Market analysis of UAE prospects

Market cap: Dh21.73bn P/E ratio: 5.69 2nd-quarter earnings: Down 41 per cent to 917m As the region's largest bank by assets, Emirates NBD serves as a reliable bellwether for local banks in general. Unfortunately, the winds haven't been blowing in the bank's favour these past few months. Emirates NBD reported profits of Dh917m in the second quarter, down by 41 per cent from a year earlier. It also set aside Dh1.1bn in the second quarter to deal with a rise in defaults on loans and exposures to two Saudi conglomerates that are in the midst of a massive debt restructuring. However, Emirates NBD has been one of the UAE's most aggressive banks in writing off soured loans, putting it on track for a potential recovery in the second half of the year as it grows its presence in Abu Dhabi and expands its private banking arm.

Market cap: Dh16.2bn P/E ratio: 9.63 2nd-quarter earnings: Down 38 per cent to 435m Mashreq is the UAE's fifth-largest lender by assets, but its second-largest by market capitalisation. That reflects the high level of confidence investors place in its long-term prospects. At the same time, economic conditions have put a major dent in the bank's profits, which were down by more than 35 per cent for the second quarter of 2009 compared to last year. Like Emirates NBD, Mashreq has also been struggling through a steep rise in loan defaults, which led to Dh319m in loan provisions for the first half of 2009. Meanwhile, Standard and Poor's and other credit ratings agencies this year downgraded Mashreq's ratings or put them on review for possible downgrades, much as they have for the other big Dubai banks. The bank is also in the middle of a court battle with Hamad Ahmad Algosaibi and Brothers, a struggling Saudi conglomerate, over a series of foreign currency-swap deals in which Mashreq alleges the Algosaibi group failed to meet its obligations. On the bright side, Mashreq's loan-to-deposit ratio, a key measure of balance-sheet stability, has improved over the past year to 86.31 per cent as loan growth slowed.

Market cap: Dh9bn P/E ratio: 9.40 2nd-quarter earnings: Down 53 per cent to Dh294.86m With the possible exception of the property industry, it's pretty safe to say the banking sector has taken the biggest tumble of any in the Gulf during the global financial crisis. And ADCB has been no exception. With a year-over-year decline in profits of 35 per cent in the first quarter of this year, followed by a 51 per cent hit in the second quarter, ADCB has had a rough ride of late - rougher, arguably, than any of the country's largest lenders. It also has one of the highest loan-to-deposit ratios in the land, at 138.7 per cent. At the same time, the bank's revenues have risen substantially in recent quarters. So have deposits, which grew by 12.7 per cent during the second quarter alone. Those positives haven't helped the bank's bottom line, however, because of provisioning for bad loans, which totalled Dh890m in the first half of 2009. The question now is whether ADCB has worked out all its loan-default problems.

@Body-SubheadPF:Dana Gas Market cap: 6.9bn P/E ratio: 68.82 1st-quarter earnings: Negative 32m The Sharjah-based company derives the bulk of its revenue from gas production in Egypt. Operationally, this business has been doing well this year, as a string of discoveries in the Nile Delta has allowed Dana to raise production. However, sharply lower international gas prices, combined with continuing Egyptian government caps on domestic prices, resulted in a first-quarter loss. Dana's two other main ventures are a long-stalled project to distribute Iranian gas in the UAE and a major gas production and pipeline development in Iraqi Kurdistan. Its partner in both enterprises is it biggest shareholder, Crescent Petroleum, a privately held Sharjah oil company, and both projects are fraught with political uncertainty. Crescent has recently said it plans to seek international arbitration over its gas supply contract with the National Iranian Oil Company, as the gas imports were supposed to begin in 2006. The deliveries have been stalled over the Iranian company's failure to complete gas production and export facilities and a dispute over the price of gas. In Kurdistan, gas is produced for the regional market, but profits from the project depend on extracting and marketing associated gas liquids and/or exporting gas.

Market cap: 10bn P/E ratio: 9.31 1st-quarter earnings: Dh40m, down 90 percent When Taqa was launched three years ago, it was a staid utilities company with holdings comprised of majority stakes in Abu Dhabi's biggest power and desalination plants. It is now on a mission to become a vertically integrated player in the global oil and gas production, gas transportation and storage, and power generation businesses. Its roughly US$25 billion (Dh92bn) of investments to date include a portfolio of mature oil- and gas-producing assets, mainly in western Canada and the North Sea, gas transportation infrastructure in the North Sea and onshore in Holland, and stakes in power generation projects on four continents. Taqa is also a partner with the Russian gas giant Gazprom in a major Dutch gas-storage project, and is seeking to widen its portfolio of thermal electricity assets into the renewable energy sector, especially wind power.

Market cap: Dh5.810bn P/E ratio: 20.59 2nd-half 08: US$217.54, up 45 per cent DP World is the fourth largest ports operator in the world, with operations in 49 terminals and 12 new developments across 31 countries. The Dubai-based firm rode a five year boom in international trade which turned to bust in 2008, when global shipping fell dramatically. DP World fared better than most due to its focus in emerging markets including Africa and the Middle East, particularly its flagship port in Jebel Ali in Dubai. Across its network, it handled 10 per cent fewer box moves in the first half of 2009 than the year before, compared with a 15 per cent drop in shipments globally. The company has nearly 30,000 employees worldwide and plans to invest in emerging markets once global trade resumes. Analysts say the economic downturn is presenting DP World with real challenges, mainly because port traffic has slowed considerably around the world, including in Dubai. In addition, while its share valuation may seem attractive compared with historical averages, it is not as competitive compared with some of its global peers.

Market cap: Dh4.666.7bn P/E ratio: 9.26 2nd-quarter earnings: Up 10 per cent to Dh89.68m Air Arabia was the first budget airline in the Middle East and North Africa and is the largest in the region. Begun in October 2003, Air Arabia is based at Sharjah International Airport but is in the process of expanding into new hubs to franchise its successful business plan to other parts of the region, where budget carriers are under-represented. Air Arabia's fleet consists of 16 Airbus A320 aircraft, and it currently flies to 46 destinations in the Middle East, North Africa, Indian subcontinent, Europe and CIS regions, with plans to add destinations on the drawing board. To fuel its growth, the company signed an agreement with Airbus in November 2007 to purchase up to 49 A320 aircraft. In early 2009, it opened a second hub in Casablanca, Morocco. Air Arabia's Sharjah operations face competition from budget start-up flydubai, but its expansion to other parts of the Middle East should ensure access into emerging markets.

@Body-SubheadPF:Aldar Properties Market cap: Dh10.827m P/E ratio: 9.35 2nd-quarter earnings: Down 79 per cent to Dh253.89m Aldar Properties, the largest property developer in Abu Dhabi, is poised to succeed in the year ahead because of a sharp need for housing in the capital and new contracts coming from the Government. The developer is building some of Abu Dhabi's highest-profile projects, including the Formula 1 racetrack and hotels on Yas Island, Raha Beach, Central Market and Nareel Island. The property slowdown has taken its toll on Aldar, but executives have been regearing the business plan and changing some of its project designs to cater to middle-income buyers. The announcement earlier this year that the company would build thousands of villas for the Government's public housing programme also bodes well for Aldar. The question, analysts say, is how will Aldar remain profitable with declines in prices and a lower number of transactions.

Market cap: Dh7.550bn P/E ratio: 7.49 2nd-quarter earnings: Down 78 per cent to Dh148.29m Sorouh Real Estate, the second largest property developer in Abu Dhabi, has been taking a proactive approach to mitigate the impacts of the property sector slowdown. Executives have cut prices at some developments and signed agreements with UAE banks to make more mortgages available to buyers. The company also indicated recently that it would hold more land to develop, rather than sell off as plots, and increase its rental portfolio to boost its recurring income in the quarters ahead. Analysts have said the company has weathered the worst part of the slowdown and would gradually start recovering profitability as the market bottoms out and the housing shortage in Abu Dhabi grows.

Market cap: Dh4.391bn P/E ratio: 7.24 2nd-quarter earnings: Down 69 per cent to Dh76.34m A year ago, Deyaar Development looked like it was in trouble. Its executive ranks had been upended by a corruption investigation and the property slowdown had wiped out most of the scant confidence left in the company. But under new leadership, Deyaar managed to turn itself around so much that Nomura Securities highlighted the company as the "market leader" in the property sector because of its efforts to reduce the number of buyers defaulting on payments. Markus Giebel, the chief executive, has said Deyaar was actually looking to expand into neighbouring countries while other developers are pulling out.

Market cap: Dh19.30bn P/E ratio: 5.58 2nd-quarter earnings: Negative 1,285bn Emaar Properties has mostly gone silent since property prices and transactions started falling last autumn, but the company has been quietly coming up with new directions for its business in the year ahead. It remains the largest property developer in the Middle East, but it can no longer rely on blockbuster projects like Burj Dubai to sell out overnight. Instead, the company is focusing on growing its hospitality division and spreading its hotel brand, The Address, around the region. In June, it announced it would play some role in the building of the Kingdom Tower in Jeddah - which at more than 1km in length would be the tallest building in the world. A big moment on the horizon for the company is the opening of the Burj Dubai later this year.

Market cap: 1.140.58bn P/E ratio: 19.58 1st-quarter earnings: Down 18 per cent to 19.34m Tabreed, the largest district cooling provider in the region, is expected to excel in the years ahead despite the trouble it is having in raising funds. Last December, Standard & Poor's downgraded Tabreed's credit rating to the "low BB" category as a result of "weaker than expected financial performance partly resulting from higher than anticipated capital returns". But the company has responded by selling off some of its assets to infrastructure funds to raise cash. More importantly, Mubadala Development, the investment arm of the Abu Dhabi Government, has been taking a larger role at the company and tapping its connections at international banks to increase liquidity. To some extent, the slowdown in the property sector will also slow growth at Tabreed because a major input for new plants is new property developments.

Market Cap: Dh73.31bn P/E ratio: 9.43 1st-quarter earnings: 2.41bn, up 4 per cent Etisalat is seen by most analysts as a solid, defensive stock, unlikely to lose significant value and with room for growth. Its current price levels reflect the value of its UAE operations, where it dominates the mobile market and has a monopoly on broadband internet in much of the country. While its strong domestic base forms its foundations, Etisalat's growth is likely to come from operations in markets like India, Nigeria, Egypt and Indonesia. Demand for telecommunications services in these markets has shown no sign of waning during the recent economic crisis. Foreign investors are prohibited from owning shares in Etisalat, and long-rumoured changes to the laws on this front seem unlikely to materialise in the short term.

Market Cap: 10.920m P/E ratio: 29.35 1st quarter earnings: Up 231 per cent to Dh57.65m The du network has quickly became a serious contender in the mobile market, and retains a lucrative geographic monopoly over internet and pay television in some of Dubai's richest areas. The company remains "a growth story" as its chief executive, Osman Sultan, likes to say, and now dominates the market for new mobile customers, who are far more likely to choose the company ahead of its more established competitor. But du's mandate appears limited to the UAE, with no signs yet that the company is considering international expansion. This means its growth prospects are limited, but remain considerable, particularly when the national broadband internet market is opened to competition in the coming year.

Market cap: Dh3.336bn P/E ratio: 4.75 2nd-quarter earnings: Down 33 per cent to Dh183.91m Formed in 1976, Arabtec Construction, is now the largest construction company in the UAE. Its winning streak began in 2004, when it was awarded a Dh3.2bn contract to construct Burj Dubai, currently the world's tallest building, in partnership with Samsung Construction and Engineering and Belhasa Six Construct. The company has been inundated with deals since the Burj contract, resulting in an order book worth Dh50bn at the end of 2008. But the downturn brought challenging times, with cancelled contracts reducing the company's order book to about Dh28.4bn by the middle of this year. Arabtec was quick to adapt by seeking work in stronger GCC construction markets. In March, it set up Arabtec Saudi Arabia, through which it hopes to generate Dh1.47bn in profit from projects this year. While Arabtec has been hit with delayed payments from property developers to the tune of Dh3bn, analysts say it is well placed to weather the slowdown and emerge stronger.

Market cap: Dh1.026bn P/E ratio: 9.31 1st-half earnings: Up 52 per cent to Dh29.43m Agthia, the Abu Dhabi-based food and beverage company that produces Al Ain water and Grand Mills flour and feed, among many other products, has consistently shown robust sales over the past year, and has doubled its profits during the first half of 2008, a tough economic time for most retailers. While retail sales of goods such as jewellery and other luxury items have plummeted by as much as 40 per cent compared with last year, food sales have remained resilient. And in turn, Agthia is expanding. It has launched a new frozen vegetable line called Al Ain Vegetables, and in its first international expansion opened a tomato paste plant in Egypt in June. Analysts have taken notice as well, and have recommended the stock as a "strong buy".

Market cap: Dh376.05m P/E ratio: 5.65 Full-year 2008: 194.56m, up 21 percent Holding a contract to fit out the world's tallest tower, the Burj Dubai, hasn't given Depa's stock the boost it deserves, according to the Dubai-based interior contracting firm. It cancelled more than 12 million shares last week (August 2) that it had repurchased after saying the stock was significantly undervalued. The cancellation means Depa's free float has fallen by 2.6 per cent, from just over 454 million shares to just over 442 million shares.

Indeed, its shares have taken somewhat of a battering as the financial crisis has submerged the Gulf, tumbling 46.78 per cent in the past 12 months on Nasdaq Dubai. DEPA officials say it is on target to achieve around 30 per cent revenue and profit growth for 2009 as the firm overcomes a slump in Dubai's construction market by building on its presence in Abu Dhabi, Saudi Arabia and Asia. The firm has a backlog of Dh3.2 billion in projects from the first quarter, according to an estimate in a research note published by Morgan Stanley in June.