If! 27 February 2020

As it extends an offer of a 50% finance facility, Samana Developments has launched its US$ 27 million Saman Golf Avenue project. Located in Dubai Studio City, the development, covering 80k sq mt, features 233 luxury studio, 1 and 2 B/R apartments. The developer also guarantees 24% return over three years and offers a payment scheme, comprising a deposit, followed by 80 months at 1% of the unit’s cost.

A report by Property Finder concludes that the best yield for investors is to be found for apartments in Dubai International City, with 10.6% returns, ahead of the likes of Discovery Gardens, Al Barsha, Barsha Heights/Tecom and Dubai Sports City, with returns of 8.6%, 8.0%, 7.9% and 7.8% respectively. When looking at established locations and villa/townhouse communities, Motor City, Barsha and Arabian Ranches posted smaller returns – 5.2%, 5.0% and 4.9% – whilst newer developments, such as Town Square, Mudon, Reem and JVC, with higher gross returns of 7.6%, 7.3%, 6.4% and 6.3%. All these look a lot more attractive than say Toronto, Singapore, London, Sydney and Hong Kong where average gross rental yields are between 2.8% – 3.9%.

Yet another acquisition for DP World was the purchase of Canadian terminal Fraser Surrey Docks (FSD) from Macquarie Infrastructure Partners. The terminal operates more than 1.2k mt of berth and 189 acres of yard, whilst handling over a million tonnes of grain, (and 250k twenty-foot equivalent shipping containers).

Careem and Uber will face new opposition as Wow Electronic Transport Services started operations last Saturday, after final RTA approval. The ride hailing firm already has a presence in Pakistan, France and four US cities, with massive global expansion plans. Like others, Wow will allow users to order a ride to pick them up and take them to a particular destination and will offer different options such as  Wow stretch limo, Wow ladies and Wow VIP.

Meanwhile, Careem has diversified and, in tandem with the RTA, has launched a bike rental service in the region, with 780 bicycles initially available across 78 solar-powered stations, that will eventually reach 3.5k bikes and 350 stations over the next five years. Dubai currently boasts 425 km of bike tracks, expected to expand a further 50% by 2023.

It is reported that NMC’s BR Shetty has requested Houlihan Lokey to look at a potential debt restructuring, or the sale of some of his group’s assets, which includes NMC, (currently mired in a potential accounting scandal), and financial services firm Finablr Plc. It seems that the holding company had a US$ 1 billion loan used to acquire Travelex Holdings Ltd (now owned by Finalbr); the money travel service owned by Shetty was offline for six weeks, until the end of January, because of a cyberattack, during which time it had to use pen and paper to manually complete transactions. Only last week, this blog noted that Shetty had resigned from the board of NMC, amid investor concerns he faced a margin call and misrepresented his stake in the hospital operator; furthermore, Carson Block’s Muddy Waters also alleged that NMC’s financial statements could have a potential over payment for assets, inflated cash balances and understated debt.

On Thursday, NMC Health suspended trading of its shares on the London Stock Exchange, after a request by the much-depleted board to ensure “the smooth operation of the market”. A day earlier, the UAE healthcare firm had removed its CEO Prasanth Manghat and also granted CFO, Prashanth Shenoy, extended sick leave.

According to the central bank, UAE’s overall real GDP grew by 2.9% last year, driven by  growth in both the non-hydrocarbon and hydrocarbon sectors; this is much higher than the figure of 1.6% bandied about by the IMF. The agency noted that employment in the private sector increased by 2%, year on year, whilst total credit expanded by 6.2%. Because of the 6.5% Q4 decline in oil prices, and continuing falls in rents, the consumer price index declined by 1.6%.

Figures released by the Central Bank showed that 2019 expat remittances, out of the UAE, slowed 2.5% to US$ 45.0 billion – an indicator of how difficult the year had been. Like many other countries, the UAE has had to battle geopolitical tensions, a slowdown in global trade, an oversupplied property sector and now the impact of coronavirus. However, with hiring in the private sector 2.0% higher in Q4, year on year, remittances were up 1.8% – a hopeful sign of what may happen in 2020. There was no change in the countries benefitting from UAE remittances, with the top five being India, Pakistan, Philippines, Egypt and the UK.

Having seen fuel prices remain flat for the first two months of the year – and with oil prices tanking due to the coronavirus – it was no surprise that March prices have fallen; Special 95 will retail 3.8% lower at US$ 0.556 per litre, with diesel down 6.3% to US$ 0.613.

The federal Ministry of Health and Prevention has slashed the prices of 573 medicines by between 47%-68%. These include medicines for diabetes, hypertension, cardiovascular, nervous/respiratory issues and some paediatric problems. This follows discussions between the ministry and 97 major local and international pharmaceutical manufacturers.

A mix of bank sector consolidation, tighter operating margins and digital transformation has resulted in a reduction in the number of branches (by 6.9% to 664) and employees (by 2.6% to 35.5k) as at the end of Q3. Because of the FAB bank merger, the number of licensed commercial banks dropped by one to 59 – thirty-eight of which are foreign banks (including eleven wholesale banks) and the balance “local”. The central bank also noted that the banks remain well capitalised and are sound overall, with a Capital Adequacy Ratio of 17.7% and Tier 1 Capital at 16.5%; the eligible liquid assets at 17.6% remained well above the central bank’s 10% regulatory minimum buffer.

Etisalat has completed the acquisition of cyber security outfit Help AG, which will give the telco enhanced presence in relation to cyber security, as well as strengthening its cloud, internet of things, artificial intelligence, big data and analytics lines of business. The 25-year old German company has had a regional presence since 2004, over which time it has served a plethora of sectors and has become a trusted regional security adviser.

The Majid Al Futtaim Group posted 1.0% growth in both its 2019 revenue, at US$ 9.6 billion, and profit of nearly US$ 1.3 billion, driven by “our diversification efforts by entering new countries and expanding out footprint in priority markets, while maintaining strong financial discipline across our portfolio.” By the end of the year, its asset portfolio topped US$ 17.2 billion, as its operational cash flow amounted to 122% of its EBITDA (earnings before interest, taxes, depreciation and amortisation). Its two major revenue streams had almost flat results with Properties accounting for US$ 1.3 billion of revenue (down 1.0% on the year), as EBITDA remained at US$ 817 million, and the Retail revenue nudging 1.0% higher to US$ 7.7 billion, as EBITDA came in 2.0% up, to US$ 381 million.

Damac Properties is looking to expand operations into Saudi Arabia, whilst continuing to invest in the UK, as its local market remains flat. The Dubai-based investor is also involved in projects in Lebanon, the Maldives and Oman and has entered the North American market for the first time with a JV in Toronto. Although it posted its first annual loss in a decade last year, the developer remains bullish noting that “we’re at the bottom now in Dubai and we’ll see some slight improvement with Expo 2020”.

Probably wishing that it had not, the bourse opened on Sunday 23 February and four points higher (0.1%) the previous week, slumped 148 points (5.4%) to 2590 by 27 February 2020. Emaar Properties, having gained US$ 0.01 the previous week, was US$ 0.11 lower at US$ 0.95, whilst Arabtec, US$ 0.02 higher over the previous week, was US$ 0.03 lower at US$ 0.20. Thursday 27 February saw the market trading 132 million shares, worth US$ 72 million, (compared to 95 million shares, at a value of US$ 49 million, on 20 February). Almost five years ago, Arabtec was trading at US$ 3.13 (AED 11.59 v AED 0.75), and over February shed 25.7% from its month opening of US$ 0.28. Thirty months ago, an Emaar share was at US$ 2.40 – in February it lost 13.3%. in market value to close on US$ 0.95.

By Thursday, 27 February, Brent, having gained US$ 3.61 (6.5%) the previous fortnight fell victim to coronavirus, losing US$ 8.03 (13.6%) to close at US$ 51.01. Gold, US$ 56 (3.6%) to the good the previous two weeks, gained a further US$ 25 (1.5%), closing on Thursday 27 February at US$ 1,646.

Like most other western economies, the Australian retail sector is feeling the stress, attributable to high rents, e-commerce, many business models not changing with the times

and the recent tendency of consumers to pay down debt rather than spend. The combination of these factors has seen the name of Colette join the likes of Jeanswest, McWilliams, Ishka, Bardot and Harris Scarfe to become the latest to call in administrators. Deloittes Restructuring has indicated that 25% of its 140 stores will have to close, over the next three weeks, whilst the firm will try and on-sell the remaining business.

The NSW gaming authority has begun an enquiry into allegations that Australian casino firm Crown Resorts has links to organised crime. The casino, 37% owned by Australian tycoon James Packer, and son of the infamous Kerry Packer, is reportedly defending claims over the use of junkets to encourage mainly overseas big spenders. The gaming authority is looking at two facets – “the vulnerability of junkets to the infiltration of organised crime” and “vulnerabilities of casinos to money laundering both generally and in connection with the use of junkets”. The case follows recent media reports, relating to the conduct of Crown Resorts and its alleged associates. Other allegations include that “Crown Resorts casinos were used to launder money, anti-money laundering controls were not rigorously enforced, gambling laws were breached and Crown Resorts or its subsidiaries were associated with junket operators that had links to drug traffickers, money launderers, human traffickers and organised crime groups.”

A September 2015 howesdubai  blog concluded that “there are reports that FIFA’s Secretary General, Jerome Valcke, has been put on leave by the scandal-ridden world football body. The 54-year old denies any wrongdoing but it is alleged that he was involved in a scheme to sell World Cup tickets for up to five times face value. Sepp Blatter’s right-hand man also reportedly tried to secure a pay-off of several million dollars before this suspension; so it is not difficult to see what the hierarchy are being paid for bringing the game into disrepute and ridicule. Now even his self-deluded boss must realise that The Party Is Over”!

This week, the disgraced so-called French football administrator, along with the chairman of Qatar-based media group BeIN Sports, Nasser Al Khelaifi, have been charged by Swiss prosecutors in relation to the awarding of television rights for the World Cup. Already banned by FIFA’s ethics committee for ten years, Valcke is being investigated for accepting bribes, aggravated criminal mismanagement and falsification of documents, The BeIN Sports chairman, (who is also president of Paris St Germain, and a member of UEFA’s executive committee), – and a third unnamed person – have been charged with inciting Valcke to commit aggravated criminal mismanagement; he no longer faces allegations of bribery after FIFA reached an “amicable agreement” with him to drop a criminal complaint connected to the awarding of rights for the 2026 and 2030 World Cups! No surprise there!

The damage that Valcke (one of many of the then corrupt FIFA hierarchy) has done to football’s reputation will never be fully known. During his eight-year reign, ending in ignominy in 2015, he oversaw organisation of two World Cup tournaments in South Africa and Brazil. Between 2013 and 2015, he exploited his FIFA role “to influence the award of media rights” for various World Cup and Confederations Cup tournaments “to favour media partners that he preferred”. In December 2010, in an unprecedented move, two World Cups were announced at the same time – Russia (2018) and Qatar (2022). Prior to this, world cup hosts were announced around six years before the event – not eight or twelve years and definitely not two at one ceremony. It seems that Valcke was but one in the FIFA “meritocracy” that may now face the full force of the law. How have the others escaped justice??

US investment firm Sycamore Partners has acquired a 55% controlling stake in the ailing retailer, Victoria Secrets, from L Brands, valuing the lingerie brand at US$ 1.1 billion. The main reason for the sale was that it now wanted to focus on its core brand, Bath & Body Works which sells soaps and home fragrances. L Brands, with a market cap of US$ 7.0 billion, had seen sales from Victoria Secrets, which accounted for about 50% of its total US$ 13.2 billion revenue, dwindle as it failed to keep up with both traditional and on-line competitors. Its 83-year-old chief executive, Les Wexner, who owns 13.2% of L Brands, has been in charge since 1963, making him the longest-serving chief executive of a S&P 500 company.

Having finally admitted to opening millions of fake customer accounts and wrongly collecting millions of dollars of fees over a fourteen year period to 2016,, Wells Fargo has agreed to pay US$ 3.0 billion to settle with US government regulators; US$ 500 million of the settlement will be repaid to investors, who were misled by bank disclosures. In January, former chief executive John Stumpf agreed to pay US$ 18 million to settle charges of failing to stop misconduct within the bank, which since 2018 has been under an order from the US Federal Reserve that limits its growth.

Restaurant Group confirmed that it would close up to 90 of its Frankie & Benny’s and Chiquito outlets by the end of next year, (rather than the six-year period indicated last year), as well as suspending its dividend. Whilst the revenue stream has been declining in many of its operations – with like for like sales in its leisure business, which includes Frankie & Benny’s and Chiquito, dipping 2.8% – it appears that its Wagamama and pubs units have been performing better, with sales 8.5% higher. The Group, currently with 360 restaurants, saw its shares falling more than 6% in Tuesday trading, not helped by the ongoing coronavirus crisis, which has been wreaking havoc on the global bourses.

Blaming the move “on a big shift in customer tastes and preferences”, Tesco is set to retrench 1.8k staff, in 58 locations, as the supermarket will make less fresh baking products in-store and bring in fully pre-prepared products, to be then baked on site. It would appear that consumer taste is moving away from traditional loaves, as UK sales of bagels, flatbreads and wraps gain traction.

Lebanon joins the likes of Argentine, DRC and Mozambique,  as its long term foreign currency rating has been cut deeper to junk status by S&P, down two notches to CC and Moody’s to Ca; there is no doubt that the country’s bondholders face a potential default in March. The cuts came on the back of the World Bank warning of an economic “implosion`, as well the country’s Eurobonds seeing yield levels in excess of 1000%. A debt restructuring is almost certain to occur that would result in Lebanese bondholders losing at least 67% of their original investment.

As the UK had been a net contributor, its leaving the EU has resulted in a massive US$ 81 billion gap in the EU’s seven year budget; there was no surprise then to see the bloc ending their recent summit meeting in disarray. It was reported that the “frugal four” – Austria, Denmark, Netherlands and Sweden – were unwilling to accept a budget of more than I% of the total EU GDP. German Chancellor Angela Merkel admitted that the “differences are too big” but warned that “we are going to have to return to the subject.” It appears that the seventeen beneficiary countries – dubbed the “friends of cohesion”, and including Greece, Hungary, Poland, Portugal and Spain – rejected a compromise proposal which would have had the cap at 1.069% of joint GDP and wanted a bigger budget percentage. On top of this squabble, there is further disagreement over how the budget should be spent, with some countries wanting more to cover the migrant crisis, climate change, security and digitisation. Maybe the UK got out of the mess just in time.

Apart from the human cost of coronavirus, 2.8k fatalities and 82k infected at the end of the week, its impact on both the Chinese and global economies is taking its toll. Chinese February car sales have slumped by 96%, to just 811 vehicles a day, as major dealerships remain closed; last year, 21 million cars were sold in the country – the world’s biggest car market. Meanwhile, production has also been disrupted with many of the global carmakers cutting back because of lack of parts made in China. It will take time for such companies to return to full capacity. Fiat has indicated that there was one “critical” supplier of parts that was putting its European production at risk, with three more Chinese suppliers causing concern. Toyota continues to monitor the situation but to date there has been no impact on its operations. Volvo has been forced to switch battery suppliers, whilst Hyundai has temporarily stopped production lines, at its factories in the country closed because of shortages of Chinese parts. Jaguar Land Rover has indicated that it could start to run out of Chinese parts for its UK factories and have been flying in supplies in suitcases. It is estimated that the Chinese economy will grow less than 4% in Q1, a lot less than the 6% level forecast before the onset of the virus; the global economy is expected to grow slightly less, by 0.2%, than it would have done otherwise.

This is but one of many industries suffering from the coronavirus risk and the resultant disruptions from “the world’s factory”. JCB has cut production because of a shortage of components from China. Within China, international companies have been facing the pinch with the likes of Ikea, Starbucks and other global retailers closing all their “local” outlets. Several overseas airlines have stopped all China flights and international hotel chains have been offering refunds – with an inevitable fall in their global revenue and profit. IATA estimate that the virus will result in a 4.7% downward estimate, (from 4.1% growth to 0.6% contraction), compared to what was expected prior to the coronavirus outbreak and that 2020 will now witness the first annual decline in global passenger since the GFC.  This is equivalent to a US$ 30 billion fall-out in revenue.

Other global manufacturers are also facing production delays, with concerns about a breakdown in international supply chains of which China is the main cog. Apple have come out warning that there will be supply shortages that will impact on global iPhones. On the commodity front, prices will fall as the Chinese economy slows; for example, copper prices have dipped 13% as demand slows. It is still too early to quantify the impact of such price reductions, but it will be felt by many emerging and developing economies, where such exports are their main source of income.

By the end of Wednesday, in Australia, the ASX 200 had lost about US$ 90 billion (6.0%) in value on the three days of trading this week, closing at 6,708 and the dollar was hovering around the US$ 0.66 level – near an eleven-year low. Tech and biotech companies suffered the worst of the damage, but many had already been trading probably at too a high price relative to their earnings. Firms such as biotech start-up tanked 20%, whilst tech firms Appen and WiseTech were 10.3% and 8.3% lower. Although 186 of the two hundred listed companies have lost ground, some of the remaining entities posted impressive gains, including healthcare provider, Healius and funeral operator Invocare, up 15.2% and 13.6%.

This week saw the global markets in turmoil, as traders dumped shares on fears that the spreading coronavirus could lead to a worldwide recession. On Thursday, all markets were painted red with Nasdaq, down 4.6%, followed by the Dow Jones and the S&P 500, both 4.4% off; the Dow Jones posted its biggest ever daily loss. Elsewhere the FTSE 100 shed 3.5% and the Nikkei more than 2%. It is estimated that so far this week, the global stock markets are now well into “correction” territory, having lost over 10% (more than US$ 3.5 trillion) by the end of Thursday trading, and potentially heading for a bear market, as global shares sink rapidly from recent record highs.

There is no doubt that the companies (as well as countries and individuals) that will suffer most are those who thought they had taken advantage of cheap debt when it seemed that the global economy could only go one way – and that was north. This blog has often indicated that the biggest economic problem was that of debt which has exploded since the GFC. For example, Australia has the highest household debt in the world, Japan a government debt equivalent to 260% of its GDP, the US Fed holding US$ 4 trillion in debt securities and China with its massive problem of shadow banking. The person who could suffer most is Donald Trump who has espoused the strength of the US economy (and this is where the conspiracy theorists will have a field day). If the US – and global economies – were to go into a tailspin and the world into recession, there is every possibility of a new resident in the White House at the end of the year. It is a big word and a little word – If!