EMERGING HEROES
Tapping into the right opportunities promises investors a chance to make good returns even in these troubled times. Stocks like galfar engineering and qatar telecom being sure shot bets

By Matein Khalid

There are two GCC money market opportunities that I feel could offer a potential 30 per cent return in 2009. First, Oman’s Galfar Engineering and Contracting is attractive at RO0.65, down from its high of RO2.40. This is a blue chip contracting firm whose order book exceeds $2bn, primarily with Oman’s government ministries, Petroleum Development Oman (PDO) and Shell.

The Galfar IPO in October 2007 was a spectacular winner, raising more than four times of its offer price on the Muscat Securities Market. However, Galfar shares were devastated by the GCC bear markets, the exit of offshore hedge funds, the plunge in crude oil prices and a third quarter earning miss on lower contract margins. This resulted in a sustained selling, particularly by offshore and margin accounts as Galfar is one of the largest and most liquid shares on the exchange.

Buy into Galfar
However, the Galfar story has actually improved even as its valuation was gutted in the past six months. The Oman government’s revised budget estimates for oil are at $45 and PDO has a strategic commitment to boost oil/gas reserves, so it is not a surprise that Galfar’s order book actually rose to $900mn in 2008. Moreover, the fall in the contract margins will reverse as steel, cement, bitumen, construction equipment and copper prices plunge as a result of the global recession and the Wall Street credit crunch. Meanwhile, Galfar valuations have compressed below 8 times earnings, far below its recent peak. In essence, Galfar is finally a value share for the first time since its flotation. My target range is to buy at RO0.5 and sell at RO0.8.

A defensive GCC share is Qatar Telecom (Q-Tel), which has also halved to QR125 on the Doha stock exchange. Q-Tel has done seminal acquisitions such as Wataniya (Kuwait), PT Indosat (Indonesia), Liberty Telecom (the Philippines), Asiacell (Iraq) and Nawras (Oman). Its overall subscriber base totals up to an impressive 56mn. Q-Tel is a growth engine that derives a mere one-third of its revenues from Qatar which makes sense as Qatar is a miniscule market with a teledensity of 125. Moreover, as Vodafone enters Qatar as a second operator, Q-Tel is expected to face tough competition. Q-Tel also derives almost all its revenues from wireless now, making it a true emerging market powerhouse.

Presence in growth markets
Though margins and average revenue per user (ARPU’s) are much lower in Southeast Asia than the Gulf the scale of growth in the former is far higher and this augurs well for Q-Tel.

Q-Tel was trading at a time at a bubble valuation of five times its book value and 18 times its earnings in Doha and Dubai. But this has changed and Q-Tel now trades at a modest 1.3 times book value and 10 times earnings despite the fact that it is now a totally different firm. The telecom major is no longer a Qatari telecom monopoly but an emerging market global wireless franchise. I doubt if Q-Tel shares will fall much below its recent bottom of QR110 which if it holds, could be an attractive entry point.

Geographical outlook
I believe Brazil will be one of the best performing emerging markets next year. It trades at a rock bottom forward valuation metric of only 6 times earnings, a 30 per cent discount to Latin America and global emerging markets. Of course, Brazil’s Bovespa is a classic commodities index.

However, Brazil is also ultra-sensitive to a rise in international appetite. This is the reason the Brazilian Real has plunged from 1.60 to 2.40 against the dollar. Yet Brazil has some of the highest real rates on the planet, with a SELIC (The SELIC rate is Banco Central do Brasil’s overnight lending rate) money market rate as high as 13.5 per cent. The monetary stimulus by the world’s central banks will push up the commodities market at the same time as China injects a $600bn stimulus to maintain GDP growth in the Middle Kingdom. I believe Brazil will outperform Mexico whose exports are primarily headed to the US and whose remittance revenue from its Diaspora in Texas, Arizona, California and New York will plummet as the American consumer recession bites next year. Brazil has no problem with banks holding toxic CDOs (collateralised debt obligations) and the central bank will surely reduce interest rates to revive GDP growth as domestic inflation falls. I believe it is entirely possible that Brazil offers a total return potential in excess of 30-40 per cent next year as the Bovespa benefits from the biggest synchronised monetary and fiscal stimulus in the history of finance. Moreover, the Brazilian Real is undervalued by at least 20 per cent. The best way to benefit from a potential Brazil bounceback is to buy the Brazil Index Fund listed on Amex (symbol EWZ). The Brazil Index Fund has plummeted from 102 to a recent 32, which is an attractive entry point.

Russia has promised to co-ordinate with OPEC because neither Moscow nor the Gulf oil exporters wish to see oil prices fall to $30 or lower. A two million barrel production cut, led by Saudi Arabia, Kuwait and the UAE, is thus highly probable. As interest rates plunge, and credit markets recover from their nuclear winter, oil prices could rise by $10 even if global demand remains sluggish as long as China maintains its GDP growth. This suggests that the Norwegian Kroner is undervalued at 7 against the dollar, which has now fallen 10 full points against the euro.

The author is a renowned investment banker based in Dubai.

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