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The Dubai Financial Market (DFM) commenced operations in March 2000 as the operator of the first regulated electronic exchange in the UAE. It was later listed in March 2007 to become the first listed exchange in the GCC. The DFM’s vision today is to strengthen its position as a regional hub for the GCC capital market activity and to position itself as one of the key exchanges in emerging markets today. The establishment of Bourse Dubai as the holding company for the Government of Dubai’s stake in both the DFM and the DIFX is a recent key development, with significant implications for DFM shareholders.
We anticipate continuing strong growth in the size of the equity market in Dubai, on the back of both price appreciation and significant new listings, which should continue to drive trading volumes on the DFM higher. The DFM’s revenue model is currently driven purely by trading volumes of equities on the exchange, and is underpinned by very high operating margins. We expect net income to grow by 50% in 2007 to reach AED 1.2 bn, and AED 1.3 bn in 2008 and at a CAGR of 14.2% for the remainder of our forecast period.
The DFM is currently trading at a significant premium to global peer average multiples which indicates very lofty expectations for growth. Even with the significant anticipated growth in listings, the current market value of the exchange is unjustifiably higher than almost any other listed global exchange indicating exaggerated expectations. The current price does not seem to account for increasing domestic competition in a fragmented market with potential pressure on high exchange fees and restrictive regulatory environment.
We initiate coverage on DFM with a Sell recommendation based on a target value of AED 4.01 per share implying a downside of 41% to the current market price of AED 6.85 per share. The target value was based on a sum of parts valuation which includes a discounted cash flow (DCF) valuation and a relative valuation utilizing a meaningful peer group with comparable market and growth prospects.