Gulf News - Rationale and mystery in Emirates Refreshments Co.'s stock upturn

Vijay Valecha, Special to Gulf News, Dated 04 Feb 2021

UAE equities were subdued this week after a stellar run all through January. DFM closed lower by 0.98 percent while ADX rose 0.40 percent for the week ended February 4, with a host of restrictions imposed to curb the spread of COVID-19 dampening local markets' sentiments..

This week's top gainer is Emirates Refreshments Co (ERC) with 73.95 percent. The rally is powered by its recent decision to increase paid-up capital by Dh270 million to Dh300 million through a rights issue. Nonetheless, the company has run far ahead of its fundamentals with a market capitalization of Dh933 million, while the cash infusion is only Dh270 million.

Even if the authorized capital limit of Dh600 million is reached, the amount that will come into the company is only Dh570 million. Anyway, there is no indication from the management that it will raise the paid-up capital to authorized capital.

Diversification plays

ERC planning to invest in real estate, construction, and facility management, as well as in industrial and mining activities, and healthcare. And sectors like mining and food generally operate at razor-thin margins. It is highly unlikely that ERC will be making significant profits with a capital of Dh300 million, even if it can leverage it.

The current retail mania seems to have triggered this rally, and investors will be better off not chasing this rally.

Aldar Properties, a well-run real estate company, has assets of Dh39.5 billion from which it generated revenues of Dh7.98 billion in the last 12 months. And it struck a profit of Dh1.45 billion giving it a net profit margin of 18.2 percent.

Solid ground

The developer has a market capitalization of Dh30.192 billion, trading at 20.73 times TTM (Trailing 12-month) profits. Certainly, Aldar can make this profit margin due to its economies of scale

The other major gainers are Dubai Insurance Co. (up 15 percent), Palms Sports (13.89 percent), Waha Capital (12.50 percent), and Orascom Construction (10.40 percent). Recently Orascom Construction bagged about $920 million in new awards, which triggered the gains. The total backlog of Orascom stood at $5.3 billion as of the end of December.

UAE equities are likely to stay stable…