The great thing about the region in which we invest is that we never run out of exciting stories to tell you, more importantly, most of these tales are of a positive nature and narrate the region’s growth and opportunity. The main themes are always about how companies in the 70+ economies of this new silk road harness both the strong internal growth dynamics and find ways to work with each other, forging a network in which the developed world is increasingly moving out to a peripheral position.
As you may already know, when we consider Africa and the Middle East, we classify the region as per 4 grand themes: South Africa, with its highly developed framework and its strongly growing middle class, an example for other African countries to aspire towards. Sub-Saharan Africa, a paradigm shift which leads to the rising of new nations and its consumer markets. North Africa is all about consolidation of vast populations towards higher levels of GDP/capita and, finally, the Gulf region with its competitive advantages and its privileged location in the epicentre of the world’s economic activity.
Every week we select a story that narrates the kind of opportunities we are seeing. This week, we feature 2 developments that caught our attention. The first speaks about how the UAE continues to position itself as the quintessential hub in the middle of the world. The second is about the voracious appetite of the Maghreb investor for new companies to invest in.
Let’s start by telling you more about Dubai’s latest bid to consolidate itself as the hub of the new world. Marc Foss, our man in the Gulf provides us with a perspective on this development:
The key word in the ‘Middle East’ is ‘Middle’
Over the centuries, Dubai’s value proposition has been that of a hub for commerce. A place where merchants traded goods that came from Asia, Arabia and Africa. Recently, the high profile debt issues of Dubai World’s holding group have cast a cloud over the city state. This, alongside the very public slump in the property market there has undoubtedly tainted the perception many foreigners have of the place. Yet the perceptions and the realities are poles apart. As we have pointed out in the past, the restructuring of Nakheel, the real estate developer and culprit of the holding’s problems, has so far run an ordered course: no default has occurred; revised terms of the restructuring are expected to offer the bank creditors 5 year extensions on their loans (not 10 as widely expected), as well as a spread of 400 basis points over LIBOR/EIBOR (not lower or even zero as widely expected); full redemption of USD4.5bn in Nakheel ’09 and ’10 bonds has already occurred. Despite the initial shock to creditors, this has to be viewed as a creditor-friendly work-out, not a disaster as is widely perceived.
The Gulf truly has a privileged geographic ubication. 9 out of the world’s top 20 countries lie within a 5 hour flight radius, representing more than 60% of the World’s population. Dubai recently reinforced this central position not just as the leading regional aviation hub but also as the operator of what will be the world’s largest airport with the official opening of the first phase of the new Al Maktoum International Airport. This facility, which will be operational in March next year, is also strategically located between Duabi and Abu Dhabi while also being in the vicinity of the seaport of Jebel Ali. It will represent a new phase for Dubai’s transport and logistics industry which is one of its long-standing economic engines.
The city around the airport and the associated infrastructure build-out will happen over a number of years into the early 2020’s at an estimated phased cost of $32BN making it one of the biggest infrastructure projects in the region.
This clearly shows is the Emirate’s commitment to going back to what it is good at, namely providing excellent infrastructure and logistical facilities designed to attract both regional and international companies to Dubai and the UAE. Dubai is re-focusing on its competitive advantages as a dynamic and entrepreneurial place to live and to do business. Did you know that, while Dubai’s resident population stands at around 1.8 million, the average daily population of the emirate rises up to around 2.6 million? This amazing statistic serves as proof that people are visiting to the place to meet, engage in business and leisure.
When complete, the Al Maktoum International Airport will be the largest airport in the world with 5 parallel runways, 2 terminals and 6 concourses. It will be capable of carrying 12M tonnes of cargo and 160M passengers annually; that’s three times the passenger capacity of Heathrow! As can be seen on the chart, the existing Dubai International Airport is already one of the busiest airports in the world after Heathrow and Hong Kong International.
As much as 41milllion passengers passed through its gates last year, the growth is running at an annual rate of nearly 20% with capacity planned to reach 90M over the next few years. Just look at Dubai’s hugely successful national flag carrier, Emirates Airline, it already flies from Dubai to more than 100 destinations in over 60 countries, reaching every continent. This growth trend in traffic is not just limited to Dubai, airport footfall grew 33% in the Middle East last year compared to 7% globally.
Similarly, from a trade perspective, Dubai’s existing international airport handled 1.92M tonnes of cargo last year, even growing by 5.6% during the worst downturn in civil aviation history. An increasing amount of this cargo trade is coming from Asia and destined to the Middle East, much of which in turn is being shipped further transported to Africa and Europe, yet more evidence of trade routes re-connecting along the new Silk Road.
Pricing as well as quality of customer service have also been contributing factors with many of the middle eastern carriers outshining their western counterparts in this respect. How many of you who have travelled on Emirates or indeed Etihad airlines have not been impressed by the quality of service and the ever-increasing myriad of flight routes on offer?
The global recession has focused passengers attention on price and the carriers from the Gulf are generally able to offer routes at prices that others can’t compete with. The UAE’s airlines have a set of competitive advantages in their favour. Just imagine, if it costs me less than $15 dollars to fill up my car in the UAE, so just go figure how little these airline carriers must spend on fuel! In addition, labour costs are lower and the economies of scale and efficiency generated from newer and larger fleets is resulting in pricing that is difficult to beat by the majority of competitors or legacy carriers, all this obviously results in strong pricing power. Furthermore, desert land is plentiful, and the absence of residents that complain about airport noise makes it possible for the airports to operate 24/7.
Already Emirates Airline has 10 of the new A380 super jumbos in service and has recently placed an order for 32 more which brings its total orders up to 90 aircraft. In fact, taken together the region’s major carriers (Emirates, Etihad & Qatar Airways) represent some 10% of all new orders for the A380. By around 2020, Emirates expects to have an overall fleet of more than 400 long-haul aircrafts, dwarfing the capacity of any other airline. It seems the skies are clearing over Dubai with many new runways ahead…
The Maghreb and is insatiable appetite for equities
Judging by the strong recent performance of the Maghreb markets and the high anticipation surrounding the new issues in north Africa, it would be fair to say there is voracious appetite by investors to put money to work in new investment opportunities. A last minute decision to exclude foreign investors from the IPO of Ennakl, the Tunisian car dealership, in order to ensure that the appetite of local investors is met, is a clear example that investor sentiment is spilling over in this part of the world. Before the decision to limit the participation to domestic investors, the IPO was more than 100 times over-subscribed, without the foreigners, the subscription ratio still stands at more than 70 times!
This week we ‘d like to take a closer look at Addoha, the main Moroccan real estate develeopr’s capital increase. Youssef Lahlou, our Casablanca-based investment analyst provides us with the local perspective:
Morocco’s social housing shortage is estimated to be around 1.2 million homes, which is expected to increase by 125,000 annually. Over the past few years already, the kingdom is on a mission to eradicate the existence of slums and raise the living standards of its citizens. Providing good quality and affordable housing is one of the key deliverables in order to realize this objective.
Only 35,000 social housing units were built in 2009, down from 129,000 in 2008. This decrease is partially attributable to the global recession, but also related to the repeal of tax breaks in 2008 for developers of social housing segment. Instead, all property developers received a 50% break last year, causing many to leave the low-income construction market in search of higher profit margins. Lessons have been learned from this and the government has further tinkered with policy to ensure that low-income homes are being built at affordable prices. Around 70% of market demand for real estate is for social housing, so the Moroccan government has reinstated affordable housing incentives in its 2010 budget. The bill will give social housing developers exemptions from a capital gains tax and a cement tax. Low-income homebuyers will also benefit from a value-added tax rebate and an exemption from registration fees. Furthermore, the State has put together a fund granting people with low or irregular incomes loans covering up to 70% of the price of their home. Commercial banks have been reluctant to extend housing loans to the low-income population, exacerbating the housing crisis as the majority cannot afford to purchase homes on their own.
The advantages given to developers will allow for attractive returns on investment to the construction industry, with all that it entails in terms of opening up new construction sites, job creation and sales of building materials, which will in return further boost the economy of the country.
Addoha, the fifth largest company in terms of market capitalization on the Casablanca Stock Exchange, is the local leader in social housing with market share of over 65% and one the most important land reserve of over 15000 acres spread across the major Moroccan cities. In order to position itself to felly benefit from the budget’s new incentives, the company is planning to look for financing on the capital markets.
Addoha will sell shares in its planned 272 million Euros rights issue at MAD 95 a share, giving it funds to forge ahead with social housing programmes. The price offers an equivalent of 21% discount to last Monday’s close of MAD 121. The company plans to sell 31.5 million shares during the subscription period of July 15th to August 12th. Shareholders will be able to buy 1 share for every 9 shares held.
The market consensus tells us that the rights issue was well received as it showed that founder and top shareholder Anas Sefrioui was positioning Addoha’s for a prodigious future as the process from the capital increase would allow the company to engage in numerous new projects. The company will use the funds from the capital raising and a bond issue (181 million Euros) to build 150,000 social housing units, buy land and still retain the ability to also press ahead with projects of luxury housing arm Prestigia.
Addoha powered the Moroccan stock market to new highs in the years after its 2006 initial public offering. However, its stock price remained unchanged last year due to concerns over the effect of the global economic downturn on demand for its luxury villa developments. The stock price has gained around 16% this year as investors again focused on prospects for its cash-generating, state backed social housing projects.
With this buoyant investor appetite, we will certainly see the announcement of more IPO’s in North Africa..
Al always, we look forward to keeping you updated and look forward to discussing all this in more detail with you in the near future.
With kind regards from the Silk Invest Team
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