On the back of the economy’s strong recovery, in particular Dubai, the UAE stock market has gained nearly 30 per cent this year.
The UAE has stood out as a safe haven amid the instability around Middle East. It has also been the main recipient of liquidity across the region.
Dubai’s position as a financial and a tourist hub has been cemented further during this year. This is evident in all the numbers—from trading , tourist footfall and hotel occupancy rates to real estate transactions and purchasing managers index (PMI).
Adding to the overall confidence is “a number of government-related entities continu[ing] to make progress in reducing and rescheduling their debts,” said Bassel Khatoun and Salah Chamma, co-portfolio managers of Franklin MENA Fund.
Coming from a “very low base, the valuations continue to be extremely compelling”, giving the UAE market an upside next year, says Rami Sidani, head of Middle East and North Africa Investments at Schroders.
“We believe the blue chips, which were affected by the financial crisis but were able to weather it, will be the leading stocks in the market.”
The view is restricted for the equity markets.
These will do better next year but not necessarily see “the huge comeback that everyone is hoping for,” says Haissam Arabi, chief executive of Gulfmena Investments. “We believe that global macro conditions have improved but don’t change the outlook much and from fiscal cliff to Eurozone troubles, we might still get periods of uncertainty.”
Chronic lukewarm trading activity will continue to be an issue.
“Such matters may impose higher levels of volatility next year but would most likely be skewed towards the upside,” Talal Touqan , head of equity research at Al Ramz Securities, says. “This is not to neglect the fact that the European debt crisis and geopolitics may suppress the overall sentiments, but rather to emphasise that the lifecycle of asset classes should probably favour equities this time.”
Here are some of the local picks:
Etisalat:
“Although the company has been suffering from local competition and losing market share, in addition to the increase of royalty fees by the government, we believe Etisalat is positioned well to capture the next growth cycle in the UAE and its international subsidiaries earnings will grow in the coming two years,” says Tariq Qaqish, head of asset management, Al Mal Capital. “We expect Etisalat share will open to GCC investors as a start and to be followed by foreign investors, which will present a strong catalyst in our opinion.”
The company also provides “a very solid fundamental play with good dividend yield and possible relaxation of institutional, foreign and GCC ownership limits,” says Saleem Khokhar, head of equities, asset management group, National Bank of Abu Dhabi.
Emaar Properties:
With a price earnings ratio of 9.9x and a price to book value of 0.7x makes this a top pick. Emaar benefits “from the ‘Dubai comeback’ where its integrated and geographically diversified model makes it ideal to benefit from launch of new projects in Dubai especially as it enjoys the largest land bank and where residential property prices increased by more than 20 per cent in 2012,” says Haissam Arabi, “Emaar’s bottom-line next year will happily surprise investors.”
With excellent exposure to the hospitality segment and real estate sector, it is one of Khokhar’s top picks for next year.
“It’s a clear play on the general pick up in Dubai,” says Rami Sidani, head of Middle East and North Africa Investments, Schroders.
Emaar tops the list of stocks of Talal Touqan, head of equity research at Al Ramz Securities.
Aldar Properties and Sorouh Real Estate:
“We believe both companies will benefit from the merger in terms of synergy, will have more control on the supply of units in the emirate of Abu Dhabi and at the same time control prices in major locations,” Qaqish says.
As a combined entity, Khokhar says, it should be in strong position to win major contracts in Abu Dhabi.
While the merger with Aldar should benefit Sorouh, its strong financial situation, recovery in real estate and government housing projects are expected to improve the company bottom-line.
“Sorouh currently trades at a price earnings of 7x and a price to book value of 0.5x making it too attractive and a great call option on recovery of Abu Dhabi real estate,” Arabi says.
Touqan, however, is reserved about the two. “The vision towards other stocks is still blurred and path-dependent, especially the awaited merger between Aldar and Sorouh, in addition to selected players in businesses like construction and building materials.”
First Gulf Bank:
Touqan favours FGB for its quality of high yield and liquidity that consistently generates cash income of 4 to 7 per cent and is part of the first wave of picking that has already started and may last until the end of the first quarter of 2013.
Abu Dhabi banks:
Sidani prefers Abu Dhabi banks to Dubai ones, which he says are still dealing with legacy problems.
“Abu Dhabi banks have recovered faster and with their smaller exposure to Dubai, we see great opportunity in very liquid banks, which are highly capitalized with clean balance sheets and ready to grow their loan books to keep up with the growth in the underlying economy.”
The Union National Bank is among Touqan’s top picks.
Air Arabia:
“With a price earnings ratio of 8.2x and price to book value of 0.64x and more importantly a dividend yield of 8.1 per cent makes this one of our favorite plays for [first half] 2013,” Arabi says. “With additional hubs coming into play, improved load factor, and moderate energy costs nothing justifies the low valuations that this company is trading on and it is just a matter of time before we see its share price flying.”
Touqan expects that Air Arabia is in the high yield but liquid stocks and is also a part of the first wave of picking that might last until first quarter of 2012.
Transportation:
Any stock that would be part of the general theme of continuing recovery in trade, tourism, retail and real estate such as Air Arabia and DP World would be among the beneficiaries, says Sidani. DP World, for example, “would benefit from all the volume and the expansion that we are seeing in Jebel Ali.”
Depa Limited:
The last two years were not helpful to the global interior contracting company. Depa underperformed the market significantly. This drop in stock price, Qaqish says, is attributed to loss of 25 per cent of backlog, lower margins due to competition, and lack of new awards. “With Arabtec acquiring 25 per cent of the company, we believe it will help securing new business,” Qaqish says. “With Arabtec (Aabar) on board we might see the stock list on ADX which will make it more liquid to investors.”
Abu Dhabi National Energy Company (Taqa):
“The company continues to benefit from the backing of Abu Dhabi government and secure funding at cheap rates,” Qaqish says??. “A catalyst for the stock will be opening for foreign ownership.”
Tabreed:
“Clean books and a stronger balance sheet, Tabreed’s well positioned model will benefit from the re-launch of many older projects in addition to existing deliveries where central district cooling is required,” says Arabi. “Domestic growth factors and recovery in real-estate will guarantee decent bottom-line figures next year making it interesting enough to investors despite any future dilution fears.”
Other stocks:
Touqan says if anticipated capital markets developments materialize, including that of securities lending and short selling, he expects a new wave to trigger a radical change, with demand aiming at less-researched and less-active stocks that enjoy high intrinsic values or are distressed with low Price/Book multiples could come into focus. Waha, Agthia and Dana Gas are among the stocks he has in mind.
