Dubai Financial Market

Transcription

1 June 21, 2009 Fair Value Estimate: AED 2.04 Recommendation:: Hold Executive Summary DFM posted a weak operating result in Q Total revenue fell 24.7% q-o-q to AED 68.6mn due to lower trading commission fee as a result of the exchange s weaker total traded value. While first quarter market data suggested investors were becoming cautiously optimistic, April-May figures show that the market has rebounded and investor confidence improved. As a result, we forecast a 97.6% q-o-q increase in Q trading commission fee and an EBIT of AED 91.3mn. The Q net profit improved to AED 68.2mn, from a loss of AED 175.7mn in Q However after adjusting for impairment losses in Q4 2008, profit for Q decreased by 8.2%. For Q we expect net profit to increase by 61.7% q-o-q to AED 110.3mn resulting from higher trading commission fee. Market data for April-May 2009 indicates a significant increase in the exchange s total traded value based on greater investor confidence; supported by the recent rally in oil prices and hopes that the economic slowdown is bottoming-out. As we expect this uptrend to continue, we have upgraded our key market capitalisation/gdp and market-velocity estimates. Valuation: Based on our increased key estimates, our weighted average SOTP and peer group multiple valuation yields a fair value estimate of AED 2.04, indicating a possible upside of 12.6% from current levels. However, we believe that the 46% increase in DFM s share price over Q largely factors-in the potential near-to-medium term positives. We don t expect any significant upside from current levels, therefore, we downgrade our rating to Hold. RESULT UPDATE Share Data Market Cap Price AED 14.4 bn AED 1.81 DFM General Index 2, Reuters DFM.DU Bloomberg DFM UH Avg. Volume (52 Week) 44.7 mn 52-Week High/Low Shares Outstanding AED 5.5 / ,944 mn Fair Value Estimate AED 2.04 Key Figures Year to 31 Dec 2008A 2009E Revenue (mn) EBITDA (mn) Investment income (mn) Net Profit (mn) Adj. EPS (AED) /- (%) (37.7)% (33.3)% RoA (%) 6.4% 4.7% RoE (%) 6.8% 4.9% P / E (x) 16.4x 35.6x EV / EBITDA (x) 14.2x 33.4x P / BV (x) 1.2x 1.7x Shareholding Pattern (%) Borse Dubai 80% Public & Others 20% Relative Performance Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 DFM Rebased Index ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 1

2 Investment Rationale DFM reported a weak operating result for Q1 2009, due to weaker trading commission fee income, following a decline in the exchange traded value. While the net income for the quarter increased from a loss of AED 175.7mn in Q to a profit AED 68.2mn, it was mainly driven by the absence of impairment losses on the AFS portfolio. The DFM General Index has increased by approximately 30% since the end of the first quarter, showing early signs of recovery. While Q indicated sluggish trading activity, market data in April-May 2009 suggests an upsurge in total traded value on the exchange. Consequently, we have revised upward our near-term assumptions regarding market capitalisation and market velocity. Further, in view of rising oil prices, and improving risk appetite, especially for the UAE region, we raise our long-term market capitalisation/gdp and market velocity forecasts, resulting in an increase in our fair value estimate to AED We believe the current share price largely discounts the near-term positives, and see no significant upside possibilities from present levels. Hence, we regard the share as fairly-valued and downgrade our rating to Hold. Weak operating performance; likely to improve DFM reported a 25.5% q-o-q fall in the chief constituent of its total revenue trading commission fee, which fell from AED 82.8mn to AED 61.7mn. This was due to lower exchange traded values, which went down from AED 37.6bn in Q to AED 27.6bn in Q First quarter EBIT fell 35.9% q-o-q to AED 31.7mn. Operating costs remained under control with selling, general, and administrative expenses down 23.3% q-o-q. For Q2 2009, we expect total revenues to increase by 88% q-o-q to AED 128.9mn, following an increase in traded values. Exchange data for April and May 2009 indicates a significantly higher total traded value on the exchange. We expect DFM s revenues to improve steadily in 2009, as market activity increases further. In our view, the pessimism prevailing until Q is being replaced by cautious optimism with markets showing early signs of recovery. Long-term outlook on trading activity remains bullish Despite short-term market weakness in Q1 2009, we remain bullish on DFM s long-term prospects. Total traded value, the key driver of the company s income increased from an average of AED 9.2 billion per month in Q to AED 13.9bn in April, and AED 14.9bn in May. Higher values indicate increasing turnover velocity, reflecting improved investor sentiment. In our view, this development is supported by visible signs of economic recovery and rising oil prices which should benefit the region. In addition, the net investment by foreign investors has improved in recent months. Through Q1 2009, foreign investors were net sellers to the tune of AED 338.9mn, whereas in April and May alone they have been net buyers of AED 792.1mn. This has resulted in further increases in values and better investor confidence. ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 2

3 Trade Value on DFM AED bn Oct Nov Dec Jan Feb Mar April May Source: DFM Monthly Bulletins The DFM General Index is currently trading at ~6x 2009E earnings, compared with 5.2x in April 2009, providing further evidence of the recovery in investor confidence. We believe PE multiples are likely to revert to their long-run historical averages. Consequently, we increase our market capitalisation/gdp ratio to % for and to 160% on a terminal year basis. We have also revised our trading velocity forecast upward to % for , maintaining it at 135% for the terminal year. As a result, our fair value increases significantly to AED Reforms in full swing DFM has intensified its efforts to improve its functional and regulatory framework to bring itself more in line with international standards. The most important of the company s recent initiatives was the publication of its "Guide to Going Public" intended to support private and family businesses planning to seek a public listing. In this regard, the Emirates Securities and Commodities Authority (ESCA) is now seeking to develop laws and regulations to lower the minimum free float requirement to 30%, allow book building, and adopt relevant valuation mechanisms. These initiatives should help improve IPO market activity and increase trading income. At the same time, other developments being considered include allowing trading of rights issue listings, and permitting short selling. In addition, the exchange is currently introducing a Delivery Versus Payment (DVP) system, intended to abolish present T+2 settlement arrangements. Overall, these new proposals should help improve market efficiency and support investor efforts to diversify their investment options. ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 3

4 Valuation We have valued using a combination of SOTP and Peer-Based Multiples. Within the SOTP, we have valued the exchange using DCF valuation and its portfolio of AFS investments at current value, based on the QTD movement in the DFM General Index. We have assigned subjective weights of 90% to our SOTP and 10% to our Peer-based Multiples Valuation to calculate our fair value estimate. Our SOTP valuation has been assigned a higher weight as it discounts firm-specific cash flows and assets. We arrive at a weighted average fair value estimate of AED 2.04, which implies a 12.6% upside from the current market price of AED Therefore, we downgrade our rating to Hold. Weighted average table: Weighted Average Value per Share Valuation Method Value (AED) Weight (%) Discounted Cash Flow (DCF) 1.99 Value of AFS Investments 0.15 Total SOTP Value % Peer-based multiple valuation % Weighted Average Fair Value 2.04 Source: ADCB research SOTP Valuation We have valued the core exchange business using a two-stage DCF model with explicit forecasts to Based on our forecasts, we have calculated free cash flows to equity holders which have then been discounted in order to estimate the fair value of the Company. We have estimated the Cost of Equity using the Capital Asset Pricing Model. The key assumptions underlying our model are as follows: Risk free rate: 4.2% Equity Risk Premium: 6.0% Country Risk Premium: 2.9% Beta: 1.16 Cost of equity: 14.06% Terminal growth rate: 3.5% Based on these assumptions, our estimate of the fair value of equity for DFM is AED 15.8bn. There are 7.9 billion fully diluted shares currently outstanding. On this basis, our DCF model yields a fair value of the core exchange business of AED 1.99per share. In addition, DFM had AFS portfolio of AED 954.1mn as of March 31, This portfolio consists of actively traded equity shares. We have estimated current value of the AFS portfolio based on the change in the DFM General Index since March 31, DFM General Index value has since increased 28.8% and we have accordingly increased the book value of AFS portfolio (as of March 31, 2009), indicating a fair value of AFS portfolio of AED 0.15 per share. Consequently, our SOTP methodology yields a fair value estimate of AED 2.14 per share. ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 4

5 Sensitivity of the SOTP fair-value estimate, using different rates for terminal cost of capital and terminal growth rates: Terminal growth Source: ADCB research Terminal Cost of Capital % 13.6% 14.1% 14.6% 15.1% 2.5% % % % % Sensitivity of DCF based fair value to changes in value of shares traded in the terminal year (2016) Sensitivity of DCF Derived Valuation to Value Traded Shares -40% -30% -20% -10% Base Case +10% +20% +30% +40% Value of Traded Shares (in AED Bn) Fair Value Estimate ,042 1,158 1,273 1,389 1,505 1, Using our peer-based multiples valuation, our analysis yields a fair value per share of AED Company Comparable Company Trading Analysis Mcap MCap Index co./mcap 31-Mar-09/ P/E ROE index Total GDP 31-Mar A 2009E 2010E 2008A 2009E 2010E Deutsche Bourse 1.7% 19.7% 10.7x 13.5x 12.0x 41.1% 27.5% 28.2% New Zealand Exchange 0.1% 116.0% 20.1x 17.2x 15.8x 32.1% 14.3% 10.8% Australian Stock Exchange 0.6% 76.1% 16.8x 19.1x 20.0x 13.3% 11.8% 11.2% Bovespa Brazil 1.5% 32.9% 36.2x 20.6x 16.0x 2.4% 5.8% 10.6% Hong kong Stock Exchange 1.2% 385.5% 25.4x 28.9x 25.1x 65.5% 58.1% 61.9% Bursa Malaysia 0.7% 58.6% 36.9x 39.8x 32.5x 13.8% 13.2% 15.4% Singapore Exchange N/A N/A 15.8x 25.7x 21.9x 55.5% 35.0% 41.0% Johannesburg Stock Exchange 0.1% 118.0% 11.3x 13.0x 11.5x 30.2% 23.1% 21.3% Mean 0.8% 115.2% 21.7x 22.2x 19.4x 31.7% 23.6% 25.0% Median 0.7% 76.1% 18.4x 19.8x 18.0x 31.1% 18.7% 18.3% P/E multiple (Peer-group Avg) 22.2x EPS09E 0.05 Equity Value 1.13 Source: ADCB research, Reuters ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 5

6 Balance Sheet Income Statement (AED M,Yr. ending Dec. 31) Q109A Q209E Q309E Q409E Q109A Q209E Q309E Q409E Cash and cash equivalents 670 1,600 1,705 1,517 Revenue Investment deposits Operating Cost Receivables and other current assets EBIT Property, plant and equipment - net EBITDA Other financial assets - non current Depreciation & Amortization Goodwill & other intangible assets-net 5,659 5,640 5,621 5,602 Non-operating income (expense) Total Assets 8,707 8,784 8,883 8,692 Interest expense Investment Revenue Payables and other current liabilities Gain from revaluation of HFT securities Bank Loan Impairment Loss on AFS Investments Other long term liabilities Profit Before Tax Share capital and reserves & surplus 8,589 8,589 8,589 8,589 Tax Investments revaluation reserves Adjusted Net Profit Retained Earnings IPO and other income Total Equity & Liabilities 8,707 8,784 8,883 8,692 Exceptional Items (non tax adj) Reported Net Profit Balance Sheet Income Statement (AED mn, year ending Dec. 31) E 2010E E 2010E Cash and cash equivalents 1,313 1,106 1,517 1,587 Revenue Investment deposits 1, Operating Cost Receivables and other current assets EBIT Property, plant and equipment - net EBITDA Other financial assets - non current 1, Depreciation & Amortization Goodwill & other intangible assets-net 5,754 5,678 5,602 5,526 Non-operating income (expense) Total Assets 10,223 8,636 8,692 8,834 Interest expense Investment Revenue Payables and other current liabilities Gain from revaluation of HFT securities Bank Loan Impairment Loss on AFS Investments 0 (250) 0 (50) Other long term liabilities Profit Before Tax Share capital and reserves & surplus 8,408 8,589 8,589 8,589 Tax Investments revaluation reserves 189 (975) (965) (965) Adjusted Net Profit Retained Earnings 1, IPO and other income Total Equity & Liabilities 10,223 8,636 8,692 8,834 Exceptional Items (non tax adj) Reported Net Profit 1, Cash Flow Statement E 2010E Key Ratios E 2010E Net Profit - Reported 1, Per share data (AED) Depreciation Shares outstanding (mn) 7,944 7,944 7,944 7,944 Other non-cash and non-operating items (700) 2 (13) (40) Adj. Basic EPS Changes in Working Capital 89 (241) 1 2 Adj. Diluted EPS Cash from operating activities Book Value per share Employees' end of service indemnity Interest paid Valuation ratios (x) Net cash from operating activities P/E 10.2x 16.4x 35.6x 26.8x EV/EBITDA 11.5x 14.2x 33.4x 22.8x Net Capex (14) (10) (14) (20) P/BV 5.1x 1.2x 1.7x 1.7x Other Adjustments (1,150) (25) Net cash from investing activities (1,164) (45) Other Ratios (%) Adj. ROAA 15.5% 6.4% 4.7% 6.1% Proceeds from long term loans Adj. ROAE 16.5% 6.8% 4.9% 6.4% Dividend - (774) (318) (397) Adj. ROACE 16.5% 6.8% 4.8% 6.4% Other Adjustments Net cash from financing activities 1,058 (774) (308) (397) EBIT Margin 80.0% 77.0% 66.2% 74.5% EBITDA margin 90.4% 89.9% 86.0% 88.8% Net (Dec.) / Inc. in cash 732 (208) Net Profit Margin 117.4% 87.8% 90.3% 84.9% Cash at the beginning of period 582 1,313 1,106 1,517 Debt/Equity 0.0% 0.0% 0.0% 0.0% Cash at the end of period 1,313 1,106 1,517 1,587 Interest coverage ratio NA NA NA NA Source: Company Data, ADCB Research ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 6

7 Investment Ratings: Buy: More than 15% potential return. We recommend that investors buy the stock based on the annualised return to the shareholders over 6-24 months time horizon (percentage change from current price to the projected target price). Sell: Negative potential return. We recommend that investors sell the stock based on the annualised return to the shareholders over the 6-24 months time horizon. Hold: Between 0 and 15% potential return. We take a neutral view on the stock over the 6-24 months period. Other Disclosures: Abu Dhabi Commercial Entity (ADCB) publishes independent research based on its own opinions and does not have investment banking relationships with any firm whose security is mentioned in this report. ADCB does, however, hold securities of the firm mentioned in this report through its fund management activities. If you choose to use the information in this report, you do so on your own initiative, and you are responsible for compliance with any applicable local laws. ADCB certifies that no part of the research analyst s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. The information and opinions in this report were prepared by employees of ADCB and are current as of the date of the report. The information contained herein has been obtained from sources that they believe to be reliable, but ADCB does not guarantee its accuracy, adequacy, completeness, reliability, or timeliness. Moreover, it is not responsible for any errors or omissions or for the results obtained from the use of such information. All opinions and estimates included in this report are subject to change without notice. ADCB will furnish, upon request, available investment information supporting this recommendation. This report is intended for qualified customers of ADCB. This research report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment or any options, futures or derivatives related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Investors should note that income from such securities or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Foreign currency rates of ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 7

8 exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. To the fullest extent permitted by law, neither ADCB nor any of its employees will be liable to you or anyone else under any tort, contract, negligence, strict liability, products liability, or other theory with respect to this presentation of information. You may not redistribute this report without explicit permission from ADCB. Note: is an Islamic financial institution that does not deal with interest and follows Islamic law (Sharia) in all its practices. We have used the terms interests & loans solely for the sake of comparing s financial performance against other commercial entities in the market. ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 8

9 ADCB Research Team: Khaled Akl, MBA, CFA Head of Research Sami Benghezal, M.Sc, FRM, CFA Research Manager sami.b2@adcb.com Jehad Saeed Al Mazrooei Research Analyst Jehad.s@adcb.com Rakesh Kumar Agrawal, MBA Research Analyst Rakesh.k@adcb.com ADCB Wealth Management Group I Research I ADCBresearch@adcb.com 9