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Sunday, 17 January 2010

National Bank of Oman net profit tumbles 42.5pc

National Bank of Oman's full-year net profit fell 42.5 per cent to RO26.11 million ($67.82 million) from RO45.38 million in 2008, according to a filing on the Muscat stock exchange on Sunday.

National Bank of Oman, the sultanate's third-largest lender by market value, posted a six-per cent drop in customers' deposits and a 2.5-per cent decline in loans for the full year.

The company is the third Omani bank to disclose full-year results. NBO's results are still subject to approval from the bank's board of directors and didn't provide a quarterly breakdown.-Reuters

Dubai Has Longest Losing Streak Since March on Debt Concern

Dubai’s index dropped for a sixth day, the longest losing streak since March, on concern that Dubai World may have trouble restructuring its debt and in anticipation of fourth-quarter earnings.

Emaar Properties PJSC, the United Arab Emirates’ biggest developer, and Dubai Financial Market, the only Gulf Arab stock market to sell shares to the public, slid to their lowest levels in more than a month. Al-Rajhi Bank, Saudi Arabia’s largest lender, dropped for the first time in three days after fourth- quarter earnings fell short of analysts’ expectations. The DFM General Index retreated 1.3 percent to 1,685.30 at 12:31 p.m. in Dubai. Abu Dhabi’s gauge lost 0.8 percent and Qatar DSM 20 Index declined 2.1 percent to 6,707.75, the lowest level since Dec. 2.

“The U.A.E. should remain rangebound until fourth-quarter earnings at which point we should begin to differentiate between stocks,” said Ali Khan, head of cash-equity trading at Dubai- based Arqaam Capital Ltd. “Possible headline risk from Dubai World restructuring continues to weigh on the market.”

"Whom the Gods would destroy, they first make mad with power." -Euripides. Dubai considers something different, they're going to sell their power.

It came out yesterday that DEWA the Dubai Electricity and Water Authority was considering a potential privatization. This is very interesting for a number of reasons. The stated purpose of this is to increase service quality and the overall competitiveness of the industry. As with so many things in Dubai these days there is probably another reason behind the one given. At this point it is not a secret that the Dubai Government is facing a severe cash crunch. So far what talk there has been of asset sales has been at the subsidiaries Dubai World and ICD. DEWA is a public utility, yes it has debt but it is not an investment vehicle of the Dubai government but a basic municipal service. Perhaps if a successful privatization can be done at DEWA maybe something can also be done with the Dubai Metro to help raise funds to pay the Japanese contractors who built it. If nothing else this is a sign that the powers that be in Dubai though still capable of flights of fancy are coming to terms with the real issues at stake.

The thing that strikes me about this is that what the idea of privatizing DEWA really is, is the equitization of the debts of Dubai. That is to say Dubai is willing to give up some ownership in order to pay down debt. It is becoming increasingly clear that the debt burden of Dubai is so great that this is going to happen regardless of what Dubai does. There is just too much debt coming due relative to the ready cash that the Emirate has. One way or another Dubai is going to lose ownership in many of its assets. This can happen in one of three ways.

1.) Default and repossession— this is the messiest for all involved. Not only is the insolvency code in the UAE not up to the job, neither are the judges who would adjudicate them. There are also many assets in many jurisdictions and in the end the entire process would humiliate everyone involved and enrich only the lawyers. So far both Dubai and Abu Dhabi have bent over backwards to prevent this outcome.
2.) Stealth Equitization to Abu Dhabi—So far this has been the method of choice. The bonds in the Dubai Financial Support Fund carry a low rate of interest and do not contain any covenants or warrants or anything that even resembles equity or a claim on Dubai. Though that may be how things are on paper I think it is a dead certainty that the money does come with strings attached. Dubai may not fully recognize this as yet but I think the renaming of the Burj Dubai/Khalifa and the recent take-under of the largest private construction company in Dubai are signs that there is a new sheriff in town. This is a transfer of equity in fact if not in name. The difficulty for Sheikh Mohammed in this kind of opaque equitization is that he does not know where it ends. Today they want Arabtec, tomorrow Emaar? Emirates Airlines? And for how big a discount? The trouble with unwritten contracts is that they mean whatever the more powerful guy says they do.
3.) Formal Public Equitization—in theory Dubai could manage its own equitization through a combination of trade sales like the one envisioned in a DEWA privatization or through the issuance of public equity. The only time Dubai has done this was back in 2007 when it sold 20% of Dubai Ports World in an IPO on the DIFX.

This last idea whereby Dubai would sell equity in its various entities to outside investors and then take the proceeds and pay down debt is probably the best way forward for Dubai. It would allow Dubai to avoid default and it would also allow Dubai to emerge from the crisis without being completely beholden to Abu Dhabi.

Any attempt to formally equitize the debts of Dubai is going to run into three hurdles: psychology, reality, and the nature of the capital markets in the Emirates. Arabs in general and Dubai in particular are jealous of equity, they do not like to share it. This is generally understandable, who wants to surrender control of something, even partially, if there is any alternative. This recent announcement about a potential privatization of a basic service in Dubai I think is a realization by the government of Dubai that their debt is going be equitized no matter what and it will probably be better for them if they do it rather than have it done to them by their creditors or by Abu Dhabi.

The next hurdle is reality. It will only be possible for Dubai to equitize its debt if the markets believe that the discounted future cash flows of all the businesses that Dubai owns are greater than the value of the debt outstanding. It would seem that within quite a few of the Dubai entities this is very much in doubt, particularly in the Dubai real estate markets. In others such as DPW or Emirates Airlines the markets seem to think that there are pretty good prospects. So, ideally what Dubai would do is issue partial equity in the assets which are viewed favourably and use those funds to rescue those which are not. Given that this is going to be a close run thing it is very important for Dubai to get the best possible prices for the assets it has. To get the best possible price you need to have the widest possible auction and the ideal venue for that would be a public offer of shares in the larger Dubai entities.

This is where Dubai will face it’s greatest hurdle: the capital markets of the UAE simply do not function. The way in which they malfunction will be the topic of my next blog post.

Oil price and interest rates main headwinds for Saudi economy

The uncertain outlook for oil prices and a probable rise in interest rates are the main headwinds facing the Saudi economy in 2010.

Last year there was almost no growth in the Saudi economy, according to a new report from Banque Saudi Fransi. The slowdown resulted in a surge in unemployment from 6.2 to 15.2 per cent.

Bad debts from the collapse of the Algosaibi group helped to depress bank lending during the year. Growth in bank lending crashed from an unsustainable 27 per cent in 2008 to just 2.1 per cent in 2009, said Banque Saudi Fransi. Similar rates of bank lending in China in 2009 have led to question marks about the sustainability of economic expansion there.

Let’s Talk GCC 2010 Outlook

After ending the rollercoaster ride that we saw in 2009, we remain cautious as we enter 2010. It is expected that the second half of the year will be a better performer than the first. The reason for that is due to the negative short-term outlook for the financial sector (higher costs of funding along with low margins). The financial sector is significant to GCC stock markets as it makes up more than 50% of the total market cap of these markets. There are reasons for optimism as the expected decrease in credit cost and increase in balance sheet growth (especially in Qatar and Saudi Arabia), it is expected that the second half of the year will improve. Due to Dubai’s debt issues, it will take investors some time to regain confidence in the market and deploy more investments.
Higher Cost of Borrowing = Lower Earnings
The aftermath of Dubai World’s restructuring added a couple of bps to the not so cheap cost of debt, and quasi government bonds are now priced equal to the corporate bonds. According the Credit Suisse analysis, each 100bps increase in the cost of corporate debt reduces 2010E earnings by 5% in the UAE and 7.2% in the KSA. This indicates how even the strongest economy in the GCC is vulnerable to the cost of borrowing.
Highly Levered
In mid 2007, GCC equities were the least levered in the world with net debt to equity of only 9%. However, currently they are the most levered equities with net debt to equity of 73%. Having said that, this adds more risk of capital infusion and dilution of current shareholders.
Interest Rates
Any increase in global interest rates will be positive, especially for the Saudi banking sector. A better financial sector translates into a surge in stock market returns. Credit Suisse’s Global Strategy team expects global rate hikes in the second half of the year.
Earnings Looks Good
On the earnings side, Qatar has not only the highest ROE in the GCC but also in the world. Qatar’s expected 2010 ROE is 17.7%. Furthermore, Qatar and Kuwait have the highest dividend yields in the GCC standing at 4.5% and 4.7% respectively.
Valuations at a Discount
The GCC is trading at a discount against its peers. The GCC is currently trading at a 2010E Price/Earnings multiple of 10x (GCC ex Saudi is 8.4x) which constitutes a 20% discount to Emerging Markets. In terms of Price/Book, the GCC is trading at a multiple of 1.5x which translates into a 20% discount to Emerging Markets. On the other hand, the high leverage (73% Debt-to-Equity) results in a 2010E EV/EBITDA of 9.2x which stands at a 40% premium to Emerging Markets.
In my next 4 articles I will write about each country’s outlook separately (Kuwait – UAE – Saudi – Qatar)

NOTE: all numbers and caption are taken from Credit Suisse: MENA Equity Strategy GCC Equities 2010.

Dubai Utility DEWA Defers Bond Issue to Second Quarter, CEO Says

Dubai Electricity & Water Authority deferred plans for a bond offer to the second quarter from the first, the state-run utility’s Chief Executive Officer Saeed Mohammed al-Tayer told reporters in Dubai today.

Dubai Electricity expects its generating capacity to rise to 10,000 megawatts this year from the current 7,000 megawatts, he said.END

Kuwait's CBK says all its board members resign

Commercial Bank of Kuwait (CBKK.KW) said on Sunday that all its board members resigned last week but it did not give a reason for their departure.


The board resigned on Jan. 12, and elections for a new board will start on Jan. 17 and run to Jan. 31, CBK said in a statement on the Kuwaiti bourse website.END

When ‘thanks, but no thanks’ can be good for business (Comment)

Say the words “corporate governance” and people immediately think of the business world. In fact, many of the problems that ail the UAE have their roots in a lack of good business practice. That fancy-sounding phrase simply means a set of rules that are designed to avoid potential conflicts of interest.

There is plenty to be done to meet international standards. For instance, it is still possible, legal and acceptable for ministers serve on the boards of businesses and banks. In some even more odd cases, some individuals sit on the boards of two competing corporations.

The federal and local governments may own shares in both these companies and see no issue with having the same official representing their interest in both, but that may not be the case with regular investors. This negatively affects the reputation of the UAE. In Oman, for instance, ministers are not permitted to serve on public company boards, let alone chair two competing company boards, and individuals cannot serve on the boards of more than five listed companies.

Where the money went (Damas Jewellery)

The US$165 million (Dh606.04m) in “unauthorised transactions” undertaken at Damas International included about 50 investments in a wide range of property projects, hospitals and regional companies. Nearly 70 per cent of the investments were in the property sector, with about 90 per cent of those transactions taking place in the UAE.

These included:

Land in Meydan City, an expansive horse racing-themed project on the outskirts of Dubai that includes a 1.6km racecourse, as well as planned office and apartment buildings.

Investment in the development of the Angsana Hotel & Suites, a pair of 49-storey towers on Sheikh Zayed Road. Damas Hotels announced last year that it had cancelled its contract with Angsana to manage the hotel and would convert the buildings into residential apartments.

Shares of Villa Moda, a Kuwait-based luxury retail chain that was founded by Sheikh Majed Al Sabah. The company’s stores are in Bahrain, Dubai, Kuwait, Qatar and Syria, and feature high-end clothing and accessories from the likes of Gucci, Bottega Veneta and Prada.

A stake in the Bupa Cromwell Hospital, a private hospital in the South Kensington area of London, and a shopping mall in Turkey.

Dynastic struggle for survival

The Abdullah brothers must have felt like three prodigal sons in July 2008 as Damas, the jewellery retailer founded in 1907 by their grandfather as a tiny shop in Dubai, made more than US$270 million (Dh991.7m) in an initial public offering (IPO) of a little less than one third of the company.

It was a defining event for Damas, the brothers and their dynasty.

For the company, it was the latest stage in a multi-generational arc that transformed their grandfather Mohammed Tawfique Abdullah’s storefront into a regional giant with nearly 450 stores in 18 countries.

Damas set to sign formal Dh4bn debt standstill

Damas, the region’s largest jewellery company, is close to signing a debt standstill on up to Dh4 billion (US$1.08bn) it owes, and asset liquidation has begun, informed sources say.

An informal standstill on principal payments on its loans involving more than 20 banks has been in place since November.

Damas is working towards an official agreement, under which it will defer its principal loan payments until May 31 but still accrue interest, the source said.

One good thing about this year: it is not last year

A prominent local economist last week accused me of being – brace yourself – upbeat.

Optimism, regular readers will recall, was a dish served seldom during the 21-months this column appeared on Thursdays. Blame it on the worst global recession since the Great Depression. And given the precarious outlook that still dogs the world’s largest economies, it seems likely that optimism will remain a rare treat even now that we are meeting here at the start of the week.

The economist was referring not to a column, but rather to an article I wrote last week on forecasts that the UAE’s economy would grow just 2.5 per cent this year.

A tip for DFM’s Arabtec sleuths: follow the volume

Share-trading analysis is a complex thing. The London Stock Exchange used to publish a monthly record of share dealings called the Official Gazette (though I’m sure it’s all available online now) over which I spent many hours of tedious labour trying to identify suspect share deals in quoted companies.

The OG was like a huge telephone directory, but without the names. Just column after column of numbers, giving dates, times, amounts and prices but no clue as to the identity of traders. In order to protect market confidentiality, trader IDs were all coded, and only the LSE had the code. This financial Enigma machine would have enabled me to crack some of the biggest insider-dealing stories of the 1980s and 1990s, but I never managed to obtain it.

But all the hours spent sifting OG statistics taught me one valuable thing: follow the volume.

Kuwait needs security, not money from Iraq: FM

Kuwait is not asking its former occupier Iraq to repay a multi-billion-dollar debt but only for assurances on security and good neighbourly ties, the Kuwaiti foreign minister has said.

"What we need from Iraq is security and assurances. We don't want money which is the last thing on our mind," Sheikh Mohammad al-Sabah told Al-Qabas newspaper in an interview due to appear on Sunday.

"Let me be very clear. We have not asked Iraq to repay the debt," said Sheikh Mohammad, according to an advance copy of the interview received by AFP.

Saudi Arabia’s Tadawul Rises 1%, Paced by Riyad Bank, Al-Rajhi

Saudi Arabian stocks rose, snapping four days of losses, after Riyad Bank, the kingdom’s third- biggest by market value, reported profit that beat estimates.

The Tadawul All Share Index rose 1 percent to 6,326.19 today, the highest since Nov. 25, as banking stocks climbed. The gain brings the benchmark’s gain this year to 3.3 percent after its 27.5 percent rise in 2009. Saudi Arabia is the only Arab market monitored by Bloomberg that is open on Saturdays. The market shuts on Thursday and Friday for the weekend.

Riyad Bank said after the close of trading on Wednesday Jan. 13 that net income advanced 15 percent to 3.03 billion riyals ($808 million) in 2009, beating the 2.81 billion-riyal median estimate 10 analysts surveyed by Bloomberg. The stock jumped 6.9 percent to 27.8 riyals today.