Dubai Financial Market PJSC – Initial Coverage-April 2008- Dubai Financial Market PJSC (DFM) is a public joint stock company incorporated in the Emirate of Dubai, United Arab Emirates and was originally established in the year 2000. DFM has grown at a faster rate over the years and is one of the leading stock exchanges in the region. Currently 57 companies and 5 bonds and Islamic sukuks are listed on DFM. The revenue model of DFM is mainly dependent on trading commission fees. This stream of revenue is directly proportional to trading value on the exchange. For the year 2007, the total revenue of DFM was AED827.3mn, up 4.8% from the previous year. Net profit of DFM increased by 80.5% during the year 2007 to reach AED1,439.6mn, up from AED797.6mn in the previous period.
The value of DFM’s shares derived from the weighted average of the DCF and peer comparison methods is AED5.37 per share. The stock currently trades at AED5.69, which implies that the weighted average value of DFM’s shares is at a discount of 5.6% to the share’s current market price( as on April 21, 2008). At the current price, DFM’s shares have forward P/E multiples of 38.7x and 29.6x the estimated 2008 and 2009 earnings respectively. We, therefore, initiate our coverage of the DFM stock with a ‘HOLD’ recommendation, at its prevailing price levels.
Financial Performance
For the year 2007, the total revenue of DFM was AED827.3mn, up 4.8% from the previous year. Out of the total revenue in 2007, trading commission fees contributed 95.7%. Brokerage fees contributed around 2.4% of total revenue during the year whereas ownership transfer and mortgage fees contributed 1.6%. Rest 0.3% was contributed by other sources.
In line with the positive performance of the market in 2007, the total value of share traded increased to AED379bn i.e. an increase of 9.0% over 2006. The average daily trading value increased to AED1.50bn in 2007, up from AED1.24bn in 2006 i.e. an increase of 21.6%. This improvement in value traded led to a 6.2% increase in trading commission fees to reach AED791.4mn in 2007. During the year 2007, 10 new companies were listed on DFM which contributed to rise in traded value. It is important to note that some of the companies which were listed on DFM in 2007 were among the top traded shares in 2007. These include stocks like Deyaar Development, Air Arabia and DFM etc.
Among the other sources of revenues, brokerage fees were up 14.3% during the year to reach AED20.1mn in 2007, from AED17.6mn in 2006. Ownership transfer and mortgage fees were down 43.6% during the year to reach AED13.0mn in 2007, from AED23.0mn in 2006. Similarly other fees were down 14.0% during the year to reach AED2.8mn in 2007, from AED3.3mn in 2006
For the year 2007, the investment income was AED119.2mn, up 76.4% from the previous year. Out of the investment income in 2007, return on Islamic investment deposits contributed AED118.0mn i.e. around 99% of total. During 2007, Islamic investment deposits of DFM increased to AED2,158.3mn up from AED889.1mn i.e. a quantum leap of 142.7%. The company undertook IPO towards the end of 2006 and listed in 2007. A significant part of the IPO proceeds was invested in Islamic investment deposits. Gain on sales of available-for-sales investment and dividends were other contributors to the investment income. DFM gained AED190.4mn from revaluation of investments in marketable securities held for trading.
Operating profit of DFM was up 22.1% during the year 2007 to reach AED971.6mn, up from AED795.8mn in the previous period. The operating margin for the year 2007 was 117.4%, up from 100.9% in the previous period. The significant improvement in the operating margin was due to a rise in investment income and gain from revaluation of investments in marketable securities held for trading.
Net profit of DFM increased by 80.5% during the year 2007 to reach AED1,439.6mn, up from AED797.6mn in the previous period. The net profit margin for the year 2007 was 174.0%, up from 101.1% in the previous period. This significant jump in the margin was mainly due to one-time IPO income as described before.
Total assets of DFM stood at AED10.2bn at the end of 2007. On account of change in the structure of the company during the year, the figures for 2007 are not comparable to that of the previous years. A significant part of total assets of the company are in the form of intangible assets and goodwill. The Company acquired Dubai Financial Market, a wholly owned entity of the Government of Dubai, effective on January 1, 2007. At the end of 2007, goodwill and intangible assets combinedly comprised more than 56% of total assets of the company.
For the period Q1-2008, the total revenue of DFM was AED272.9mn, up 174.2% YoY from the corresponding period in previous year. Out of the total revenue in Q1-2008, trading commission fees contributed 94.9%. Brokerage fees contributed around 1.9% of total revenue during the period whereas ownership transfer and mortgage fees contributed 2.2%. Rest 1.0% was contributed by other sources.
Operating profit of DFM was up 231.5% YoY during Q1-2008 to reach AED314.4mn, up from AED94.8mn in Q1-2007. The operating margin for the period was 115.2%, up from 95.3% in Q1-2007. Net profit of DFM was down 44.1% YoY during Q1-2008 to reach AED314.4mn, down from AED562.9mn in Q1-2007. However that was mainly due to one-time IPO income in Q1-2007.
Overall we are the of the opinion that DFM has a stable business model in place and will continue to grow at a healthy rate in coming years driven by strong macroeconomic environment. Factors like introduction of new products, increased listing by government-owned entities/family-owned companies, healthy corporate earning, conversion to World’s first Islamic bourse and increasing participation by foreign and institutional investors will prove to be beneficial for the company. One of the important factors to be considered is that most of the expenses of DFM are fixed in nature, and therefore any additional revenue from increased trading activity will have around 100% operation profit margin. On the negative side any significant slowdown in economy and increasing competition especially from DIFX might impact the growth of DFM.
