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Tadawul and DFM are overvalued, data shows

An Investor looks at the screen at the Dubai Financial Market in Dubai DFM
  • Trading fell 50% in Q1 in Saudi Arabia and 15% in Dubai
  • Bourse revenues come from commissions on share sales
  • Rush of IPOs only a temporary solution

The companies that operate Dubai and Saudi Arabia’s bourses are providing investors with scant returns because of high valuations and low dividend yields following a prolonged Gulf stock trading slump.

Dubai Financial Market (DFM) was the first Gulf bourse to go public, in 2007, while Boursa Kuwait and Saudi Tadawul Group followed suit in 2020 and 2021 respectively. All are government controlled.

Stock markets’ core revenues come from commissions on share sales, so this year’s turnover decline bodes ill for their bottom line. An upswell of IPOs has failed to rekindle traders’ enthusiasm.

First-quarter trading activity fell 50 percent year-on-year in Saudi Arabia, 36 percent in Kuwait, 15 percent in Dubai and 40 percent in Qatar, according to financial services firm EFG Hermes.

Tadawul Group has a price-to-earnings (PE) ratio of 47.8, bourse data shows, approximately triple the wider market average, while its dividend yield was 1.4 percent in 2022 according to Finbox. Simply Wall Street describes the stock as “expensive compared to the peer average” of 12.7 and suggests a fair valuation would be a PE of 24.3.

DFM is even more expensive, trading at a dividend yield of 1.1 percent and a PE of 79.3, despite its share price tumbling by nearly half since the end of 2021, Finbox estimates.

“The return on assets is very low and stock is trading at high multiples according to various metrics,” said Kaiss Kriaa, head of research at AlphaMena in Tunis.

Such high ratios can be justified for fast-growing companies in new or dynamic industries. Not so for stock markets.  

DFM’s first-quarter profit rose 29.6 percent year on year to AED 35.6 million ($9.5 million) as its investment income more than doubled to AED 34.0 million.

Yet its operating income – which largely constitutes trading commissions and related fees – fell 15.1 percent year on year and was less than its operating costs.

“DFM’s net cash position is huge, which enabled it to generate a decent amount of investment income, but it’s a boring business – in terms of revenue, the only way it can grow is through higher trading volumes and turnover,” added Kriaa.

“DFM can’t grow inorganically by buying other Mena bourses. It’s a regulated business and other regional stock markets are all government controlled.”

Dubai’s IPO bonanza – five listings last year raised a combined AED 31 billion – increased bourse trading, albeit temporarily, but not to the extent anticipated by many.

Last year’s annual turnover, for example, was 40 percent below a 2015 peak despite DFM’s market capitalisation nearly doubling over the preceding seven years.

These constraints may explain DFM’s stingy dividend pay-outs, which shrank to 0.0168 dirhams per share for 2022, its lowest since at least 2013 and less than a quarter of what it paid shareholders for 2014.

Investors dissatisfied with the returns from Tadawul and DFM, neither of which responded to requests for comment, could target Boursa Kuwait instead. The stock offers a dividend yield of 4.7 percent and has a PE of 21.1, according to Finbox.

Six companies in Saudi Arabia have announced plans to list on its stock exchange, Tadawul, as experts say the IPO pipeline is "healthy" for the rest of 2023Reuters/Faisal Al Nasser
Tadawul Group has a PE ratio of 47.8, approximately triple the wider market average
Saudi slump

Tadawul reported a 35 percent drop in first-quarter profit that it blamed on declining bourse turnover.

More than half of Tadawul’s first-quarter gross profit came from non-operating profit – mostly investment income and a reversal of previously taken provisions – with its operating profit plunging by two-thirds.

“While the headline results beat our forecasts, the underlying trends were relatively weak,” said Rahul Bajaj, director of Mena equity research at Citi in Dubai.

Tadawul’s stock ended May 9 at 169.20 riyals ($45.15), down 30.3 percent from a September peak of 243.20 riyals. Citi has a price target of 150 riyals and a sell rating on Tadawul.

The company’s pre-tax profit also fell to a three-year low in 2022. Earnings per share slumped to 3.54 riyals last year versus 4.90 riyals in 2021.

In the first quarter of 2023, the daily average traded value was 4.2 billion riyals, down by about half year on year, according to Citi.

In January 2020, before the Covid-19 pandemic took hold, bourse daily turnover was around 3.5 billion to 4 billion riyals. This surged to more than 13 billion riyals over the following year, Citi notes, mirroring similar increases in equity trading worldwide as lockdowns spurred novice investors to speculate in stocks.

Average daily turnover declined to around 7 billion riyals by late 2021 and has struggled to reach such levels since summer 2022. In January and February 2023, it was just below 4 billion riyals, around pre-Covid levels.

Tadawul told analysts following its first-quarter results that daily trading will likely average 6 billion to 7 billion riyals in 2023.

“To reach Tadawul’s forecast for the year, there will have to be a very big jump in trading in the second half of 2023 which doesn’t seem realistic,” said Bajaj.

The trading slump coincides with a pause in a flurry of Saudi IPOs, of which there were 27 in 2023 that combined sold $5.11 billion of shares, according to S&P Global Market Intelligence data.

Mohammed El Kuwaiz, chairman of the Capital Market Authority, told February’s Saudi Capital Market Forum that 23 businesses had been approved for listing this year and another 75 were under review.

“The medium- to long-term outlook for the Saudi bourse is quite upbeat,” said Bajaj. “But in the short term, I expect pressure on revenues to continue.”

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