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Tue 21 Jun 2011 12:12 PM

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Five UAE stock tips for MSCI newbies

Emerging market status could tempt global investors to buy UAE and Qatar stocks, says Richard Dean

Five UAE stock tips for MSCI newbies
Richard Dean

This is a huge week for the UAE and Qatar. Stock market boffins at MSCI will decide whether to promote both Gulf states to coveted “emerging market” status. If they do, fund managers from Frankfurt to Philadelphia will have no choice but to buy Emirati and Qatari stocks. To help foreign investors new to the region, here are my top five UAE stock picks.

Air Arabia

Share price: AED0.69

Price/Earnings ratio: 10.4

International investors would love to buy Emirates Airline, but it’s private so they can’t. Air Arabia offers a tempting alternative. This budget carrier is based just 30km away in neighbouring Sharjah. Chief executive Adel Ali has run a smooth operation since launch in 2003, making consistent profits and paying a whopping dividend yield last year of (take a deep breath) twelve percent.

The killer fact is this: today, just six percent of regional air travel is on budget carriers. In Europe, that figure is nearer 40 percent. The Middle East’s low-cost airline industry has massive potential, and Air Arabia is the undisputed leader, with hubs in the UAE, Egypt and Morocco.

And here’s the best news: the stock is trading close to an all-time low, driven down by high oil prices and the Arab uprising. Analysts at Global Investment House forecast revenue will climb 70 percent by 2014 to AED3.4bn, with net profit not far behind.

Drake & Scull

Share price: AED0.99

P/E ratio: 13.3

Drake & Scull does the ugly work on regional building sites that nobody else can or will. It’s a specialist contracting company based in Dubai that’s weathered the recession with a mix of financial strength and savvy management.

Chief executive Khaldoun Tabari closed an IPO back in summer 2008, raising about AED1bn in the last big Dubai flotation before the crash. He’s used that money wisely, buying rivals in Saudi Arabia, Kuwait and Qatar to gain a foothold in oil-rich countries. He’s also bought expertise, notably German sewage treatment company Passavant-Roediger.

As a result, Drake & Scull has a bumper order book worth AED8bn. Analysts at SHUAA Capital forecast revenue and profit will more than double by 2013, with a price target on the stock of AED1.29.

Emaar Properties

Share price: AED3.10

P/E ratio: 7.7

Here’s a travel tip for foreign investors on their fact-finding trips to Dubai, if and when MSCI upgrades the UAE.

Stay at The Address hotel next to Burj Khalifa (the world’s tallest tower), go shopping at Dubai Mall (the world’s biggest mall), hang out at Dubai Marina, followed by coffee in one of residential areas across the highway such as The Greens, The Meadows or Emirates Hills. The point is that they’re all thriving, upscale communities. And they’re all owned, built or managed by real estate developer Emaar — living proof of the company’s track record in delivering world-class projects. Emaar has done it in Dubai, and now it’s taking the model across the region and into India. Still not convinced? Deutsche Bank has a “buy” rating on Emaar, citing  “superior asset quality, strong recurring income, reasonable leverage and cheap valuation.” Emaar’s net asset value is AED8.9 per share — triple the stock price — according to the firm’s own numbers. Debt is tiny, at just ten percent of assets.

National Bank of Abu Dhabi

Share price: AED11.4

P/E ratio: 8.9

Michael Tomalin has built a brilliant bank since joining as CEO from Barclays back in 1999. NBAD consistently delivers strong returns — Tomalin targets and achieves return on equity above 20 percent. Net profit grew sevenfold over the past decade.

Crucially, he does this with low risk: NBAD swerved the region’s two big financial blowouts of recent years (Dubai World and Saad/Algosaibi), unlike some of its more aggressive rivals. With strong ties to the mega-rich Abu Dhabi government, Tomalin still has room for more growth.

Ras Al Khaimah Ceramics

Share price: AED1.91

P/E ratio: 5.3

This is a hidden gem. One of the world’s leading makers of tiles and toilets is trading at just five times earnings. Revenue may have fallen last year, as its domestic contracting business dried up, but RAK Ceramics exports to more than 150 countries.

For an added kicker, the company owns a majority stake in its Bangladeshi unit, traded on the Dhaka Stock Exchange. That stake alone is worth AED900m, more than half the parent company’s market capitalisation.

Analysts at Global Investment House are predicting little or no growth in coming years, but who cares? Their price target is AED2.72 — an upside of about 50 percent.

Richard Dean is a journalist, author and broadcaster living and working in Dubai.

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@rupertbu 8 years ago

Yet more irresponsible hyping-up of the market, this time by a radio presenter, a task requiring different skills to those of an analyst.

Far better if those responsible for UAE markets would bite the bullet and merge all three bourses, without worrying about the distraction of MSCIEM acceptance, which would be implemented in 2012.