• Global values Dubai Financial Market stock at AED1.16 and recommends ‘REDUCE’
Global Investment House “ Global” – Kuwait - Dubai Financial Market – Investment Update-
The year 2008 was one of the most turbulent years for economies and markets world over. Dubai Financial Market (DFM) was also significantly impacted by the crisis. Factors like exit of foreign investors, liquidity crisis, slowdown in real estate market, concerns over credit portfolio of banks pulled down the index 72.4% during the year to reach 1,636.29 points at the end of 2008.
The value of DFM’s shares derived from the weighted average of the DCF and peer comparison methods is AED1.16 per share. The stock currently trades at AED1.39 ( as on 13th Apr 2009), which implies that the weighted average value of DFM’s shares is at a discount of 16.4% to the share’s current market price. At the current price, DFM’s shares have forward P/E multiples of 34.3x and 26.3x the estimated 2009 and 2010 earnings respectively. We, therefore, recommend a ‘REDUCE’ on DFM stock, at its prevailing price levels.
Financial Performance
On account of the decline in trading activity especially during the fourth quarter, the average daily trading value declined by 17.5% to AED1,240.6mn in 2008 down from AED1,530.9mn in 2007. Since trading commission fee is the most important source of revenue of DFM (contributed 92.9% of revenue in 2008), the total revenue of DFM in 2008 declined to AED688.9mn, down 16.7% from the previous year. Brokerage fees contributed around 3.1% of total revenue during the year whereas ownership transfer and mortgage fees contributed 3.0%. Rest 1.0% was contributed by other sources.
Chart 1: Average Daily Trading Value (AED mn)
Source: DFM
Like other companies in the region, DFM was significantly impacted by investment related losses during 2008. DFM has a significant investment portfolio which witnessed decline during the year along with corrections in the market world over. In fact the investment related losses pulled down the net profitability of DFM quite substantially during the year. During the year, DFM recognized a loss of AED1,265.7mn from revaluation of available for sale investments. Out of that AED250mn was recognized in the income statement because of impairment.
It is important to note that the Company adopted the amendments to IAS 39 issued by the International Accounting Standards Board and reclassified investments held for trading to investment available for sales. As a result of the reclassification, net profit for the year ended December 31, 2008 increased by AED330mn. During the year, DFM recorded a gain of AED61.0mn from held for trading investments till June 30, 2008 which is the effective date of reclassification.
Net profit of DFM decreased by 58.0% during the year 2008 to reach AED605.0mn, down from AED1,439.6mn in the previous period. However on an adjusted basis (without considering one-time IPO income of AED468.0mn in 2007), the profit was down 37.7% YoY.
Total assets of DFM stood at AED8.6bn at the end of 2008, down from AED10.2bn in 2007. The decline was mainly due to decrease in investment portfolio and Islamic investment deposits. There was a dip in the portfolio of Islamic investment deposits on account of dividend payout during the year. The investment portfolio was down during the year on account of corrections witnessed in global markets. As mentioned before, the Company adopted the amendments to IAS 39 issued by the International Accounting Standards Board and reclassified investments held for trading to investments available for sales.
Outlook
The current revenue model of DFM is heavily dependent upon a single steam of income i.e. trading commission fees. Out of the total revenue in 2008, trading commission fees contributed more than 90%. This source of income is directly proportional to trading value on the bourse. Therefore the factors which will impact the trading activity on stock exchange will in turn impact the growth of DFM.
In view of the current correction across global markets, slowdown in the economies, exit of foreign investors from emerging markets, liquidity crisis and concerns over real estate and banking sector in Dubai, we expect trading activity to significant lower in 2009 as compared to the previous year. Though in the past few weeks we have witnessed significant rally across global markets, we believe that was primarily due to government stimulus packages. We do not expect a sharp recovery in markets in the near future.
Corporate earnings of Dubai-based companies were significantly down during 4Q-2008. We expect 2009 will be a tough year for the companies from earnings point of view especially for real estate and banking sector. The economic growth outlook of UAE for 2009 is not promising which is again a negative factor for DFM. The impact of liquidity crunch in the country and reluctance of banks to lend will impact DFM adversely.
We expect to see very few new listings on the exchange during the current year as most of the companies have postponed their plans. Also there are no concrete plans to introduce new financial products on DFM which limits growth potential. On its home front, DFM faces increasing competition from NASDAQ Dubai (previously known as DIFX). There are talks of merger between NASDAQ Dubai and DFM but nothing concrete has come out yet. Management has indicated that strategic studies are in place for the possible consolidation of the back office operation and technology.
