Diary of an armchair investor

The smart money is betting on Abu Dhabi’s tourism story, says Richard Dean
Diary of an armchair investor
Richard Dean
By Richard Dean
Thu 19 May 2011 11:38 AM

Sunday May 15: Abu Dhabi National Hotels: a 5-star gem of a stock

Quarterly earnings out today from Abu Dhabi National Hotels. The numbers were so-so but long-term, this is a great little company. It’s not easy to play the tourism game on local stock markets – there just aren’t many listed travel firms out there. ADNH is one of them, and it’s a solid operation with a decent track record and bold plans. Having just spent an hour with CEO Richard Riley, be assured that you can add savvy management to that list.

But first, the bad news. Quarterly profit fell more than 50 percent from the same period last year to AED83m. Ouch! Sounds painful, though when you drill down, it’s not as bad as it seems. Last year, about half the profit came from “investments”, rather than operations. There was no repeat of this windfall, so net profit tumbled. Operating profit was flat, give or take, with revenue nudging higher.

Then, lurking in the footnotes, are so-called “contingencies and commitments”. I won’t bore you with the details, but ADNH says it has a couple of commercial legal disputes in the courts that could run to tens of millions of dirhams. To be fair, provisions have been taken, and the sums are trivial given the size of ADNH, with a market value of AED2.9bn. And of course, it could win. Finally, I don’t like the fact that I had to search with a toothcomb to even FIND the quarterly report. No Investor relations section on the company website. The most recent financial info was – get this – 2008! I eventually found the 2011 first quarter accounts on the Abu Dhabi Stock Exchange website. It shouldn’t be that hard.

But I’m prepared to overlook all of this, for three reasons: track record, Abu Dhabi and management.

ADNH has been around since the 70s. It currently owns six five-star hotels, including Le Meridien Abu Dhabi and a Sofitel in Dubai. It also has an in-house budget hotel chain, Al Diar, which owns and manages 11 properties across the UAE. And there’s more. For the past decade it’s had a catering joint venture with UK firm Compass, a world leader. Throw in a tour operator, a taxi firm and ADNH generates a lot of cash.

Then there’s Abu Dhabi, one of the richest cities on earth. Last year, just 1.8 million tourists visited the place, leaving it very much in the shadow of big, brash Dubai down the road. Not for long. Abu Dhabi’s strategic plan for 2030 makes tourism a top priority, targeting 7.8 million visitors. Will they come? I think they might. The booming, oil-fuelled economy will lure business travellers. Louvre and Guggenheim museums will lure holidaymakers. Etihad Airways will deliver them on a plate.

But track record and a rising tide are nothing without strong managers to exploit the situation. Enter Richard Riley. The American joined as CEO three years ago, after three decades working for a ‘Who’s Who’ of global hotel operators. I interviewed him recently on the radio. It was one of those rare moments when seemingly everyone who heard it agreed: “Damn, he was good.” Charming without being smarmy, smart without being arrogant. (To be fair, he’s not alone – Gerald Lawless at Jumeirah and Marc Dardenne at Emaar Hotels prompted similar reactions).

Riley gets the need for growth, and for change. The company will open two new hotels in Abu Dhabi this year – a Ritz-Carlton and a Park Hyatt. This matters, because it marks a move upmarket, with higher revenues and higher margins. Some of its existing five-star hotels in the capital are, to be blunt, looking a bit shabby. And shabby hotels generate shabby returns – a quick Expedia search offered me a room in ADNH’s ageing Le Meridien Abu Dhabi for $103 this coming Sunday. That’s about half the going rate for the swanky new Fairmont or Shangri-La owned by competitors.

Riley knows this is a problem – and is fixing it. “We’re in a position where if we don’t redevelop them we’ll get left behind… We are looking at the white space in Abu Dhabi alongside everything else that’s being built.”

What do the analysts say? Not many of them cover ADNH (maybe they’re still searching for those accounts). TAIB Securities in Bahrain does, with an ‘overweight’ rating on the stock. Based on last year’s profit of AED305m, the price/earnings ratio is about 10. But if you look at TAIB’s bullish forecast for 2013 earnings, the P/E ratio falls below 7.

I’m even more gung-ho. If I’m right about Abu Dhabi luring millions more tourists, that’s a compound annual growth rate of 7.6% in visitors over the next couple of decades. With ADNH in the sweet spot to benefit from this growth, it’s a compelling story.

Armchair Insight: Put ADNH in your retirement fund at AED2.90 and you’ll have the cash to stay at posh hotels well into your dotage.

Monday May 16: Another boutique Islamic bank seeks help

This is becoming a habit. Today Dubai Bank became the third small Islamic lender from the emirate to be bailed out by the government. The previous victims – mortgage lenders Amlak and Tamweel – ceased operations back in 2008 when the property market crashed. Dubai Bank held out for longer, thanks partly to its broader remit, but losses mounted and last year it was in the red to the tune of AED291 million.

What lessons can we learn? The obvious one is that when it comes to banking, size does matter. Bigger institutions have economies of scale. More important, other banks take them more seriously, as do ratings agencies, investors and depositors – and that makes it easier and cheaper for big banks to raise money.

I can see why the Dubai government was keen to encourage multiple bank start-ups back in the early 200s. Competition is good. But some industries  - airline manufacturers, nuclear power producers - have natural economies of scale. Perhaps we can add Islamic banks to that list? Or perhaps Noor Islamic Bank – a small Shariah-compliant lender launched in Dubai in 2007 – will prove that the model can work after all.

Armchair Insight: I’ve put in a call to Hussain Al Qemzi, CEO of Noor Islamic Bank, asking for his views. Will keep you posted.

Wednesday May 18: Ahmadinejad heads to OPEC

Next month’s OPEC meeting could, for a change, be worth watching. Today we got confirmation that Iran’s President Mahmoud Ahmadinejad will attend the gathering in Vienna on June 8. That’s because he added the job of oil minister to his portfolio this week – and officials in Tehran confirm that if he’s still in the job in three weeks time, he’ll be on the plane to Austria.

Why do we care? Partly because he’ll add some controversy to the meeting – in recent years they’ve become rather dull bureaucratic affairs focusing on technical issues of oil quotas. Partly because even without his involvement, OPEC has some real issues to address. How to deal with Libya, a significant OPEC member with a power vacuum. How to maintain a healthy oil price close to $100 when, by most estimates, there’s up to 3 million barrels per day of excess crude being supplied to global markets.

Armchair Insight: It’s been fully six months since the last OPEC pow-wow. With lots on the agenda and a colourful cast list, this one should be required viewing.

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