HSBC: Shuaa is deeply undervalued

The bullish outlook is based on Shuaa’s annuity business, which HSBC said is not currently priced into the company’s stock.

This means Shuaa is trading at a price to earnings ratio of 6.5 based on 2009 estimated figures, leading HSBC to offer an overweight rating. “The PE ratio and the company’s growth potential imply that Shuaa’s stock price is unjustifiably deeply discounted,” the HSBC report said.

 Shuaa shares have been among the top performers on the Dubai Financial Market over the past 12 months, jumping 91 per cent. The company was founded in 1979 to handle principal investments, but since 2000 has reinvented itself as a fully integrated financial services firm and has embarked on an aggressive expansion over the past three years.

Shuaa has access to the Saudi and Qatar markets and had acquired effective control of five brokerage licences in Egypt, Kuwait, Syria, Jordan and Turkey. HSBC compared Shuaa to its rival EFG-Hermes, with the latter trading at a PE of 11.6.

Based on 2009 estimates, Shuaa has a price to book value of 1.4, while EFG’s is 2.1, with both companies enjoying a return on equity of around 17 per cent.

“Shuaa is trading at deep discount to EFG-Hermes,” HSBC said. 

For Shuaa, its return on equity will come under pressure in November this year when a convertible bond matures. This will see its share capital will increase from Dh550 million to Dh800m with the issue of 250 million shares worth a nominal Dh1.

The company is currently at its foreign ownership limit of 49 per cent, so the new shares will offer greater opportunity for overseas investors.

Shuaa’s focus on annuities and its regional expansion will be the company’s key value drivers, HSBC claimed, with the former expected to enjoy a compound annual growth rate (CAGR) of 44 per cent between 2006 and 2012. Its principal investment division will have a CAGR of 20 per cent over the same period.

These projections would mean fee revenues would account for 58 per cent of Shuaa’s revenues by 2012, compared to 30 per cent in 2006.

Shuua’s brokerage arm will increase its market share marginally, from 4.5 per cent in 2007 to 5.5 per cent in 2012, but volumes will increase by more than 25 per cent per year over this time.

The IPO industry should continue to offer rich pickings for Shuaa. The company has an excellent track record after managing the floatations of Air Arabia, Amlak and Arabtec, while it was also joint lead manager for the DP World’s IPO.