Rationale and mystery in Emirates Refreshments Co.'s stock upturn
Its diversification plans seem to have wowed investors for now
UAE equities were subdued this week after a stellar run all through January. DFM closed lower by 0.98 per cent while ADX rose 0.40 per cent for the week ended February 4, with a host of restrictions imposed to curb the spread of COVID-19 dampening local markets' sentiments.
This week's top gainer is Emirates Refreshments Co (ERC) with 73.95 per cent. The rally is powered by its recent decision to increase paid-up capital by Dh270 million to Dh300 million through a rights issue. Nonetheless, the company has run far ahead of its fundamentals with a market capitalisation of Dh933 million, while the cash infusion is only Dh270 million.
Even if the authorised capital limit of Dh600 million is reached, the amount that will come into the company is only Dh570 million. Anyway, there is no indication from the management that it will raise the paid-up capital to authorised capital.
Diversification plays
ERC planning to invest in real estate, construction and facility management, as well as in industrial and mining activities, and healthcare. And sectors like mining and food generally operate at razor-thin margins. It is highly unlikely that ERC will be making significant profits with a capital of Dh300 million, even if it can leverage it.
The current retail mania seems to have triggered this rally, and investors will be better off not chasing this rally.
Aldar Properties, a well-run real estate company, has assets of Dh39.5 billion from which it generated revenues of Dh7.98 billion in the last 12 months. And it struck a profit of Dh1.45 billion giving it a net profit margin of 18.2 per cent.
Solid ground
The developer has a market capitalisation of Dh30.192 billion, trading at 20.73 times TTM (Trailing 12-month) profits. Certainly, Aldar can make this profit margin due to its economies of scale
The other major gainers are Dubai Insurance Co. (up 15 per cent), Palms Sports (13.89 per cent), Waha Capital (12.50 per cent) and Orascom Construction (10.40 per cent). Recently Orascom Construction bagged about $920 million in new awards, which triggered the gains. The total backlog of Orascom stood at $5.3 billion as of end December.
UAE equities are likely to stay stable…
- Vijay Valecha is Chief Investment Officer at Century Financial.