Markaz Research: Robust Earnings growth in UAE. Markets trading at a discount to fair value.


Markaz in a recently published report, states that earnings growth continues to be robust for UAE and the markets at the current valuations are trading at a steep discount to the fair value. At the beginning of the year “Markaz” was expecting the UAE markets to post an earnings growth of 28% and provide 43% index return based on the NBAD index. In the YTD period, the NBAD index has witnessed a decline of 28%, however, there has been no slow down in earnings growth notes M.R. Raghu Head of Research and Amrith Mukkamala Senior Analyst, the authors of the report.

The 1H08 earnings growth has been at 41% and “Markaz” expects the aggregate UAE growth at the end of the year to be at 31%. On a sectoral basis, the telecom and real estate sectors with estimated YoY growth of 33% and 27% respectively are expected to lead the growth in 2008 as compared to the banking sector earnings growth of an estimated 26%. A significant chunk (75%) of this earnings growth continues to come in from the top 23 companies in the market of the total 90 companies listed in the twin bourses of Dubai and Abu Dhabi. The top 23 companies, which form 80% of 2008E earnings represent a fairly well diversified set of companies from sectors such as telecom, banking and real estate.

The contraction in the price to earnings multiple has been a significant deterrent to price objective. At the end of the last year, the UAE markets were trading at a forward multiple of 17x, this has compressed to 9x currently. At the current price levels, the UAE markets provide an upside potential of 12% as derived from a Price to Forward Earnings and Forward Growth Model. “Markaz” continues to believe that the target PEG of 0.32 will still look attractive if compared to emerging markets and other GCC markets current PEG ratio’s. Earnings growth momentum continues to be robust Table: 1 – Earnings Trend & Outlook USD Mn 2002 2003 2004 2005 2006 2007 2008E % Change 2008E Banks 766 976 1,437 3,487 3,938 5,105 6,416 26% Real Estate 160 208 500 1,822 2,749 3,090 3,932 27% Telecom 669 782 930 1,159 1,429 1,745 2,327 33% Investment Services 3 52 115 655 445 815 970 19% Others 118 486 1,059 2,660 1,898 2,993 4,374 46% Total 1,717 2,504 4,042 9,782 10,459 13,748 18,020 31% Source: Thomson Reuters Knowledge, Zawya Investor, Markaz Research Banking: The banking segment accounted for 35% of the earnings in 2007 and registered a growth of 30% in 2007. In 1H08, the aggregate banking earnings witnessed a growth of 31% on a YoY basis.

“Markaz” expects the sector to close the year with an earnings growth rate of 26%. Emirates NBD provided to 15% of the earnings in 2007 and it is expected that this contribution will increase by 100 bps in 2008. The core banking activities and the non-interest income witnessed significant growth of 51% and 46% in 1H08 on a YoY basis for Emirates NBD. The net profits of the company witnessed a growth of 41% in 1H08 on a YoY basis. “Markaz” expects a 40% growth in the net profits for Emirates NBD in 2008. National Bank of Abu Dhabi (provided to 13% of the 2007 banking earnings) witnessed a 58% earnings growth in 1H08. Similar to Emirates NBD, the growth in earnings were supported by both an increase in non-interest income and core income. The non-interest income witnessed a growth of 121% on a YoY basis in Q208. It is expected that earnings will grow by 32% in 2008 for NBAD.

The report states that the risk to the earnings call will be a significant slow down in credit growth in 4Q08. Real Estate: The real estate segment formed 22% of the earnings in 2007. Three real estate companies – Emaar, Aldar Properties and Sorouh formed 86% of the real estate earnings in 2007. “Markaz” expects the total real estate earnings to grow by 27% mainly driven by Aldar properties and Sorouh Real Estate. The report notes that it has been a year of muted performance for Emaar properties. The 1H08 growth was flat at 2% on a YoY basis.

Going forward, “Markaz” expects a net profit decline of -2% for Emaar. The forecast is mainly based on declining land sale revenue as a percentage of total revenues, loss making US Subsidiary (John Laing Homes) and limited pipeline of projects getting commercialized in 2008. However, it is believed that the sectoral earnings of 27% will still be higher than the previous year growth of 12% mainly due to expectation of strong growth from Aldar properties and Sorouh Real Estate. In 1H08 Aldar properties witnessed a growth of 187% in earnings. However, this earnings has come on the back of lower base. It has to be noted that 2H07 was the first period of normal operations for Aldar as the company booked property sales for the first time. Prior to 2H07, Aldar’s income statement was not indicative of the company’s performance as revenues were being generated from just two rental properties and raw land sales. “Markaz” expects the growth rates to decline in 2H08, mainly due to a higher base effect.

It expects the company to close the year with a full year growth rate of 104% Telecom: Telecom accounted for 13% of the total earnings in 2007. There are two telecom companies which are listed on the UAE bourses – Etisalat and EITL. EITL is still a loss making company and is expected to close the year with a loss of USD 96 Mn. Therefore, the entire earnings of the UAE telecom is from Etisalat. Etisalat posted a 37% growth in earnings in 1H08 to USD 1.39 Bn on a YoY basis.

However, with the user penetration rates reaching over 175% in the UAE and the mobile Average Revenue Per User (ARPU) declining 21% in 1H08, the telecom sector is likely to witness moderate increase in earnings in 2H08. “Markaz” expects the Telecom sector’s earnings to grow 33% in 2008. Market Cap Segmentation Corporate earnings in the UAE were driven by the performance of large and mid-cap stocks (Table: 2). The earnings of large cap stocks (constituting about 57 % of total earnings in 2007) increased 39% in 1H08 due to strong growth in earnings posted by large caps such as Emirates NBD, Aldar Properties and Emirates Telecommunications Corporation. However, the growth in large cap earnings is expected to moderate in the second half of 2008 and the segment is expected to register a YoY growth of 26% in 2008. Blue chips like Aldar Properties and Emirates NBD are likely to drive the growth in large cap earnings in 2008. Aldar Properties is expected to post 104% increase in earnings, while Emirates NBD’s bottom-line is likely to expand 40%.

The earnings of mid cap stocks, which contributed 23% to the UAE’s corporate earnings in 2007, are expected to grow 34% in 2008 with Deyaar Development likely to lead the pack. The company’s earnings increased by 266% to USD 122 Mn in 1H08 compared to USD 33 Mn in 1H07. Small caps, which contributed 11% to overall earnings in 2007, are expected to record 46% growth in earnings. Companies such as Oman Insurance Company and Finance House are expected to lead the segment in terms of earnings growth in 2008. In 1H08, Oman Insurance Company more than doubled its earnings from that a year earlier. Table: 2 - Corporate Earnings Trend – Market Cap Segmentation Earnings (USD Mn) 2004 2005 2006 2007 2008E YoY Chg 2008 Avg Market Cap (USD Mn) Number of Companies Large 2,117 4,936 6,370 7,870 9,887 26% 9,480 11 Mid 904 2,212 2,597 3,195 4,286 34% 2,689 16 Small 449 1,421 899 1,457 2,121 46% 987 18 Ultra Small 573 1,213 593 1,225 1,726 41% 103 45 Total Earnings 4,042 9,782 10,459 13,748 18,020 31% 90 Note: Segment classification: Large: Market Cap >USD 4.6 Bn; Mid: Market Cap >USD 1.6 Bn & Market Cap< USD 4.6 Bn; Small: Market Cap> USD 650 Mn & Market Cap < USD 1600 Mn; Ultra Small: Market Cap> USD 290 Mn & Market Cap < USD 650 Mn Source: Thomson Reuters, Markaz Research So far in 2008, most IPOs in the UAE have been in the Financial Services sector.

Most IPOs during the period were highly oversubscribed, resulting in an average oversubscription rate of 45.53 times. In spite of the bearish sentiments in the market, three of the six IPOs posted triple digit returns since floatation. While, Depa, the biggest IPO (in terms of amount raised) in 2008, has lost close to 49% since floatation, Methaq Takaful Insurance Company has recorded a gain of 519% since floatation. The central bank of UAE reduced the rate of interest charged by the Central Bank of the UAE on purchase of Certificate of Deposits (repo rate) several times to match rate cuts in US. The first rate cut was in January 2008, when the Central Bank reduced the repo rate from 4.25% to 3%. This 75-basis-point rate cut was followed by a further slashing of the repo rate by 50 basis points in February 2008. In May 2008, the repo rate was further reduced to 2%. Another major initiative taken by the Central Bank of the UAE to maintain sufficient liquidity in the market was the announcement of a new emergency bank lending facility of USD 13.6 Bn in September 2008.

The new credit facility aims to safeguard the domestic banking system from international money supply constraints. Also a new mortgage and property law by the ruler of Dubai was introduced in August 2008. The new law aims to regulate Dubai’s mortgage and property market with a more specific focus on transactions involving purchase and sale of off-plan properties (unregistered). The law requires each off-plan property to be registered with the Land Department before being resold. The law also restricts the offering of mortgage facility to registered financial institutions and requires each mortgage to be fully insured and registered with the Land department.

 In addition, it takes care of the repayment issue of mortgage and requires the defaulting investors to sell their property through a public auction managed by the Land department. The new law is expected to bring more transparency in the property and mortgage market in Dubai and (consequently) reduce the risks involved and attract new players. Increased competition in the market is also expected to dampen overheated real estate prices in the region.

About Markaz Kuwait Financial Centre 'Markaz', with total assets under management of over KD1.4 billion as of September 30, 2007, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region.

Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and was recently awarded a BBB+ corporate rating by Capital Intelligence Ltd.