• Global values Tamweel at AED9.21 and recommends a BUY on the stock.
Global Investment House – Tamweel – initial Equity Research-Tamweel is a leading provider of Sharia compliant real estate financing in the UAE and is one of two dedicated mortgage finance companies in the UAE, the other being Amlak Finance. The company started its operations in March 2004 and has now become the UAE’s leading mortgage finance provider with a market share estimated at approx 34% (by mortgage value) at the end of 2007. The company is currently licensed by the UAE Central Bank to operate as an Islamic finance company and is primarily engaged in Sharia compliant financing and investment activities. The Government of Dubai holds a direct or indirect shareholding of approx 38% in the company. The company currently has four branches in UAE: two in Dubai and one each in Abu Dhabi and Sharjah and more than 300 industry partners across the region with over AED11.0bn of mortgage assets under its origination and servicing program.
Tamweel was earlier appointed as an official escrow account agent by the Dubai Land Department which will contribute to its revenues from 2008 onwards. The company is now in the process of diversifying its revenue base by expanding its geographic reach of its home financing services and has entered the budding markets of Egypt and Saudi Arabia in the first half of 2008. Furthermore, in order to capitalize on the booming real estate market in UAE and as such has recently floated Tamweel Properties and Investments, a fully owned subsidiary that will focus on real estate investment and offer brokerage services in UAE.
Based on the current market price of AED8.08 (as on July 13, 2008), the stock is trading at 12.9x 2008E earnings and 3.2x 2008E book value. The stock is trading at 10.4x 2009E earnings and 2.7x 2009E book value. Our estimated value for this scrip is worked out to be AED9.21 based on DDM. According to our fair value the banking scrip offers an upside of 14.0% on the closing price of AED8.08 per share; we therefore recommend a “BUY” on the scrip.
Financial Performance
Tamweel continued to come up with strong performances in 2007 as well, as the company reported net profit of AED451.2mn, an increase of 195.4% as compared to the previous year’s reported net profit of AED152.8mn (excluding AED699mn of income from IPO proceeds, net in 2006). What is noteworthy is that this has come at the back of 262.0% and 134.7% growth rates achieved in 2005 and 2006 respectively.
The balance sheet size of the company increased Y-o-Y by a whopping 161.0% to reach AED8.5bn at the end of 2007 as compared to AED3.3bn in the previous year (excluding a securitization book of AED771mn taken off balance sheet). The company has been increasing its deposits using its product innovations and aggressive marketing strategies. The company’s deposit base has increased at a CAGR of 321.9%, from AED75.0mn in 2004 to reach AED5.6bn at the end of 2007. During 2007, the deposit base more than quadrupled. Going forward, we believe the company will be able to increase its funding base through the use of sukuks, securitization and other medium term notes which will further support the company’s ability to finance growth.
Islamic Financing and Investing Assets continues to increase substantially and doubled to reach AED5.2bn in 2007 from AED2.6bn at the end of 2006. The majority of Tamweel’s customer financing is carried out through an ijarah (or lease-based) finance product. Tamweel’s current emphasis is on the Flexi ijarah and as such the company has entered into very few fixed ijarah contracts in 2007. Ijara and Forward Ijara accounted for 80.6% of the total lending portfolio in 2007, which has increased from 64.5% at the end of 2006. Tamweel focuses on ijarah financing products because the structure allows the company to retain ownership of the property until the end of the financing term.
There has been a phenomenal growth in income from Islamic finances. Income from Islamic finances has grown at a CAGR of 206.6% during the period 2004-2007, from AED10.83mn in 2004 to AED311.5mn in 2007. In the year 2007, income from Islamic finances doubled over AED155.8mn recorded in the previous year. With the growth in business and economies of scale, the efficiency to operate is improving. As such, the ratio of operating expense to operating income has come down from 50.3% in 2004 to 22.6% in 2007.
The growth momentum continued in the first quarter of 2008 as well with total operating income of the company recorded a healthy Y-o-Y growth of 255.7% to reach AED176.3mn for the quarter. Income from Islamic finances increased by 127.8% to AED139.5mn in 1Q-2008 as compared to AED61.2mn achieved in 1Q-2007. However, the main driver for growth was the income from the sale of properties which increased substantially and registered an increase of 786.8%, from AED17.6mn in 1Q-2007 to AED155.9mn or 88.4% of the reported profit at the end of 1Q-2008. The earnings of the company continued to surge with the company reporting net profit for 1Q-2008 at AED176.3mn, an impressive growth of 249.4% over AED50.5mn reported for 1Q-2007.
Tamweel’s balance sheet size increased by 13.1% Q-o-Q to reach AED9.6bn at the end of 1Q-2008 as compared to AED8.5bn at the end 2007. This has come mainly due to an increase of 19.6% in financing obligations which has increased to AED6.7bn at end of 1Q-2008 as compared with AED5.6bn at the end of year 2007. During January 2008, Tamweel issues US$300mn exchangeable sukuk maturing in 2013 to fund its expansion. The sukuk will carry a sub-libor rate of 4.31%, payable quarterly in arrears, and the exchange price is US$2.2711. This was the first public issuance transaction in GCC market to achieve sub-libor funding.
The boom in the UAE real estate market continues thus underpinning the exponential growth in the real estate housing finance industry. With the real estate financing in UAE expected to double in the next four years, we believe that Tamweel is well placed to exploit the booming real estate financing activity in UAE due to its current position. The company has a strong network of over 300 partnerships with developers, the right management expertise and an ability to engineering products to tap the diverse needs of customers all of which would help the company to grow and maintain its market share and leadership position in the industry.
