Uncovering Hidden Gems: Middle Eastern Small-Caps Thriving Amid Chaos

The Middle East is often painted as a region of geopolitical turbulence, but beneath the headlines of conflict and volatility lie small-cap companies with resilient fundamentals and compelling valuation discounts. Two such hidden gems—Ackerstein Group (TASE:ACKR) and National Cement Company (DFM:NCC)—are outperforming industry peers with robust earnings growth, reduced debt burdens, and trading at discounts to their intrinsic value. Let's dissect why these stocks could be among the best-positioned plays in the region despite the risks.

Why the Middle East? A Contrarian's Paradise

The Middle East's small-cap universe is often overlooked by global investors, who focus on megacaps or developed markets. Yet, companies like ACKR and NCC thrive in niche sectors—engineering, construction, and cement—where demand is tied to infrastructure development, urbanization, and regional stability.

Ackerstein Group: Earnings Powerhouse with a Margin Boost

Ackerstein Group, a diversified engineering and construction firm listed on the Tel Aviv Stock Exchange, has emerged as a standout performer.

• Earnings Growth: Q1 2025 EPS hit ₪0.075, a 41.5% jump year-over-year, driven by its Engineering and Real Estate divisions. Five-year annual earnings growth averaged 18.5%, with 2024's surge to 48.8% outpacing a Basic Materials sector in decline.
• Debt Reduction: Debt-to-equity fell from 43.3% in 2019 to 12% in 2024, improving financial resilience. Interest coverage remains robust at 50.8x, shielding it from rising rates.
• Valuation: Trading at a P/E of 25.5, it's moderately priced compared to high-growth peers.

Key Takeaway: Ackerstein's margin expansion (net profit margin rose to 13.8%) and diversified revenue streams (engineering, industry, real estate) position it as a defensive play in a volatile region.

National Cement Company: Valuation Discounts Mask Operational Challenges

National Cement Company (NCC), listed on the Dubai Financial Market, offers a stark contrast. Its financials reveal both opportunity and risk:

• Valuation Discounts: Trading at a P/E of 9.05 and P/B of 0.56, it's deeply undervalued relative to its book value and peers. GuruFocus estimates it's 66% below fair value, suggesting a significant margin of safety.
• Cash Position: With AED 300 million in net cash and a current ratio of 4.36, liquidity is strong despite weak operating margins (-7.01%).
• Risks: Negative ROIC (-0.31%) and reliance on one-off gains (e.g., ₪62.3M non-recurring income in ACKR's case) raise questions about earnings sustainability.

Key Takeaway: NCC's dividend yield of 5.42% and valuation discount make it a compelling pick for income-focused investors, but its operational inefficiencies demand closer scrutiny.

Why These Stocks Succeed Where Others Fail

1. Debt Discipline: Both companies have slashed leverage, reducing financial fragility in a high-interest-rate world.
2. Margin Resilience: Ackerstein's margins expanded despite global cost pressures, while NCC's cash hoard cushions it against volatility.
3. Valuation Anchors: Their P/E and P/B ratios are far below global peers, offering a cushion against downside risks.

Navigating Geopolitical Risks

The Middle East's political landscape is a double-edged sword. While conflicts like the UAE-Israel normalization or Iran tensions create uncertainty, they also drive infrastructure spending. For instance:
- Ackerstein's engineering projects benefit from Israel's tech-driven growth and regional partnerships.
- NCC's cement demand is tied to UAE's Vision 2031 infrastructure plans, including Expo 2030 Dubai.

Investment Thesis: Buy the Dip, Hold for Long-Term Value

Both stocks are contrarian bets on regional stability and undervalued assets:
- Ackerstein Group (ACKR): A buy at current levels, with a target P/E of 30 justifying a ₪5-6 price target (up from ₪3.5).
- National Cement (NCC): A hold for income investors, but wait for operational turnaround signs before scaling up exposure.

Final Word: Patience Pays

The Middle East's small-cap space is a treasure trove for investors willing to look beyond headlines. While geopolitical risks remain, companies like Ackerstein and NCC—backed by strong fundamentals and discounts—offer asymmetric upside. For the patient investor, these stocks could be the region's next success stories.

Disclosures: Always conduct due diligence and consider geopolitical risks before investing.