Shuaa’s Profit due to Negative Goodwill

Shuaa reported a 2018 net profit of AED 28.5 million. AED 31.4 million of that is attributed to negative goodwill, an intangible asset and not part of recurring ordinary operating income. This means that if you use the market values of assets as opposed to their accounting treatment based on appraisals of the value, then Shuaa’s P/L could be considered a loss of AED -2.9 million.

In effect Shuaa uses the theory of accounting to override the experience of investors in the Kuwaiti stock market so as to turn a loss into a profit.

But don’t take my word for it. Only a coward would say things without supporting it with credible arguments, based on known facts, and reliable public sources.
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Foreign Companies are Good for the Economy

I previously tweeted about an interview in which Mohammed Alabbar, Chairman of the e-commerce company noon “ called for new legislation that imposes 51% local ownership of e-commerce related businesses ranging from payment service firms to logistics companies, in order to protect the national economy from global giants such as Amazon.” I pointed out that the article only looked at one stakeholder, noon, and didn’t consider other stakeholders such as consumers. This led to a lively debate on the subject across the twittersphere and is worthy of a revisit.

Noon’s Shareholding and Souq’s Rise

The most glaring inconsistency in the arguments raised by Alabbar is the idea that nationals should own 51% of the companies and payment systems in e-commerce. The company noon is not held 51% by local shareholders, at least according to the announcements about noon. I understand that the other 50% is held by the Saudi government, a close ally of the UAE, but it still contradicts Alabbar’s arguments.

The second, and also glaring, inconsistency is the fact that the e-commerce company Souq built their business to a value of around USD 600 million without any help from, and in spite of, “global giant” competitors. Souq is a resounding success as a local startup and didn’t need any government protection. This is true entrepreneurship. This is true capitalism.

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GFH Buys Backs Shares, Issues Bonus Shares

Last week, Gulf Finance House (GFH) announced that it would recommend distributing bonus shares. That comes on the heels of a share buyback program launched last year. The idea of a share buyback program is that shares of GFH are cheap and so it makes sense for the company to buy them back. The reverse, issuing bonus shares, makes sense for GFH when shares are expensive. So the two are, on the face of it, inconsistent if executed at the same time.

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Is UAE Economic Productivity Declining?

Economic production, usually measured using gross domestic product (GDP) or gross national product (GNP), is not the same as economic productivity. Production is creating goods and services. Productivity is what you do with goods and services. To gain insight into the difference let’s look at a simple example.

GDP is a flawed measure

Simplistically, if you produce a widget that nobody uses then you’ve produced something but it is not productive. A little more realistically if you build a building at a cost of AED 60 million and valued in the market at AED 100 million then you have contributed AED 40 million to GDP (local resources involved that contributed to GDP would be counted in the AED 60 million cost). However this contribution to GDP is the same regardless of what is happening with the building. Regardless of whether you fully rent out the building or if it remains empty the GDP contribution remains the same. A reasonable person might argue that a GDP whereby the economy uses the production is healthier than the same GDP whereby the economy does not use the production.

So although GDP growth is often used as the main measure of the health of an economy it is clear that this does not give the full story. How can we clarify the picture further? One way to measure productivity, or if goods and services are being used, is by looking at the total value of transactions in an economy. The idea is that the greater the value of transactions the greater economic activity and, presumably, the greater use of goods and services.

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The UAE’s Equity Market Performance Bank deposits have a place in your portfolio

My last article regarding the effect of rising interest rates on the UAE’s equity markets sparked quite a bit of debate on LinkedIn and got me to thinking about how the equity markets have been performing. So I looked at the year to date (YTD) return for Abu Dhabi’s market at found out it is 9.82% as of today (source Bloomberg). For Dubai’s financial market the YTD return is -12.62% (source Bloomberg). This doesn’t tell me much about the overall equity performance on a national level. Continue reading

Interest rates are a threat to equities The rise of EIBOR

The major theme for equity markets over the last couple of years has been the oil price. That was a valid issue as it affected the fiscal side of the economy tremendously (i.e. government spending).

Various other issues have cropped up in terms of looking at the market, such as the tightening fiscal policy of introducing VAT and the investor trust levels post the Abraaj issues. Fiscal policy will have an impact, Abraaj is really about learning from their mistakes.

But there is another threat, one that is growing, and that is interest rates. The US Federal Reserve (Fed), the central bank of America, has been countering Trump’s loosening fiscal policy of reducing taxes by moving towards a more contractionary monetary policy of increasing interest rates. This makes sense for the US which has a robust economy these days. For us, and other countries pegged to the US dollar and facing a challenging economic environment, increasing rates are a problem. Continue reading

Abraaj’s flawed operating model

A lot has been written recently about Abraaj Capital, the private equity company based in the Dubai International Financial Center. The current focus is around Abraaj’s actions with regards to the potential co-mingling of client funds with its own operating funds. News is updated on a relatively frequent basis about the subject and there is clearly a lot to learn on many fronts. However, it is too early to do a full post-mortem as investigations and legal cases have not come to a conclusion. But there are some things that can be gleaned that could be instructive for investors. The aim of this post is not to judge Abraaj, the courts will do that. The aim is to try to see if there are lessons that can be used by investors to better manage their portfolios. Continue reading

VAT’s Impact on Business Strategy

Disclaimer: I am not an expert on VAT and I am not providing advice. I am simply trying to expand the discussion around VAT from how it is applied to what it might mean to business strategy.

The first point that I want to discuss is the idea that this is a value added tax levied by the government and collected by various vendors and suppliers. From my understanding this is a legally correct definition. The problem is that this phrasing does not change the laws of supply and demand. If the price of a good or service moves, it matters not why it has moved in terms of the effect of demand. Price up, demand is usually down. Continue reading

Waha’s lost AED 543 million hedging loss Is borrowing to pay for operations and investments wise?

Waha Capital’s management report for 2017 “[Waha] reported net profit attributable to owners of the Company of AED 425.9 million…” As is my usual approach, I double check the financials. Looking at the bottom of the income statement I see a loss of AED 95m. That’s a difference of over half a billion dirhams. Going up the income statement I find the number that the management uses under “Profit” and the number at the bottom of the income statement is termed “Total comprehensive loss.” The main difference is a loss of AED 543m on some hedges. Now, I confess not to be an expert in accounting but I know quite a bit about investing. Waha’s accountants may be able to persuade their auditors that this classification is correct but Waha’s management should have explained such a large discrepancy to its investors, regardless of what the accounts say. Transparency is the bedrock of good corporate governance and when Waha’s management report does not provide the correct transparency, then there simply cannot be good governance. Waha’s management had a duty to its shareholders to point out the half a billion dirham loss on the hedges and to explain why they where not included in the accounting of the P/L of the company as reported. There might well be a good explanation. But no explanation is not acceptable, especially for an investment company. Continue reading

Shuaa rising profits mask questions over provisions and commissions How much of the investment bank's return to profit is due to provisioning changes?

Shuaa last week announced profits of Dh74 million for 2017 versus a loss of Dh132m in 2016. Quite the turnaround. As always, it is important to examine such large differences in financial performance. So our first step is to look where this came from, an increase in revenues or a decrease in expenses. Continue reading