DUBAI: As the first quarter of the year draws to a close, investors are looking ahead to the announcement of corporate earnings for the period. In the United Arab Emirates, they are seeking justification for the sharp rally in local stocks over recent weeks. The Dubai and Abu Dhabi markets have been dominated by retail traders and speculative buying, so any disappointment in the quarterly numbers could shake newly acquired confidence. Dubai's benchmark is up 22 percent year-to-date, although it is still down 74 percent from its peak in early 2008. Abu Dhabi's index has risen about 8 percent so far this year, leaving it down 49 percent from its peak before the financial crisis. "In order to build confidence for the equity market rally in the near term, sequential earnings growth from UAE corporations in 1Q12 is important...to show that they have indeed passed the trough," said a Dubai-based portfolio manager. First-quarter earnings are expected to be released in late April. Shares in the two sectors that form the backbone of the UAE's stock markets, real estate and banking, are trading at valuations which are still considered attractive. Banks are expected to post strong quarterly earnings with Abu Dhabi names being favored over Dubai banks. "The banking sector is solid in the UAE in general, with all banks being well capitalized," said Rami Sidani, Middle East head of investment at Schroders. "Given the loan book in Abu Dhabi, which was less affected than Dubai banks, they have turned a corner. And although growth might be subdued for 2012, their balance sheets are in good shape and they will be able to keep up with growth as the market improves. "For Dubai banks, we are reaching the peak in the impairment cycle. ENBD is well-capitalized and although they continue to take losses, given the high capitalization, they can absorb these impairments." Ali Adou, portfolio manager at The National Investor, expects UAE banks to grow their earnings by 7 percent on average during the quarter compared to a year earlier. "Abu Dhabi banks have a strong capital adequacy ratio and any write-offs in real estate prices will affect Dubai banks more than Abu Dhabi banks," Adou said. "In Dubai, there are still concerns with exposures to government-related entities. There has been a lot done in that regard, but you still have a provisioning cycle and the banks need time to get out of the woods." According to Reuters data, Emirates NBD, Dubai's largest bank by market capitalization, is trading at 6.5 times this year's estimated earnings, above a multiple of 4.9 times at the end of 2009 but well below 16.9 times in 2007. Dubai Islamic Bank looks a bit cheaper; it is trading at 6.4 times this year's estimated earnings, compared to a 2009 level of 6.9. Abu Dhabi Commercial Bank is at a forward price/earnings ratio of 8.4 times, against about 12 in 2009. Real estate Valuations also appear reasonable compared to historical levels in the real estate sector, where Emaar Properties is trading at an estimated forward price/earnings ratio of 9.6 times compared to 11.35 at the end of 2009. Aldar Properties is trading at 12.7 times compared to 17.2. "Emaar's numbers will be good because the hotel occupation rates have been strong, not just for the company but across the hospitality sector," said Loic Pelichet, assistant vice-president for research at NBK Capital. "Visibility is still low on the property development sales. Things are generally getting better in the Dubai real estate sector, but selectively. Rents have started recovering but we will have to see if it's sustainable." Pelichet said Emaar's stock had upside of 10 to 15 percent, and he expects the company to post quarter-on-quarter growth in net profit of 25 percent for the January-March period. Abu Dhabi's decision to consider a merger between builders Aldar Properties and Sorouh Real Estate will dominate investors' decisions in coming weeks. Analysts say Aldar is likely to benefit from the merger if it goes through, but the terms of the deal are not yet known. "Sorouh is going to trade on people's expectations of the merger. No one will look at earnings. We've suspended our recommendation on it given the possible outcome of the negotiations," Pelichet said.
