UAE. Morgan Stanley has downgraded its rating of the Dubai Financial Market (DFM) company to ‘underweight’ due to the disappointing trading pattern witnessed in the second quarter of 2008 and the belief that the market is still optimistic on the stock.
With the average daily traded value of the market now close to the bank’s forecasted ‘bear scenario’ of AED 1.5 billion, Morgan Stanley has lowered its DFM traded value forecasts for 2008 and 2009 by 39%.
In the report ‘Dubai Financial Market: Consensus Too Optimistic Given Poor Trading’, Tammam El Barbir, Morgan Stanley Banking Analyst for the MENA Region, says that the market remains too optimistic, in our view, with earnings forecasts implying 65% year on year growth in trading values, in contrast to our forecast of 17%. Bearing in mind the special circumstances that drove the strong fourth quarter 2007 figures we see further downside risk to DFM’s price.
As a result, Morgan Stanley has lowered its price target to AED 4.13 from AED 6.32.
“This cut represents the higher cost of equity to reflect low earnings visibility, lower profit growth in maturity phase, no cash and investment related income and lower average daily traded value forecasts,” said El Barbir. “In addition, the change in methodology from a pure residual income approach to a 50/50 weighting of residual income and PE [price-earnings ratio] has also affected the market.”
Despite lowering the rating, El Barbir said he feels that the potential remains for DFM to improve its performance in the second half of 2008 and into 2009.
“In order for DFM to improve its performance, there needs to be a significant and sustainable pick up in market activity. With more high profile listings, the addition of new products and essential regulatory changes to IPO pricing, investors may start regaining interest in Dubai. We believe 2009 could be enough time to see some positive triggers materialise.” he added.
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