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Summary
As a key component of Dubais economy, DEWA is critical in assisting the Emirates growth and transition to a zero-economy economy. DEWA is a prominent participant in the area because of its great track record of technological innovation and operational efficiency and a prudent and diversified financial policy. Its recent share-sale offers, which were well received by the business community, have increased the companys reputation in the Middle East. A well-planned financial policy is the foundation of the companys success in the UAE.
The Financial Corporate Objectives
The financial statements of DEWA were prepared on a cost basis, with financial assets and liabilities valued at fair value excluded. DEWA divides its financial assets into three categories: amortized cost, subsequent fair value measurement via other comprehensive income, and subsequent fair value measurement via profit or loss (Dubai Electricity and Water Authority, 2018). When establishing whether cash flows are exclusively principal and interest payments, financial assets with embedded derivatives are examined as a whole (de Salles et al., 2021). All of the companys financial assets were divided into three groups: trade and other receivables, cash and bank balances, and short-term investments (Dubai Electricity and Water Authority, 2018). DEWA forecasts the probable credit losses associated with its loan assets carried at amortized cost on a forward-looking basis in accordance with its financial policy.
Implementation of a three-stage impairment model based on changes in credit quality since first recognition was an essential aspect of the financial objectives. This indicates that an organization will continue to monitor credit risk on a financial instrument that is not impaired at the time of initial recognition (Antoniou et al., 2008). DEWA values its trade receivables and contract assets using a simplified ECL method, which is split down by client segments, such as individuals, foreign nationals, commercial and industrial customers, and government-related institutions (Dubai Electricity and Water Authority, 2018). For each of these categories, the corporation does further financial analysis based on past loss rates.
Financial Decisions
One of the most important financial moves was the companys statement that it planned to list a portion of its stock on the Dubai financial market. This is evidence of an improvement in DEWAs transparency and oversight, as well as a more stable financial policy over time. DEWA will also have easier access to the equity capital markets as a publicly traded firm, which is a significant benefit in todays economy (Bekaert et al., 2001). Furthermore, the monopolistic position in the transmission, distribution and supply of power and water in Dubai will continue to benefit the corporation (Al Naqbi et al., 2019). It will also grow if tariffs and rules are beneficial, making the enterprise more appealing to the market.
The introduction of higher leverage, on the other hand, damaged DEWAs financial situation. Increased debt might result in higher transaction costs for the organization. The related transaction expenses of excessive leverage might hypothetically drain money over time, a process DEWA is attempting to reverse. Prospective DEWA stock traders should think about the costs of adopting large leverage since this can have a significant influence on the firm over time (Al Naqbi et al., 2019). The companys corporate management attempted to employ financial leverage primarily to boost profits per share and return on equity (Barclay & Smith, 1999). DEWAs efforts to deleverage and recruit new income holders are also confirmed by the financial aims mentioned above.
Another strategy connected to the DEWAs most current actions, the increased dividend policy, should be handled with caution as well. The company will pay a minimum year dividend of more than AED 6 billion for the following five years, beginning in October 2022 (Fioretti & Narayanan, 2022). Dividends will be paid bi-annually. This payment policy has concerned potential partners and prompted worries about financial dangers, although Dewasas dominant position in the UAE market alleviates these concerns greatly. Higher dividend distributions are still considered a key determinant of financial stability in the short and long term.
Economic Environment
All economic elements that impact business and consumer behavior are referred to as the economic environment. Competitors and demand are important micro and macroeconomic aspects that may be considered in the case of DEWA. DEWA, as previously said, has a near-monopoly in the local market and, together with Saudi Arabian firms, plays a critical role in the Gulf area (Shaji et al., 2022). The demand for the companys products is also high, owing to evident meteorological factors as well as the Gulf States recent economic policies. Furthermore, the Gulf market and its shares are among the worlds fastest-expanding markets, adding to the companys positive economic climate (Fioretti & Narayanan, 2022). Despite contentious financial actions, the companys potential is fast expanding as a result of the current geopolitical upheaval in Eastern Europe.
The assault on Ukraine by Russia, increasing inflation, and the central banks strict policies have all had an impact on stock markets throughout the world, derailing multiple listings. High oil prices, on the other hand, have helped the energy-rich Persian Gulf, attracting a large flood of investment. Due to a surge in oil prices, major stock exchanges in the energy-rich Persian Gulf have proven resilient (Atkin, M. & Glen, 1992). To keep up with competitors, the UAE is attempting to revitalize its capital markets and increase decreasing trade volumes. DEWA is the first of several state-owned firms to be listed by the government (Fioretti & Narayanan, 2022). Despite the controversial enhanced dividend policy and dangers of capital outflow, the companys financial program maintained pace with the increasing market. In the present economic context, this has proven to be a win-win approach for both the corporation and the government, highlighting the Gulf markets value to investors.
The Importance of Securing Long-Term Funds
Long-term finances main premise is to fund a companys strategic capital projects or extend its business operations. These funds are often utilized to invest in projects that will provide firm synergy in the future (Madura & Fox, 2014). The financial policies, share sales, and investments of DEWA demonstrate that the firm understands the advantages of long-term financing. It has become one of the crucial players in the Middle East, and it is eager to go further. Long-term financing allows for prolonged payback periods at a natural fixed rate throughout the loans life cycle, eliminating the need for an exchange (Fama & French, 2005). This allows DEWA to match its capital structure with its long-term strategic goals, allowing the company to generate a return on investment over a longer period of time. Long-term fixed-rate financing uses a set interest rate to reduce the refinancing risk associated with shorter loan maturities, lowering the companys interest rate and balance sheet risk (Sarfraz et al., 2018). DEWA also gained additional flexibility and resources to fund various capital needs, reducing its reliance on a single source of revenue.
References
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Atkin, M. & Glen, J. 1992. Comparing corporate capital structures around the globe. The International Executive, 34(5): 369-387.
Barclay, M.J. & Smith, C.W. 1999. The capital structure puzzle. Journal of Applied Corporate Finance, 12(1): 8-20. Web.
Bekaert, G., Harvey, C.R. & Lundblad, C. 2001. Emerging equity markets and economic development. Journal of Development Economics, 66(2): 465-504. Web.
de Salles, A. A., Silva, M. E., & Teles, P. (2021). Empirical Evidence of Associations and Similarities between the National Equity Markets Indexes and Crude Oil Prices in the International Market. Open Journal of Business and Management, 10(1), 155-174. Web.
Dubai Electricity and Water Authority. (2018) Consolidated financial statements. DEWA. Web.
Fama, E.F. & French, K.R. 2005. Financing decisions: who issues stock? Journal of Financial Economics, 76(3): 549- 582. Web.
Fioretti, J. & Narayanan, A. (2022). Dubais DEWA Raises $6.1 Billion in EMEAs Biggest IPO Since 2019. Bloomberg. Web.
Madura, R. & Fox, J. (2014). International Financial Management. Cengage Learning EMEA
Sarfraz, M., Qun, W., Hui, L., & Abdullah, M. I. (2018). Environmental risk management strategies and the moderating role of corporate social responsibility in project financing decisions. Sustainability, 10(8), 2771. Web.
Shaji, M., Narayanan, A. & Ratcliffe, V. (2022). Dubai Kicks Off IPO Rush With Landmark Listing of Utility DEWA. Bloomberg. Web.
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