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29-Oct-2018

UAE Strategy - Time to shift from Abu Dhabi to Dubai names

Abu Dhabi’s premium is unjustified with limited upside ahead 

We believe the premium for ADSMI Index vs. DFMGI is unsustainable – which is due, in part, to FAB’s strong performance (see fig.1 – the ADSMI is up 17% YTD), while EMAAR’s weak performance has weighed on DFMGI (-14% YTD). Once the FAB (44% of ADSMI index) MSCI trade is concluded, we see downside for the name, while upside for ETISALAT is limited (fig.4) and ST upside at ADCB/UNB is also constrained, in our view. This means that 75% of the ADSMI Index offers little to no upside. On DFMGI, EMAAR offers one of the highest upside potentials in EM and MENA, although this is unlikely to materialise in the ST, while Dubai banks in general are more attractive on valuation than Abu Dhabi banks. We recommend a Long DFMGI Index / Short ADSMI Index approach to UAE equities. Local institutions can best express this trade by shifting from FAB to EMIRATES or DIB, and from ETISALAT to DU.  
 
Remove FAB from Top 20, replace EDEV with EMAAR, add DIB

It is time to take profit on FAB (previously NBAD) after a total return of 89% (vs. 3.6% for the UAE, 30% for MENA, and 26.4% for EM) since Dec 2016 when we added it to our Top 20 list, especially with an easy exit around the corner – USD400mn inflows from MSCI trackers end-November. Instead, we choose DIB (high yield, undemanding valuation) rather than ENBD, our first pick, as it is still closed to foreign investors. We also replace EMAARDEV (flat since we added it in January this year, but outperformed the parent and DFREALTY Index by 25%) with EMAAR (fig.2). Finally, we keep DPW, which we have had in the list since Nov 2014 (flattish). We consider DPW to be a core exposure to Dubai equities. The name is trading at the lowest trailing P/E (x) since 2012 (25% below LT avg. – fig.3), which we see as a buying opportunity.
 
Spark needed to re-rate market

We remain Neutral on UAE equities in a MENA context, despite the attractive valuation in Dubai, as the market still lacks a catalyst. Furthermore, in Abu Dhabi, upside looks limited for the reasons mentioned above. Investors interested in DIC, WAHA, and AGTHIA should follow the MSCI Nov results as we see outflows in all three. While those interested in TABREED should keep an eye on outflows this Dec as the name gets out of FTSE benchmarks due to low foreign room. Speaking of foreign room, the low hanging fruit for UAE equities is FOL increases, and it could provide the catalyst needed for the market, in our view. We calculate that a blanket 49% FOL in the UAE could drive cUSD3.3bn passive inflows. However, there is nothing in the pipeline at the time of writing apart from ENBD whose shareholders approved raising its FOL from 5% to 20% (implementation timeline remains unclear).

Mohamad Al Hajj