Q1 forecasts for UAE companies miss the mark

Many prophesiers went way off the tangent when it came to forecasting the first quarter earnings of the UAE-listed companies.

Most of the earnings announced so far had either surpassed the projections or fell way behind the forecasts made by major investment firms and analysts.

High provisions and unexpected global market dynamics weighed on the corporate performance in the UAE giving analysts the slip.

The main reasons for mismatch of forecasts and actual performance were the unexpected rate of provisions set aside for bad loans and unforeseen risk, high volatility in crude oil, aviation fuel, lack of disclosures and lack of transparency in the financial reporting system as emerged in an analysis by Emirates Business.

The market bellwether Emaar topped the list of companies that beat the forecasts for the first quarter, while the other major outperformers of forecasts were Emirates NBD, Abu Dhabi Islamic Bank, First Gulf Bank, Union National Bank, Sorouh and Aramex.

DFM and etisalat were the only two major companies that came closer to the forecasts. Indicating the prevailing uncertainty in the market dynamics, majority of companies fell way behind the projections made by several investment firms.

The company that came closer to the forecast was DFM, which posted Dh53.60 million net profit against the average net profit forecast of Dh58.50m. DFM witnessed a fall of 8.4 per cent in the first quarter net profit from Dh58.50m in the previous corresponding period.

Wadah Al Taha, senior financial analyst, told this newspaper: "The UAE-based companies are going through an exceptional period as sensitive news is impacting the market sentiment more than the positive fundamentals. Moreover, forecasts are done in conventional and traditional way that doesn't take certain circumstances under consideration."

The telecom major Emirate Integrated Telecommunications Company (du) posted Dh194m net profit for the first quarter this year against Dh47m in the previous corresponding period. The surge in net profit was due to royalty income as the first quarter net profit included a one-time gain of Dh39.7m. The adjusted net profit before royalty for the fourth quarter of 2009 was Dh169m. Considering this, the net profit indicates a 15 per cent rise when compared with Q4 of 2009 and more than four times growth from Dh47m in Q1 of 2009.

The Emaar factor

Emaar results were beyond expectations on a positive note as it posted Dh760m net profit against the average forecast of Dh584.68m. The net profit of the realty major soared 221 per cent in the first quarter of 2010 from Dh236.54m in Q1 of 2009.

However, the encouraging results failed to boost the share price as it breached Dh4 for a brief period on DFM and again slipped below this psychological level and was closed at Dh3.85 on Thursday.

Robert McKinnon, Chief Investment Officer at ASAS Capital, said: "Emaar has boosted the trading as the market players moved positively to the encouraging results from the property major. However, the early gains couldn't sustain as the initial excitement was short lived as there was no follow up through.

"Adding to this, there was a bit profit booking too."

The encouraging performance of Emaar in hospitality and shopping mall subsidiaries propelled the company to record unexpected revenues and profit.

The first quarter also witnessed inauguration of the world's tallest building Burj Khalifa. Emaar's joint venture Emaar MGF is in the process of launching Dh2.79bn IPO in India soon.

The market major is expanding its footprint in the Mena region and South Asia. Market majors such as Deyaar, Dubai Islamic Bank, Abu Dhabi Commercial Bank (ADCB), etisalat, Union Properties and Ai Arabia fell short of forecasts for the first quarter.

Forecasts made by major investment firms fell far beyond the actual performance in the range of 12 per cent to 274 per cent.

"The other major factor that made the difference between forecasts and actual performance is lack of transparency and disclosures. As a result of this, the gap between expectations and actual performance is widening. Adding to this, high promises and assumptions are not done in a natural way. The direct impact of such widening gap will enhance the level of confusion among investors. The market is already directionless over this prevailing confusion," said Al Taha.

Dow Jones and Nasdaq witnessed biggest fall on weekend trading since November 20 and the Saudi market was also under pressure on Saturday. This type of weak market sentiment will influence the trading on regional bourses more than the impact of positive first quarter results, said analysts.

"The UAE markets are moving under the influence of psychological and sentiment factors only. Strong fundamentals are not pushing the markets upwards. Macro factors in the UAE are stable and micro factors are also OK as most of the companies announced better than expected results. The correction on the US markets is impacting the local bourses too. From the technical point of view, the weekend closing on DFM was OK as it was above 1750 points, but the trading was not supported by volumes. Hence, it may touch 1700 points," said Al Taha.

Banks' performance

Emirates NBD, the largest bank by assets in the UAE, posted an encouraging net profit of Dh1.11bn for the first quarter this year against the average forecast of Dh617m. However, net profit dropped by 12 per cent, when compared with Dh1.26bn in the first quarter of 2009.

Emirates NBD has booked Dh555m for impairment charges in the first quarter from Dh462m in the previous corresponding quarter. "Encouraging results from some banks couldn't boost the market as it was anticipated. I believe that if positive news comes from Dubai World, then only the market sentiment improves," said Hassan Awan, an analyst at The National Investor.

Dubai Islamic Bank (DIB) recorded Dh200m net profit for the first quarter this year and this was 28.14 per cent away from the average net profit forecast of Dh278.33m. The net profit of the bank was down by 46 per cent from Dh370.3m in the previous corresponding period owing to rise in loan provisions.

Abu Dhabi Commercial Bank (ADCB), one of the exposed banks to Dubai World, registered Dh225m net profit for the first quarter against Dh353.7mn in the previous corresponding period, while the average net profit was forecast at Dh270m.

ADCB has made huge provisions against bad loans and this impacted the net profit numbers.

The UAE market is witnessing early signs of recovery this year.

The global rating agency Moody's recently said that Dubai World's restructuring plan is manageable and would not be a burden on the local banks. This instilled new confidence among investors.

For instance, Air Arabia results could not fall in line with the market forecasts. Air Arabia recorded a net profit of Dh50m against Dh79.83m average net profit of forecasts, with the budget carrier showing a rise in passenger traffic and a drop in net profit. The Sharjah-based budget air carrier managed to improve its performance as the number of passengers rose 9.2 per cent to 1.03mn from 951,000 in the previous corresponding period.

Encouragingly, the average seat load factor stood at 80 per cent of the previous level. Despite this, the net profit of Air Arabia fell 51 per cent to Dh50m from Dh103m in the previous corresponding period. This is mainly because of rise in fuel prices and pressure on yield margins owing to the global conditions.

Real estate conundrum

The forecasts failed to read the pulse of real estate sector too. The construction major Arabtec posted a Dh134.50m net profit indicating 24.87 per cent lower than the average forecast net profit of Dh178.90m.

The net profit fell 17 per cent when compared with Dh161.2m net profit in the previous corresponding period. The adverse conditions in the domestic construction sector were the main reason for the drop in the net profit. The construction major is poised to get dues from Nakheel and this will ease the cashflow situation at Arabtec. HSBC in April cut rating of Arabtec from underweight to neutral. Deyaar posted net loss of Dh100m against the average net loss forecast of Dh26.70m for the first quarter.

The average forecast fell far behind the actual performance varying by 274.53 per cent. The rise in net profit was on the back of high provisions made by the realty major.

Abu Dhabi-based realty major Aldar posted a net loss against the forecast of a net profit, while Union Properties, beating the forecast of Dh30m net profit, posted Dh50m net profit.

Missing the average net profit forecast of Dh332.2m, Aldar posted Dh314.2m net loss during the first quarter.

The telecom majors etisalat and du beat the projections in opposite directions.

Etisalat posted net profit for the quarter at Dh1,970.51m, 12.47 per cent lower than the average forecast of Dh2,251.35m, while du exceeded the average forecast of Dh97.23m as the Dubai's based telecom major posted Dh194m net profit for the first quarter of 2010.

Since royalties were included in the net profit, the company recorded four-fold jump in the profit.

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