That’s What Friends Are For                                                                        20 August 2020

Not seen for more than a decade, rent to own schemes have returned to the Dubai property sector, as Dubai South Properties announce such a plan for new tenants of The Pulse in its Residential District. The scheme has easy exit terms and there is no need to actually buy, but renters are allowed to make quarterly payments towards their unit, while living in it, which will contribute towards full ownership after a period of ten years. There is no doubt that there will be many potential first-time buyers in Dubai keen on owning their own property, without the need of any major up-front investments which can be as high as 30% of the value of the property.

Having reviewed ‘the fifty economic plan’, outlining the country’s fiscal policy for the next ten years, HH Sheikh Mohammed bin Rashid Al Maktoum is optimistic about the country’s future and confident that the UAE is striving  to have the fastest-recovering economy in the world, as well as being the most stable and diversified in the long term. The Dubai Ruler was chairing a meeting with a Ministry of Economy’s task force to review their post Covid-19 plans for the next decade, and key outcomes for the national economy by 2030. HH Sheikh Mohammed indicated that the federal government is promoting a drive towards an economy post-Covid-19 which is based on knowledge, smart technology and advanced sciences, adding that the cornerstone of this new economy is passionate talent. The strategy, launched last December, is focussed on several pillars – integrated economy, SMEs and entrepreneurship, tourism, foreign direct investment (FDI), doubling exports and attracting talents.

A week after the world was shocked to see a peace accord signed between the UAE and Israel, UAE’s Apex National Investment and TeraGroup have announced a commercial agreement to develop research and studies on Covid-19. This is apparently the first of hopefully a raft of trade, economy and effective partnerships between the Emirati and Israeli business sectors which will inevitably boost the economies of both countries, including energy, tourism, technology and precious metals.

With the cruise season fast approaching, Dubai is taking steps to ensure that it is ready to meet the challenge, arising from Covid-19, by assuring cruise tourists of the highest global safety standards at every stage of their travel journey from the time they disembark at Port Rashid to the point they depart from the cruise terminals; a draft safety protocol for the cruise industry is currently being drawn up by Dubai Tourism.

Global ports operator DP World saw H1 profit plummet 58.5%, on a reported basis, or by 34.5%, excluding a 2019 land sale to Emaar Properties, although revenue was 17.7% higher at US$ 4.1 billion, with the main driver being acquisitions made over the previous twelve months.  Cash from operating activities nudged marginally higher to US$ 1.1 billion. At the beginning of the year, DP World issued a US$ 1.0 billion capex guidance for 2020 – with investments planned in the UAE, London Gateway, Berbera in Somaliland, Sokhna in Egypt and Caucedo in the Dominican Republic. To date, it has it invested US$ 552 million across the existing portfolio.

Majid Al Futtaim Group posted a 27% decline in its H1 Ebitda (earnings before interest, tax, depreciation and amortisation) figure at US$ 436 million, as revenue slipped 3% to US$ 4.7 billion. The multi-faceted Dubai-based conglomerate, with major interests in shopping malls, real estate, retail and leisure sectors, tried to lessen the negative economic impact by reducing its cost base and focusing on digital transformation. Despite the economic environment, MAF is continuing with its expansion plans, including the openings, later in the year, of Mall of Oman in Muscat and City Centre Al Zahia in Sharjah as well as fifty-five new VOX Cinemas screens. Management have noted that ‘the recovery is a bit faster than expected,” but do not see a full economic recovery until the end of Q2 2021, dependent on the availability of an effective vaccine.

Of its five divisions, four – Properties, Malls, Hotels, (a 41% fall in occupancy rates) and Ventures (with a revenue drop of 46% to US$ 188 million) – posted declines, whilst retail revenue came in 4.0% higher at US$ 3.7 billion, with Ebitda growing 18% to US$ 193 million. Its Carrefour franchises posted a 263% jump in on-line sales, as it opened five physical stores and three new fulfilment centres in H1.

Driven by a 12% decline in H1 revenue to US$ 134 million, payments processor Network International swung to a first-half loss of US$ 150k, compared to a US$ 16 million profit over the same period in 2019. Its revenue streams in the ME and Africa fell 15.3% and 10.5%, year on year, caused by the usual Covid-19 suspects of movement restrictions along with reductions in domestic and tourism-related consumer spending. As a direct consequence of the pandemic, capital expenditure of US$ 40 million, including its entry into the Saudi Arabian market, was put on hold in April in a “prudent measure to protect” its cash flows; it has also introduced a hiring freeze and will cut discretionary spending. However, it did sign a US$ 288 million agreement last month to take over DPO Group, an African online commerce platform. Network International posted a 61% hike in e-commerce volumes in July, whilst Q2 volumes were 45% higher.

A JV between Emaar Entertainment and Abu Dhabi-based developer Eagle Hills is to develop an aquarium and underwater zoo at its 200k sq mt Marassi Galleria shopping mall, with 560 outlets, in Bahrain; no financial details were readily available. It will feature a 20 ft long “digital tunnel”, with interactive digital exhibits, and also house four different ecological zones – the ‘Rainforest’, the ‘Ocean Trench’, the ‘Jellyfish’ and the ‘Reef Zone’. Marassi Galleria mall forms part of 875,000 square metre Marassi Al Bahrain development, a joint venture project between Eagle Hills and Bahrain’s Diyar Al Muharraq that was launched in 2016. The waterfront site includes 6k residential apartments, 245k sq mt of retail space and two hotels. Emaar Entertainment manages facilities including Reel cinemas, Dubai Ice Rink, Dubai Aquarium and underwater zoo and KidZania. Mohammed Alabbar of Emaar is also chairman of Eagle Hills, whose chief executive is Low Ping.

Bahrain-based., but DFM-listed, GFH financial group posted a massive 69.4% slump in H1 profit to just US$ 15 million, with revenue slipping 10.4% to US$ 147 million; total expenses moved 10.0% high at US$ 126 million, mainly attributable to a US$ 500 million Sukuk issue to shore up the investment bank’s balance sheet. In H1, total assets expanded 3.1% to US$ 6.1 billion, whilst earnings per share dropped 69.0% to US$ 0.45 because the Covid-19 pandemic resulted in “modification losses, commercial banking restructuring activities, recognition of fair value losses and foreign currency translation differences”.

There is not too much to say when a company loses 94.4% of its revenue stream and this is what has happened to DXB Entertainments in Q2, after the theme park was closed as from 15 March.  The company, 52% owned by Meraas Leisure and Entertainment, posted revenue and loss figures of US$ 1.7 million (down from Q2 2019’s US$ 30 million) and by 11.0% to US$ 70 million. H1 visitor numbers dropped 57% to 596k, as revenue dipped 58% to US$ 29 million, and losses widened by 69% to US$ 236 million, which included a one-off, non-cash US$ 107 million impairment charge related to the pandemic. The theme park will reopen on 23 September and, with major upgrades during the six-month closure, guests will see a revitalised facility, including twelve new rides.

Embattled Union Properties posted a 20.4% decline in Q2 revenue to US$ 23 million, as it narrowed its net loss by 54.0% to US$ 11 million, driven by “a drastic cost cutting effort, including a reduction of the group’s administrative and operational expenses”. However, its H1 loss almost doubled to US$ 44 million, as revenue dipped 5.7% to US$ 53 million, although administrative and operational costs fell by about 24.2% to US$ 16 million. In H1, the developer was hit by a US$ 20 million loss on the value of investments held and a US$ 5 million loss on the disposal of investment properties.

As part of its strategy to erase accumulated losses of US$ 627 million, Union Properties is planning to list three of its subsidiaries – ServeU, (a facilities management business), The FitOut  (specialising in interior fit-out to offices, hotels and restaurant), and Dubai Autodrome – on the Dubai Financial Market. Dubai Autodrome is the first multi-purpose motorsports and entertainment facility located in Motor City. To date, the developer has built 60k units in Dubai and is planning a new project – Motor City Hills – with 195 villas, 490 town houses and six commercial land plots. (Who knew that Dubai had so many hills?).

Arabtec posted a net loss of US$ 215 million in H1, (compared to a US$ 16 million profit over the same period in 2019), with revenue 28% lower at US$ 823 million, attributing the loss mainly to “limited liquidity in the real estate and construction sector”. Cash flow was impacted by delays in the settlement of outstanding claims, increased costs and progress on projects being slowed down by the impact of Covid-19. The contractor’s other core businesses – Target Engineering, Arabtec Engineering Services and Efeco – remained profitable. The company is hoping for a quick solution to its on-going problems that sees its liabilities of US$ 2.76 billion greater than its assets of US$ 2.67 billion, with it owing the banks US$ 490 million and creditors US$ 1.444 billion. Only three years ago, Arabtec recapitalised that saw a reduction in the number of shares to clear US$ 1.25 billion of losses and a US$ 409 million fresh equity boost, via a rights issue. The developer will continue with its restructuring plans that aim to boost liquidity, cut costs, clear legacy projects, pursue legal claims to “secure and recover the group’s contractual rights” and to divest its non-core assets.

The bourse opened on Sunday 16 August and, 104 points (5.1%) higher the previous fortnight moved up a further 81 points (3.8%) on the week, closing on 2,236 by 20 August. Emaar Properties, US$ 0.06 higher the previous fortnight, closed up a further US$ 0.03 to US$ 0.79, whilst Arabtec, shedding US$ 0.04 the previous week, lost a further US$ 0.06 to US$ 0.20. Thursday 20 August saw the market trading at 336 million shares, worth US$ 85 million, (compared to 330 million shares, at a value of US$ 123 million, on 13 August). 

By Thursday, 20 August, Brent, US$ 5.47 (17.6%) higher the previous five weeks nudged up US$ 0.05 to US$ 45.07. Gold, having lost US$ 109 (5.3%) the previous week, shed US$ 10 (0.5%) on the week to close on US$ 1,940 by Thursday 20 August.  

Both Jaguar Land Rover and Tata Steel Bailout will have to seek private funding now that negotiations with the Johnson administration have broken down. The government decided that both companies – owned by the Indian conglomerate Tata Group – did not qualify for taxpayer support through its bailout plan, titled “Project Birch” which was introduced, by Chancellor Rishi Sunak, to rescue companies that are seen as strategically important. There are reports that the main stumbling block to any progress was the imposition of strict conditions on any lending.

Marks & Spencer is cutting a further 7k  jobs (about 9% of its payroll) over the next three months, noting there had been a “material shift in trade”, since the onset of Covid-19; in-store sales of clothing and home goods were “well below” 2019 levels, down 29.9% in the eight weeks since shops reopened.  Online and home deliveries headed in the other direction, with online surging 39.2%, compared to store sales tanking 47.9%. It seems that working practices during the pandemic showed that staff could work “more flexibly and productively”, multi-tasking and moving between food, clothing and home departments.

Supermarket chain Morrisons and Amazon are trialling a same day delivery scheme in Leeds, allowing its customers to get their shopping requirements from the tech giant for the first time; people have to an Amazon Prime subscription to benefit from the service and will have an option to book two-hour slots for same-day delivery. Currently, Morrisons operates a grocery delivery business through its own website, using Deliveroo and Ocado, but an Amazon deal would put its online platform on a different level. For Amazon, it is another step towards the tech giant’s target to serve millions of UK shoppers by the end of the year in a sector that has more than doubled during the pandemic, with many grocery chains struggling to keep up with demand.

Pizza Express is to close 16% of its UK restaurants to bring its total outlets to 381. The chain has taken this step, that could see the loss of 1.1k jobs, (almost 11% of the current workforce), to reduce its massive rental costs and “to safeguard the chain for the long term”. Pizza Express, majority owned by Chinese firm Hony Capital, noted that most of its restaurants had been profitable over the past three years, although the revenue stream had been slowing.

Since it came out of administration in 2018, House of Fraser has shut ten of its fifty-nine stores and is now expecting more closures. The number of shops to close will be dependent on current rental negotiations between the new administrators and landlords. The chain, part of Mike Ashley’s Frasers Group that owns Sport Direct, expects more job losses all over the High Street. Its annual pre-tax profits were 20% lower at US$ 186 million, despite a 6.9% hike in revenue to US$ 5.2 billion, driven by acquisitions.

After going into administration and closing its remaining 79 UK outlets, baby goods firm Mothercare has completed a ten-year franchise deal with Boots to sell its branded clothing and home and travel products at branches and online. Mothercare still has eight hundred global stores, operated by franchise partners, and has just signed a twenty-year deal with Kuwait’s Alshaya Group, which operates stores in Russia and ten ME countries.

According to Takeaway.com’s founder, Jitse Groen, Just Eat Takeaway, plans to end gig working across Europe that will see staff getting benefits and more workplace protection. This year, the company became the biggest food delivery, company outside China, when it completed a US$ 7.6 billion deal for UK based Just Eat in January and a US$ 9.6 billion acquisition of its US rival Grubhub. In its three leading European markets – the UK, Germany and the Netherlands – H1 orders jumped 34% to 149 million, compared with the same period in 2019.

Having been appointed the new Walt Disney chief executive earlier in the year, Bob Chapek has wasted no time to make his mark to transform the world’s largest entertainment company. He has already scrapped twenty foreign TV channels, closed down a musical version of the animated film Frozen, abandoned a chain of Chinese language schools and scaled back a US$ 1 billion resort-technology project; 100k workers have been furloughed. A consequence of the pandemic is the need to cut costs, as lockdown conditions have seen Disney theme parks cruise ships generating no turnover and a marked slowdown in their TV (inc ESPN and ABC)/movie businesses, resulting in a 42% slump in revenue; it also took a US$ 4.9 billion impairment charge. In a bold move, the new CE is planning to remove the Disney Channel TV networks from pay-tv systems, operated by Virgin Media and Sky in the UK, and to put the programming on the new Disney+ streaming service instead, using the Star brand internationally.

Apple has become the first US company to have a market value in excess of US$ 2 trillion in mid-morning trading yesterday, Wednesday 19 August, as its share price hit US$ 467.77. It took the tech giant just two years to double its value, after it became the world’s first trillion-dollar company in 2018. It was not the first global company to hit the US$ 2 trillion mark – this was the Saudi oil giant, Aramco, which reached this figure when it listed its shares last December; since then, its value has eased to US$ 1.8 trillion.

Following Fortnite by-passing Apple, (who take a standard 30% cut of sales from its compulsory payment system), by letting players buy in-game currency at a lower rate if they bought direct from maker Epic Games – Apple removed the platform from its App Store. Epic retaliated by filing a legal complaint, with Apple arguing that Epic had taken the “unfortunate step of violating the App Store guidelines”. It is alleged that Apple effectively runs a monopoly in both deciding what apps can appear on iPhones and demanding that its own payment system is used. Epic confirmed that it is not seeking financial compensation but would pass on any savings to its millions of consumers and is more concerned “in seeking injunctive relief to allow fair competition in these two key markets”.

In his latest effort to pressurise China, the US President, using his security trump card, has given ByteDance ninety days to divest its US operations of its video-sharing app TikTok. The US company is in advanced talks with Bytedance to buy its North America, Australia and New Zealand operations. (Two other suiters appear to be Twitter and Oracle, with the California-based company working with a group of American investors, including General Atlantic and Sequoia Capital). Donald Trump has indicated that he would support this deal if the US government got a “substantial portion” of the proceeds. He has also authorised government agencies to crackdown on the Chinese-owned social media app and to allow them to inspect TikTok and ByteDance’s books and information systems to ensure the safety of personal data while the sale talks are ongoing.

Earlier in the year, Softbank’s Vision Fund posted record losses, partly attributable to writing down WeWork’s valuation by more than 90% to US$ 2.9 billion, from its US$ 47 billion peak in which it had invested more than US$ 10 billion. This week, the Japanese company has added further financing of US$ 1.1 billion, in the form of senior secured notes, to WeWork at a time when the co-working company is witnessing declining membership, (12% lower at 612k), amid the coronavirus pandemic; the New York-based company has available cash and unfunded cash commitments totalling  US$ 4.1 billion. Quarter on quarter, revenue was 19.8% down at US$ 882 million, but 9% higher than in Q2 2019, with 843 locations in 38 countries.

IATA’s latest forecast, amended by a further year, is that passenger traffic will not return to pre-Covid levels until 2024, as the recovery so far has been slower than originally expected, with falls in 2020 passenger numbers now at 55%, rather than the 46% figure forecast in April. The reasons behind the revised forecast include slower lifting of restrictions, with increased cases in several countries, weak consumer confidence and uncertainty over possible future retrenchments, along with a marked decline in business trips as companies cut costs. On top of these three problem reasons, the position has been made worse by an increasing number of countries imposing travel restrictions to curb the virus spread. Figures speak for themselves – on a yearly basis, passenger traffic in May and June tanked 91.0% and 85.5%, as June load factors of 57.6% were an all-time low for the month. IATA anticipates that the airline industry will lose US$ 84.3 billion this year, with revenue declining 50%.

Australia is probably typical of many advanced countries as it experiences a ‘buy now, pay later’ boom, at a time that sees credit cards on the decline, (with 400k personal credit card accounts closed since March); furthermore, RBA data points to US$ 43.0 billion having been wiped off national credit card debt over that time period. The problem is that compared to other financial services, the industry is seen as being under-regulated, with warnings that this modern-day lay-by service leaves the vulnerable at risk of spiralling into debt. The Covid-19 pandemic has acted as a catalyst for companies like Afterpay and Zip Co. Between them, they have about 5.4 million customers in the country, both have had immense growth since the onset of Covid-19 and both have seen share values increase eightfold since March. Australia’s watchdog, ASIC, is reviewing the sector where most models allow customers to pay off purchases in instalments and avoid fees if they pay on time. Afterpay has estimated that 85% of its revenue is generated from charging fees to its 55.4k merchants which range from 3% – 6%.

The Indian Prime Minister announced a US$ 1.46 trillion package in infrastructure projects to boost the sagging economy, battered by Covid-19. It seems that Narendra Modi is aiming to make India self-sufficient in manufacturing and to develop the country as a leading global supply chain location. At an event celebrating the country’s 73rd independence anniversary, the Indian leader also confirmed that three vaccines are in different phases of testing in the country and mass production will begin as soon as scientists give the green light.

The world’s third largest economy witnessed its Q2 GDP shrink by an unprecedented 27.8%, quarter on quarter. Japan had been struggling well before the onset pf Covid-19 – and had already fallen into a technical recession – but the pandemic has only exacerbated the problem. Although exports have fallen sharply, the main driver continues to be a severe decrease in domestic consumption, made worse by two events last October – a 10% sales tax hike and typhoon Hagibis. As with all other countries scarred by Covid-19 – consumers buy less, companies earn less, and governments are hit by the double whammy of less tax receipts and the need to spend more. There is a feeling that Japan should bounce back, as Prime Minister Shinzo Abe has already injected massive stimulus packages and restrictions started to be eased in late May – a little earlier than other G20 economies. One country that lifted restrictions earlier was China, the world’s second biggest economy, and now it is bearing the fruit of their action, posting a 3.2% Q2 growth.

If there is one lesson that Covid-19 has taught economists is that the world has been too dependent on China for its supplies. The country was the first to go into lockdown and, almost immediately, supply chains were cut off and access to raw materials and products non-existent. Very few companies had a plan ‘B’ – and were without an alternative supply chain – and Just in Time inventory finally met its match, with so many companies regretting the fact that there was not any surplus stock lying around in the stores. A recent US survey concluded that 95% of companies would diversify suppliers both in and out of China, whilst 87% of the companies surveyed still maintained that China is still one of their top three sourcing destinations.

Last week, the number of Americans claiming unemployment benefits had dropped to 971k and has now unexpectedly climbed back to 1.1 million, at the same time Donald Trump is facing mounting pressure over his handling of the health crisis. It seems that, as the recent jobs’ improvement has stalled, this could be as a consequence of the impact of virus-related rolling shutdowns that are beginning to spread around the country, as consumers limit their activity and spending. As the recovery stalls, Congress is split in bipartisan groups on the detail and value of the next relief package and no agreement has been reached after more than two weeks of bickering. Democrats are pushing for a further US$ 3 trillion in further spending, with the Republicans looking for a smaller stimulus package.

In the first fortnight of the UK’s ‘Eat Out to Help Out’, the scheme, which runs every Monday, Tuesday and Wednesday has been used more than 35 million times. In a bid to further support the battered hospitality sector, the government has set aside US$ 650 million to fund the scheme that offers customers, in a total of 85k registered restaurants, pubs and cafes, 50% off the price of their meal, up to a maximum of US$ 13. It has been estimated that these facilities are actually 27% fuller now than compared to the same periods in 2019.

There is a tendency in the global financial press to use the UK economy as a whipping boy but there is every chance that it could be a major error, as it will probably recover a lot quicker than most of its peers. Only last week, the headlines screamed that the UK had entered into a technical recession and the economy had contracted 20.4% in Q2 (April – June). Not many reports added that the economy had actually grown in May and June by 1.8% and 8.7% respectively. Latest data according to a July IHS Markit/CIPS survey indicate that businesses in the services and manufacturing sectors grew at the fastest rate in more than five years. At the same time, retail spending levels have already recovered to pre-pandemic levels, driven by online shopping and sales rising over 70%. It is estimated that the country has already reclaimed half of its Covid-19 related losses and that by the end of the year, it will have expanded by a further 20%, but even at this rate, it will take another twelve months to fully recover. One problem area could be in relation to employment, but the fear of massive job losses has receded somewhat, with spending and business confidence picking up.

There is a thin line when it comes to a conflict of interest and the old boys’ network that sometimes sees a too cosy relationship between government and big business. The latest is the case of Sajid Javid who left as the UK Chancellor of Exchequer in February and has now accepted a position, as senior adviser for Europe, the Middle East and Africa, with JP Morgan, a bank he first worked with in the 1990s. He is barred from sharing sensitive information he received as chancellor, whilst the bank has not disclosed his pay or hours but noted that the work would not interfere with his duties as an MP. That must be a relief to his Bromsgrove constituents! However, the bank is “looking forward to drawing upon his in-depth understanding of the business and economic environment to help shape our client strategy across Europe.”  The job has been approved by the UK’s Advisory Committee on Business Appointments (ACOBA), which oversees jobs for former ministers and top civil servants. (Over the past two years it has approved ten applications by former ministers to take on outside work). He joins an illustrious list of former politicians on the same advisory council gravy train including former Italian economy and finance minister Vittorio Grilli and former prime minister of Finland Esko Aho. Even Tony Blair took a post at the bank after leaving office and was reportedly paid US$ 2.6 million as a “senior global adviser”. In 2017, it was reported that the then ex-Chancellor George Osborne managed to secure six jobs, including US$ 850k a year plus shares for a job with BlackRock that required him to work four days a month. Life in the fast lane can be a little more rewarding than the US$ 110k MP’s basic salary but although it can provide a path to financial riches, there are questions as to the value of the extent of government lobbying, policy knowhow and insider knowledge. That’s What Friends Are For!