Utility stocks are the poster child for value investors.
They provide for stable earnings and cash flow dividend yields, providing a buffer for other parts of the portfolio that may be prone to greater bouts of volatility. In 2023, in the midst of a banner year for capital markets, we had Empower that rose more than 16 per cent, and Tabreed by an even higher 23 per cent, demonstrating the value that companies with ‘Managed ROEs’.
In the same time, DEWA, after having paid out dividends of more than 13 per cent since its IPO, sits close to its IPO price, having risen a more subdued 9 per cent in 2023. This is primarily because of the specter of rising interest rates in 2023 (the utility sector is considered as a bond proxy, and fixed income instruments have underperformed).
Which makes the traditional portfolio - long considered to be less exciting than philately - somewhat more volatile. However, it is in this period of excitement that valuation discrepancies often arise and the same can be said of DEWA, the behemoth that, just like the RTA, has more divisions that are likely to be spun off as the pace of privatization continues in 2024.
All systems point to more growth
This makes DEWA a crown jewel of the value-oriented investor as reallocations are made in the new year. Even on its own, the growth of DEWA comes from the underlying population growth Dubai is experiencing.
This is buttressed by the move to solar and other renewables that over time will double margins and serve as potential carve-out for further spinoffs (along with its AI division). Lastly, the valuation discrepancy that arises because of UAE’s status as an emerging market (progressively compressed in other faster growing areas) does not apply to DEWA.
There is no secret by now that the capital markets renaissance in the UAE will continue into 2024, with investors piling in to most new offerings.
In point of fact the opposite thesis can be made if there is a case to be made for interest rates having peaked. Top-line growth is expected to trend higher than the population growth as the mix skews towards the luxury end of the spectrum implying greater per unit demand (which is amply demonstrated by the rapid influx of luxury communities).
Still room for stock spike
On a relative basis to regulated utilities in the US, the stock appears to be undervalued by more than 20 per cent on an ‘as is where is’ basis, not accounting for the opportunities for further spinoffs. This will increase the ability to buttress top line growth and dividend payouts.
Dominion Energy, for example, trades at a multiple that is in excess of 25 per cent above DEWA with higher debt burdens. Unsurprisingly it has been a poor pick for shareholders, falling by nearly a quarter in 2023, and by over 38 per cent over the last five years.
Duke Energy, another regulated utility has likewise performed poorly, with a share price drop of 10 in 2023, on even higher valuations as debt burdens have eaten into net margins, leading to questions about its sustainability to pay out dividends.
There is no secret by now that the capital markets renaissance in the UAE will continue into 2024, with investors piling in to most new offerings. It is likely that the allocations will be slim for retail investors and that as valuations creep up, they will need to be more selective.
As such, focus will shift to the secondary market, relative valuations and company performance relative to its regional and international peers.
It has been astonishing as to how quickly the media coverage has shifted towards the capital markets. This will continue as capital markets and corporate finance activity continue to dominate the zeitgeist in 2024.
Whilst the safe bets will always be to gain broad exposure via ETFs, there will always remain opportunities that form a part of a core portfolio of assets that are to be held.
DEWA represents one such candidate, a no brainer amidst a blizzard of such opportunities.