UAE fuel retailer ADNOC Distribution’s entry in MSCI Emerging Market Index is right exposure

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ADNOC Distribution gets to play in the big league with the elevation to the MSCI Emerging Markets Index. It’s all good to go for the fuel retailer. Image Credit: Gulf News Archive

The largest UAE fuel retailer ADNOC Distribution’s inclusion in the MSCI Emerging Market Index could increase the attractiveness of its shares to potential overseas investors and further diversify the investor base. With $31.56 billion in assets, the company joins nine other UAE-listed companies that are part of the index with an estimated weightage of 0.04 per cent.

Asset management firms, foreign pension funds and sovereign wealth funds usually use indices such as the MSCI EM Index as part of their globe-spanning passive investment strategy. Adding ADNOC into that universe could attract significant foreign institutional interest.

ADNOC Distribution’s current market capitalization stands at Dh60.37 billion, and in the second-half of 2020, it successfully completed a private placement valued at $1 billion to institutional investors, increasing its free-floating equity to 20 per cent and contributing to improved liquidity of its shares.

Pre-COVID numbers

The first quarter 2021 revenue was at Dh4.28 billion, the best in the last four quarters and suggesting that the recovery for the company has possibly begun, although it is down by 13.3% compared to Q1-2020. With UAE being at the forefront of the vaccination programme, potentially resulting in a pickup for economic activity, revenues could get a boost to pre- pandemic levels.

The EBITDA for Q1-2021 was Dh817 million, which is up 46.8 per cent over first quarter 2020 due to the rise of corporate fuel volumes, improved margins as well as lower operating cost. Net earnings were Dh631 million, up by 57.9 per cent compared to same quarter last year, largely as a consequence of the higher EBITDA.

Non-fuel transactions were 17.5 per cent lower than in Q1-2020, but 5.3 per cent higher than in the fourth quarter of 2020, suggesting a sequential rebound. Recovery could be encouraged by a rise in the number of convenience shops and vehicle inspection centres as part of the growth strategy, as well as marketing and promotion tools aimed at attracting more customers and increased consumer expenditure.

In addition to its continuing expansion in the UAE, ADNOC Distribution is presumably well positioned to take advantage of opportunities to acquire 35 service stations in Saudi Arabia and increase its national network to 37 stations. This could be the catalyst for generating improved revenues.

Robust dividend outgo

The Abu Dhabi fuel retailer first started paying dividends in April 2018 with Dh0.06 and raised to Dh0.1 in October 2018, paid on a semi-annual basis with a current dividend yield of 4.25 per cent. A robust expansion has led to a progressive dividend policy with a payout of Dh2.57 billion for 2021. The aim is to pay dividends of at least 75 per cent of distributable profits.

ADNOC Distribution showed a strong balance-sheet at the end of the first quarter of 2021, with liquidity at Dh5.1 billion in the shape of Dh2.3 billion in cash and cash equivalents and Dh2.8 billion in unused credit facilities. The free cashflow was recorded at Dh835 million, which is a 56.7 per cent surge from same quarter last year and supports a sustainable return for shareholders.

The UAE has effectively controlled the pandemic by the rapid use of safety measures, including the quick deployment of vaccinations. These suggest that fuel and non-fuel demands could gradually rebound. With the economic upturn and expansion in the UAE and Saudi Arabia, the company seems well-positioned.

Vijay Valecha

The writer is Chief Investment Officer at Century Financial.

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