• Expected incline in top line in 2011 but far from pre crisis levels
• Value traded in 2010 down 60%
• Investment sentiments in low levels
• Panic spread as political crisis looms in the Middle east

Net profits down at all-time low
In 2010, the DFMGI witnessed a 60% decline in the average daily trading value on a YoY basis as stocks plummeted due to market correction and negative news from the European Soverign debt crisis, spurring a 77.2% decrease in net profits for 2010. Net profits in 2010 reached AED78.9mn as compared to AED346.6mn bring the net profit margin down to 38.7%.

Top-line – recovery likely to be slow
Top line revenue was hit hard in 2010 as trading commission fees decreased 58% to reach AED158.7mn. Revenues decreased 73.1% to reach AED 189.6mn in 2010. We expect the company’s revenue to increase by 17.7% in 2011 to AED223.3mn as the investor confidence likely to be positive. On a 2010-2014 CAGR basis we expect revenue to increase 31.9%, but far from pre-crisis levels. The growth in trading fees will mainly be driven by the increase in trading activity as the credit crisis calms and sign of economic revival arises from better economic indicators in UAE, resurgence of the real estate market, a better performance of the banking sector and the increased positive sentiment in the markets. In addition, we believe that the gross margins will increase and reach 82% in 2014 as the company develops synergy with NASDAQ Dubai to decrease investment cost. The company will continue to benefit from favorable economic and demographic factors.

Finally, as trading commissions make more than 80% of DFM’s revenues, DFM is currently working on diversifying its income away from the trading commission by introducing new fees on its advanced services, including relooking at the imposed fees on new listings , collaborating with Abu Dhabi Securities Exchange to collect yearly fees from listed companies and introducing new financial services and by attracting more IPO’s.

Valuation update
We have maintained our fair value at AED0.980/share. Global Research has added 1% political risk to their risk premium because of recent uncertain political scenario in the region which has raised our WACC to 10.1%. The stock at its current price of AED1.19 is trading at a premium of 18% to our fair value. We reiterate our SELL recommendation on the stock.

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