The Dubai Financial Market benchmark has soared 51.5 per cent and the Abu Dhabi Securities General Index is up 41.3 per cent so far this year. For both markets, May was a stellar month. The DFM index rose 10.8 per cent, with the value of shares traded reaching Dh16.896 billion. The ADX index rose 8.84 per cent, with its value traded reaching Dh9.29 billion.
Property and banking stocks have been among the best performers, not unexpected given the recovery in both sectors since the financial crisis, says an analyst. “The re-rating of real estate assets in the country has helped [industry] stocks to outperform,” said Rakan Himadeh, research analyst at Mashreq Asset Management. “Given the high correlation between banks and real estate in UAE, the banks have expectedly also become the outperformers these days.” Benchmark stock, Emaar Properties, has gained 62 per cent, Union National Bank has advanced 67 per cent and Rak Bank and Rak Properties have jumped 72 per cent and 65 per cent respectively.
Looking ahead, however, analysts are cautious. The surge in the markets has somewhat disconnected stock prices from the fundamentals of their companies and a correction is needed to bring them back into line. “Having said that, the copious liquidity we’ve seen enter the market will mitigate a larger than expected drop,” said Himadeh. “Consequently, we expect to see a period of consolidation in the next six months and will look to position ourselves in names that will be expected to grow [their revenue].”
Gulf News looked at the ten best performing stocks for the year and their prospects in the coming months:
Aldar Properties and Sorouh Real Estate:
“Merger talks between the two companies has been the main driver [of their] share prices, which were trading below book value,” said Himadeh . “The enormous amount of liquidity that has found its way in the UAE markets has exacerbated the returns we’ve seen year to date.”
Saleem Khokhar, head of equities, Asset Management Group, National Bank of Abu Dhabi, pointed out that the deal, which is expected to be completed by this month, will create one of the largest real estate companies in the region with total assets of over Dh46 billion.
Outlook
Himadeh pointed out that Aldar is expected to benefit from a relatively better balance sheet and access to funding for future growth; while Sorouh will gain from less competition and increased synergies. “ The market will want to assess what the merged entity will be able to produce. However, one cannot ignore the overriding tailwind for Abu Dhabi real estate names in terms of growing tourist arrivals and potentially rising real estate prices,” he said.
“The outlook for the merged entity remains positive as it is expected to undertake large government projects going forward. Additionally, the recent recovery of real estate and rental prices in Abu Dhabi along with its strong recurring assets portfolio such as Yas Mall, Yas Hotels, Al Rayyana, among others, should also positively impact the profitability of the merged entity,” said Khokhar.
Emirates NBD, Dubai Islamic Bank (DIB) and Abu Dhabi Commercial Bank (ADCB) These financial institutions have benefited from the recovery of the UAE economy and banking system, said Himadeh. Their non-performing loan ratios have also improved as real estate and construction recovered, resulting in a much [better] operating environment and [lower] costs. The banks have also paid back their government loans, which were given during the financial crisis to help liquidity.
DIB’s acquisition of Tamweel, a mortgage lender, revealed that the real estate market was close to bottoming out. The deal was a value accretive acquisition for DIB as Tamweel would get access to DIB’s balance sheet and result in a savings of Dh 100 million a year from a cost of funding perspective, explained Himadeh.
Outlook:
Himadeh believes the improvements in these banks operating environment has been priced into their shares and: “we are consequently likely to see consolidation in the next six months. [However,] there is a strong likelihood that top line growth will return, which is not that far away in our opinion.”
Khokhar points out that Emirates NBD’s first quarter profitability improved, as its provisions for bad loans declined. Its non-performing loans ratio should remain stable and its loan growth is expected to pick up marginally in 2013. “The outlook on the stock remains positive [and the] only concern is the historically low liquidity of the stock,” said Khokhar.
ADCB was trading at a discount to its peers at the beginning of the year and there was a catch-up rally in the stock, explained Khokhar. The asset quality of the bank remains stable and provisioning is expected to gradually decline. “ADCB has started a share buy back program and this also improved market sentiment as it indicated the bank believes its stocks to be undervalued. Prospects for the remainder of 2013 remain positive for the bank,” said Khokhar.
Improvement in the Dubai real estate market and the acquisition of Tamweel helped boost profits at DIB. It issued a perpetual bond that strengthened its capital base and helped it to grow its loan book. “DIB’s asset quality is expected to improve and the remainder of 2013 should see continued strength from the bank,” said Khokhar.
Du
The telecommunications company has been benefitting from increased population growth, growing tourist arrivals and a bigger share of the high-margin mobile and fixed broadband market. The company also doubled the dividends it distributed in fiscal year 2012, compared to the previous year, said Himadeh.
Outlook:
“The overall tailwinds for this company will continue and its execution in the UAE vis-à-vis to its competitor remains strong. We see some consolidation, [but the share will continue to attract interest,” said Himadeh.
“[We] expect to see continued growth in dividend going forward which should act as a positive catalyst for the stock,” added Khokhar.
Rak Cement and Rak
Despite steep valuations and absent of any notable improvement in Rak Cement’s operations, the company distributed dividends for the first time since fiscal year 2009, which gave a boost to investor confidence. There is also a sentiment that project announcements in the UAE and increased demand from export markets such as Saudi Arabia and Oman, will bode well for the company. Since the announcement that Saudi Arabia will need to import 10 million tons of cement, shares in Rak Cement have spiked 55 per cent, said Himadeh.
Outlook:
“It’s likely that the [Rak Cement] stock has run ahead of itself as it’s still uncertain whether its financial results [will benefit from the announced construction projects,” said Himadeh. There are no specifics about the Saudi mandate to import cement and there is a large amount of spare capacity in the industry. There will be a lag before UAE cement companies show the benefits, he explained.
While revenues at RAK Ceramics have been relatively flat for the last few years, the company has been able to take control of its operating expenses, and had a stronger first quarter. The company is trading at a trailing price-earnings of 5.8 times, a more than a 50 per cent discount to peers, which in the context of an improving UAE economy makes it an interesting proposition for investors, said Himadeh.
Waha Capital and Eshraq Properties
Waha reported solid results in the first quarter of 2013, on the back of a strong start to the year for its key direct investments, including AerCap, which leases airplanes, and Dunia Finance, a consumer finance company. Seemingly the market has also rewarded Waha for collecting on advisory fees, even though they are not recurring in nature, said Himadeh.
Eshraq Properties has been one of the beneficiaries of increased traction among residential, hotel and commercial properties. It has specifically benefitted from asking prices for residential properties in Abu Dhabi increasing and, more generally, hotel occupancies in the UAE rising, despite new supply coming online.
Outlook
Financial consultant and trader, Bruce Powers, said that although Eshraq hasn’t participated much in the broader market rally the past couple of months, from a technical perspective, it is still holding up very well. The stock has held above support of its 200 daily exponential moving average since late-2012. As long as it stays above Dh0.47 on a deeper pullback, the odds are good it can eventually rally above 0.80, the high so far in 2013.
Powers is of the opinion that Waha will likely retrace towards Dh0.80 – possibly soon – when investors might jump back in more aggressively. The next upside target of any significance is around Dh1.17, which will complete a 38.2 per cent Fibonacci retracement of the long-term downtrend from its November 2007 high.
