 level in 2020. This, together with the trend in operating income has resulted in the operating profit increasing more than tenfold from 2019 to 2020. Income from investments has shown a decline of 58.9% in 2020 compared with the previous year. This is mostly attributable to the depressed interest rates. Non-operating income has reduced by 63.0% largely due to the decline in interest income. Profit for the year (before Zakat) has increased by 281% compared with that of 2019. The five-year trend has been one of a steady increase with a quantum leap in 2020. Effective financial year 2020, Zakat is payable in accordance with the Zakat regulation issued by GAZT based on Royal Decree 35657 issued on 29/6/1442H.

Soon after the pandemic broke out, an aggressive strategy of managing controllable costs and cost optimization was followed. Considering the prevailing uncertainty of which direction the market would take, the Exchange opted for a strategy of planning for alternative scenarios.

Year	General and admin expenses SAR	Operating profit SAR	Profit before Zakat SAR	Zakat SAR	Profit after Zakat SAR
2016	180,469,349	(68,748,136)	(29,297,981)	-	-
2017	(192,528,380)	57,454,268	145,302,709	-	-
2018	210,520,277	74,255,825	148,186,665	-	-
2019	196,960,609	41,659,174	153,293,786	-	-
2020	180,244,860	542,905,737	584,080,144	83,561,274	500,518,870

 

Assets

Non-current assets steadily declined over the period 2016-2019 but showed an increase of 47.8% in 2020. The increase in 2020 was mainly due to an increase in equity-accounted investee from SAR 41 Mn to SAR 378.9 Mn as a result of a conversion of an investment of the Group in the Associate in the form of Sukuk amounting to SAR 130 Mn to equity investment and making an additional investment of SAR 210 Mn in the Associate during the year under review. Other non-current investments have declined steadily from 2016 to 2020.

Investments under current assets have shown an almost continuous increase from 2016 to 2020, approximately doubling over the period. In 2020, it has increased over the previous year by 16.5% from SAR 2.66 Bn to SAR 3.10 Bn. The increase is accounted for by investments at fair value through profit and loss (FVTPL). The increase in investments is the primary cause for the increase in current assets over the past five years. The total assets increased by 15% from SAR 3.55 Bn to SAR 4.09 Bn. This increase is attributed to the increase in current asset investments being partly set off by the decrease in non-current investments.

Equity and liabilities

Total shareholder's equity which did not grow much over the period 2016-2019 grew by 11.5% from SAR 3.26 Bn to SAR 3.63 Bn from 2019 to 2020 consequent to the phenomenal growth in profit for the year, leading to retained earnings growing from SAR 618.3 Mn in 2019 to SAR 943.5 Mn in 2020.

Current liabilities have generally shown a steady growth with an increase of 72.65% in the year under review. This has mainly been the result of an increase in accrued expenses and other current liabilities from SAR 75.0 Mn to SAR 116.6 Mn.