Fourth quarter forecasts miss mark by wide margin

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Only a few of the 20 market majors the newspaper examined, managed to beat the forecasts made by investment experts and researchers - and the remainder were below them. More than half the companies were well below the predicted levels.

Companies such as Aldar, Sorouh and Dana Gas emerged as major underperformers when their published results are compared with the forecasts made by leading investment houses such as EFG-Hermes, Shuaa Capital, Al Mal Capital, HC Brokerage, Prime Group, Sico Investment Bank and Nomura Securities.

"Forecasts depend upon certain factors and any projection has to review the performance of the company, the market situation and other factors," Senior Financial Analyst Wadah Al Taha told this paper. "The huge difference between projections and actual performance is an indicator of a lack of transparency and lack of disclosures. If there are big differences then we can say there is a lack of transparency on key issues."

"The economic crisis created new factors that should have been considered by investment and research agencies," added Al Taha

Analysts forecast that Aldar would announce robust profits - but in fact it posted its first-ever quarterly loss. The fourth quarter profit forecasts made by different analysts varied greatly in the range of Dh156 million to Dh664m, giving an average net profit projection of Dh498.48m. But Aldar reported a huge loss for the period.

The Abu Dhabi-based property major posted a Dh570m net loss compared with a Dh84.3m net profit in the corresponding period in 2008. Some analysts said payments of Dh9.1 billion received by the company were not included in its published figures. For example, the Abu Dhabi Government bought the Yas Island Formula One track along with a nearby yacht club and associated buildings and infrastructure from Aldar - but these transactions were not included in the company's financial statement.

Moody's recently downgraded Aldar by two levels to Ba1, saying that the company's profile had been deteriorating over the past year. The ratings agency added that though the company received support from the government, the weak real estate market was the major factor that influenced the decision to downgrade it.

Sorouh, another Abu Dhabi-based market major in the real estate sector, reported a drop in net profit for the fourth quarter that was well below the expectations of analysts. Sorouh posted a net profit of Dh28.1m, a 39 per cent drop over the previous corresponding figure of Dh46.4m, while EFG-Hermes forecast a Dh181m net profit and Sico Investment Bank predicted Dh167m. HC Brokerage's projection of Dh37m was closer to the Sorouh's actual performance.

The fall in net profit for the quarter came as the company decided to increase its provisions following a review of assets.

Dana Gas, which fell far short of forecasts, posted a fourth quarter loss of Dh193m, its second consecutive loss, following accounting write-offs and the impairment of some oil and gas assets for 2009.

The net profit for the full year 2009 fell to Dh88m from Dh120m in 2008.

Shuaa, Nomura Securities and Prime Group projected net profits of Dh34m, Dh25m and Dh30m respectively and the average projected profit for the quarter was Dh30m.

"The decline in net profit was due mainly to exploration write-offs in 2009 plus the impairment of certain oil and gas assets," Dana said in its financial statement. Contrary to expectations, Taqa registered a net loss in the fourth quarter as the company took Dh228m of impairment charges on upstream assets into its earnings. Earnings per share slumped to three fils in 2009 from 36 fils per share the previous year.

The company made a net loss of Dh83m in the fourth quarter compared with a net profit of Dh233m in the previous quarter. Its full-year profit slumped 90 per cent to Dh183m from Dh1.8bn in 2008 due to lower commodity prices.

Taimur Saadat, Head of Technical Analysis at Arab Capital Markets Resource Centre, said: "Random events happening in the economy are influencing the performance of companies. As a result, there was wide variation in the actual performance when compared with the projections.

"One should not blame market analysts for this as dubious accounting practices at several companies can manipulate numbers. In such a scenario, no researcher can arrive at accurate figures. Of course, incompetence among analysts could also be one reason.

"And there are moral values - if an analyst sold up then his analysis would be biased. And if analysts were unable to pay physical visits to a company, this would also affect the analysis."

Central Bank data

Recent Central Bank data showed that the UAE's 22 national banks and 24 foreign units made record high provisions in 2009 - they leaped by around 62 per cent from Dh19.7bn at the end of 2008 to Dh32bn at the end of November.

In October and November alone, their combined NPL provisions soared by around Dh4.2bn and experts believe they were sharply higher at the end of the year in line with instructions from the Central Bank.

This is because of regional default problems and stricter Central Bank regulations, analysts said.

A surge in earnings compared with the fourth quarter of 2008 could offset a drop of more than 16 per cent in the national banks' income in the first nine months of last year and allow them to achieve similar results as in 2008.

"Long-term projections, say three to five years, are much more reasonable but short-term projections always face the problem of wide variations," said Saadat. "This problem is everywhere, it's a global problem. Investor relations departments at most of the companies are not effective. With this problem in place, analysts are limited to the online information and other available sources."

Emirates NBD posted a net profit of Dh178m for the fourth quarter against an average net profit forecast of Dh524.33m. The banking major recorded Dh3.3bn net profit in 2009 from Dh3.78bn in 2008.

National Bank of Abu Dhabi fell far short of the projections as the bank reported a fourth quarter net profit of Dh429m against the average forecast of Dh865m - a wide difference of 201.63 per cent.

NBAD said its net impairment charges in 2009 totalled Dh1.4bn while its non-performing loans ratio stood at 1.25 per cent.

"Capital and reserves, including the convertible subordinated debt, at the end of 2009 were Dh23.3bn, 34 per cent up on the Dh17.4bn at the end of 2008," NBAD said in a statement. Saadat added:

"Companies should tell the market about impairment charges and other provisions at least three to six months in advance so that researchers can discount such measures in order to arrive at more accurate numbers.

"Every firm should create an investor relations department to provide all the information needed about operations and decisions," said the bank in a statement

Arabtec's results were well off the forecasts. The construction major posted a net loss of Dh16.8m for the fourth quarter as against the forecast of a net profit of Dh172.4m.

"The reason why companies underperformed compared to the projections was the high level of write-offs. In the fourth quarter most companies saw 2009 as a bad year and took the opportunity to write off their bad debts and unyielding high costs," said a senior market analyst on condition of anonymity. Market heavyweight Emaar Properties came close to expectations. Emaar posted a net profit of Dh720m for the fourth quarter and Dh327m for 2009 after writing off losses and other adjustments.

Investment and analysts had made an average forecast of a net profit Dh761.06m for the quarter.

"Some realty companies incurred huge costs on certain projects which were either delayed or stopped," the analyst added. "As a result the write-offs were much bigger than the projections in the real estate sector. Emaar owns 49 per cent of Tamweel and banks have stakes in Amlak.

"So naturally the performance of the banking and real estate sectors will also impact these companies.

"For instance Emirates NBD has a 49 per cent stake in Union Properties and the banking major has made huge provisions." The results of Aldar and Sorouh disappointed the market as the numbers fell below the expectations.

Aldar reported a net loss of Dh570m for the fourth quarter as against the average forecast of Dh498.48m, while Sorouh posted a Dh28.1m net loss when compared to the forecast of a Dh128.33m net profit.

Ahmed Badr, a research analyst at Credit Suisse, said: "The Abu Dhabi real estate market started to show early signs of stabilisation on the back of an improved financing environment - banks and finance companies offering loan-to-value ratios of up to 80 per cent at average mortgage rate of 7.5 per cent currently compared to 8.5-9 per cent in January 2009.

"The limited size of the secondary market in Abu Dhabi's primary transactions has resumed, offering better visibility to developers for property sale transactions," said Badr.

By Sreenivasa Rao Dasari

© Emirates Business 24/7 2010