Cloudy outlook for DFM value

(LIZ RAMOS)   

Analysts are divided over the outlook for Dubai Financial Market stock, with local brokers predicting a lower price based on fundamentals, while research from international banks says a boom in overall trading volumes means DFM transaction fee earnings will soar.

Since the company began trading on its own exchange last year, its stock has shot up sixfold from its IPO price in a rather smooth upward trajectory.

But analysts diverge significantly on Dubai Financial Market’s outlook and fair value target.

Research by local brokerages HC Securities and Shuaa Capital estimates the target value as Dh3.82 and Dh4.01, respectively, which denotes a steep downturn from DFM’s closing price yesterday of Dh6.33.

International investment banks have not released their research on the stock, but Emirates Business was able to receive their recommendations from their [banks’] clients.

Goldman Sachs has placed DFM as one of its top picks in the UAE with a price target of Dh8.8. Deutsche Bank is equally bullish, recommending clients to buy with a target of Dh8.4.

Morgan Stanley’s position is more in line with local analysts, with a price target of Dh4.57 per share.

These significant variations have foxed investors.

Foreign investors were net sellers of the stock over the past two months by Dh250 million, which reduced their ownership by 0.5 per cent.

[International investors were also net sellers of Emaar by Dh1.4 billion, as Emirates Business reported yesterday].

It seems international investors have opted out of DFM and Emaar, two of the biggest companies, this year in favour of smaller companies in financial services, construction and logistics.

Sherif Abdul Khalek, dealing room manager at Al Futtaim HC Securities said companies such as Arabtec and Aramex routinely hit the foreign ownership limits, a clear indication of their popularity.

But DFM, which allows up to 40 per cent foreign ownership, is only at 7.15 per cent. [Emaar also has a 49 per cent limit, and foreign owners’ stake is currently at 24.07 per cent].

The conflicting valuations and perceptions of DFM and Emaar, which are both over and underpriced significantly at any given moment, may be leaving some shareholders confused.

Rob Beishuizen, founder of dubaisharetalk.com, is not surprised that international investors are not buying into DFM stock.

“It is very expensive – there have been research reports valuing it at Dh4 per share, and it is trading at a very high price compared to its earnings forecast for the next couple of years.”

The common method used to judge if a stock is expensive is to look at its price-to-earnings (PE) multiple and compare it to other listed companies operating in the same realm.

Shuaa Capital’s research compared DFM to other listed exchanges in emerging markets – Hong Kong, Singapore and Malaysia – and found that the Dubai exchange “is trading at a 2008 forward earnings multiple significantly higher than that of its peer average”.

DFM’s PE multiple is currently 33, compared to its peer group’s average of 25.5.

Mohamed El Nabarawy, vice-president – research at Shuaa Capital and author of the investment bank’s analysis of DFM, said the exchange is “currently trading at a significant premium to global peer average multiples, which indicates very lofty expectations of growth”.

El Nabarawy believes the positive outlook for growth is partially warranted, given the “economic boom being witnessed in the region, significant anticipated growth in listings and the emergence of Dubai as the preeminent financial centre in the Gulf”.

But he stressed the current market value of DFM “is in fact higher than the market capitalisation for the Nasdaq and London Stock exchange combined”, which have further depth with more than 3,000 listed companies trading on each exchange, compared to fewer than 60 stocks on DFM.

El Nabarawy also pointed out the increasing domestic competition for DFM, and the potential pressure on the high exchange fees that are above the industry’s average.

“The current price also does not seem to account” for these potential challenges, El Nabarawy said.

There is no question that DFM had a stellar first year as a public company.

El Nabarawy’s profit estimates for DFM were way off in the fourth quarter last year due to the company’s positive investment revaluation, and the exchange’s net profit of Dh1.4bn (Dh971.6m excluding the one-off proceeds from the IPO) was 19.8 per cent higher than Shuaa’s predictions.
 
A spike in trading during the last quarter of 2007 on the exchange also contributed to higher earnings, and was missed by analysts’ predictions.

During the last three months of last year the overall value of shares traded was Dh198.1 bn.

The potential for increased activity on the exchange, especially due to high liquidity in the Gulf, has encouraged Goldman Sachs and Deutsche Bank to place a much higher target than their peers.

Abdul Khalek believes local investors remain interested in the stock because it is unique, which should also spark more interest among international players.

“Dubai Financial Market is the only listed exchange in the Middle East, so holding its shares gives investors the chance to benefit from trading activity in the region, regardless of the market movements.”

While the debate over the valuation of certain stocks is bound to continue, Issa Kazem, Chairman of Borse Dubai, the parent company of DFM, maintains his commitment to developing the exchange and attracting foreign capital.

He recently told Emirates Business that he is of the view that newly listed companies should open up to foreign investors to the maximum allowed by law.

With more trading volumes and a diverse international investor base, the future of DFM appears to be sound. Maybe analysts will then be able to reach a closer target price for the Dh50.6bn exchange.