UAE Stocks Trading At A Discount To Qatar & Saudi Arabia
United Arab Emirates (UAE) stock market indices fell 30% from their highs in the Spring of Y 2014 due to the impact of the Crude Oil price shock, a surge in the USD and an exodus of offshore capital from EMS (emerging markets). Lower liquidity in the money markets amid decelerating bank growth was also to blame.
Since the UAE is the most diversified consumer economy in the Gulf and Abu Dhabi has accumulated $2.6-T in sovereign wealth funds, public spending will continue to provide momentum for economic growth. This is forecast to be at least 3% in Y 2015, according to the International Monetary Fund (IMF). However, it is undeniable that the loss of $350-B in Gulf Cooperation Council (GCC) petro-currency revenues will be a deflation shock from which no economy in the Arab world is immune.
Valuations have derated as every stock market index in the GCC lost 25 to 35% from the highs.
The UAE’s fall has been disproportionate in Y 2015, exceeded only by Indonesia, Russia, Brazil, Turkey, South Africa and Egypt. Yet the country does not face any systemic current account funding, banking, recession, sovereign balance sheet or geopolitical risk. That, unlike its bigger emerging market peers.
At 12.5X forward earnings, UAE equities now trade at a discount to Qatar and Saudi Arabia, let alone more expensive EM’s like India, or South Africa, which trade well above 16X earnings. Mexico trades at 20X earnings and Indonesia trades at 15X earnings despite the savage bear market in Jakarta shares and the Rupiah.
Correlations between the Dubai Financial Market and Abu Dhabi Securities Exchange increase when Crude Oil falls far more than when it rises.
Despite the current global glut, approaching end to Iranian sanctions, Saudi Arabia’s abandonment of its role as OPEC’s swing producer and a surge in Russian/Iraqi output, drilling and exploration budgets across the global provinces of Black Gold have been slashed.
A Y 1998 style free fall in Crude Oil to 20 is not the horizon I believe. However the ‘lower for longer’ Crude Oil price means slower EPS growth for most UAE companies, wider credit spreads in the corporate/sukuk bond markets and lower world trade volumes. It is no longer accurate to point to an Arabian stock market bubble.
I am mystified why China’s mini devaluation should lead to a 20% fall in Emaar’s share price in the next month after 10 August 2015. Emaar has slashed net debt on its balance sheet and accumulated some of the world’s most attractive trophy retail and hospitality assets. It floated Emaar Malls and Emaar Misr, increased operating margins from 35 to 60% since Y 2008, presold 95% of its delivery schedule near property market peaks and has multiple monetization opportunities in its international businesses. The 4% dividend will only grow. Emaar’s newer high margin, recurrent revenue model makes it undervalued at Dhs 6 or only 12X forward earnings and 1.2X price/book value.
I believe fair value on Emaar could well be nearer Dhs 9 in the next 12 months as high end expat population growth and high relative rental yields will prevent a protracted Bear market in Dubai property. Lower Crude Oil prices are negative for contractors and construction companies, making me unwilling to accumulate Arabtec or Drake and Skull.
Air Arabia has emerged as 1 of the world’s most efficient, high growth, multi-hub budget airlines and is one of the few actual beneficiaries of the Crude Oil price collapse. While the sharp falls in the Russian Rouble and Asian currencies are a revenue hit, 80% of passenger traffic emanates from USD peg countries. As a favorite holding of global fund managers, Air Arabia was a predictable victim of margin call related forced selling in the emerging markets ‘Black Death’ in August and early September. Air Arabia is inexpensive at Dhs 1.40 or 10.4X forward earnings.
By Matein Khalid
Paul Ebeling, Editor
HeffX-LTN
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