RHB FIC Global Sukuk Markets Weekly - 27/7/15

27 July 2015

Global Sukuk Markets Weekly

High-Yield Sukuk in Demand as External Concerns Eases; Add JAFZSK 19

Highlights & Performance

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¨      Dollar Sukuk returned 0.07%-0.13% as yields tightened 2.1bps. The Bloomberg Malaysia Sukuk Ex-MYR Total Return Index (BMSXMTR) added 0.13% over the week to close at a 8-week high of 101.62 on Friday (week prior: +0.04% to 101.5). Gainers were led by ISDB 10/18, DIBUH 6/20, SECO 4/24, ISDB 3/20, and LBSUK 10/19 gaining USD16.3m in value. Weighted average yield on the index was 2.1bps tighter WoW at 2.267% (week prior: -0.6bps to 2.288%). Similarly, the Dow Jones Sukuk Total Return Index (DJSUKTXR) returned 0.07% this week to close at 155.35 (week prior: +0.11% to 155.24), pulling YTD returns up by 7bps to 1.87% (week prior: +11bps to 1.80%).

¨      High-yield corporates and FI sukuk led gains. Global sukuk had somewhat of a bull-run last week as markets opened after Eid holidays to subsided external concerns (over Greece, China and Iran), allowing investors to regain appetite for yielder prints as the earnings season kicked off. Bidders took interest in high-yield/non-rated sukuk, especially for corporate prints like DAMAC 19 (yield tightening -19bps to 6.63%), EMAAR 16 (-17bps to 1.46%) and FLYDU 19 (-14bps to 3.07%); and financial institutions like KFINKW 16 (-17bps to 2.54%) and DIBUH 17 & 20 (-9bps to 1.89% & 2.90% respectively). We expect investors to remain interested in yieldy sukuk given the lack of fresh prints over the last two months.

¨      Sovereigns seemed mixed after Iran deal. Sovereign sukuk saw mixed performance after Iran struck a nuclear deal which sparked bearish sentiment on Brent crude, dropped (4.3% WoW) to 54.62/bbl on Friday’s close. The deal could be positive for INDOIS (complex tightening 1-9bps) on savings from cheaper oil imports, and DUGB (complex tightening 2-4bps) from wealth spillovers from Iran as the latter’s second largest trade partner after China (refer to Chart of the Week).

¨      CDS spreads widened on skeptical fiscal outlooks. CDS spreads generally widened as seen by Turkey (+17.9bps to 228.2), Bahrain (+14.1ps to 281.0), Indonesia (+16.8bps to 179.5), sparing only safer-markets like Abu Dhabi (-1.4bps to 52.0) and Qatar (-1.5bps to 54.7); however, with the exception of Saudi Arabia (+4.2bps to 60.4) after crude oil exports fell to 5-month lows, raising expectations of further debt raising and drawing of reserves. Similarly, Malaysia CDS widened sharply (+17.2bps to 138.5) after foreign reserves hit 5-year low of USD100.5bn. Dubai’s risks was relatively cushioned (+3.7bps to 182.9) by oil subsidy rationalization (refer to sovereign updates).

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SOVEREIGN UPDATES

Country/Issuer	Update	RHBFIC View
United Arab Emirates (UAE) (Aa2/AA/AA)	Announced removal of fuel subsidies by linking gasoline and diesel prices to global oil markets, starting 1 Aug 2015.	Positive. We believe this is more of a ‘stop-gap measure’ which could help the peninsula save up to USD12.0bn in energy subsidies (based on IMF’s earlier projection of USD29.0bn for 2015) and prevent the peninsula’s fiscal balance from swinging into deficit as oil (34.3% contribution to GDP) price remains bearish. INVCOR 20, DUGB 17-29 and DIFCAE 24 yields were flat-to-tighter by 0-2bps W-o-W.
Malaysia (MALAYS, A3/A-/A-)	·         CPI picked up to 2.5% YoY in June (consensus: 2.4%; prior: 2.1%); ·         Foreign reserves dropped 4.7% M-o-M to USD100.5bn at 15-Jul.	Marketweight. Foreign reserves remains fair at 7.9 months of retained imports and 1.1x of ST external debt (30-June: 8.2 months; 1.1x). MALAYS complex were mixed with yields moving -7 to +5bps.
Turkey (TURKSK, Baa3/NR/BBB-)	·         Central government budget balance rose to TRY3.20bn in June (prior: TRY1.64bn) on higher revenues of (+12.8% YoY) to TRY30.5bn in 1H15; debt rose to TRY650.9bn (prior: TRY647.2bn); ·         Benchmark repurchase rate held at 7.5%; CPI falls to 7.2% in June (prior: 8.09%). ·         1Q15 GDP at 2.3% YoY, slower vs 2.6% in 4Q14 and 4.9% in 1Q14; ·         Consumer confidence falls to 64.7 in July (prior: 66.4); ·         Current account deficit widened to USD3.99bn in May (consensus: USD3.53bn), while April’s deficit revised wider to USD3.46bn (from USD3.41bn);	Mild Underweight. Despite improvements in fiscal balances on stronger public revenues (as well as a redrafted tax code in the works), credit profile remains undermined by stagflation, political uncertainty, current account and currency weakness, and geopolitical tension. TURKSK ended the week mixed -1bps to +6bps.

CREDIT UPDATES

Company/Issuer	Sector	Country	Update	RHBFIC View
Dar Al Arkan Real Estate Development Co (DARALA, NR/B+/NR)	Real Estate	Saudi Arabia	·         Saudi Arabia real estate sales fall 16.4% YoY in July; ·         Riyadh apartment prices rise 20.2% YoY in July.	Marketweight. We believe the slowing sales is tied to a tax on undeveloped city plots approved by King Salman earlier this year. While this may continue to weigh on DARALA’s performance – after EBITDA declined 23% YoY to SAR771m in 1H15 as most of its revenues were from land sales – the developer (which holds c.30m sqm of land) has decent prospects given its increasing development pipeline to meet a shortage of 2m homes (Bloomberg). Over the week, yield on DARALA 16 tightened 7bps to 4.21% while DARALA 18 & 19 narrowed 1bps to 4.98% and 5.40% respectively, ranking the 3 among the top 6 performing Dollar-sukuk so far this year, having tightened by an absolute c.114-178bps.
Abu Dhabi Islamic Bank (ADIBUH, A2/NR/A+)	FI	Abu Dhabi, UAE	·         1H15 net profit rose 10.3% YoY to AED953.4m and customer financing grew 14.9% YoY to AED74.5bn; ·         Provisions coverage ratio increased to 88.3% (Jun-14: 66.5%); ·         CAR of 14.0% and Tier-1 lower at 13.5% (Jun-14: 15.8% and 15.3%), still above regulatory 12% and 8% respectively;	Marketweight. Capital deterioration (after acquiring Barclay’s UAE retail business and new RWA treatment) should be temporary as the bank goes through a capital rebuilding exercise, i.e. AED504m rights issue, increasing Tier-1 capital issuance limit to USD3bn, and reduction of dividend payout ratio to 40% of net profit. Furthermore, credit profile is well supported by likely shareholder support, with at least 40% ownership by Abu Dhabi royal family. Yields on ADIBUH 4/11/15 & 30/11/16 seniors tightened 3-4bps to 0.6% and 1.36% respectively, ADIBUH Pc10/18 tightened 2bps to 4.79%.
Abu Dhabi Commercial Bank (ADCB, A1/A/A+)	Abu Dhabi, UAE	FI	·         1H15 net profit grew 17% YoY to AED2.5bn, NIM widened by 15bps to 3.47% and ROA rose 39bps to 2.39%; ·         NPL and provision coverage ratios were 3% and 139% (Dec-14: 3.1% and 137.1%) respectively; ·         CAR and Tier-1 at 19.8% and 16.1% (Jun-14: 20.1% and 15.8%) respectively.	Marketweight. ADCB retained sound credit profile after having its standalone BCA raised to baa3 from ba1 by Moody’s in Feb-15. The bank has high likelihood of government support (as the 4th largest UAE bank by deposits and 58% government owned), is well-capitalised and a net lender of AED18bn. However, ADCB reliance on wholesale funding is a minus point, as LDR remains high at 110.7% (Dec-14: 111.6%; peers: c.88%). ADCBUH tightened 1bps to 1.32%.

TRADE IDEA

¨                  Add JAFZSK 19

Sukuk	Jebel Ali Free Zone JAFZSK  19/6/19 (NR/NR/BBB-) (Yield: 3.023%; Z-spread: 156.1bps) (Amt o/s: USD650m)
Comparable	DP World DPWDU 8.5% 2/7/17 (Baa3/NR/BBB-) (Yield: 1.934%; Z-spread: 103.4bps) (Amt o/s: USD1.5bn)
Relative Value	We recommend to add JAFZSK 19 which offers more than 1ppt in yield and 50bps in z-spread over DPWDU 17, which we opine is sufficient to compensate for the smaller issue size and 2y longer duration. We see JAFZSK’s recent 3-notch upgrade to ‘BBB-‘ by Fitch earlier this month (after being acquired by DPWDU) as a catalyst to profit from its adjustment to fair value, which we opine is at least 15bps versus other similar-rated corporate Dollar-sukuk.
Fundamentals	We are comfortable with JAFZSK’s credit profile given: ·         Strong ties with parent company due to its strong legal, operational and strategic links with DPWDU; ·         Key contribution to Dubai’s economy as the company and the activities based in the Free Zone account for 20% of the city’s GDP, and provides the link from Jebel Ali port to Al Maktoum International Airport; ·         Solid FY14 performance given EBITDA of AED1.36m (FY13: AED1.23m) and stable margins; ·         High geographical concentration risk given its situation in solely in Dubai, though this partly mitigated given availability of supply of rental properties in free zones throughout Dubai.