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05 December 2023

Cash-rich firms continue to be star performers

By Sreenivasa Rao Dasari

Cash rich companies listed on the UAE bourses continue to hog the limelight irrespective of market movements.

In the volatile market, one could rely on companies that have strong cash inflows because cash plays a crucial role in insulating companies from a contraction in sales and profits, say market analysts. Analysis of the performance of a cross section of companies with strong cash flows found that they offered higher liquidity to investors.

Ian Munro, Head of Research, and Shiv Prakash, equity investment analyst, of Mac Capital Advisors, have picked five companies with high cash reserves randomly being traded on DFM, ADX and Nasdaq Dubai, and analysed their trading patterns. Though moving in a narrow range, the trading pattern in the five scrips shows higher liquidity to the investors.

"Our top picks of strong cash flow companies are Air Arabia, DP World, Aramex, Sorouh and Gulf Navigation. We have isolated these five companies that currently have a combination of strong net cash positions on their balance sheet and strong forecast cash generation," says Ian Munro.

Despite past week's uptrend and Sunday's recovery of 7.91 per cent on DFM followed by a heavy profit booking yesterday, these scrips remain active with brisk activity on the counters. More often than not, companies with a combination of these factors are more appealing to investors and exhibit higher market price in short and medium terms.

Based on the cash reserves, the selected five scrips, according to the analysts, hold positive outlook considering their fundamental and technical analysis.

Air Arabia (listed on DFM): This low budget air carrier has no debt on its balance sheet and a cash balance of Dh1.5 billion, equating to Dh0.32 of cash per share. This means that the actual cost for an equity share in the business is Dh0.63 instead of Dh0.95 (last closing price). Although the company is due to outlay some of its cash flow for five new planes in 2009, earnings from the existing operations are expected to supplement the majority of capital expenditure required, ensuring that Air Arabia remains a strong cash flow churner. The company has traded largely on fundamentals during the past month, with some investor support shown following its release of strong 2008 profits.

Technical view: If Air Arabia is moving the range of Dh0.97 to Dh0.91 with strong resistance near Dh1.05, which if broken can see good rise until Dh1.20 in the near term.

DP World (Nasdaq Dubai): Global ports owner and operator, DP World, generates over $1.3bn in operating cash flow per year. This allows the company to grow and expand its portfolio of ports, while retaining excess cash to pay down debt and return dividends to share holders. DP World's share price has been driven by a mixture of fundamental and technical trading, as news regarding the deterioration of global shipping volumes have affected market sentiment. Analysts believe that the stock represents excellent fundamental buying at current price levels around $0.22.

Technical view: DP World is moving down with resistance near $0.23, which if broken can see the rise until $0.30 in near term. Lower support area comes at $0.18 and if breached will be very bearish for the stock. However, there is buying on lower levels in the stock.

Aramex (DFM): Logistics and delivery player Aramex has built a solid cash flow business with operations spanning the Middle East, Europe and America. Aramex has a very low debt/equity ratio of less than three per cent, meaning that it does not need to divert earnings into paying interest to banks. With strong forecast earnings growth and a low annual capital expenditure requirement, analysts expect Aramex to continue to generate solid cash flow returns with which it can finance expansion. Share price returns on Aramex have outperformed the DFM in recent weeks, largely on fundamentals following a strong 2008 profit result.

As per the Shuaa Capital's research report, the company is sitting on a healthy cash position of about Dh300 million. Since no acquisition has been made so far, it believes the debt position is very low in the range of Dh 25-30m and is in line with the previous quarter resulting in higher net finance income contributing to the bottom line.

Technical view: Break of 0.95 was bullish signal for the stock which made it rise until the previous tops of Dh1.03 and looks bullish to see the next major resistance of Dh1.20 in the near term. Lower support comes at Dh0.90, which if breached can be bearish for the stock.

Sorouh (ADX): Abu Dhabi developer Sorouh has a cash position of Dh6.84bn on its balance sheet as at 2008. Including Dh3.6bn worth of long-term non-convertible Sukuks, Sorouh's net gearing ratio is 53 per cent. With no re-finance risk until 2015, Sorouh is placed in a stable position to weather the UAE property slowdown during 2009. It has around 400 villas ready for delivery over the coming 12 months and holds a growing portfolio of reoccurring rental properties.

Technical view: Sorouh is facing a continuous selling from the highs of Dh4.22 and forms a low of Dh2.03 which now moves sideways and if it gives a breakout on Dh2.49, the analysts expect a good reversal in the stock and can rise until Dh3.10. As of now it is moving sideways.

Gulf Navigation (DFM): Shipping firm Gulf Navigation has a cash balance of Dh649m, representing Dh0.34 per share. This means that the actual cost of the equity component of every share is only Dh0.24, representing a cheap, adjusted 2008 P/E ratio of 3.4x. GulfNav has a low net gearing ratio of 24 per cent and has proposed to pay out 90 per cent of its 2008 earnings as a dividend. This gives us an indication of management's confidence in the business during 2009. Although the analysts expect some slowdown from earnings in 2009, Gulf Nav's ships are leased to the less volatile oil and chemical industry.

Technical view: After a good sideways movement, the analysts witness some activity in the stock as it is picking up and can see the resistance at Dh0.62/0.75 level in the near term as a technical bounce is very much expected in the stock. Stock has a good support at Dh0.48.