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Dubai Financial Market Co.

Source: Taib Bank

Quarterly Result Update

Dubai Financial Market (DFM) reported an operating income of AED 405.88 million for FY09, down 41.1% YoY. The company’s operating income was 6.6% below our estimate due to lower than expected trading income.

The company’s net profit declined 42.7% to AED 346.62 million, 9.6% lower than our estimate.

We are revising our FY2010E operating income downward by 12.2% YoY. Accordingly, we have reduced our net profit estimate by 15.0%.

We revise our earlier UNDERWEIGHT recommendation to NEUTRAL with an updated target price of AED 1.84, implying an upside of 1.6%.

Operating income
During FY09, DFM’s operating income plunged 41.1% to AED 405.88 million from AED 688.88 million, hurt by lower trading commission fees and declines in brokerage, mortgage, and other fees. The company’s trading commission fees plummeted 41.5% to AED 374.74 million from AED 640.21 million in FY08, owing to a decline in total value traded due to the fall in stock prices. Nonetheless, increased participation supported the total volume growth by 44.7% to 110.68 billion shares during the year compared to 76.51 billion shares in 2008, even as total value traded on the exchange was down 43.1% YoY to AED 173.51 billion. Moreover, ownership transfer and mortgage fees decreased 72.4% to AED 5.67 million, while brokerage fees were down 1.1% YoY to AED 20.79 million. Meanwhile, other fees stood at AED 4.68 million, down 34.1% from AED 7.11 million.

Other Income
The company’s Islamic investments fetched a net income of AED 91.51 million, down 65.2% from AED 263.21 million in FY08 on account of lower returns on deposits, reduced dividends, and lower gains on sale of investment of AED 0.71 million compared to AED 130.50 million last year. Moreover, other income stood at AED 5.54 million, and there were no gains from revaluation of investments during FY09, compared to AED 61.04 million during FY08.

Net profit
Driven by lower operating income and decline in net investment revenues, DFM’s net profit plummeted 42.7% to AED 346.62 million from AED 604.97 million in FY08. In tandem, DFM’s adjusted EPS stood at AED 0.04, down from AED 0.08 last year.

We had initiated DFM on August 12, 2009 with an UNDERWEIGHT recommendation (target price of AED 1.64 with a 4.7% downside). Currently, the company’s stock is trading at a P/E multiple of 28.07x and 22.08x on 2010E and 2011E earnings, and at a P/BV multiple of 1.77x and 1.71 on 2010E and 2011E BVPS. Meanwhile, the stock has declined 3.7% since the beginning of 2010 compared to a loss of 2.2% by the Dubai Financial Market General Index (DFMGI). Considering the above factors, we have arrived at a target price of AED 1.84, implying an upside of 1.6% over its current price of AED 1.81 (as on March 22, 2010). Accordingly, we are revising our earlier UNDERWEIGHT recommendation to NEUTRAL on Dubai Financial Market.

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