Limited construction and banking exposure to Dubai, says Maybank IB

KUALA LUMPUR: The sell-down on CONSTRUCTION [] stocks over the past week in the wake of the Dubai World debt crisis has been overdone, as many contractors have shifted their focus to Abu Dhabi, said Maybank Investment Bank (Maybank IB) Research.

The research house retained its buy recommendations on WCT BHD [] with a target price (TP) RM3.30, GAMUDA BHD [] (TP: RM3.80) and SUNWAY HOLDINGS BHD [] (TP: RM1.90).

It said the Dubai World debt crisis was a setback, but it should not affect Middle East investments, with member countries sitting on huge oil reserves.

Maybank IB said although Dubai was the first United Arab Emirates (UAE) destination of Malaysian contractors in 2004, many had since shifted their focus to Abu Dhabi.

Malaysian contractors have secured RM10.3 billion contracts in the UAE to date, of which RM1.9 billion have been handed over and the balance are at various stages of completion, mainly in Abu Dhabi.

“Listed contractors with a presence still in Dubai are LCL Corp Bhd, ZELAN BHD [] and IJM Corp, which is slated to complete its last job by 1Q10. Except for LCL and WCT which is embroiled in the Meydan contract dispute arbitration, bad debt should not be an issue for the contractors,” it said.

The research house also said its checks revealed marginal exposure by Malaysian banks to Dubai, adding these were loans mainly for project financing or the holding of bonds.

An artistic impression of WCT's Marina Landside Facilities for the Yas Marina Yacht Club in Abu Dhabi. Maybank IB retained its buy recommendation on WCT at a target price of RM3.30.

It estimated a total exposure of RM500 million to RM800 million for the five major banking groups. The relatively larger exposures were at MALAYAN BANKING BHD [] (Maybank), which on a worst case could impact the shareholders’ funds by up to 1.9% and RHB CAPITAL BHD [] by up to 1%, it said.

Maybank IB said the exposure of CIMB Group Holdings Bhd and AMMB HOLDINGS BHD [] was marginal, while the Public Bank Group had no exposure to any corporations in Dubai, it said.

It said a likely fall-out, however, could be the exit of Dubai Financial Group LLC (DFG), which did not subscribe for its 40% entitlement to Bank Islam’s RM540 million Islamic convertible preference share issue in October 2009, which was subsequently taken up by Lembaga Tabung Haji (LTH).

“Upon full conversion of the preference shares, DFG’s stake in Bank Islam will dilute to 30.5% from 40%. Earlier, the Dubai group had said that it was reviewing its Bank Islam stake and may consider an exit if a good opportunity arises.

“DFG subscribed for new shares in Bank Islam in 2006 at RM828 million. Its entry price represents a price-to-book value of 1.06 times based on Bank Islam’s books as at September 2009,” it said.

Meanwhile, Dubai’s exposure in Malaysia property development is only in Iskandar Malaysia, via Limitless LLC, in a 60:40 joint venture with UEM LAND HOLDINGS BHD [] to develop Puteri Harbour’s premier residential enclave, said Maybank IB.

“This project is still at the master planning stage,” it said, adding that there were no other major Dubai investments in Malaysia.

The research house said the other major Middle East investments in Malaysia were from Abu Dhabi (in RHB Capital) and Saudi Arabia (in Binariang).

Investors from Abu Dhabi, Kuwait and Malaysia have teamed up to control UBG BHD [], which holds stakes in construction groups, LOH & LOH CORPORATION BHD [] and PUTRAJAYA PERDANA BHD [], it said.

Maybank IB said despite the setback at Dubai World, it believed the quest to find a suitable home for Middle East petro-dollars would continue. “With total crude oil reserves of 494 billion barrels as at end-2008 (38% of global reserves), the five major oil-producing countries in the Gulf (Saudi Arabia, Kuwait, Qatar, Oman, UAE) remain in a very comfortable position, resting on an inventory value of US$38 trillion (RM129.2 trillion) at today’s oil price of US$77 per barrel.

“The combined oil reserves could last another 80 years. The wealth potential will fuel investments by the states, state-owned corporations and sovereign wealth funds, which are among the top three in the world in current asset base,” it said.