News
Shuaa looks like a bargain
Of all the bargains on offer during Dubai Summer Surprises 2008, the investment bank Shuaa Capital looks like the steal of the season. The share price has taken a beating this week, as the company reported a drop in quarterly profit. But investment banking is a cyclical business, and for those brave enough to ride out the bumps, this stock looks grossly undervalued.
First, the bad news. On Tuesday, Shuaa reported quarterly earnings for the three months to June 30, with net profit falling 10 per cent to Dh67.1 million. Crucially, the bank actually reported a small loss in the Principal Investments unit. This invests in stocks, bonds, commodities etc around the world and here in the Gulf. Normally, it's a money-making machine: this time last year it was Shuaa's most profitable division. What went wrong with Principal Investments in April, May and June 2008? Shuaa blamed "continued volatility in global capital markets".
Now, the good news. The fall in Principal Investments is not cause for undue concern: Shuaa IS NOT sitting on a mountain of sub prime US mortgage debt. A quick glance at regional and global indices suggests that Shuaa was right in blaming market volatility. Over the quarter, America's S&P 500 index fell about three per cent, while Shuaa's own GCC index fell almost nine per cent. An investment bank like Shuaa is always going to have good times and bad times on its proprietary trading book. Shareholders really do have to look at the long-term performance, and this is creditable in Shuaa's Principal Investments division. If you don't like volatility, don't own investment banking stocks – go and buy utilities or telephone companies with stable yet boring earnings.
More important for Shuaa is to look at the underlying strength of the business. Back in March, and again in June, analysts at HSBC issued an "overweight" rating on the stock, with a target price of Dh12.6. That's more than double today's share price.
HSBC is bullish on the stock because Shuaa makes a growing portion of its profit through fees from more stable activities, such as investment banking, stock broking and fund management. And this business, says HSBC, is what investors are seriously undervaluing. Back in 2006, fees generated just a third of Shuaa's profit, but by 2012 analysts say that will rise to almost two thirds.
Indeed, even during the volatile quarter between April and June, this annuity business (as Shuaa calls it) did extremely well. To quote chief executive Iyad Duwaji: "Although the performance during the first quarter partially reflected the poor performance and unusual volatility in capital markets, our annuity fee business generated the second strongest quarter in the company's history."
The total value of funds that Shuaa manages more than doubled over the year, to almost Dh16 billion. Given that Shuaa takes a commission on pretty much every dirham of that, the profit mounts up. Throw in revenue from private equity, through Shuaa Partners, and you can see the makings of a full-service investment bank.
And then there's the old-fashioned business of lending money, through the financing unit Gulf Finance Corporation. Profit there climbed more than 50 per cent, contributing just over 10 per cent of profit. GFC mainly finances construction equipment and vehicles, but Shuaa says it's "expanding its consumer finance offering."
So much for the numbers. Investors must also look at the quality of management, and in Iyad Duwaji, Shuaa has a respected chief executive. The bank has won a host of awards - most recently this week a Euromoney gong for the quality of its research. Having known Walid Shihabi, head of research, for the best part of a decade, he too is an impressive individual with a strong grasp of regional markets. The fact that Shuaa has been able to hold on to people of this calibre for years, despite the circling overtures of international investment banks, speaks volumes for Shuaa. Back in March, HSBC valued Shuaa's annuity fee business on a forward 2009 price/earnings ratio of 6.5. That's extremely cheap. Since then, the share price has fallen from Dh7.5 to Dh6, making it even more attractive. Short of placing an inflatable Modhesh outside the company's head office in Emirates Towers, I'm not sure there could be any more obvious reason to buy.
- Richard Dean does not own shares of Shuaa Capital.
First, the bad news. On Tuesday, Shuaa reported quarterly earnings for the three months to June 30, with net profit falling 10 per cent to Dh67.1 million. Crucially, the bank actually reported a small loss in the Principal Investments unit. This invests in stocks, bonds, commodities etc around the world and here in the Gulf. Normally, it's a money-making machine: this time last year it was Shuaa's most profitable division. What went wrong with Principal Investments in April, May and June 2008? Shuaa blamed "continued volatility in global capital markets".
Now, the good news. The fall in Principal Investments is not cause for undue concern: Shuaa IS NOT sitting on a mountain of sub prime US mortgage debt. A quick glance at regional and global indices suggests that Shuaa was right in blaming market volatility. Over the quarter, America's S&P 500 index fell about three per cent, while Shuaa's own GCC index fell almost nine per cent. An investment bank like Shuaa is always going to have good times and bad times on its proprietary trading book. Shareholders really do have to look at the long-term performance, and this is creditable in Shuaa's Principal Investments division. If you don't like volatility, don't own investment banking stocks – go and buy utilities or telephone companies with stable yet boring earnings.
More important for Shuaa is to look at the underlying strength of the business. Back in March, and again in June, analysts at HSBC issued an "overweight" rating on the stock, with a target price of Dh12.6. That's more than double today's share price.
HSBC is bullish on the stock because Shuaa makes a growing portion of its profit through fees from more stable activities, such as investment banking, stock broking and fund management. And this business, says HSBC, is what investors are seriously undervaluing. Back in 2006, fees generated just a third of Shuaa's profit, but by 2012 analysts say that will rise to almost two thirds.
Indeed, even during the volatile quarter between April and June, this annuity business (as Shuaa calls it) did extremely well. To quote chief executive Iyad Duwaji: "Although the performance during the first quarter partially reflected the poor performance and unusual volatility in capital markets, our annuity fee business generated the second strongest quarter in the company's history."
The total value of funds that Shuaa manages more than doubled over the year, to almost Dh16 billion. Given that Shuaa takes a commission on pretty much every dirham of that, the profit mounts up. Throw in revenue from private equity, through Shuaa Partners, and you can see the makings of a full-service investment bank.
And then there's the old-fashioned business of lending money, through the financing unit Gulf Finance Corporation. Profit there climbed more than 50 per cent, contributing just over 10 per cent of profit. GFC mainly finances construction equipment and vehicles, but Shuaa says it's "expanding its consumer finance offering."
So much for the numbers. Investors must also look at the quality of management, and in Iyad Duwaji, Shuaa has a respected chief executive. The bank has won a host of awards - most recently this week a Euromoney gong for the quality of its research. Having known Walid Shihabi, head of research, for the best part of a decade, he too is an impressive individual with a strong grasp of regional markets. The fact that Shuaa has been able to hold on to people of this calibre for years, despite the circling overtures of international investment banks, speaks volumes for Shuaa. Back in March, HSBC valued Shuaa's annuity fee business on a forward 2009 price/earnings ratio of 6.5. That's extremely cheap. Since then, the share price has fallen from Dh7.5 to Dh6, making it even more attractive. Short of placing an inflatable Modhesh outside the company's head office in Emirates Towers, I'm not sure there could be any more obvious reason to buy.
- Richard Dean does not own shares of Shuaa Capital.