Shuaa reports FY2008 results, strong balance sheet - expects no further downside

The year end results are compared to the first 9 months of 2007 here because the firm has changed its financial year end from 31 March to 31 December to align with its peer group and increase market comparison.

For the financial year 2008, Shuaa reported a net loss of Dhs948.5m ($258.4m) and diluted earnings per share were negative Dhs1.199 ($0.327), compared to positive Dhs0.559 ($0.152) for the first 9 months of 2007.

For the third quarter 2008, Shuaa reported a net loss of Dhs577.4m ($157.3m), compared to a net profit of Dhs213m ($58m) during the same reporting period last year.

Mr. Majid Saif Al Ghurair, Chairman of Shuaa Capital, said: "2008 was a challenging year for the financial services sector worldwide, for the regional capital markets and for Shuaa Capital. We witnessed major market dislocations in the second half of 2008 that resulted in a significant drop in income for the Company. As a result, we have taken significant steps to reduce our exposure to the market and we have realigned our base in core business lines to mitigate these risks in the future. We have marked down our assets as prudently as possible. In addition, we have taken steps to cut costs across all areas as challenging market conditions persist."

He added: "We are confident in the prospects for Shuaa Capital although 2009 is unlikely to be an easy year. Longer term the firm is well positioned with a strong balance sheet and cash position and market leading diversified businesses."

Mr. Iyad Duwaji, Chief Executive Officer of Shuaa Capital commented: "While we have shrunk by one third in 2008, erasing significant gains made over the past few years, we remain well capitalized and well placed to navigate our way through these difficult times. In this context, we would like to emphasize a number of important points: Shuaa is solvent, cash flow positive in its core businesses, and holds a healthy cash position."

Continuing, Mr. Duwaji said: "The losses we are reporting are book losses that resulted from the sharp fall in asset prices over the past few months. Nevertheless, we continue to believe in the quality of our assets and the sectors where we maintain an exposure. Our investments are predominantly in GCC public markets or businesses. We have no significant real estate investments, and our exposure outside the region, including India, is negligible. Accordingly, an improvement in asset valuation in the GCC will reflect positively in our results going forward."

He concluded:" "We continue to have the experience and the skill set to turn the region's challenges into opportunities, and make these opportunities work for our clients, and our shareholders."

While the SC UAE Index recorded a decline of 66.0 per cent from 1 January to 31 December 2008, Shuaa Capital's share price decreased by 84.6 per cent. The firm's book value was Dhs2.27bn ($618.5m) on 31 December 2008, while its market capitalization stood at Dhs550m ($149.9m). This means that the market capitalization was equal to the firm's paid up share capital and that the firm, which closed at a share price of Dhs1.00 on 31 December 2008, was trading at 0.24 x its book value.

FY2008 Business Review
The reduction in earnings experienced by the Group primarily represents investment write-downs related to the year ended 31 December 2008, and are unlikely be repeated in future years. The Group strengthened the liquidity profile of its balance sheet during the last quarter of 2008 in response to the global downturn, and is in a strong position to comfortably meet the obligations of its lenders and creditors as and when they fall due.

The main reason for the firm's income decline were 'mark-to-market' reductions in asset valuations booked through the P&L under International Financial Reporting Standards ('IFRS') during the past two quarters. The firm suffered Dhs284m ($77.4m) in mark-to-market reductions and took Dhs153m ($41.7m) in impairment charges and its share of operating losses from its investments in associate companies.

Shuaa also started to feel the impact of the crisis in its fee-generating business units when significant market dislocations occurred. The current crisis of liquidity and confidence will take time to sort out, and we therefore anticipate that 2009 will prove to be a defining year for many in our business.

During the year the Principal Investments division was reorganized. This division contributed significantly to group earnings in the past under normal market conditions. In 2008, however, and while the strategies outperformed global markets in relative terms, it did poorly in absolute terms as a result of the exceptional market volatility and deflation of asset prices witnessed over the last two quarters of 2008.

The division reduced positions in the multi strategy, multi asset class portfolio systematically over the course of the last quarter of 2008. While the firm remains invested in the GCC and India mostly through our sponsored funds and along with our clients, we expect these markets to recover faster from their global peers on the back of stronger long term fundamentals.

As a result, the firm does not expect any further negative material impact on its overall performance from this business. The portfolio now has significant upside potential in the near term, however management will continue to monitor the valuations of these positions carefully.

This is underscored by the fact that Shuaa did not leverage its principal investments. Moreover, the firm has a strict policy of keeping leverage at a minimum. It was able to reduce its leverage ratio on Group level to 0.93 x equity at year end, down from 1.01 x equity from September or a reduction of 8 per cent. Excluding Gulf Finance Corporation, the leverage ratio stood at 0.77 x equity at the end of December 2008 which compares very well with other investment banking institutions worldwide.

Shuaa continues to invest in its fee-generating businesses and particularly in key growth markets, primarily Saudi Arabia. Whilst the focus will be on organic growth in 2009, the Company will remain open for consolidation opportunities.
Highlights in the period included the successful launch of Shuaa Capital Saudi Arabia, which has seen a positive start and the record results from Gulf Finance, the consumer finance operation.

Shuaa will continue to pursue its strategy of full and fair disclosure. The Company has not made use of the amendment to IAS 39 that would have allowed a reclassification of trading assets as available for sale, and any earnings reductions from those assets to be excluded from profit and loss. Shuaa prefers to be as transparent and coFnsistent as possible in all business cycles and report honestly, accurately and comprehensively.