Financials : Specialized Finance
26 November 2013 Initiation of Coverage
SELL Dubai Financial Market Primary ticker: DFM UH Hope alone 2 Currency: AED Dubai Financial Market (DFM UH) is one of the five main stock Stock Data exchanges in MENA, and the only listed stock exchange. We are Last price 2.19 initiating coverage of DFM with a Sell recommendation as our 12-month Last price date 24 Nov 2013 Target price 1.50 Target Price of AED 1.5 implies 32% downside. This is a result of our Target price established 26 Nov 2013 view on DFM’s valuation and the risks inherent in its ownership Upside/(downside), % -32% structure. 52 week price range 0.98 - 2.34 Market cap, USD / AED mn 4,767 / 17,511 Valuations price in all the good news. DFM’s current valuations price in EV, USD / AED mn 4,490 / 16,491 annual turnover surpassing 2005 peaks of AED 400bn, aided by the rising # shares outstanding, mn 7,996 market capitalisation of companies, increasing turnover velocity and a Free float 80% potential IPO pipeline of USD 17bn within the next 4-5 years. While the Benchmark Index (MXEF) 1,004.24 realisation of all these is probable, this is not the best entry point, in our view.
Ignoring the corporate governance risk. The Borse Dubai ownership and Share price performance, 12-mo the precedent transactions reflect a degree of risk for minority investors which 2.5 160% cannot be completely offset by the benign regulatory environment. Related 140% party transactions structured to upstream cash without paying dividends to 2 120% minorities are not in line with best practices, in our view 100%
1.5 80% Economic resurgence extrapolated and also stock market vs. economy 60% correlation. While Dubai’s economic resurgence has been impressive, it is 1 40% based as much on exogenous factors. To extrapolate it on a six-year time
Equities 0.5 20% horizon and assume that new IPOs would lead to stock market representing 0% the economic activity in Dubai/UAE is a far-fetched assumption in our view. 0 -20% Nov Jan Mar May Jul Sep MSCI is not the be all and end all. While an increase in turnover velocity is
DFM UH, AED, lhs Relative to MSCI EM, %, rhs a valid assumption, we do not see it jumping beyond 100%, from 60% at
present, while the market is pricing in higher levels. A comparison of turnover 1M 3M 12M velocity in markets included in MSCI EM index clearly identifies limitations. Price -4.8% 5% 122% Price relative -3% -4% 117% Little scope for revenue diversification. An often made consensus ADTV (USD mn) 9.60 13.91 11.55 assumption is that DFM could diversify its revenue sources to other sources such as data and custody, but what is often ignored is that DFM’s trading fees, at 12bp, are at a significant premium to exchanges that have developed Key financial highlights ancilliary revenue streams, such as LSE. Fiscal year end 12/11 12/12 12/13F 12/14F P/E, x n/a n/m 66.7x 59.2x Structurally unattractive for IPOs. With its high degree of liquidity EV/EBITDA, x n/a n/m 63.1x 54.0x concentration and Herfindahl index, we see limited market attraction for P/B, x n/a 1.1x 2.3x 2.2x FCF yield, % n/a 5.7% 3.3% 3.3% smaller new entrants, as liquidity based discounts are likely to be high. Net sales, AED mn 124 150 380 473 Earnings volatility is high. The pricing structure of fees, being EBITDA, AED mn 27 59 257 294 Net income, AED mn (7) 35 263 296 predominantly a percentage of traded value, introduces a higher volatility Net sales, chg -35% 21% 154% 24% than the hybrid structure at exchanges outside the region. EBITDA, chg -71% 118% 338% 14% Our TP of 1.5 AED is derived from a DCF valuation, assuming a Net income, chg -109% -613% 646% 13% Valuation: EPS, AED (0.00086) 0.0044 0.033 0.037 terminal free cash growth of 3% and WACC of 9.2%. DFM trades at a BPS, AED 0.94 0.94 0.97 1.01 Bloomberg-consensus 2013F P/E of 74.5, a 213% premium to EM peers and EBITDA margin, % 21.7% 39.2% 67.5% 62.1% 296% premium to developed market peers. On 2015F P/E, DFM trades at a ROE, % 0% 0% 3% 4% 61% premium to EM peers and 89% premium to developed market peers. Net Debt, AED mn (1,122) (1,019) (1,312) (1,639) ND/EBITDA, x (41.7x) (17.4x) (5.1x) (5.6x) Risks: We see potential new listings as representing an earnings and Net int. cover, x (38.3x) (15.6x) 48.5x 43.3x valuation risk for our Sell thesis on DFM.
Source: Bloomberg, Company data, VTB Capital Research
Digvijay Singh // +971 4 377 0819 // [email protected]
Prices cited in the body of this report are as of 24.11.13 (except where indicated otherwise). Please refer to the “Disclosures” section of this report for other important disclosures, including the analyst certification. Additional disclosures regarding the subject company(ies) discussed in this report can be found at http://research.vtbcapital.com/ServicePages/Disclosures.aspx.
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
VTB Capital Facts & Forecasts Last model update on: 26 November 2013
IFRS 2010 2011 2012 2013F 2014F 2015F United Arab Emirates Company data Financials / Specialized Finance Weighted avg # shares, mn 7,976 7,996 7,996 7,996 7,996 7,996
Avg market cap, AED mn n/a n/a 7,944 17,511 17,511 17,511
EV, AED mn n/a n/a 6,925 16,199 15,871 15,489 Ratios & analysis P/E, x n/a n/a n/m 66.7x 59.2x 50.6x EV/EBITDA, x n/a n/a n/m 63.1x 54.0x 44.1x Dubai Financial P/B, x n/a n/a 1.1x 2.3x 2.2x 2.1x Dividend yield (ords), % n/a n/a - - - - Market EPS, AED 0.0099 (0.00086) 0.0044 0.033 0.037 0.043 CFPS, AED 0.013 0.012 0.011 0.038 0.042 0.049
Free CFPS, AED 0.077 0.083 0.056 0.072 0.072 0.068
DPS (ords), AED ------Prices as of: 24 November 2013 Payout ratio (ords), % ------Ticker CCY Current 12mo TP Rating BPS, AED 0.95 0.94 0.94 0.97 1.01 1.06 DFM UH AED 2.19 1.50 Sell Revenues growth, % -53% -35% 21% 154% 24% 20%
EPS growth, % -77% -109% -613% 646% 13% 17% EBITDA margin, % 49.0% 21.7% 39.2% 67.5% 62.1% 62.0% Net margin, % 41.6% -5.5% 23.5% 69.1% 62.5% 61.1% Share price performance, 12-mo ROE, % 1.0% -0.1% 0.5% 3.4% 3.7% 4.1% 2.5 150% ROIC, % 0.0% -1.2% -0.3% 4.4% 5.1% 6.1% Capex/Revenues, % 6% 4% 2% 2% 2% 2% 2 Capex/Depreciation, x (0.1x) (0.1x) 0.0x (0.9x) (1.1x) (1.2x) 100% Net debt/Equity, % -11% -15% -14% -17% -20% -24% 1.5 Net debt/EBITDA, x (8.8x) (41.7x) (17.4x) (5.1x) (5.6x) (5.8x) 50% Net interest cover, x (0.1x) (38.3x) (15.6x) 48.5x 43.3x 41.4x 1 Income statement summary, AED mn 190 124 150 380 473 566 0% Revenues 0.5 Cost of sales n/a n/a n/a n/a n/a n/a SG&A and other opexp. 192 193 168 138 195 233 0 -50% EBITDA 93 27 59 257 294 351 Nov Jan Mar May Jul Sep 11 DFM UH, AED, lhs Depreciation & amortization 93 93 73 10 10 Operating profit 0 (66) (15) 247 284 340 Relative to MSCI EM, %, rhs (53) Non-operating gains /(exp.) (75) (53) (47) (50) (52) EBIT 0 (66) (15) 247 284 340
Net interest income/(exp.) ------Company description Profit before tax 73 (15) 32 292 329 385 Dubai Financial Market is one of the top five Income tax ------stock exchanges in the MENA region and the Minority interests (5) (8) (3) (29) (33) (39) only listed stock exchange operator. VTBC Net income 79 (7) 35 263 296 346
Cash flow statement summary, AED mn Cash flow from operations 107 99 89 302 339 396 Company website Working capital changes 11 67 26 - - - Capex (11) (5) (4) (9) (11) (14) Other investing activities (81) 18 (318) (59) (62) (65) http://www.dfm.ae/ Free cash flow 617 666 450 573 577 541 Share issue (reacquisition) ------Dividends paid (314) (186) (1) - - - Net change in borrowings ------Shareholder structure Other financing cash flow - - - 0 0 0 Movement in cash 138 (42) (202) 233 265 317 Free Float 20% Balance sheet summary, AED mn Cash and equivalents 248 51 65 299 564 881 PP&E 40 22 15 14 16 18 Goodwill ------Investments 2,101 1,918 1,987 2,046 2,108 2,174 Other assets 5,526 5,708 5,645 5,645 5,645 5,645 Total assets 7,915 7,698 7,712 8,004 8,333 8,718 Borse Interest bearing debt 58 20 21 21 21 21 Dubai Other liabilities 302 175 212 212 213 213 80% Total liabilities 360 196 233 234 234 234 Total shareholder's equity 7,523 7,479 7,458 7,721 8,016 8,362 Minority interest 31 24 20 50 83 122 Source: Company data, VTB Capital Research Net working capital ------Net Debt (819) (1,122) (1,019) (1,312) (1,639) (2,022)
Capital 7,582 7,499 7,479 7,742 8,038 8,383 FCF yield, % n/a n/a 5.7% 3.3% 3.3% 3.1% Research team Net sales, chg -53% -35% 21% 154% 24% 20% EBITDA, chg -72% -71% 118% 338% 14% 19% Digvijay Singh / +971 4 377 0819 Net income, chg -77% -109% -613% 646% 13% 17%
EBIT margin, % 0% -53% -10% 65% 60% 60%
26 November 2013 2
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Table of contents
Executive Summary ...... 4 Valuation ...... 6 Regulatory landscape is benign ...... 7 Structurally unattractive ...... 11 Financial Analysis ...... 17 Disclosures ...... 21
26 November 2013 3
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Executive Summary
§ Dubai Financial Market (DFM UH) is a unique asset, being the only listed stock exchange operator in the MENA markets. § The 80% ownership by a quasi-government entity is a blessing, in terms of sustainable monopoly pricing structure and benign regulatory environment, yet raises potential corporate governance risks. § Valuations are stretched as the market prices in a premium for the asset driven by highly aggressive expectations on new issuance (USD 17bn) and much higher annual turnover (AED 300bn/yr) within next 4-5 years.
We are initiating coverage of Dubai Financial market (DFM), the stock exchange, with a Sell recommendation and a 12-month Target Price of AED 1.5, which implies 32% downside potential to current prices. DFM is one of the six main stock exchanges in the MENA region, but the only one of them which is listed. We identify five key investment characteristics for DFM.
Benign regulatory environment increases margin visibility – Unlike international exchanges that not only compete with other platforms but also have to contend with regulatory liberalsation on execution and costs in a race to the bottom, DFM is ensconced in a benign regulatory environment in a monopolistic position and with government support. Thus, exogenous margin shocks are not a near-term risk. The DFM can thus charge top quartile commission fees globally (12bp), though such fees are in line with regional peers.
Earnings are highly cyclical on account of § Fee structure – DFM charges a percentage of traded value, unlike other exchanges which have tiered pricing regimes based on volumes and where the pricing structure is a hybrid of fixed and variable charges. DFM’s fee structure induces a higher degree of volatility into earnings, though considering the high commission rates and quasi fixed costs the volatility is a price for upside gains. § Lack of sector and stock diversification – With real estate and construction accounting for over 47% of DFM’s traded value and over 25% of the cumulative index market cap concentrated in banking sector, the trading volumes and thus earnings suffer from a high degree of volatility. Two aggregate sectors (financials and real estate) constitute c.71% of the DFM index, while the top five traded stocks on the exchange accounted for over 80% of the total trading values during the first two months of the year.
MSCI inclusion does not solve structural issues UAE has been upgraded to EM status and the 2014 inclusion is seen as a catalyst for the exchange. The liquidity premia for MSCI ranges between 30% and 200%, but since MSCI inclusion itself is a function of liquidity and market cap size, we believe that at least half of this premium is due to MSCI selection bias. Thus upon MSCI inclusion and subsequent stabilization (post the one off inflows) we see the turnover for MSCI included stocks rising by anywhere between 15%- 70%. However considering the high concentration of both market cap and liquidity, the inclusion will drain relative liquidity further from the non-indexed stocks and increase the concentration effects arising from structural issues. DFM ADX potential merger: Synergies exist, but for DFM? We believe that there is a longer term possibility that DFM and ADX actually execute a merger. How that is structured is anyone’s guess but to consider a homogenization of investor base leading to homogenization in turnover velocities and a trickle effect from MSCI inclusion led turnover enhancement, the potential for total synergies ranges between AED 0.6-7.9bn (c 3-45% of DFM’s market cap). Yet the cost paid and which entity actually benefits from the synergies will determine the actual scope for benefit for DFM. Until further visibility is available on deal terms, no upside can be assigned.
26 November 2013 4
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Valuation prices in all the good news and plenty of hope Current market valuations price in trading volumes jumping to their annual highs of the 2005-07 period and a 25% increase in market capitalisation driven by new issuance (IPOs). We see limited potential for all the good news to be realised in the short term and while are projections are quite aggressive, the resultant gap between our TP and current price reflects irrational optimism without any consideration for structural risks.
Valuation: Our TP of 1.5 AED is derived from a DCF valuation, based on an 11-year forecast period and a terminal free cash flow growth of 3%. We have used a WACC of 9.2%, which we feel adequately reflects the risk profile of the company. Considering the benefits of protection from regulatory pressure on fees against the corporate governance risk and structural issues at DFM, we do not believe that a premium for DFM is warranted. At a 2015F P/E of 29.8x, DFM trades at an unjustifiable 61% premium to EM peers
Risks § A financing crunch driven by the maturity structure of Dubai’s government debt could bring forth a primary issuance of high quality assets such as Dubai Duty free and Emirates Airline among others that could potentially lead to development of a wider and deeper equity market and underpin higher valuations. We do not believe the outcome is a near-term possibility. § A slew of new listings from hitherto private businesses spurred by UAE’s upgrade to EM and less stringent minimum float requirements is plausible and represents an earnings and valuation upside risk in medium term.
26 November 2013 5
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Valuation
§ We assume a cost of equity of 10.5% and a cost of debt of 6%. § We use a DCF to arrive at a 12-month TP of AED 1.5. § The stock trades at a 2013F P/E premium of 213% to EM peers.
We are initiating coverage of Dubai Financial Market (DFM) with a Sell recommendation and a 12-month Target Price of AED 1.5, implying 32% downside potential to the current price. Our Target Price is derived from a DCF valuation, based on an 11-year forecast period. The main assumptions of our DCF model are: WACC of 9.2% (our WACC calculation was based on a cost of equity of 10.5% and a cost of debt of 6%. The cost of equity is based on a risk free rate of 5.5%, a market beta of 1.0 and an emerging markets risk premium of 5%). The terminal value was derived as the present value of perpetuity of free cash flows, assuming a perpetual growth rate of 3%.
Figure 1: Target Price Computation Fair Value Computation
PV of TV (m, LC) 5,683.6 PV of FCFF (m, LC) 3,413.6 EV (m, LC) 9,097.2 Investments (m, LC) - Less: Net Debt (m, LC) 1,311.9 Less: Minorities (m, LC) 1,049.6 Equity Value (m, LC) 11,458.7 Number of shares (mn) 7,995.8 Equity Value/Share (LC) 1.4 Dividend/share (LC) - Cost of equity 10.8% Target Price (LC) 1.5 Current Price (LC) 2.19 Currency depreciation (to USD) - Upside (in USD terms) -32% Source: Company data, VTB Capital Research
Figure 2: WACC Computation WACC
Risk free rate 5.5% Market risk premium 5.0% Beta 1.0 Cost of equity 10.5% Cost of debt 6.0% Tax Rate 0.0% Debt 30% WACC 9.2% Terminal growth rate 3.0% Source: VTB Capital Research
What’s the market pricing in? That DFM’s valuations are stretched is essentially the consensus view, with only one out of six analysts covering the stock having a Buy rating on the name and four a Sell; the key question, however, is how stretched are the valuations and what is the market pricing in? Figures 3 and 4 show the historical levels of trading and turnover velocity at DFM. Considering that revenue from trading volumes accounts for 84% of the revenue mix, with other contributions relatively constant, we have chosen to focus on the variables influencing revenues from trading operations. Retail investors, who comprise a majority of investors in DFM, are looking at a cyclical recovery in market cap, trading values and a large IPO pipeline. We have priced in a recovery in trading volumes at the same pricing power and yet our Target Price comes in 32% short of the current price.
26 November 2013 6
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
With GDP growth rates capped and debt limits reached, Dubai’s economy is not likely to confer the high growth opportunities to domestic listed companies of the past, which has its bearing on market, with market cap to GDP ratios rating well below 70%. On turnover velocity, we have factored in a bullish return to form, with trading values climbing from AED 138bn in 2013F to AED 354bn by 2019F, even while the recovery in turnover is tenuous at best, and in its first six months. So not only is the market pricing in highly effervescent trading volumes but also a large IPO pipeline, placing over 25% of existing market capitalisation on the exchange as new issuance. In figure below we highlight the expectations priced in for market cap/GDP ratios and turnover velocity in two zones, the grey zone that represents fundamental value and the blue zone that represents upside to currently prevailing share price for DFM. 2013 market cap/GDP is likely to hover at 33% and turnover velocity at c 60% by year end, to put things in perspective.
Figure 3: Market Cap and Traded Value (in AED mn) Figure 4: Market Cap/GDP and Turnover velocity
450,000 250% 400,000 200% 350,000 300,000 150% 250,000
200,000 100% 150,000 100,000 50% 50,000 0% - 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F 2019F Cumulative Market cap (Yr mid) Traded Value Turnover Velocity Market Cap/GDP
Source: Company data, VTB Capital Research Source: Company data, VTB Capital Research
Figure 5: TP sensitivity to governing variables (TP in AED) Mcap/GDP
0.50 30% 40% 50% 60% 70% 80% 90% 100% 30% 0.7 0.8 0.8 0.9 1 1 1.1 1.2 40% 0.8 0.9 0.9 1 1.1 1.2 1.3 1.4 50% 0.8 0.9 1.1 1.2 1.3 1.4 1.5 1.7 60% 0.9 1 1.2 1.3 1.5 1.6 1.8 1.9 Turnover 70% 1 1.1 1.3 1.5 1.6 1.8 2 2.1 Velocity 80% 1 1.2 1.4 1.6 1.8 2 2.2 2.4 90% 1.1 1.3 1.5 1.8 2 2.2 2.4 2.6 100% 1.2 1.4 1.7 1.9 2.1 2.4 2.6 2.9 110% 1.3 1.5 1.8 2 2.3 2.6 2.8 3.1 120% 1.3 1.6 1.9 2.2 2.5 2.8 3.1 3.3 Source: Company data, VTB Capital Research, Blue region represents upside from current market price, Grey region represents VTB’s value zone
Peer Valuation DFM trades at a consensus 2013F P/E of 74.5x, a 213% premium to its EM peers and a 296% premium to its developed market peers. It could be argued that there potentially could be an adjustment to the consensus in short term, but even on 2015F P/E, DFM trades at a 61% premium to its EM peers and 89% premium to developed market peers. While one could potentially argue about DFM’s balance sheet strength (even while we see it as a risk due to cash management concerns), it has a net cash to market cap ratio of 9% compared to EM and developed peers’ median of 0.8%.
26 November 2013 7
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Figure 6: Peer valuation Company BBG Price Mcap Net P/E EV/EBITDA P/CF Div yield, % P/BV Net Debt/EBITDA BBG # Change, % ticker USD mn Debt 13F 14F 15F 13F 14F 15F 13F 14F 15F 13F 14F 15F 13F 13F 14F 15F anlst 1W 1M 12M (LC) 2013F Middle East Dubai Financial DFM UH 2.19 4,770 (545) 74.5 42.6 29.8 63.4 37.8 24.4 74.5 45.9 28.4 1.3 1.8 2.7 2.3 (8.2) (5.7) (4.2) 6 1.9 (4.8) 122 Market EM Moscow Stock MOEX RX 67.04 4,866 1,490 13.7 12.9 11.7 n/a n/a n/a 11.7 11.1 10.2 2.8 3.8 4.5 2.1 n/a n/a n/a 10 2.7 (1.5) n/a Exchange Hong Kong Stock 388 HK 137.3 21,112 (2,395) 33.8 30.0 26.2 23.6 20.8 17.8 28.2 25.0 20.7 2.7 3.0 3.5 8.6 (3.0) (3.0) (3.0) 22 9.8 10.9 7 Exchange Mexico Stock 30.31 n/a (169) 23.8 21.2 18.5 n/a n/a n/a 19.1 16.4 14.0 3.7 4.3 5.0 3.3 (2.1) (1.9) (1.7) 15 (3.5) (1.0) 6 BOLSAA MM Exchange Median 23.8 21.2 18.5 23.6 20.8 17.8 19.1 16.4 14.0 2.8 3.8 4.5 3.3 -2.5 -2.4 -2.4 2.7 -1.0 6.7 Developed Markets Deutsche Borse DB1 GY 55.43 20,149 1,218 16.8 14.1 12.8 16.0 13.6 12.4 14.3 12.0 10.6 3.8 4.0 4.3 3.2 0.9 0.6 0.4 29 1.6 (6.5) 36 NYSE Euronext* NYX US 45.29 11,005 1,765 19.5 16.3 14.2 11.4 10.0 8.9 16.2 13.0 11.6 2.6 2.7 2.7 1.7 1.6 1.1 0.7 7 0.0 1.6 98 Australia Stock ASX AU 6,569 (2,264) 18.8 18.2 17.0 10.0 8.7 7.8 17.1 17.8 16.2 4.6 4.9 5.1 2.0 (5.2) (5.1) (4.9) 18 (3.0) (1.4) 12 37.09 Exchange New Zealand NZX NZ 940 (10) 22.5 19.2 17.9 44.0 40.4 37.9 16.7 15.2 14.2 4.4 4.7 5.1 7.1 (0.5) (0.6) (0.6) 4 (1.2) (0.8) 4 1.27 Stock Exchange Spanish Stock BME SM 26.99 3,055 (335) 16.3 16.1 15.8 10.0 9.9 9.7 14.6 15.6 15.6 6.4 6.2 6.2 5.5 (1.2) (1.2) (1.2) 20 2.9 (2.0) 66 Exchange Median 18.8 16.3 15.8 11.4 10.0 9.7 16.2 15.2 14.2 4.4 4.7 5.1 3.2 -0.5 -0.6 -0.6 18.0 0.0 neg 35.7 MEDIAN, ALL PEERS 19.2 17.2 16.4 13.7 11.8 11.1 16.4 15.4 14.1 3.8 4.2 4.8 3.2 -1.2 -1.2 -1.2 0.8 -1.2 12.4 Source: Company data, Bloomberg, LC refers to local currency, NYX US as of 12 Nov 2013, acquired by ICE US on 13/11/2013.
26 November 2013 8
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Regulatory Landscape Benign
§ Government ownership confers a uniquely benign regulatory environment offset by corporate governance risks. § Cross-border M&A is unlikely in the short term due to regional political environment. § Since the MSCI upgrade, DFM’s positioning is superior to all other regional exchanges, but execution JV’s and Saudi liberalisation could change that.
Regulatory fee pressure limited The competition among international exchanges has been primarily driven by regulatory liberalisation and technological advances. MIFID and its regulatory principles around execution and costs (and Reg NMS in USA) have aided new entrants. Technological advances have lowered the barriers to entry in the sector and also led to a complete metamorphosis of execution platforms, requiring heavy investments from incumbents. Regulatory pressures have also created multilateral trading facilities and cross exchange execution. The market share evolution has been transformative, with new exchanges such as Chi-x now accounting for 20% of Pan- European trading volume from 16.5% of trading volume in February 2009 and 4% in October 2008). The incumbents have faced the headwinds of lower market share while being hit by a double whammy of lower turnover and a decline in fees (up to 75% sometimes) in response to newly established platforms. For example, the entry of Eurex, Deutsche Börse's futures subsidiary, to compete with CBOT led to a slashing of prices by 75% on the opening day of Eurex trading. CBOT at one point also offered free trades for two to three years for overseas firms that agreed to make electronic markets in interest-rate options. DFM on the other hand is relatively immune to regulatory pressures on account of its monopoly position and government ownership, like other regional exchanges. The competition dynamic for DFM is likely to primarily relate to the relative attractiveness for pan regional companies to list on DFM rather than their home country exchanges. Considering regional dynamics it is also hard to see a single exchange emerging for the GCC countries, a sensible step, but perhaps too far-sighted a one considering regional political dynamics. Even the merger of the three exchanges within UAE, DFM, Nasdaq Dubai and ADX has been pending for over five years.
Figure 7: MTF Market Share (Aug 2009) Figure 8: MTF Market Share (Aug 2011)
Other, 6.3% Other, 4.8% Chi-X Europe, Stockholm, Stockholm, Chi-X Europe, 12.0% 4.2% 4.3% 18.8% Turquoise, Mercado Mercado 4.5% Continuo, 4.6% Continuo, 6.1% BATS, 2.4% Turquoise, Six Swiss, 6.0% Six Swiss, 7.4% 7.1% BATS, 5.1%
Borsa Italiana, NYSE 5.9% Borsa Italiana, Euronext, 9.7% 18.6% Deutsche NYSE Borse, 14.7% Deutsche Euronext, Borse, 13.3% 15.3% LSE, 15.7% LSE, 13.2%
Source: Thomson Reuters EMS, WSJ Source: Thomson Reuters EMS, WSJ
26 November 2013 9
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Cross border mergers unlikely; execution JVs a possibility In the UAE, while we do not expect an open door for regional or new exchanges we could see a potential link up to execution platforms via a JV. Furthermore, a merger between two or even three of the UAE exchanges is a distinct possibility. However, we are unlikely to see pressure on execution fees. DFM has vertically integrated operations ranging from trading, settlement, clearing and custody, which would probably serve better as an assimilation platform for all other UAE exchanges. The vertical integration also makes it unlikely that foreign entrants will make a foray on the execution platform. In the medium term, the only risk to the competitive landscape is a WTO challenge to exchange monopolies, which is unlikely, in our view. Besides the DFM, the UAE also has two other stock exchanges, the Abu Dhabi Securities Exchange (ADX) and NASDAQ Dubai. DFM and ADX were both established in 2000 and mainly offer cash-based trading in equities. NASDAQ Dubai was established in 2005 (then DIFX), mainly as an international financial hub and offers trading cash equities, derivatives, Sukuk bonds and structured products. DIFX’s low turnover velocity (3%) is testimony to the lack of international investor interest and hence has not been able to attract significant supplemental new equity listings and investors.
Figure 9: Market Cap and turnover velocity Figure 10: Number of stocks and bonds
450,000 1,800 250 400,000 1,600 200 350,000 1,400 300,000 1,200 150
250,000 1,000 100 200,000 800 50 150,000 600 100,000 400 0 50,000 200 Qatar Egypt Dubai Kuwait - - Saudi Dubai Qatar Kuwait Egypt Dhabi Abu Saudi Arabia
Arabia Nasdaq Dubai Market Cap. (USD bn) Turnover (USD M, RHS) Equities Bonds/Sukuks/Others
Source: Bloomberg, Company data, VTB Capital Research Source: Bloomberg, Company data, VTB Capital Research
Saudi Arabia’s Tadawul, traded at 39x of DFM trading value (2012) and much lower liquidity concentration among the top decile stocks offers higher liquidity for new listings. A slightly offsetting negative factor is the lack of direct cash equity access (underlying stock ownership) for foreign institutional investors in Saudi equities. Hence if regional economic cooperation was to culminate in integrated markets and a potential opening of the Saudi Arabian equity markets, it would be a potential negative for DFM as a standalone entity. Thus, DFM’s competitive positioning is attractive and superior to major international exchanges in the context of protection from international competition and regulatory pressures, along with a competitive barrier arising from its vertically integrated business model. However, we believe that the competitive positioning of DFM is weaker in the regional market, especially in the context of longer term integration of regional execution platforms.
26 November 2013 10
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Structurally Unattractive
§ Liquidity and market cap concentration is too high. § Stock market is not adequately representative of economic activity. § Volatile earnings and limited revenue diversification opportunities.
Market depth limited; structurally unattractive for IPOs While index diversity matters for DFM’s earnings volatility profile, the market depth is a good indicator for attractiveness of the index for IPOs. Every primary issuer looks at potential float and turnover as selection criteria. If we consider the market cap and value traded among the top five listed stocks on DFM (by market cap), the concentration is among the highest globally, compared to both EM and developed market peers. Market depth is therefore significantly limited. We then undertook the study for the top decile of stocks on each of the stock exchanges below to assess the uniformity of distribution of traded value via computation of Herfindahl’s index. The idea that DFM has a severe concentration of liquidity is well borne out (Figures 10 and 11). We thus believe that DFM structurally unattractive for new listings, particularly in the mid cap space.
Figure 11: Concentration of largest 5 stocks (mcap) Figure 12: Herfindahl Index (Top decile by volumes)
80% 9%
70% 8%
60% 7% 6% 50% 5% 40% 4% 30% 3% 20% 2% 10% 1% 0% 0% UK UK KSA DFM India KSA DFM India Brazil Brazil Turkey Mexico Turkey Mexico Trading Value Market Cap
Source: Bloomberg, Company data, VTB Capital Research Source: Bloomberg, Company data, VTB Capital Research
High trading concentration; unrepresentative of economy The distribution of market capitalisation and traded value by sector is an important measure of index diversity. A higher degree of diversity lends a greater degree of resilience to earnings and reduces volatility. Real Estate and Construction accounts for over 47% of the total traded value on the DFM, and close to 25% of the market cap is concentrated among banking sector names. Thus a dominance of banking, and the leveraged finance-driven real estate and construction sector leads to a higher degree of volatility in DFM’s earnings profile. Even for non-hydrocarbon based Dubai, 40% of GDP is logistics-driven, which has sub 15% representation in market cap and sub 5% in trading volumes of DFM. Thus DFM’s growth profile is acutely dependent on leverage induced in Dubai’s economy via the banking and real estate sectors, and with the current debt level (External debt/GDP of 102%), we believe the room for upside is limited.
26 November 2013 11
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Figure 13: DFM: Trading value by sector (2012) Figure 14: DFM: Market Capitalization by sector (2012)
3.5% 0.1% 0.0% 5.8% Real Estate & Construction 17.4% Real Estate & Construction 5.8% 19.6% Banking Banking 8.4% Financial Services Financial Services 0.9% Services Services 4.6% Telecoms Telecoms
Transportation Transportation
10.5% Insurance 14.1% Insurance
Consumer 24.9% Consumer 47.7% 18.3% Industrial 9.1% Industrial 0.7% 8.8%
Source: Company data, VTB Capital Research Source: Company data, VTB Capital Research
Potential new sources of revenues are limited DFM accrues over 76% of its operating income through trading fees. The figure for established exchanges, such as the LSE, is at 42%. Among EM peers the typical level is between 50% and 95%. DFM has consistently lowered its exposure to trading fees, from over 93% in 2008, to current levels, and we see limited scope for top-line growth through diversification. A continued reduction in volumes and turnover until 2012 led to a vacuum of new listings and removed any potential for creating new revenue streams from an already thin and disengaged investor base. A key component would be a potential privatisation plan by the government and lower free float limits which would also encourage large family groups to tap public equity markets for expansion. However, the current framework on minimum offering size, the cheap cost of debt and historical track record of corporate governance prevents any scope for short-term optimism on new listings and the institutional investor’s enthusiasm for the same.
Figure 15: DFM: Income sources(2012) Figure 16: Trading Fees as share of op income (2012)
90% 23.0% 80% 70% 60% 50% 40%
30% 20% 11.6% 58.2% 10%
7.2% 0% DFM Bovespa LSE NYSE BSE
Trading Brokerage Other Investment Trading Fees as share of operating income
Source: Company data, VTB Capital Research Source: Company data, VTB Capital Research
26 November 2013 12
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Fee structure increases cyclicality; reduced earnings quality Stock exchanges are exposed to the cyclicality of asset flows, as most trading volumes are concentrated in the equity sub asset class. Diversity in income sources could potentially offset that but for DFM, with over 76% of its income arising from trading volumes, the mitigating factor is minor. A secondary level of volatility is induced by the fee structure. Exchanges that charge fees on traded value alone inject even higher volatility into the earnings mix than those that charge on the basis of volume and traded value. DFM charges fees primarily on value traded, leading to revenue fluctuations with both volume and market capitalisation and thus suffers from three tiers of volatility: asset class induced, earnings concentration induced and pricing induced. MSCI is not the panacea for structural problems The UAE has been upgraded to an EM status and the 2014 inclusion is seen as a catalyst for the exchange. We tried to isolate the MSCI effect by looking at the difference between the turnover velocity of the exchange vs. the MSCI stocks and found that the premia ranged between 30% to 200%. Since MSCI inclusion itself is a function of liquidity and market cap size, we believe that at least half of this premium is due to the MSCI selection bias. Thus, upon MSCI inclusion and subsequent stabilisation (after the one off inflows) we see the turnover velocity for MSCI-included stocks rising by between 15 and 70%. However, considering the high concentration of both market cap and liquidity, the inclusion will likely drain relative liquidity further from the non-indexed stocks at DFM and increase the concentration effects arising from structural issues, making it extremely unattractive for midcaps and new issuance in midcaps.
Figure 17: 2012 Turnover Velocity: MSCI Premium Figure 18: 2011 Turnover Velocity: MSCI Premium
2.5 250% 1.8 200% 1.6 180% 2.0 200% 1.4 160% 140% 1.2 1.5 150% 120% 1.0 100% 0.8 1.0 100% 80% 0.6 60% 0.5 50% 0.4 40% 0.2 20% 0.0 0% 0.0 0% Saudi Egypt India Turkey Brazil Mexico Saudi Egypt India Turkey Brazil Mexico Arabia Arabia MSCI Exchange Premium (%, RHS) MSCI Exchange Premium (%, RHS)
Source: MSCI, WEF, Bloomberg, VTB Capital Research Source: MSCI, WEF, Bloomberg, VTB Capital Research
DFM ADX potential merger: Synergies exist but for DFM? We believe a single unified exchange in a small country such as UAE is a rational decision but there is no near term visibility on the same. Yet one could draw hope that with recent moves seen in rationalization of aluminium capacities, a long awaited rail link, there may be a longer term possibility that DFM and ADX actually execute a merger. How that is structured is anyone’s guess but to consider a homogenization of investor base leading to homogenization in turnover velocities and a trickle effect from MSCI inclusion led turnover enhancement, the potential for synergies ranges between AED 620.1m – AED 7915.7 m (c 4%-51% of DFM’s market cap). Yet the cost paid and which entity actually benefits from the synergies will determine the actual scope for benefit for DFM.
26 November 2013 13
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Figure 19: Dubai – Abu Dhabi Exchange Merger: Potential synergy scenarios Abu Dhabi Exchange - Model Inputs 2008 2009 2010 2011 2012 2013F 2013F1 2013F2 2013F3 Trading value Index (US$ mn) 63,203 19,068 9,302 6,750 6,023 16,500 19,879 39,758 59,637 Mkt Cap (Index, US$ mn) 59,154 68,644 68,919 62,686 68,583 99,395 99,395 99,395 99,395 Mkt Cap growth -43% 24% 26% 23% 19% 19% 19% 19%
Turnover Velocity 30% 14% 10% 9% 15% 20% 40% 60%
Trading commission 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% Estimated Revenues & Synergy Scenarios 2009F 2010F 2011F 2012F 2013F 2013F1 2013F2 2013F3 Trading Revenues (US$ mn) 47.7 23.3 16.9 15.1 41.3 49.7 99.4 149.1
Exchange rate assumption (USD/AED) 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67
Total Revenues (AED mn) 174.9 85.3 61.9 55.3 151.4 182.4 364.8 547.2
Costs (AED mn) 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0
Net Margin (%) 8.5% -87.5% -158.4% -189.5% -5.7% 12.3% 56.1% 70.8%
Net income - ADX Dubai (AED mn) 14.9 (74.7) (98.1) (104.7) (8.6) 22.4 204.8 387.2
ADX Dubai Synergy Value (AED mn) 620.1 4,267.9 7,915.7 Source: Company data, VTB Capital Research
Borse Dubai ownership: What are the questions? In pricing the equity of any asset, investors must have a clear visibility of ownership of the asset, the liabilities against the asset and the legal framework that segregates owner’s liabilities from being pooled against different assets. Close to 80% of DFM’s equity is held by Borse Dubai, which in turn is owned 60% by International Corporation of Dubai (ICD), 20% by Dubai International Financial Centre Investments (DIFCI) and 20% by DFG. All these entities are quasi-government entities, with the ultimate ownership resting with the sovereign and multiple layers of undisclosed debt at intermediary (GRE) levels. Thus, DFM’s balance sheet is less important than the six questions to consider as follows.
i) Management and strategy continuity: Have other companies owned by quasi- government entities faced abrupt changes in strategy, operations and management reshuffle?
ii) Recourse to law: Do minority shareholders have the recourse to a legal framework which guarantees their rights in a dispute with the majority shareholder? In our view, this perceived deficiency was one reason why the DIFX exchange with a basis in English common law was commissioned. We are not expressing an opinion either way, but we do believe that it would be prudent to ask whether minority shareholding is offered any legal protection and the historical track record on the same.
iii) Pooling of assets and liabilities: Another question is whether prime and junk assets have been pooled together in the past in the Dubai sovereign’s realignment of operating strategy for government related entities?
iv) Dubai’s debt challenge gone away: Investors also need to question whether there is a risk of further restructurings on credit, and, despite of DFM’s pristine balance sheet, is that really the correct balance sheet to focus on? Can parent level credit destabilisation subsume the subsidiary equity of minorities?
v) Minority rights track record: Have there been instances in the past when the UAE government utilized its position as a major creditor or a debtor to dilute equity valuations by introducing cash flow volatility or credit risk?
vi) Have minorities been sidestepped in cash returns to shareholders, whether strategic or not. As another example, consider the NASDAQ Dubai acquisition. For a consistently loss making company (2011 AED 23.6mn, 2010 AED 16mn) DFM executed the NASDAQ acquisition in the following way:
a./ DFM transferred 50mn DFM treasury shares to NASDAQ OMX and paid AED 56mn to Borse Dubai to transfer another 30mn of DFM shares to NASDAQ OMX in exchange for 5mn shares of NASDAQ Dubai.
b./ DFM paid AED 148mn to Borse Dubai to acquire another 5mn shares of Nasdaq Dubai.
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United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
After these two steps DFM held 66.67% of NASDAQ Dubai. The third and final step for acquiring the last 5mn shares of NASDAQ Dubai from Borse Dubai was postponed. In effect, DFM paid AED 204mn in cash and 50mn in shares to acquire 66.67% of NASDAQ Dubai. At the time of the offer for a 100% acquisition, the cash component was AED 353mn and share component was 50mn shares. Hence, there is an overhang that means that as and when DFM’s profitability improves, another AED 149m would be upstreamed to Borse Dubai, for a company that is unlikely to turn in a profit anytime soon. The total transaction value at the time of the offer was AED 445mn.
Corporate Profile DFM (Dubai Financial Market) is a secondary market for trading securities issued by publicly listed entities, government and quasi-government issued bonds, units of collective investment schemes and other financial securities that are accepted by the exchange for trading. The exchange is relatively new, having been commissioned in March 2000. DFM itself was set up as a public company, when it was listed with a paid up capital of AED 8bn and started trading on 7 March, 2007. At the time of the IPO, 20% of the shares were offered to the public at AED 1.2/share and the remaining 80% are held by a quasi-government entity of Borse Dubai which is in turn owned by ICD, which has a 60% stake, DIFCI, which has a 20% stake, and DFG, which has a 20% stake.
Figure 20: Shareholding: DFM Figure 21: Shareholding: Borse Dubai
20.4% 20%
60% 20%
79.6%
Borse Dubai Other ICD DIFCI DFG
Source: Company data, VTB Capital Research Source: Company data, VTB Capital Research
Foreign ownership limit: The foreign ownership of DFM is currently restricted to 49% but considering the free float is only 20%, the 49% limit for foreign ownership is irrelevant. Prior to the onset of credit crisis and the subsequent repatriation of foreign funds, the foreign ownership stood at 6.88% in March 2008. Current levels hover around 5%.
26 November 2013 15
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
DFM trading patterns: The salient differentiating features between DFM and the regional exchanges are:
Size and Turnover: After the onset of credit crisis and Dubai’s debt standstill announcement DFM shrunk to being the smallest exchange among the notable regional exchanges (ex UAE) by listed market cap, though it could somewhat compete on daily volumes with other regional exchanges, save for Saudi Arabia, which dominates the extent of market capitalisation and traded value.
Figure 22: Regional exchanges: Market Cap(USD, bn) Figure 23: Regional exchanges: Avg daily value traded (USD, mn)
450 600 400 500 350 300 400 250 300 200 150 200
100 100 50 0 0 Qatar Qatar Egypt Egypt Dubai Dubai Kuwait Kuwait Abu Dhabi Abu Abu Dhabi Abu Saudi Arabia Saudi Arabia Nasdaq Dubai Market Cap (USD bn) Nasdaq Dubai 2012 Volume (USD bn)
Source: Bloomberg, VTB Capital Research Source: Bloomberg, VTB Capital Research
Foreign and institutional participation: The foreign participation in DFM trading has been increasing steadily, reaching 21% in 2012. In 2009 it stood at close to 41%. We view an increased foreign participation as a positive. Among the regional exchanges, the highest domestic participation is in Saudi Arabia (97%), understandably on account of a hitherto closed capital market and regulatory barriers while the highest foreigner participation is at 21% for DFM. The institutional participation in DFM at 22% seems low compared to the regional highest of over 40% in Kuwait but what must be considered is the significant nature of cross holdings in the Kuwaiti market. Further, 2012 was arguably the first year of recovery, and institutional volumes used to stand at 29% in 2009. The institutional participation in Saudi Arabia’s Tadawul exchange is the lowest at sub 10%.
Figure 24: DFM: Institutions vs Retail (2012) Figure 25: DFM: Foreign vs Local (2012)
18.5%
6.2%
22%
78% 54.3%
21.0%
Institutions Retail Arab ex GCC GCC Foreigners UAE
Source: Company data, VTB Capital Research Source: Company data, VTB Capital Research
26 November 2013 16
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Financial Analysis Revenues. We are forecasting revenues of AED 380mn for 2013, rising 24.4% in 2014. The increase in turnover velocity after MSCI inclusion in 2H14 presents a small upside risk to our estimates, as we have largely accounted for the premium. A relatively large source of uncertainty remains on new IPOs, which are a distinct possibility given Dubai’s debt profile, yet the past track record, has been too dismal to warrant any optimism. We expect medium-term annual traded value to hover around AED 350bn by 2019, though it might well be an optimistic estimate. The increase is driven by turnover velocity increasing from 60% to 85%, in line with attractive EM peers and market capitalisation growing organically by 28% (on a cumulative basis for 2013F-2019F) and 30% from new IPO’s. That would warrant USD 17bn of primary IPO issuance. Requirements for minimum float, cheap cost of debt, legal /compliance costs are all major challenges to a robust IPO pipeline arriving on DFM.
EBITDA. We expect EBITDA of AED 257mn for 2013 rising to AED 616mn by 2019. The share of fixed operating costs vs. variable costs at DFM is as high as 75% in our estimates. We see operating expenses rising from AED 133mn in 2013 to AED 397mn by 2019, which might be a conservative measure. Near term, we see EBITDA growing at a CAGR of 19% over 2013-2016.
Debt. DFM is a cash positive company and its balance sheet is robust – so robust that the cash management profile induces a potentially large risk to our valuation case, Considering how cash was upstreamed in the NASDAQ Dubai acquisition and investments into equity portfolios, we are highly uncomfortable with the quasi cash pile on company’s balance sheet and its associated risks, even while they might not be catastrophic.
Cash flow. We believe 2013 free cash flow is likely to hover around AED 248mn and medium-term cash flows can rise to AED 592mn by 2019. A look at NOPAT reveals that the company must generate a NOPAT of over AED 600mn to generate any economic profit (assuming WACC at 9.4%). With current levels of NOPAT at AED 248mn, the Dubai equity story has to run a lot further for the exchange to be a viable investment proposition.
Figure 26: Key Forecasts (in AED mn) Figure 27: Revenue composition (2013F)
600 Ownership Other fees transfer and 4% mortgage fees 500 7% Brokerage fees 4% 400
300
200
100
Trading 0 commission 2012 2013F 2014F 2015F fees Revenues EBITDA Net Income 85%
Source: Company data, VTB Capital Research Source: VTB Capital Research
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United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Figure 28: Debt (in AED mn) Figure 29: Total mkt. cap and turnover (in AED mn)
1,600 400,000
1,400 350,000
1,200 300,000
1,000 250,000
800 200,000
600 150,000
400 100,000
200 50,000
0 - 2012 2013F 2014F 2015F 2012 2013F 2014F 2015F LT Debt ST Debt Cash ST Investments Exchange Market Cap (Yr end) Annual Turnover
Source: Company data, VTB Capital Research Source: Company data, VTB Capital Research
Figure 30: Cash Flows (In AED mn) & ROIC (%) Figure 31: TP sensitivity to market structure
7,000 6% 50% 40% 6,000 5% 30% 20% 5,000 4% 10% 0% 4,000 3% -10% 3,000 2% -20% -30% 2,000 1% -40%
Difference to TP (%) TP to Difference -50% 1,000 0% -60% 30% 40% 50% 60% 70% 80% 90% 100% 0 -1% 2012 2013F 2014F 2015F Turnover Velocity variation (Mcap/GDP at 60%) Free Cash Flow Invested Capital ROIC (%, RHS) Market Cap/GDP variation (Turnover velocity 60%)
Source: Company data, VTB Capital Research Source: the BLOOMBERG PROFESSIONAL™ service, VTB Capital Research
26 November 2013 18
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Financial Statements Figure 32: DFM: Income Statement (Figures in AED mn unless per share data, or otherwise specified) Income Statement (YE Dec) 2012 2013F 2014F 2015F 2016F Revenue 149.7 380.3 473.2 566.2 698.6 Operating Expenses 164.2 133.1 189.3 226.5 279.4 EBITDA 58.7 256.8 293.9 350.9 432.3 D&A 73.2 9.6 9.9 11.2 13.2 Operating Income (14.5) 247.2 283.9 339.7 419.2 Interest Expense 0.9 (0.8) 0.4 1.7 3.3 Net non operating Gains (Losses) 47.4 50.0 51.5 53.0 54.6 Pretax Income 32.0 298.0 335.1 391.0 470.5 Taxes - - - - - Income Before XO Items 32.0 298.0 335.1 391.0 470.5 Extraordinary Loss Net of Tax - - - - - Minority Interests (3.2) (30.1) (33.8) (39.4) (47.4) Total Cash Preferred Dividends - - - - - Net Inc Avail to Common Shareholders 35.2 268.0 301.3 351.6 423.0 Abnormal Losses (Gains) - - - - - Normalized Income 35.2 268.0 301.3 351.6 423.0 Basic EPS 0.00 0.03 0.04 0.04 0.05 Dividends per Share - - - - - Source: Company data, VTB Capital Research
Figure 33: DFM: Balance Sheet (Figures in AED mn unless per share data, or otherwise specified) Balance Sheet (YE Dec) 2012 2013F 2014F 2015F 2016F PP&E 14.7 14.2 15.6 18.0 21.5 Intangibles - - - - - Investments 1,187.5 1,246.9 1,309.2 1,374.7 1,443.4 Other 5,645.2 5,645.2 5,645.2 5,645.2 5,645.2 Total non-current assets 6,847.3 6,906.2 6,970.0 7,037.8 7,110.1 Cash 65.3 304.7 576.3 899.7 1,298.2 Accounts receivable - - - - - Inventories - - - - - Other 799.0 799.0 799.0 799.0 799.0 Total current assets 864.3 1,103.7 1,375.3 1,698.8 2,097.2 TOTAL ASSETS 7,711.6 8,009.9 8,345.3 8,736.6 9,207.3 Debt - - - - - Accounts payable - - - - - Other 203.9 203.9 203.9 203.9 203.9 Total current liabilities 203.9 203.9 203.9 203.9 203.9 Debt 21.3 21.3 21.3 21.3 21.3 Other 8.3 8.5 8.8 9.1 9.3 Total non-current liabilities 29.6 29.8 30.1 30.4 30.6 Minorities 20.3 50.3 84.1 123.6 171.0 Shareholders' Equity 7,457.9 7,725.9 8,027.2 8,378.8 8,801.8 Preferred Equity - - - - - Total liabilities and shareholders' equity 7,711.6 8,009.9 8,345.3 8,736.6 9,207.3 Source: Company data, VTB Capital Research
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United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Figure 34: DFM: Cash Flow Statement (Figures in AED mn unless per share data, or otherwise specified) Cash Flow Statement (YE Dec) 2012 2013F 2014F 2015F 2016F Net Income 32.0 298.0 335.1 391.0 470.5 Depreciation & Amortization 73.2 9.6 9.9 11.2 13.2 Other Non-Cash Adjustments (45.7) - - - - Changes in Non-Cash Capital 25.9 - - - - Cash From Operations 88.5 307.7 345.0 402.2 483.6 Cash From Investing Activities
Disposal of Fixed Assets - - - - - Capital Expenditures (3.6) (9.1) (11.3) (13.6) (16.7) Increase in Investments - - - - - Decrease in Investments 32.1 - - - - Other Investing Activities (318.3) (59.4) (62.3) (65.5) (68.7) Cash From Investing Activities (289.9) (68.5) (73.7) (79.0) (85.5) Cash from Financing Activities (68.5) (73.7) (79.0) (85.5)
Dividends Paid (0.7) - - - - Change in Short-Term Borrowings - - - - - Increase in Long-Term Borrowings - - - - - Decrease in Long-term Borrowings - - - - - Increase in Capital Stocks - - - - - Decrease in Capital Stocks - - - - - Other Financing Activities - 0.2 0.3 0.3 0.3 Cash from Financing Activities (0.7) 0.2 0.3 0.3 0.3 Net Changes in Cash (202.1) 239.4 271.6 323.5 398.4 Source: Company data, VTB Capital Research
26 November 2013 20
United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
Disclosures
Important Disclosures The information and opinions contained within VTB Capital Research are prepared by CJSC VTB Capital. As used in this disclosure section, "VTB Capital" includes CJSC VTB Capital, VTB Capital Plc and their affiliates as necessary. VTB Capital and/or any of its worldwide affiliates which operates outside of the USA (collectively, the “VTB Group”) do and seek to do business with companies covered in their research reports. Thus, investors should be aware that the VTB Group may have a conflict of interest that could affect the objectivity of this research report. Investors should consider this research report as only a single factor in making their investment decision. Where an issuer referred to in this report is not included in the disclosure table, the issuer is either considered not to be covered by VTB Capital Research, or the reference is considered to be incidental and therefore the issuer is not a subject company within this report.
Issuer Specific Disclosures
Disclosure checklist Company Ticker Recent price Disclosure Dubai Financial Market DFM UH 2.19 (AED) 4
4. VTB Capital is a provider of liquidity and/or a market maker in the securities of the relevant issuer at the time this research report was published. VTB Capital will buy and sell securities of the relevant issuer on a principal basis.
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Investment Ratings VTB Capital uses a three-tier recommendation system for stocks under coverage: Buy, Hold, or Sell. BUY: 12-month target price exceeds the market price by 20% or more (as of the publishing date) HOLD: 12-month target price is no less than the market price but does not exceed it by more than 20% (as of the publishing date) SELL: 12-month target price is below the market price (as of the publishing date) RESTRICTED: In certain circumstances, VTB Capital is not able to communicate issuer ratings due to internal policy and/or law and regulations. UNDER REVIEW: In the event that significant information about an issuer is due to be announced or is expected to become public in the foreseeable future, an analyst might place the relevant issuer Under Review. This means that the analyst is reviewing, but not currently altering, the previously published rating while waiting for the impending information. VTB Capital’s distribution of stock ratings (and rating for banking clients) is as follows:
VTB Capital Ratings Distribution Investment Rating Distribution Ratings Distribution for Investment Banking Relationships Buy 82 38% Buy 8 28% Hold 88 41% Hold 13 45% Sell 38 18% Sell 5 17% Restricted 2 1% Restricted 1 3% Not Rated 0 0% Not Rated 0 0% Under Review 6 3% Under Review 2 7% 216 100% 28 100% Source: VTB Capital Research as at 31 October 2013
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United Arab Emirates Dubai Financial Market
Financials : Specialized Finance
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