UAE-listed stock valuations are back to more moderate levels


The contraction experienced by the UAE’s two legacy stock exchanges in the first quarter of this year has brought stock valuations to more moderate levels, research revealed.

From last year’s level of 16 times earnings, stock prices are at 13.4 times estimated 2008 earnings and 10x estimated 2009 earnings for the UAE as a whole.

This comprises of Dubai price-to-earnings (P/E) ratio at 12.3x 2008 and 7.9x 2009 earnings and Abu Dhabi at 14.6x 2008 and 13.2x 2009, Cairo-based investment bank EFG-Hermes said. 

“In our view, the poor Q1-2008 was driven largely by negative investor sentiment surrounding the current turmoil in global markets. This view has been prompted by the exit of Western institutional investors from the UAE due to losses incurred in other developed and emerging markets, and not [we would stress] by a desire to reduce exposure to the region.

“The investment bank is not too bullish on the UAE banking sector for the model portfolio that it runs, because valuations are high and a general slowdown in earnings growth is expected this year and the next.

“However, this quarter our view is more balanced with the introduction of two new overweight positions in stocks where we selectively see better value.

The first of these is Abu Dhabi Commercial Bank, where we raise our exposure to 0.5 per cent above the index weight, versus the previous quarter’s underweight position.” The second is a new off-index bet in Commercial Bank of Dubai.

“We consider CBD to be a high-quality bank characterised with excellent growth in the balance sheet.” The bank is one of the only two stocks in the sector rated with a ST/LT Buy recommendation, the other being Emirates NBD.

EFG said Amlak Finance is expensive at 21.7 times expected 2008 earnings and 18.3x 2009. Tamweel is more attractively priced at 13.7x 2008 and 12.6x 2009 earnings.

The energy and utilities sector continues to be underweight in EFG’s model portfolio “in light of low transparency and high valuations. We reduce Aabar to 0.5 per cent below the index after what we believe to be its value destructive sale of Pearl Energy, which has effectively left the company as a cash shell.

Taqa continues to be a very low transparency stock and as such we maintain our exposure at 1.9 per cent below the index weight. The company recently announced that it was considering a loan of $2 billion (Dh7.3bn) in order to fund further acquisitions.

 While the news may well be supportive towards the share price [due to the part played by speculative investors], we see further acquisitions as increasing the complexity in an already opaque story.”

EFG’s sole overweight in the sector is quasi-utility Tabreed, where it has raised its position to 0.5 per cent above the index weight.
Air Arabia’s long-term growth story remains intact, according to the report, despite the announcement from Emirates airline that it will soon be entering the low-fare carrier market.

“Instead, we see this as evidence of the growth potential within the low-cost carrier segment, an area in which Air Arabia holds a key first mover advantage. Valuation is not cheap at 21.8x 2008 and 19.9x 2009 P/E”, but a likely second hub in Rabat and a third in Egypt or the Levant will give Air Arabia’s share price strong legs.

The property and construction sector continues to have a strong overweight in EFG’s new model portfolio, but with a more polarised stance.

“We raise our overweights in Arabtec [to 2.0 per cent above the index weight] and Union Properties [to 1.9 per cent above the index weight] and counter this with a reduction in our position in Emaar [0.1 per cent above the index weight].

“Arabtec remains in a sweet spot within the construction industry as a lack of qualified contractors allows the company to pass on costs, cherry pick within profitable projects, and thereby enjoy increasing margins. We are also positive on the company’s moves towards diversification, both outside the UAE and also into new segments within construction,” EFG’s analysts said.

In telecoms, du’s valuation is too rich (10.5x 2008 and 8.7x 2009 P/E) to justify an overweight stance at this stage, despite better-than-expected growth in subscriber numbers.

"We have reduced our underweight stance relative to last quarter [though this also been a result of the share’s under performance] to 2.1 per cent below the index weight. We have raised our position in etisalat to 1.6 per cent above the index weight.” 

Major stocks
Emaar Properties: At its March 19 AGM, Emaar released its annual estimate of its net asset value at Dh102.9 billion, or Dh16.89 per share, up 46 per cent from Dh70.4 billion, or Dh11.58 per share, in 2006.

Emaar’s share in the fair value of development properties increased by 38 per cent to Dh48.9bn [of which Dh40.7bn comprises land – 52 per cent in the UAE and 31 per cent in Egypt]. The fair value of investments in associates increased by 60 per cent to Dh34.6bn in 2007, with Emaar MGF India being the main driver. 

The fair value for “investment properties and fixed assets” increased by 56 per cent to Dh21.3bn. This segment includes hotels, malls and other assets. 

“The reported NAV of Dh16.89 per share exceeded our expectations of Dh14.5 per share, with the positive surprise coming from India and Egypt, and is expected to provide support to Emaar’s share price. We reiterate our ST Accumulate/LT Buy based on our LT Fair Value of Dh18.5 per share.” 

Aabar Petroleum Investments: Aabar’s revenues for 2007 came in at Dh1.6 billion, ahead of EFG’s expectation of Dh1.4bn. However, higher-than-expected income tax expenses meant that Aabar produced a net loss from continuing operations of Dh80 million.

The sale of Dalma Energy resulted in a gain of Dh298m, “considerably below our estimated gain of Dh637m”, which resulted in net profit for the year coming in at Dh227m, “significantly below our expectation of Dh737m”.

Aabar said it expects a profit of just Dh367m to Dh602m from the sale of Pearl, its other subsidiary.“This suggests that the resulting value of Aabar is between Dh2.16bn and Dh2.40bn (or Dh2.40 and Dh2.66 per share).

Aabar has not made any further announcements about what it plans to do with the remaining cash, and therefore we value the company at the top end of its residual value. We maintain our ST/LT Sell recommendation and lower our LT Fair Value to Dh2.66 from Dh2.91.” 

Dana Gas: Revenues for 2007 came in at Dh605 million, “ahead of our expectation of Dh540m. Net profit of Dh111m was marginally ahead of our expectation of Dh95m, reflecting sole contribution from the company’s Centurion business, which achieved a year-end exit production rate of 32,100 barrels of oil equivalent per day”.

Dana Gas entered into a deal with Kurdistan for the development of its substantial gas resources.“However, the company’s cornerstone Iranian gas deal has still not materialised, and we now believe the contract will start in the second half of the year.

Given the lack of visibility regarding both the Iranian and the Kurdistan contracts, we maintain our estimates for 2008 and beyond and maintain our ST Reduce / LT Sell recommendations with a LT Fair Value of Dh1.46.”