real estate companies uae global inv june 2011
TRANSCRIPT
Global Research
Sector – Real Estate
Equities - UAE
June 22, 2011
UAE Real Estate Sector
Debt burden an overhang for economic growth in the medium term
Pressure on property prices persistent through to end of 2012
Prefer Emaar and Sorouh over Aldar on liquidity and near term earnings
Strong Buy – Emaar, Hold – Aldar, Buy – Sorouh
Debt burden an overhang for economic growth in the medium term The debt burden on Dubai government and its GREs is a key overhang to economic growth, in our
view. Total Dubai related debt is estimated at USD113 billion, equivalent to 37.3% of the UAE 2010
GDP. Despite the several successful rounds of debt restructuring by Dubai GREs, the large debt
burden still proposes challenges given exposure of the banking sector to the troubled real estate
GREs. However, markets appear to have priced in short term factors with the appetite for Dubai risk
growing given the continuous improvements in Dubai CDS, currently at 332 bps, the lowest level
since November 2009 driven by solid evidence that Dubai is well positioned as the region’s safe
haven during the recent political tensions.
Pressure on Dubai & Abu Dhabi property prices persistent through to 2012 Dubai residential selling prices have dropped almost 56% from their peak in 4Q08 until 1Q11 while
those of Abu Dhabi lost 45% over the same period. We estimate a current vacancy rate of 30% in
Dubai and 3% in Abu Dhabi. The figure for the latter is subject to significant increase in the coming
2.5 years given the influx of 65,000 units in the residential market. We forecast another drop of 10%
to take place through to the end of 2012 in Dubai and a 15-20% decline in Abu Dhabi.
We prefer Emaar and Sorouh on better liquidity profile and near term earnings
Of the three big real estate names in the UAE property sector, Emaar is our favorite pick on
sustainable earnings from its high quality retail and hospitality portfolio and the contributions from
international operations over the next three years. We also like its stable debt profile after the new
bond issuance. In Abu Dhabi, we prefer Sorouh over Aldar for its near term earnings on 2011
deliveries along with its relaxed debt profile. We like Sorouh’s growing investment portfolio although
it remains of smaller size and lower quality compared to those of Emaar and Aldar. For Aldar, the
restructuring plan has provided the needed short term lifeline at the expense of high dilution and a
weakened recurring future earnings portfolio. We also believe that Aldar’s earnings will be whipped
out, to a large extent, by the high debt service expense.
Initiate coverage on UAE real estate Initiate coverage on the three largest UAE real estate listed stocks. We initiate on Emaar with a
target price of AED3.91/share and a STRONG BUY recommendation, Aldar with target price of
AED1.51/share and a HOLD recommendation and Sorouh with a target price of AED1.52/share and
a BUY recommendation.
Global Research - UAE Real Estate
Company CMP Mkt. Cap P/E P/B ROE Target Upside Rating
AED (AED mn) 2011e 2011e 2011e Price Potential
Emaar 3.15 19,187 11.2 0.6 5.0 3.91 24% STRONG BUY
Aldar 1.37 3,948 8.4 0.6 4.3 1.51 10% Hold
Sorouh 1.34 3,518 5.9 0.5 9.0 1.52 13% Buy
Source: Bloomberg, Global Research
UA
E R
eal E
sta
te
Faisal Hasan, CFA
Head of Research [email protected] Tel: (965) 2295-1270 Mostafa El-Maghraby
Senior Financial Analyst [email protected] Tel: (965) 2295-1279 Global Investment House www.globalinv.net
Global Research - UAE Real Estate Sector
June 2011 2
Valuation & Recommendation
Valuation Methodology
For arriving at the fair value targets for listed UAE real estate developers, we utilize a Sum Of The Parts (SOTP) approach by
valuing each project separately. We apply a one stage DCF valuation methodology for development sales projects over the
project life given management guidance and our judgment of delivery dates and selling prices. For DCF based valuations, we
use the Capital Asset Pricing Model (CAPM) to arrive at the cost of equity of each company and adjust the WACC to the upside
based on our projections for the degree of riskiness of each project. We value the hospitality segment using a two stage DCF
approach with inputs on ADRs and occupancy rates being driven from market data and forecasted in line with long term trends.
For investment properties related valuations, we value retail properties utilizing a capitalization rate for the current year net
operating income or for the second operating year for properties under construction. We apply a two stage DCF for commercial
and residential properties held for investment. For all three companies, we exclude land from the valuation given our negative
views on the market and the difficulty to unlock land value in the near term.
Emaar Properties
Emaar has an exceptionally well performing operational investment portfolio comprising 5.28 million sqf of GLA of high end malls
and retail outlets that run high occupancy rates on long term contracts. The retail segment realizes high margins hovering around
80% with revenues growing from AED499 million in 2008 to AED1.9 billion in 2010, a level we see sustainable in the future given
low maintenance capex requirements and operational expenses. The hospitality segment is also well performing given the high
profile of Emaar’s hotels and Dubai’s tourism attractions, especially on the back of the recent regional political troubles.
Moreover, International operations will pick up pace and contribute an expected AED11.1 billion to revenues between 2011 and
2014 mitigating the phase out from Dubai sales. The current share price of AED3.15 implies that investors are ignoring the
combined value of UAE development sales and International operations and only factoring in the value of the retail and hospitality
segments. We value Emaar at AED3.91/share, which implies an upside potential of 24% from the current market price of
AED3.15/share and initiate with a STRONG BUY.
Aldar Properties
In our view, the restructuring plan that Aldar undertook in January 2011 to reschedule its maturing loans saved the company from
an imminent bankruptcy and rounds of settlement with debtors, which would impair management ability to proceed with
scheduled projects as planned. Further, the impairment charges have cleaned up the asset base positioning the company at a
better starting point. However, we are skeptical on Aldar’s ability to meet its high debt and capex requirements given its current
project profile. We are also not proponents of the continuing process of operating asset transfers to the government at low
margins after the company incurs the time and cash investment. We believe 2013 will conclude revenues from Aldar’s
development sales backlog, assuming no delays. This fall will not be mitigated by the growing recurring income, which accounts
to only 36% of our aggregate four year revenues. We also believe that earnings and cash flow will be under attack from the hefty
debt service costs, which we forecast at an aggregate AED1.7 billion between 2011 and 2014. Our SOTP valuation of Aldar
Properties yields a fair value target of AED1.51/share implying an upside potential of 10% from the current market price. We
initiate coverage with a HOLD recommendation on the stock.
Sorouh Real Estate
Sorouh property sales will witness high activity through to 2013 as the delivery of units across its various projects materialize. In
2011, we see complete sales from the completed towers of Shams Abu Dhabi while deliveries from Al Ghadeer and the Gate
residential towers will contribute to the top line towards the end of 2012 and into 2013. We like Sorouh’s growing investment
portfolio with its high exposure to the Abu Dhabi rental market given our expectations of high absorption rates in spite of concerns
over the downwards trending yield. The size and quality of Sorouh’s investment portfolio remain on the weak side when
compared to those of Emaar and Aldar. Sorouh’s liquidity position is sound given the company’s financing arrangements in 2010
through which it raised AED2.7 billion four-year loan facility repayable over a period of 48 months starting September 2012 after a
grace period of 27 months. We believe that by the time the first installment is due, Sorouh would have collected sufficient cash
from property sales to meet its obligations. Further, we see 2012 as the last year of Sorouh’s hefty capex requirements, which
should ease any pressures on debt repayments going forward. Our valuation for Sorouh yields a fair value target price of
AED1.52/share implying an upside potential of 13% over the current market price. Accordingly, we initiate coverage with a BUY
recommendation.
Global Research – UAE Real Estate Sector
June 2011 2
MENA Real Estate Listed Equities Multiples
Ticker Security P/E P/B P/S EV/EBITDA
United Arab Emirates
EMAAR UH Equity Emaar Properties PJSC 9.4 0.6 1.7 7.8
ALDAR UH Equity Aldar Properties PJSC na 0.9 1.6 na
SOROUH UH Equity Sorouh Real Estate Co na 0.6 2.7 12.3
DEYAAR UH Equity Deyaar Development na 0.4 0.7 na
UPP UH Equity Union Properties PJSC Na 0.4 0.4 12.6
RAKPROP UH Equity RAK Properties PJSC 4.2 0.2 2.0 3.8
Average
6.8 0.5 1.5 9.1
Saudi Arabia
ALARKAN AB Equity Dar Al Arkan Real Estate Development 5.8 0.6 2.2 9.7
EMAAR AB Equity Emaar Economic City na 0.8 64.4 na
MCDCO AB Equity Makkah Construction and Development 17.9 1.5 46.7 na
SRECO AB Equity Saudi Real Estate Co 15.6 0.9 6.3 10.7
REDSEA AB Equity Red Sea Housing Services Co 22.1 2.1 1.9 12.5
ADCO AB Equity Arriyadh Development Co 14.3 1.0 8.2 9.9
Average
15.1 1.1 21.6 10.7
Kuwait
ALTIJARI KK Equity Commercial Real Estate Co 31.4 0.5 7.2 20.3
URC KK Equity United Real Estate Co 18.3 0.6 3.2 21.4
SRE KK Equity Salhia Real Estate Co KSC 9.9 0.8 1.7 5.9
TAMEERK KK Equity Tameer Real Estate Invest 8.3 0.5 2.9 15.7
MABANEE KK Equity Mabanee Company SAKO 25.0 3.7 18.2 23.4
Average
18.6 1.2 6.6 17.3
Egypt
OCDI EY Equity Six of October Development 18.1 1.1 3.3 8.3
TMGH EY Equity Talaat Moustafa Group 13.0 0.4 2.0 12.9
PHDC EY Equity Palm Hills Developments SAE 6.2 0.6 1.3 7.2
MNHD EY Equity Medinet Nasr Housing 32.1 8.4 4.2 23.7
HELI EY Equity Heliopolis Housing 14.8 6.4 7.0 13.1
ZMID EY Equity Zahraa El Maadi Investment & Dev. 5.5 2.6 4.5 4.8
Average
24.0 2.7 7.8 15.7
Morocco
ADH MC Equity Douja Promotion Groupe 18.6 3.3 4.1 15.9
CGI MC Equity Cie Generale Immobiliere 66.1 5.8 11.6 54.4
ADI MC Equity Alliances Development 19.0 3.0 2.4 17.8
Average
34.5 4.0 6.0 29.4
Qatar
BRES QD Equity Barwa Real Estate Co 6.5 1.0 5.7 157.5
UDCD QD Equity United Development Co 5.4 0.7 2.4
Average
5.9 0.9 4.0 157.5
MENA Average
17.5 1.7 7.9 40.0
As of 21 June 2011 Closing
Source: Bloomberg, Global Research
Global Research - UAE Real Estate Sector
June 2011 4
UAE Economic Profile
UAE’s 2010 real GDP is estimated to have grown by 2.1% after dropping 1.6% in 2009 and is expected to grow by 3.6% in 2011
on higher oil prices and improved economic prospects given the country, and specifically Dubai, being a main beneficiary of the
regional political turmoil. With the exception of the real estate, construction and financial services sectors, most other sectors are
witnessing healthy growth. The UAE’s current account has been realizing comfortable surpluses thanks to contributions from oil
exports.
The debt burden on Dubai government and government related entities (GRE) remains the main overhang to economic growth,
in our view. The IMF estimates total Dubai related debt at USD113 billion, equivalent to 37.3% of the UAE 2010 GDP up from
1.6% of 2007 GDP and expected to grow to 41% of GDP in 2016. Despite the several successful rounds of debt restructuring by
Dubai GREs, the large debt burden still proposes challenges given exposure of the Dubai banking sector to the troubled GREs
specifically the real estate related ones. The aggregate UAE debt due through to the end of 2012 is estimated at USD60 billion
proposing roll-over risks in the short term.
Markets appear to have priced in short term factors with the appetite for Dubai risk growing given the continuous improvements
in Dubai CDS at 332 bps, the lowest level since November 2009 and down 158 bps from the 491 bps level recorded when Dubai
Holding announced it seeks extensions on its maturing debt. We believe the improving appetite for Dubai risk is driven by solid
evidence that Dubai has been the region’s safe haven during the recent political tensions. Moreover, the new USD500 million
EMTN Dubai government program has attracted strong investor interest with the 10-year bonds three times oversubscribed at a
5.59% yield down 1.11% from last year’s 5-year bonds priced at 6.7%. This, however, does not rule out Dubai’s vulnerability to
any short term shocks and its ability to absorb them.
With the exception of the debt exposure of Abu Dhabi’s property sector, the capital’s debt profile appears more relaxed given the
stable oil revenues and inherent sovereign wealth. Abu Dhabi 5-year CDS has been trading at a more stable collar between 64.5
and 165 bps since August 2009 reflecting a more stable macro setting. The Abu Dhabi government has been successful in
interfering as needed to fund its failing GREs as was the situation with Tabreed and Aldar when Mubadala stepped in to save
both companies ahead of bankruptcy.
UAE Gross Public & GREs Debt Profile
Maturing In Total
USD bn 2011 2012 After 2012
Government of Abu Dhabi 0.4 1.3 9.9 11.6
Abu Dhabi GREs 16.6 9.3 66.4 92.4
Total Abu Dhabi 17.1 10.6 76.3 104.0
Percent of Abu Dhabi 2010 GDP 8.9% 5.5%
54.2%
Government of Dubai 5.6 1.6 28.8 36.0
Dubai GREs 10.4 13.6 52.9 76.9
Total Dubai 16 15.2 81.7 112.94
Percent of Dubai & Northern Emirates 2010 GDP 14.5% 13.8%
102.6%
Other Emirates Sovereign 0 0 2.8 2.8
Other Emirates GREs 0.9 0.3 1.2 2.4
Total Other Emirates 0.9 0.3 4 5.2
Federal Government
19.1
Percent of UAE 2010 GDP
6.3
Total UAE 33.1 25.8 158.0 236.1
Percent of UAE 2010 GDP 11.0% 8.5%
78.2%
Source: IMF
Global Research - UAE Real Estate Sector
June 2011 5
Global GRE Gross Debt as Percent of GDP
Source: IMF
Dubai GREs Debt Maturity Profile
Source: IMF, Bloomberg
Dubai & Abu Dhabi CDS
Source: Bloomberg
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
2
4
6
8
10
12
14
16
18
2011 2012 2013 2014 2015 2016 2017 2018 After 2018
US
D b
n
Non Restructured Restructured
0
200
400
600
800
1,000
Sep-0
8
Nov-0
8
Jan-0
9
Mar-
09
May-0
9
Jul-09
Sep-0
9
Nov-0
9
Jan-1
0
Mar-
10
May-1
0
Jul-10
Sep-1
0
Nov-1
0
Jan-1
1
Mar-
11
May-1
1
Spre
ads b
ps
Dubai Abu Dhabi
Regionalpolitical turmoil
DW standstill announcement
Peak of crisis
DW debt restructuring plan
European crisis
Global Research - UAE Real Estate Sector
June 2011 6
Demographic Profile
According to the UAE Ministry of Economy (MoE) latest figures, 5 million people resided in the UAE in 2009 of which 82% where
expatriates. Dubai is the most populous emirate with 34% of the aggregate population followed by Abu Dhabi housing 32% and
Sharjah 20% of the total figure. The national population in Abu Dhabi represents 25% of the emirate’s 1.6 million residents as
opposed to only 9% in Dubai providing the capital with more sustainable demand prospects. Although UAE laws allow freehold
ownership of property and long term leasehold for expatriates, we believe that a large share of expatriate demand is driven by
speculation or investment purposes rather than owner occupation and hence, can be easily exhausted and willing to exit the
market at any sign of weakness.
Aggregate UAE population grew 23.4% between 2005 and 2009 according to MoE figures with 2009 witnessing a 6.3% growth
over 2008. Several other statistical services put the absolute aggregate figure and population growth rates at varying numbers.
The EIU Country Report asserts that UAE population decreased by 4.4% in 2009 before an estimated 3% growth in 2010. We
lean towards this view on population growth trend given the 2009 distressed economic environment associated with massive
layoffs and anecdotal evidence from slowing business and traffic across major cities.
During the period 2005-2008, Dubai residential market witnessed large tenant outflows to Sharjah and Ajman due to affordability
constraints. This pattern has been largely reversed after the crash of the Dubai property market made housing accessible to a
larger segment in spite of the persistence of the price discrepancy between both markets, which is justifiable provided Dubai’s
higher quality offering. As of 2H09, the same pattern was established between Dubai and Abu Dhabi as tenants moved to Dubai
and commuted to Abu Dhabi on a daily basis to take advantage of favorable rentals in Dubai. We expect this pattern of pent up
demand to reverse in the future as prices in Abu Dhabi become more affordable creating more demand in the capital and further
pressuring Dubai’s demand prospects downwards.
UAE Population Breakdown by Emirate 2007-2009
Source: Ministry of Economy
UAE National and Expatriate Breakdown 2005-2009
Source: Ministry of Economy
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Abu Dhabi Dubai Sharjah Ras Al Khaimah
Fujairah Ajman Umm Al Quwain
'000
2007 2008 2009
825 839 864 892 923
3,281 3,390 3,624 3,873 4,143
-
1,000
2,000
3,000
4,000
5,000
6,000
2005 2006 2007 2008 2009
'000
National Expatriate
Global Research - UAE Real Estate Sector
June 2011 7
Dubai & Abu Dhabi Real Estate Market Themes
Residential Market
Dubai residential market currently has an estimated 93,000 vacant units out of a total of 309,000 stock with an additional 60,000
units expected to come in the market through to 2013. The vacancy rate in Abu Dhabi is more contained at an average of 3% out
of the total existing stock of 185,000 units at the end of 2010. Abu Dhabi is expected to see an influx of a fresh 65,000 units
through 2013 representing an addition of 35% over the existing stock.
Dubai Residential Supply 2009-13 Abu Dhabi Residential Supply 2009-13
Source: Jones Lang LaSalle, Global Research Source: Jones Lang LaSalle, Global Research
273309 309
335358
2623
12
0
50
100
150
200
250
300
350
400
2009 2010 2011e 2012e 2013e
'000
Completed New Supply
175 185 185205
230
20
25
20
0
50
100
150
200
250
300
2009 2010 2011e 2012e 2013e'0
00
Completed New Supply
We estimate that Dubai residential selling prices have dropped almost 55% between the peak of 4Q08 and 4Q10 with average
selling prices dropping to AED1,000/sqf down from AED2,150/sqf in 4Q08. We expect another drop of 5-10% to take place
through to the end of 2012 when new demand enters the market, increasing the rate of absorption, and the pace of new supply
entering the market slows down. Although we see some positive signals in 1Q11 witnessed in increasing sales volume and a
slowdown in the pace of drop in rental and selling prices, we believe this is created by an exceptional wave of tenant and capital
movement of local and foreign investments from Egypt and Bahrain on the current political unrest in the two countries.
Abu Dhabi selling prices have dropped 43% between 4Q08 and 4Q10, according to estimates of industry sources. Although Abu
Dhabi vacancies remain low at a consensus average of only 3% (Reuters Poll April 2011), the overhang of new supply entering
the market along with lower construction and tenant mobilization to Dubai are factors pressuring prices lower. We forecast Abu
Dhabi recovery to span longer than Abu Dhabi due to the lag in the correction move downwards as the supply/demand balance
holds in the short term. We expect a Peak to bottom correction of 55% implying an average selling price of AED1,000/sqf.
Dubai Average Appartment Selling Prices Per Sqf Abu Dhabi Average Appartment Selling Prices Per Sqf
Source: Various Industry Source, Global Research Source: Various Industry Source, Global Research
-30%
-20%
-10%
0%
10%
20%
-
500
1,000
1,500
2,000
2,500
Average Price / sqf (LHS) QoQ Change (RHS)
-15%
-10%
-5%
0%
5%
10%
15%
-
500
1,000
1,500
2,000
2,500
Average Price / sqf (LHS) QoQ Change (RHS)
Global Research - UAE Real Estate Sector
June 2011 8
Dubai Land Transactions
Source: Dubai Land Department, Global Research
Dubai Land Transactions Value
Source: Dubai Land Department, Global Research
Dubai Land Implied Value per Transaction
Source: Dubai Land Department, Global Research
Global Research - UAE Real Estate Sector
June 2011 9
Rental performance followed a similar pattern with average blended apartment rents falling almost 59% and 48% in Dubai and
Abu Dhabi, respectively from their peak in 4Q08. We estimate the current blended average rent of 1, 2 & 3 bedroom apartments
in Dubai to stand at AED65,000 compared to AED97,000 in Abu Dhabi placing the capital at a 49% premium. The premium is
temporarily justified with the supply surplus/deficit situation that has been in place in both markets since 2009. We expect the gap
to narrow down gradually over the next two years as Dubai rentals bottom out while those of Abu Dhabi continue declining on
increasing vacancy rates. The key risk we see to this assumption is the pace of re-mobilization of Abu Dhabi ex-tenants who
moved to Dubai, mostly during 2010, to benefit from lower rents. We expect this shift to gradually take place smoothing out the
decline process in the capital.
Residential yields in Abu Dhabi have recorded an 18% average premium over those of Dubai between 4Q07 and 4Q10. We
estimate Dubai rental yield have moved down to 6.2% in 4Q10 down from a peak of 7.5% in 2Q09 when selling prices declined at
a faster pace than rents. Abu Dhabi current yield is estimated at 7.7% implying a 25% premium over Dubai yield. This pattern
further justifies our view of additional expected drop in Abu Dhabi rents over the coming two years to eventually converge to the
long term average ahead of narrowing down the historical yield gap. We expect this pressure to unravel as early as 1H11 as new
deliveries in Al Raha Beach and Reem Island take place allowing tenants to upgrade to better quality units at affordable prices.
Dubai Residential Rent Performance Abu Dhabi Residential Rent Performance
Source: Various Industry Sources, Global Research Source: Various Industry Sources, Global Research
Blended Average Rent Dubai & Abu Dhabi Average Rental Yield
Source: Various Industry Source, Global Research Source: Various Industry Source, Global Research
7.37.2 7.3
7.5
7.1
6.7
6.2 6.3
6.5
6.2
8.8 8.7
9.1 9.0
8.7
8.3 8.4
7.9
7.67.7
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
Dubai Abu Dhabi
150 155
120113
10797
9078
7265
175
192177
167157
142130
118110
97
0
50
100
150
200
250
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
AE
D '0
00/a
n.
Dubai Abu Dhabi
0
50
100
150
200
250
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
AE
D '0
00/a
n.
1 BR 2 BR 3 BR
0
50
100
150
200
250
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
AE
D '0
00/a
n.
1 BR 2 BR 3 BR
Global Research - UAE Real Estate Sector
June 2011 10
Office Market
The office market witnessed a more aggressive declining pattern. The average drop in Dubai office selling prices is 58% between
the peak in 4Q08 and the end of 1Q11 with average selling prices dropping from AED2,250/sqf to AED933/sqf during the same
period. We expect pressures on selling prices to persist over the short to medium term as vacancy rates remain high at 40% and
new supply of 19 million sqf, equivalent to 33% of existing supply, enters the market by 2013. We believe asset prices need to
adjust further downwards to generate investor interest in the oversupplied market. We expect a further 10-12% decline in Dubai
office prices from current levels to settle at a blended average selling price of AED830/sqf.
In Abu Dhabi, vacancy rates hover at below 10% of the total existing 24 million sqf. The vacancy rate is expected to increase
significantly as a new 13 million sqf, a 54% addition to existent supply, enters the market between 2011 and 2013. Most of the
new supply entering the market is of grade A, which runs the largest shortage in Abu Dhabi office market as opposed to
abundance in lower grades stock.
Dubai Office Supply 2009-13 Abu Dhabi Office Supply 2009-13
Source: Jones Lang LaSalle, Global Research Source: Jones Lang LaSalle, Global Research
44
56 56
68 72
12
4 3
-
10
20
30
40
50
60
70
80
2009 2010 2011e 2012e 2013e
mn S
qf
Completed New Supply
20 24 24
29 32
5
3
5
-
5
10
15
20
25
30
35
40
2009 2010 2011e 2012e 2013e
mn
Sq
f
Completed New Supply
Dubai Office Selling Prices Performance 2006 - 1Q11
Source: ASTECO, Global Research
-62% -64% -56% -55%-52%
-63%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Tecom JLT Dubai Silicon Oasis
DIFC Dubai Investment Park
Business Bay
AE
D / s
qf
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Peak to 1Q11
Global Research - UAE Real Estate Sector
June 2011 11
Office rents dropped 69% and 45% in Dubai and Abu Dhabi, respectively from the peak in 4Q08 through to 1Q11. Average office
rents in Dubai stand at AED64/sqf/an. with DIFC charging higher rates of AED120-175/sqf/an. Accordingly, we estimate that the
current Dubai office market rental yield hovers at 6.9% with DIFC experiencing the highest yield of 7.4% while offices located in
Business Bay, Tecom and JLT rent for a 6.7% yield. Going forward, we expect prime office rents in areas like DIFC and
Downtown Burj Dubai to diverge downwards closing the gap with other ex-CBD areas, which should be nearing a long term
bottom. A reversal of the declining trend remains out of sight for the next five years, in our view, given the present high vacancy
rates, supply increase and economic conditions.
Abu Dhabi commercial units are currently renting at a 76% premium to that of Dubai at AED113/sqf.an. with an associated yield
of 8.6%. Abu Dhabi rents have outperformed their respective Dubai ones down only 44% from their peak of AED200/sqf/an. in
4Q08 supported by the supply shortage, which granted higher rents over the past two years. We expect the decline in Abu Dhabi
rents to speed up in the coming two years as the new grade A supply enters the market accelerating the vacancy rates of grades
B and C and eventually pressuring grade A rents downwards.
Average Dubai Office Rent Performance Average Abu Dhabi Office Rent Performance
Source: Various Industry Sources, Global Research Source: Various Industry Sources, Global Research
204
182
149
125113
9891
8273
64
0
50
100
150
200
250
4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
AE
D/S
qf/
an.
200
174 168155 150
143 139 135124
113
0
50
100
150
200
250
4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
AE
D/S
qf/
an.
Global Research - UAE Real Estate Sector
June 2011 12
Retail Market
Dubai retail outlets are mostly of high quality attracting global brands and, in turn, positioning the city as the regional retail hub.
Offered GLA stands at 26 million sqf as of the end of 2010 and is expected to increase to 31.3 million sqf in 2013 via the addition
of several small retail centers in 2011 ahead of the opening of mall of Arabia in 2013, which will add 3.8 million sqf of retail space.
Available retail space per person is significantly high at 15sqf/person compared to 9.7 in Abu Dhabi, 11.3 in USA and 2.7 across
European countries.
In line with the declining trend in the Dubai real estate market, average retail rents have dropped 47% to AED193/sqf/an. in 4Q10
from AED366/sqf/an. in 1Q09 reflecting the oversupply situation and high vacancy rates of 15-30%. We expect Dubai retail rentals
to bottom out in 2011 on the lack of new supply of high end retail space. We remain doubtful, however, on the capacity of an
upside move before 2014 given the existent undersupply situation and a decline in footfall from Abu Dhabi shoppers as new high
end retail space enters the capital’s market.
Abu Dhabi retail space is of lower quality and is short in luxury space of regional and super regional malls. Current available GLA
stands at 16 million sqf expected to increase to 19 million sqf in 2011 on the opening of 6 new malls. Abu Dhabi vacancy stands at
only 5% but is expected to increase significantly over the next 3 years as available GLA increases 40% to 23 million sqf. Retail
rents remained constant over the past 6 quarters due to undersupply but we also expected them to drop going forward.
Dubai Retail Supply 2009-13 Abu Dhabi Retail Supply 2009-13
Source: Jones Lang LaSalle, Global Research Source: Jones Lang LaSalle, Global Research
Dubai Average Retail Rent Abu Dhabi Prime Rent
Source: Jones Lang LaSalle, Global Research Source: Jones Lang LaSalle, Global Research
2426 26
27.5 27.51.5
3.8
0
5
10
15
20
25
30
35
2009 2010 2011e 2012e 2013e
mn S
qf
Completed New Supply
1516 16
19
22
3
3
1
0
5
10
15
20
25
2009 2010 2011e 2012e 2013e
mn S
qf
Completed New Supply
366344
303
264
232
205 205193
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
0
50
100
150
200
250
300
350
400
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
AE
D/S
qf/
an.
Average Rent (LHS) QoQ Change (RHS)
294
279
255 255 255 255 255 255
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
230
240
250
260
270
280
290
300
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
AE
D/S
qf.
/an.
Average Rent (LHS) QoQ Change (RHS)
Global Research - UAE Real Estate Sector
June 2011 13
Hospitality Market
As of 1Q11, Dubai had a total of 51,200 hotel rooms operating while Abu Dhabi had 10,150 rooms. New supply entering both markets will encumber improvements in hotel occupancy rates and ADRs in spite of the growing number of tourist arrivals and hotel overnight stays. Hotel occupancy rates stood at 70% in Dubai and 66% in Abu Dhabi during 2010 before leaping further to 82% and 74% in 1Q11 due to tourism diversion to the UAE on the back of the regional political unrest affecting almost all Dubai’s tourism rivals. Performance of the hospitality segment softened in 2009 on new supply of hotel rooms entering the market coupled with slowing tourist arrivals over the year. In 2010, tourist arrivals recovered in the two major markets as Dubai hotel guests increased 10% to 8.7 million while Abu Dhabi saw 18% growth over 2009 to 1.8 million guests. Occupancy rates in Dubai appear to have bottomed out in 2009 at 74% while ADR continue to witness minor declines on the back of new supply entering the market. We do not see the pickup in 1Q11 occupancy rates as sustainable on the long term. We believe that despite the UAE’s positioning as a regional safe haven for tourism, a gradual rebalancing of regional tourist arrivals will materialize over the second half of the year as the political situation stabilizes in Egypt, Tunisia and Bahrain, which will partially redirect arrivals away from Dubai. Abu Dhabi positioning as a destination for corporate tourism continues to play the major role in deriving demand in the hospitality market. According to Abu Dhabi Tourism Authority, the business and exhibition sectors represented 80% of all arrivals in 2010. Occupancy rates and ADRs, however, remain fragile as the market lacks the leisure drive and the branded positioning as that of Dubai.
Dubai Hotel Room Supply 2009-13 Abu Dhabi Hotel Room Supply 2009-13
Source: Jones Lang LaSalle, Global Research Source: Jones Lang LaSalle, Global Research
42,572 42,572
50,218 52,585
58,285
7,646
2,367 5,700
4,500
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2009 2010 2011e 2012e 2013e
Roo
ms
Completed New Supply
9,220 9,220 10,000
11,100
15,100
780 1,100
4,000
2,700
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2009 2010 2011e 2012e 2013e
Room
s
Completed New Supply
Global Research - UAE Real Estate Sector
June 2011 14
Sector Earnings & Price Performance
A total of 7 UAE real estate developers are listed on both markets comprising 3 on ADX (ALDAR UH, SOROUH UH, RAKPROP
UH) and 4 on DFM (EMAAR DB, UPP DB, DEYAAR DB, DDB DB). There are 4 Kuwaiti real estate developers (SHOP DB,
MAZAYA DB, NRE DB, GRAND DB) that have a dual listing on both KSE and DFM. Aggregate earnings of UAE based listed
developers on both markets peaked in 2007 at AED11.5 billion representing 17.7% of UAE publicly traded companies’ earnings.
Earnings trended downwards since 2008 in tandem with the real estate and financial markets. ADX listed real estate equities
reported 2010 net losses of AED12.5 billion driven by Aldar’s AED12.7 billion loss, RAKPROP’s AED187 million net profit and
Sorouh’s AED7.5 million profit. In Dubai, Emaar net profit of AED2.4 billion was muted by UPP’s net loss of AED1.5 billion and
Deyaar’s net loss of AED2.3 billion while DDC reported a net profit of AED0.6 million.
Emaar share price peaked on January 2006 at AED24.9/ share before sliding to its current price of AED 3.22/share reflecting an
87% drop in line with DFMGI, which lost 80% of its value from peak of 8,013.99 points on January 2006 to the current level of
1,598.79 points. On the ADX, the move of listed real estate equities has significantly underperformed the index, which dropped
47% from its 5-year high of 5,253.99 points in January 2005. Aldar share lost 89% of its value from its high of AED13.3/share in
June 2008 to its current price of AED1.4/share while Sorouh dropped 87% from its peak of AED10.48/share in March 2008 to a
current market price of AED1.36/share.
ADX & ADX Listed Real Estate Earnings Perofrmance 2006-2010 DFM & DFM Listed Real Estate Earnings Perofrmance 2006-2010
Source: ADX, Global Database Source: DFM, Global Database
Price Performance 2006 - Present
Source: ADX, Global Database
2.7 3.7 5.7 1.7
(12.5)
20.6
29.2 27.5
24.4 27.3
(20.0)
(10.0)
-
10.0
20.0
30.0
40.0
2006 2007 2008 2009 2010
AE
D b
n
Real Estate Other ADX
7.0 7.8
1.7 (0.1) (1.4)
10.3
24.0
8.4 8.5
5.5
(5.0)
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2006 2007 2008 2009 2010
AE
D b
n
Real Estate Other DFM
-250%
-200%
-150%
-100%
-50%
0%
50%
100%
Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11
Sorouh Emaar Aldar DFMGI ADI
Global Research - UAE Real Estate Sector
June 2011 15
Company Profile
Global Research - UAE Real Estate Sector
Emaar Properties
June 2011 16
Market Data
Bloomberg Code: EMAAR UH
Reuters Code: EMAAR.DU
CMP (21 June 2011): AED3.15
O/S (mn) 6,091.2
Market Cap (AED mn): 19,187.3
Market Cap (USD mn): 5,228.1
P/E 2011e (x): 11.2
P/B 2011e (x): 0.6
Price Performance 1-Yr
High (AED): 4.00
Low (AED): 2.41
Average Volume: (000) 16,027.1
1m 3m 12m
Absolute (%) 0.9 16.9 9.6
Relative (%) 3.7 8.7 3.9
Price Volume Performance
Mostafa El-Maghraby Senior Financial Analyst [email protected] Tel.: (965) 22951279
Highly lucrative investment portfolio
International operations to mitigate phasing out Dubai revenues
Market missing on property sales value
Initiate coverage with a STRONG BUY and TP of AED3.91
Highly lucrative investment portfolio
Emaar has an exceptionally well performing operational investment portfolio comprising 5.28 million sqf of high class Malls and retail outlets with a high occupancy rate of 90%. The retail segment revenues grew from AED499 million in 2008 to AED1.9 billion in 2010 with a gross margin of 79%, a level we see sustainable given the segment’s low operating expenses and required maintenance capex. The hospitality segment is also well performing given Emaar’s hotels high profile and Dubai tourism attractions on both the business and leisure fronts.
International operations to mitigate phasing out Dubai revenues
Emaar residential sales comprise three projects in the UAE and 15 projects in the international markets. UAE units are expected to be fully handed over by 2013 marking the last year, on sight, of Dubai contributions to property sales revenues. International sales that commenced in 2008 are expected to pick up pace spanning through to 2014. We expect international sales to contribute AED11.1 billion to Emaar revenues between 2011 and 2014 partially mitigating the fade out of Dubai property sales. Regional political troubles are the main risk with probability of delivery delays.
Market missing on property sales value
Emaar’s current share price of AED3.15 implies that investors are ignoring the combined value of UAE development sales and International operations and only factor in the value of retail and hospitality segments. We believe that in spite of the current fragile Dubai property market conditions, the upcoming deliveries scheduled between 2011 and 2013 offer a degree of earnings visibility. Further, the international operations will have significant contributions over the coming three years given that most of the projects have started several years back and are scheduled for delivery.
Initiate Coverage with TP AED3.91/share
We value Emaar using a SOTP approach by valuing each project separately according to its credentials and our perception of its riskiness profile. Our SOTP valuation of Emaar Properties yields a fair value target of AED3.98/share, which implies an upside potential of 24% from the current market price of AED3.15/share. We, accordingly, initiate a STRONG BUY recommendation.
Investment Indicators
2010 2011e 2012e 2013e 2014e
Revenue (AED mn) 12,150 8,463 7,781 8,276 6,708
Net Profit (AED mn) 2,448 1,714 1,550 1,732 1,513
EPS (AED) 0.40 0.28 0.25 0.28 0.25
BVPS (AED) 5.13 5.68 5.94 6.22 6.47
EV/EBITDA (x) 7.4 8.3 8.5 7.1 7.8
P/E (x) 8.9 11.2 12.4 11.1 12.7
P/B (x) 0.7 0.6 0.5 0.5 0.5
Source: Company Annual Reports & Global Research
Strong Buy Target Price
AED3.91
AED
Global Research - UAE Real Estate Sector
June 2011 17
Valuation & Recommendation
For arriving at a fair value for Emaar Properties, we utilized a Sum Of The Parts approach by valuing each project separately. We have used the Capital Asset Pricing Model (CAPM) to arrive at the cost of equity for Emaar and adjusted our WACC to the upside based on our projections for the degree of riskiness of each project.
A risk-free rate of 4.2% has been assumed which is the yield on 10 year Dubai Government Bond.
A market risk premium of 7% has been assumed.
Adjusted beta assumed at 1.46.
The cost of equity derived from the above assumptions using the Capital Asset Pricing Model is 15.7%.
The cost of debt has been assumed at 8%.
On the basis of above assumptions we have derived a UAE WACC of 11.8%.
The WACC Utilized on international projects is calculated utilizing the CAPM based on each country’s respective inputs.
Emaar Properties - Equity Valuation
AED (000) Value /share Methodology
Development Sales 1,046,778 0.17 DCF
Hospitality 3,947,558 0.65 DCF
Retail 15,138,116 2.49 Capitalization Rate 10%
International operations 3,929,352 0.65 DCF
Total NPV 24,061,803 3.95
Subsidiaries 1Q11 4,431,124 0.73 Book Value
Emaar Economic City 1,827,713 0.30 Market Capitalization
Add: 1Q11 Cash 6,067,962 1.00
Less: Debt 1Q11 12,299,490 2.02
Less: Minority Interest 280,883 0.05
Total Equity Value 24,250,129 3.91
CMP
3.15
Upside Potential 26% Source: Global Estimates
Emaar NPV Geographical Breakdown Emaar NPV Segmental Breakdown
Source: Global Estimates Source: Global Estimates
10%1%
84%
3%2% 0.2% 0.4%
Egypt
Pakistan
UAE
KSA
Morocco
Syria
Turkey
Development Prioperties
20%
Hospitality 18%
Retail 62%
Global Research - UAE Real Estate Sector
June 2011 18
Recommendation
Emaar’s current share price of AED3.15 implies that investors are ignoring the combined value of UAE development sales and International operations. We believe that in spite of the current fragile Dubai property market conditions, the upcoming deliveries scheduled for 2011 and through to 2013 offer a degree of earnings visibility. Further, the international operations will have significant contributions over the coming three years given that most of the projects have started several years back and are scheduled for delivery. We like Emaar’s retail and hospitality portfolio and see sustainable and visible earnings contributions from these segments going forward. Our SOTP valuation of Emaar Properties yields a fair value target of AED3.91/share, which implies an upside potential of 24% from the current market price. We, accordingly, initiate coverage with a STRONG BUY
recommendation.
Key Risks to Valuation
Prolonged political turmoil in the region
Although Dubai was a main beneficiary of the regional political disturbance that took place during 1Q11, we believe that Emaar’s regional operations could be significantly affected by any prolonged political interruptions. The trade to Emaar comes in the form of higher hospitality income from regional flow of tourism to Dubai at the cost of delays of international deliveries, which contribution over the short term is more significant.
Extended slowdown in Dubai economy
Although we do not factor in any additional Dubai based property sales over the current ongoing ones, we see the downfall from the negative macro sentiment impacting Dubai businesses at large.
Delays in project delivery
Our earnings forecasts are based on management guidance of scheduled delivery of units on both the UAE and the international levels. Although we have factored in delivery delays where appropriate, deviations in actual deliveries are a common practice and could alter our valuation outcomes of specific projects.
Global Research - UAE Real Estate Sector
June 2011 19
Profile Emaar Properties was established in 1997 with a paid up capital of AED1 billion and was made public in 2000 through listing in the Dubai Financial Market. In 2005, Emaar doubled its share capital through a rights issue making it, at the time, the largest listed property developer in the world with a market capitalization of AED92 billion (USD25 billion). Emaar is 31.2% owned by the Investment Corporation of Dubai, which is 100% owned by the Government of Dubai. The remaining 68.8% are owned by the public. Foreign ownership limit in Emaar is 49%.
Emaar Ownership Structure
Source: Zawya
Investment Corporation of Dubai, 31.20%
Public, 68.80%
The tie with Dubai government came in the form of several land grants at near zero cost during the early development phases of the emirate. Emaar, along with other government owned real estate developers have undertaken the role of building the city of Dubai. Emaar’s track record includes the delivery of more than 15,100 villas and 17,800 apartments between 2001 and 2010 spread over several of its developments. Emaar’s flagship developments include Burj Khalifa, the world’s tallest tower, the downtown Burj development and Dubai mall along with its luxury hotel portfolio.
Business Model
Emaar is engaged in the development of full communities. The core activity of the company is property investment and development, property management services, hospitality, retail and financial services. Emaar Group PJSC is the holding company managing the group operations via several subsidiaries. The key business divisions include Emaar Dubai, which is responsible for property development and management in Dubai, Emaar International, which manages international operations, Emaar Investments, responsible for handling financial services operations, Emaar Malls, which manages the group’s retail portfolio and Emaar Hospitality, responsible for the group’s hotels. Unlike Aldar and Sorouh whose operations are geographically concentrated in Abu Dhabi, Emaar has a wide exposure to international markets with current projects in Saudi Arabia, India, Egypt, Turkey, Morocco, Syria, Canada and Jordan. Emaar land bank spans a 215 million sqf in the UAE and 2,550 million sqf internationally. International operations contributions to aggregate revenues have been slow over the past years being in their early phases. The contribution was also muted by the high revenue realization from Dubai sales. International operations contributed 7.5% and 8% of aggregate revenues in 2009 and 2010, respectively. Emaar also manages a highly prestigious investment portfolio in Dubai and growing across the international markets where it operates. The portfolio comprises over 5.28 million sqf GLA of world class retail outlets including the Dubai Mall and Marina Mall along with other retail outlets. The hospitality group manages 11 hotels in Dubai, five of which are 5-star hotels, two 4-stars and four standard ones. The move towards international operations and a more recurring income model was well timed for Emaar as it hedged against the slowing Dubai property market to which Emaar had a high concentration risk. Given our feeble outlook for Dubai property market, we believe the investment portfolio will be the main driver of revenues on the medium to long term as deliveries of the final stages of Dubai developments exit the backlog over the coming two years. Over the coming three years, contributions from international operations are expected to significantly support the top line.
Global Research - UAE Real Estate Sector
June 2011 20
Emaar Subsidiaries and Associates
Name Country of Incorporation Ownership (%)
Emaar Hospitality Group UAE 100.00%
Emaar Hotels & Resorts UAE 100.00%
Emaar International UAE 100.00%
Emaar International Jordan [via Emaar International] Jordan 100.00%
Emaar Malls Group UAE 100.00%
Emaar Misr for Development Company [via Emaar International] Egypt 100.00%
Emaar Morocco T, S & O [via Emaar International] Morocco 100.00%
Emaar Turkey [via Emaar International] Turkey 100.00%
Emaar Properties Canda Ltd. [via Emaar International] Canada 100.00%
Hamptons International Middle East UAE 100.00%
Emaar Johns Laing Homes [via Emaar International] United States 100.00%
District Cooling UAE 100.00%
National Investments UAE 100.00%
Emaar Utilities UAE 100.00%
APIC India 74.00%
Emaar DHA Islamabad Limited [via Emaar International] Pakistan 67.00%
Emaar Lebanon [via Emaar International] Lebanon 60.00%
Emaar Middle East [via Emaar International] Saudi Arabia 61.00%
Emaar Syria [via Emaar International] Syria 60.00%
Emaar Bawadi UAE 50.00%
Turner International Middle East [via Emaar Investment Holding] UAE 50.00%
Amlak Finance UAE 48.08%
Emaar MGF Land Limited [via Emaar International] India 45.50%
Emaar Industries and Investments UAE 40.00%
Emaar Financial Services UAE 37.50%
Emrill Services [via Emaar Dubai] UAE 33.33%
Emaar Economic City Saudi Arabia 30.50%
Dead Sea Company for Tourist and Real Estate Investment Jordan 29.33%
Source: Company Reports, Zawya
Global Research - UAE Real Estate Sector
June 2011 21
Emaar Cumulative Unit Delivery 2004-2010
Source: Emaar Properties
3,335 4,870 5,9658,217
12,15214,686
17,813
3,608
8,04810,227
13,185
14,226
14,768
15,173
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2004 2005 2006 2007 2008 2009 2010
Apartments Villas
Emaar Segmental Revenue Breadown 2008-2010 Emaar Geographical Revenue Breadown 2008-2010
Source: Company Reports Source: Company Reports
90%74% 76%
5%
18% 16%
5%8% 8%
0%
20%
40%
60%
80%
100%
2008 2009 2010
Property Sales Rental Income Hospitality
99%92% 92%
1%8% 8%
0%
20%
40%
60%
80%
100%
2008 2009 2010
UAE International
Global Research - UAE Real Estate Sector
June 2011 22
Project Profile
Property Developments
Emaar current residential sales comprise three projects in the UAE and 15 projects in the international markets. The aggregate number of units completed or under development stands at 21,122 units domestically and internationally. UAE units are expected to be fully handed over by 2013 marking the last year, on sight, of Dubai contributions to the property sales revenues, based on company guidance and assuming no delays. International sales that commenced in 2008 are expected to pick up pace through to 2014. Emaar has 7,469 units that are scheduled to be developed in the international markets provided conditions are favorable and will also deliver 2.1 million sqf of commercial space in 2011 in Downtown and Dubai Marina developments in 2011 and 2012.
Emaar UAE Property Developments
Project Units Under
Development
Deliveries
2011 2012 2013
Downtown Dubai 2,016 320 947 749
Umm Al Quwain 277 277 - -
Arabian Ranches 89 89
Total Residential 2,382 686 947 749
Downtown Dubai Commercial sqf 1,353,034 974,501 378,533 -
Dubai Marina Commercial sqf 758,237 758,237 - -
Total Commercial 2,111,271 1,732,738 378,533 -
Source: Emaar Properties
Emaar International Property Developments
Country Entity Units
Completed Units UD
Units TBD 11-13
Deliveries
2009 2010 2011 2012 2013
Egypt Emaar Misr 100 1,829 3,684 - 100 380 1,325 1,066
Saudi Arabia Emaar Middle East 32 523 866 - 31 133 381 481
Pakistan Emaar DHA Islamabad 78 198 47 40 11 91 98 -
Emaar GIGA Karachi - 300 300 - - - 300 -
Syria Emaar IGO 443 - 971 32 262 72 77 192
Morocco Emaar Tinja - 123 107 - - - 123 107
Canada Emaar Canada 65 43 0 21 11 40 36 -
Turkey Emaar Turkey 174 54 740 96 6 24 102 457
Lebanon Metn Renaissance - 147 535 - - 87 154 147
India Emaar MGF 100 15,408 - - 100 2,524 3,850 4,230
Jordan Samarah Project 68 115 219 - 22 26 55 122
Total
1,060 18,740 7,469 189 543 3,377 6,501 6,802
Source: Emaar Properties
Emaar International Property Unit Sales – As of 1Q11
Country Entity Released Sold % Sales
Egypt Emaar Misr 2,495 1,753 70%
Saudi Arabia Emaar Middle East 434 299 69%
Pakistan Emaar DHA Islamabad 285 199 70%
Emaar GIGA Karachi 213 55 26%
Syria Emaar IGO 1,013 695 69%
Morocco Emaar Tinja 123 49 40%
Turkey Emaar Turkey 186 123 66%
Lebanon Metn Renaissance 307 208 68%
India Emaar MGF 15,508 12,118 78%
Jordan Samarah Project Dead Sea 114 65 57%
Total
20,678 15,564 75%
Source: Emaar Properties
Global Research - UAE Real Estate Sector
June 2011 23
Retail Portfolio
Emaar retail portfolio comprises 5.28 million sqf of high class Malls and retail outlets that experiences a high overall occupancy
rate of 90%. Dubai Mall, one of the world’s largest malls, is Emaar’s flagship retail outlet. The mall spans a GLA of 3.65 million sqf
and had an occupancy rate of 92% at the end of 2010. Emaar owned malls maintain a high tenant profile with a number of
exclusive tenants only having regional presence in Dubai Mall. The retail portfolio includes Dubai Mall, Marina Mall, Souk Al
Bahar, the Business Square and other retail locations in the Burj Dubai development, the Gold & Diamond Park along with other
small retail locations. Emaar lease terms for non-anchor tenants are 3-5 year lease contracts while anchor tenants contracts are
longer term extending up 20 years.
The retail segment revenues grew from AED499 million in 2008 to AED1.9 billion in 2011 while gross margins dropped from 82%
in 2009 to 79% in 2010, a level we believe is sustainable given the segment’s low operating expenses and required maintenance
capex.
Dubai Mall Footfall
Source: Emaar Properties
Emaar Retail Revenue & GPM 2008-2010
Source: Emaar Properties
1.74
2.27 2.78
3.42
4.15
3.753.57
4.174.47
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
mill
ion v
isitors
499
1,510
1,901
64%
82%79%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2008 2009 2010
AE
D 0
00
Retail Revenue Retail GPM
Global Research - UAE Real Estate Sector
June 2011 24
Hospitality
Emaar hospitality portfolio currently manages 9 hotels. Emaar Hotels & Resorts, a fully owned subsidiary of Emaar Group owns
and manages the Armani Hotel while Emaar Hospitality controls full ownership and management of Nuran LLC, The Address
Hotels, Emaar Hotel Management, Emaar Leisure Group and Emaar International Hospitality. The hospitality group owns and
manages the other 8 hotels. Emaar has exclusive license rights of the “Armani” brand along with the wholly owned brands of “The
Address”, “The Palace” and “Nuran”
Emaar Hospitality Portfolio
Hotel Management Company Category Rooms Operational
Armani Hotel - Burj Khalifa Emaar Hotels & Resorts 5 Star 160 2010
The Address Dubai Mall The Address Hotels & Resorts 5 Star 244 2009
The Address Dubai Marina The Address Hotels & Resorts 5 Star 200 2009
The Address Downtown Dubai The Address Hotels & Resorts 5 Star 196 2008
The Palace Old Town The Address Hotels & Resorts 5 Star 242 2007
Al Manzil Southern Sun 4 Star 197 2007
Qamardeen Hotel Southern Sun 4 Star 186 2007
The Dubai Polo & Equestrian Club Emaar Hospitality Standard 11 2007
The Address Montgomerie Dubai The Address Hotels & Resorts Standard 21 2006
Nuran Marina Residences Nuran Standard 90 2006
Nuran Greens Residences Nuran Standard 228 2006
Source: Emaar Properties
Occupancy rates and ADRs across all hotels reported significant improvements in 1Q11 on the back of a flight to Dubai from
neighboring countries on the wake of the regional political events. The first quarter is also considered a high season for tourism in
Dubai given the good winter weather and the Dubai Shopping Festival, which are an annual attraction to the city. We do not see
these improvements sustainable and favor a gradual decrease of ADRs to 2010 averages.
Emaar Hospitality Performance
Hotel Occupancy % ADR RevPar
2009 2010 1Q11 2009 2010 1Q11 2009 2010 1Q11
The Address Downtown 75% 86% 96% 1,131 1,296 1,535 847 1,112 1,472
The Palace 67% 77% 90% 954 1,059 1,216 635 819 1,100
The Address Dubai Mall 58% 79% 90% 1,161 1,116 1,297 675 884 1,173
The Address Dubai Marina 35% 62% 80% 930 749 933 322 463 744
Al Manzil 79% 76% 89% 563 628 718 445 475 639
Qamardeen 72% 70% 83% 354 531 618 354 369 512
Source: Emaar Properties
Global Research - UAE Real Estate Sector
June 2011 25
Financial Highlights Emaar revenues peaked in 2007 at AED17.9 billion before sliding downwards to AED12.2 billion in 2010 after registering AED8.4
billion in 2009. 2010 had the lowest gross margin since 2003 at 37% down 1,200bps from 2009 and from the previous five year
average gross margin of 49%. The pressure on 2010 margins was mainly driven by lower realized margins of property sales from
condominiums, villas and commercial space. Retail gross margin was also 300bps lower than 2009 but was still significantly
higher than the 2008 figure. The hospitality segment saw the only margin improvement at 36% compared to 33% in 2009.
Emaar Revenue Performance 2006-2010
Source: Company Reports
Emaar Gross Margin by Segment 2008-2010
Source: Company Reports
14,006
17,566
10,717
8,413
12,150
68%
25%
-39%
-21%
44%
-60%
-40%
-20%
0%
20%
40%
60%
80%
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2006 2007 2008 2009 2010
AE
D m
illio
n
Revenues Growth
36%
64%
84%
36%
64%
35%
56%
79%
33%
82%
28%
37%34% 36%
79%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Condominiums Villas Commercial & Land Plots
Hospitality Retail
2008 2009 2010
Operating margins dropped from 33% in 2008 to 20% in 2010 in line with the decrease in the gross margin. Emaar operating profit
registered AED2.4 billion in 2010 compared to AED3.5 billion and AED2.3 billion in 2008 and 2009, respectively. Net income
came in at AED2.5 billion in 2010 considerably higher than the AED166 million and the AED327 million registered in 2008 and
2009. The lower net income of the prior two years was attributable to write-downs of assets of discontinued operations that were
directly charged to the income statement.
On the funding side, Emaar raised AED3.67 billion (USD1 billion) in the form of USD500 million guaranteed convertible bonds
maturing in 2015 priced at 7.5% and convertible at AED4.75/share in addition to USD500 million in the form of international sukuk
maturing in 2016 priced at 8.5%. The latter issue came under a program that allows Emaar to raise bonds up to USD2 billion.
Global Research - UAE Real Estate Sector
June 2011 26
As of 1Q11, Emaar reported a cash balance of AED6 billion against short term bank loans maturing within 12 month of AED7.5
billion. We believe the company is in a strong position to meet its short term obligations given that a large share of the maturing
loans can be rolled over like the USD1 billion Musharaka Islamic Syndicated facility that includes an option to be refinanced up to
USD750 million.
Assets Breakdown 1Q11 Liabilities & Equity Breakdown 1Q11
Source: Company Reports Source: Company Reports
Cash 10% Receivables 6%
Development Properties 42%
Associates 12%
PP&E 13%
Inv. Properties
13%
Other Assets 5%
Equity 49%
Payables 14%
Customer Advances 15%
Debt 19%
Other Liabilities 2%
Global Research - UAE Real Estate Sector
June 2011 27
Key Forecast Assumptions
Based on management guidance, we roll out sales from the majority of Dubai related projects in 2011 with the exception of
Downtown Dubai residential units and commercial space that are scheduled for delivery in 2012 and 2013. Accordingly, we factor
in the sale of 1,696 residential units in 2012 and 2013 along with 378,533 sqf of commercial space in 2012. For international
operations, we forecast the largest contributions to take place between 2012 and 2014 as projects phase out based on scheduled
deliveries. Emaar has sold an average of 75% of its international units, which supports stronger visibility for future earnings.
Given Emaar’s long term contracts for the retail portfolio, we expect current revenue levels to be sustainable going forward with
minor increases driven by growing occupancy levels. We factor in a 4% growth in 2011 retail revenues followed by 2% going
forward. For the hospitality segment, we believe 1Q11 occupancy rates and ADRs are exceptionally high and should normalize to
more stable levels during the remaining of 2011. However, we factor in growing rates going forward given our view on improving
tourism and business conditions over our forecast horizon.
Earnings
We expect Emaar’s revenues to register a -14% CAGR through to 2014. Based on our outlook for Emaar’s segment performance,
UAE sales will fully exit the books by 2013 after declining contributions from AED3.4 billion in 2011 down to AED1.4 billion in
2013. The drop in UAE sales will be mitigated by the growing contribution from international sales, which we forecast to peak in
2013 at AED3.5 billion. For the retail and hospitality segments, we forecast 2011 revenues of AED2 billion and AED1.1 billion.
Emaar Revenue Forecasts
AED 000 2011 2012 2013 2014
Development Sales 3,445,069 1,992,071 1,417,707 -
Investment Properties 2,018,415 2,058,784 2,099,959 2,141,959
Hospitality 1,104,815 1,176,481 1,264,193 1,360,375
International Revenue 1,894,908 2,553,948 3,494,330 3,205,550
Total Revenues 8,463,208 7,781,284 8,276,189 6,707,884
Source: Global Forecasts
Our 2011 net income stands at AED1.7 billion with a net margin of 20%. We expect net margins to remain at this level in 2012 and
2013 given contributions from the low margin property sales. For 2014, we see margin improvements on growing percentage
contributions from the high margin retail and hospitality segments. We forecast a net income of AED1.5 billion in 2014, the last
year of our forecast horizon and an associated margin of 23%.
Emaar’s near term catalysts, in our view, will stem from any accelerated property sales contributing to the topline. We see a higher
probability of this surprise event taking place in the international operations where market conditions are more solid as compared
to the local Dubai market. Against the small contribution of the hospitality segment, forecasted at 13% of 2011 revenues, we view
any signs of sustainable growth and rate improvements in this segment as another potential catalyst.
Revenues & Gross Margin Forecasts Net Income & Net Margin Forecasts
Source: Global Estimates Source: Global Estimates
8,463 7,781
8,276
6,708
41%
42%
43%
44%
45%
46%
47%
48%
49%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2011e 2012e 2013e 2014e
AE
D m
illio
n
Revenues Gross Margin
1,714
1,550
1,732
1,513
19.0%
19.5%
20.0%
20.5%
21.0%
21.5%
22.0%
22.5%
23.0%
1,400
1,450
1,500
1,550
1,600
1,650
1,700
1,750
2011e 2012e 2013e 2014e
AE
D m
illio
n
Net Income Net Margin
Global Research - UAE Real Estate Sector
June 2011 28
Financial Statements
Income Statement Emaar Properties
(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e
Revenues
10,717
8,413
12,150
8,463
7,781
8,276
6,708
Cost of revenues
(5,487)
(4,314)
(7,604)
(4,765)
(4,358)
(4,511)
(3,488)
Gross profit
5,230
4,099
4,547
3,698
3,424
3,766
3,220
SG&A
(1,610)
(1,276)
(1,224)
(1,206)
(1,089)
(1,324)
(1,073)
EBITDA
3,620
2,823
3,323
2,492
2,334
2,441
2,147
Depreciation & amortization
(295)
(636)
(805)
(803)
(804)
(803)
(762)
Provisions -
(80)
(192) - - - -
Net other operating income
169
232
113
78
62
50
40
EBIT
3,494
2,340
2,439
1,767
1,593
1,689
1,424
Net Interest income
346
139
(90)
(55)
(6)
100
140
Net other income
349
(451)
129
57
46
37
29
Net profit before tax
4,189
2,028
2,478
1,770
1,633
1,825
1,594
Taxes
3
24
(1)
(35)
(65)
(73)
(64)
Net profit after tax
4,191
2,051
2,477
1,734
1,568
1,752
1,530
Loss from discontinued operations
(4,068)
(1,762) - - - - -
Minority interest
42
38
(29)
(20)
(18)
(20)
(18)
Net profit excluding minority
166
327
2,448
1,714
1,550
1,732
1,513 Source: Company Reports & Global Research The company's Financial Year ends in December
Global Research - UAE Real Estate Sector
June 2011 29
Balance Sheet Emaar Properties
(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e
Cash and bank balances
5,175
1,860
1,773
1,301
1,836
1,002
1,611
Marketable securities
218
406
3,269
4,329
3,328
2,466
1,883
Receivables
638
750
711
510
512
518
491 Investments in associates and JV
8,314
7,861
7,592
7,592
7,592
7,592
7,592
Intangible assets
439
439
46
46
46
46
46
Other Assets
6,434
6,385
5,971
5,753
5,864
6,001
5,863
Development Properties
26,799
31,076
26,492
25,483
25,617
25,920
24,535
Net fixed assets
18,662
15,368
16,649
15,846
15,079
14,314
13,589
Total assets
66,680
64,145
62,504
60,860
59,875
57,861
55,610
Accounts & notes payables
9,680
9,545
8,939
7,900
7,941
8,035
7,606
Advances from customers
18,109
15,888
9,889
9,692
7,978
6,786
4,614
Total Debt
9,174
8,625
11,169
7,921
7,054
4,399
3,271
Other Liabilities
1,116
1,207
1,207
696
699
707
672
Total liabilities
38,079
35,266
31,204
26,207
23,672
19,926
16,163
Paid up capital
6,091
6,091
6,091
6,091
6,091
6,091
6,091
Other Adjustments
14,923
14,910
15,191
14,960
14,960
14,960
14,960
Retained earnings
7,586
7,878
10,018
13,602
15,152
16,883
18,396
Shareholders' equity
28,601
28,879
31,300
34,653
36,203
37,934
39,447
Total liabilities & equity
66,680
64,145
62,504
60,860
59,875
57,861
55,610 Source: Company Reports & Global Research
The company's Financial Year ends in December
Global Research - UAE Real Estate Sector
June 2011 30
Cash Flow Statement Emaar Properties
(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e
Net profit before tax
4,189
2,028
2,478
1,770
1,633
1,825
1,594
Depreciation & amortization
295
636
805
803
804
803
762
Net Interest
(346)
(139)
90
55
6
(100)
(140)
Changes in accounts & notes receivables
(706)
164
227
202
(3)
(6)
28
Changes in accounts & notes payables
4,259
3
(490)
(1,039)
42
94
(429)
Change in Development Properties
(5,824)
(3,020)
2,953
1,010
(134)
(303)
1,385
Changes in advances from customers
4,016
(2,221)
(5,999)
(198)
(1,713)
(1,193)
(2,171)
Other adjustments
250
799
400
(8)
12
(53)
(4)
Operating cash flow
6,132
(1,751)
464
2,595
646
1,068
1,024
Additions to fixed assets
(5,986)
(2,495)
(1,080)
803
767
766
725
Other investing activities
3,305
(11)
(1,718)
-
-
-
-
Investing cash flow
(2,681)
(2,505)
(2,798)
803
767
766
725
Net financing raised
2,265
1,196
2,653
(3,248)
(867)
(2,655)
(1,128)
Dividends Paid
(1,199)
(4)
(1)
(609)
-
-
-
Other financing activities
94
(148)
(394)
-
-
-
-
Financing cash flow
1,160
1,044
2,258
(3,857)
(867)
(2,655)
(1,128)
Net changes in cash
4,611
(3,213)
(76)
(459)
546
(822)
621
Other Adjustments
(1,568)
(102)
(12)
(12)
(12)
(12)
(12)
Beginning cash
2,132
5,175
1,860
1,773
1,301
1,836
1,002
End cash
5,175
1,860
1,773
1,301
1,836
1,002
1,611 Source: Company Reports & Global Research
The company's Financial Year ends in December
Global Research - UAE Real Estate Sector
June 2011 31
Ratio Analysis Emaar Properties
2008 2009 2010 2011e 2012e 2013e 2014e
Liquidity Ratios
Current Ratio (x) 0.98 0.65 0.42 0.61 0.83 0.87 0.87
Quick Ratio (x) 0.66 0.41 0.20 0.40 0.60 0.62 0.62
Cash Ratio 0.55 0.37 0.15 0.35 0.55 0.57 0.57
Working Capital (mn) -5,177 -8,616 -5,606 -1,788 -1,360 -1,326 -1,181
Profitability Ratios
Total Assets Turnover (x) 0.16 0.13 0.19 0.14 0.13 0.14 0.12
Total Net Fixed Assets Turnover (x) 0.57 0.55 0.73 0.53 0.52 0.58 0.49
Gross Profit Margin 48.8% 48.7% 37.4% 43.7% 44.0% 45.5% 48.0%
Operating Margin 32.6% 27.8% 20.1% 20.9% 20.5% 20.4% 21.2%
Net Profit Margin 1.5% 3.9% 20.1% 20.3% 19.9% 20.9% 22.5%
Return on Assets 6.3% 3.2% 4.0% 2.8% 2.6% 2.9% 2.7%
Return on Equity 14.6% 7.1% 7.9% 5.0% 4.3% 4.6% 3.9%
Leverage Ratios
Times Interest Earned (x) 46.34 10.80 6.87 4.96 5.02 8.53 9.68
Debt / Equity (x) 0.32 0.30 0.36 0.23 0.19 0.12 0.08
Degree of Total Leverage (x) 0.00 2.38 0.47 0.99 1.19 1.85 0.67
Valuation Ratios
Basic EPS (AED) 0.03 0.05 0.40 0.28 0.25 0.28 0.25
Basic Book Value Per Share (AED) 4.69 4.74 5.13 5.68 5.94 6.22 6.47
EV/Revenue 2.14 3.04 2.08 2.51 2.60 2.15 2.54
EV/EBITDA (x) 6.07 8.37 7.37 8.26 8.45 7.14 7.79
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Market Price (AED) 2.61 4.16 3.58 3.15 3.15 3.15 3.15
Market Capitalization (AED mn) 15,911 25,361 21,825 19,203 19,203 19,203 19,203
P/E Ratio (x) 96.10 77.50 8.90 11.20 12.39 11.09 12.70
P/B (x) 0.60 0.90 0.70 0.55 0.53 0.51 0.49
Source: Company Reports & Global Research
* Market price for 2011 and subsequent years as per closing prices on Jun 21, 2011
Global Research - UAE Real Estate Sector
Aldar Properties
June 2011 32
Market Data
Bloomberg Code: ALDAR UH
Reuters Code: ALDR.AD
CMP (2 June 2011): AED1.38
O/S (mn) 2,577.9
Market Cap (AED mn): 3,947.8
Market Cap (USD mn): 1,074.8
P/E 2011e (x): 8.4
P/B 2011e (x): 0.6
Price Performance 1-Yr
High (AED): 3.23
Low (AED): 1.26
Average Volume: (000) 910.0
1m 3m 12m
Absolute (%) -2.8 8.5 -53.2
Relative (%) -0.0 0.3 -58.9
Price Volume Performance
Restructuring plan is a lifeline, but concerns persist
Property sales revenues to phase out by 2013
Future earnings pressured by high debt service costs
Initiate Coverage with TP AED1.51/share
Restructuring plan is a lifeline, but concerns persist
In our view, the restructuring plan that Aldar undertook in January 2011 to reschedule its maturing loans saved the company from an imminent bankruptcy and rounds of settlements with debtors, which could have impaired management ability to proceed with scheduled projects as planned. Further, the impairment charges have cleaned up the asset base positioning the company at a cleaner starting point. However, we are skeptical on Aldar’s ability to meet its high debt requirements given its current project profile. We are also not proponents of the continuing process of operating asset transfers to the government at low margins after the company incurs the time and cash investment.
Property sales revenues to phase out by 2013
Based on scheduled deliveries, we believe sales form Al Zeina and Al Muneera will be reported in 2011 and 2012 along with units remaining from Al Bandar and Al Gurm villas while Al Bateen park will participate to 2013 revenues concluding all development sales in Aldar’s backlog, assuming no delays. This fall will not be mitigated by the growing recurring income, which accounts to only 36% of our aggregate four year revenues.
Earnings pressured downwards by high debt service costs
Aldar’s debt stood at AED34 billion on 1Q11 inclusive of bank loans and bonds. We believe that earnings and cash flow will be under attack from the hefty debt service costs, which we forecast at an aggregate AED1.7 billion between 2011 and 2014. We forecast a net income of AED683 million on a revenue of AED7.1 billion in 2011 followed by a net loss of AED27 million on revenues of AED4.3 billion in 2012.
Initiate Coverage with TP AED1.51/share
Our SOTP valuation for Aldar Properties yields a fair value target of AED1.51/share Our price target for Aldar Properties implies an upside potential of 10% from the current market price. We initiate coverage with a Hold recommendation on the stock.
Investment Indicators
2010 2011e 2012e 2013e 2014e
Revenue (AED mn) 1,791 7,140 4,296 3,179 2,305
Net Profit (AED mn) (12,658) 838 (27) 290 184
Diluted EPS (AED) (3.06) 0.16 (0.01) 0.07 0.04
Diluted BVPS (AED) 1.02 2.24 2.40 2.44 2.47
EV/EBITDA (x) na 10.4 12.5 12.0 13.7
P/E (x) na 8.4 na 19.7 31.0
P/B (x) 1.3 0.6 0.6 0.6 0.6
Source: Company Annual Reports & Global Research
Mostafa El-Maghraby Senior Financial Analyst [email protected] Tel.: (965) 22951279
Hold Target Price
AED1.51
AED
Global Research - UAE Real Estate Sector
June 2011 33
Valuation & Recommendation
For arriving at a fair value for Aldar Properties, we utilized a Sum Of The Parts (SOTP) approach by valuing each project separately. For DCF valuations, we have used the Capital Asset Pricing Model (CAPM) to arrive at the cost of equity for Aldar and adjusted our WACC to the upside, when warranted, based on our projections for the degree of riskiness of each project. The following assumptions were made in order to arrive at the SOTP target value:
A risk-free rate of 4.3% has been assumed which is the yield on Abu Dhabi Government Bond maturing in 2020.
A market risk premium of 7% has been assumed.
Adjusted beta assumed at 1.92.
The cost of equity derived from the above assumptions using the Capital Asset Pricing Model is 17.7%.
The cost of debt has been assumed at 8%.
On the basis of above assumptions we have derived a UAE WACC of 11.9%.
Aldar Properties - Equity Valuation
AED (000) Value /share Methodology
Development Sales 5,427,396 1.31 DCF
Hospitality 2,522,221 0.61 DCF
Investment Portfolio 8,590,550 2.07 DCF / Capitalization Rate 10%
Other operations 2,100,662 0.51 DCF
Total NPV 18,640,829 4.02
Add: Subsidiaries 1Q11 694,291 0.17 Book Value
Add: Other Assets 15,656,702 3.78 Market Capitalization
Add: 1Q11 Cash 6,156,111 1.49
Less: Debt 1Q11 34,874,260 2.02
Total Equity Value 6,273,673 1.51
CMP
1.38
Upside Potential 10% Source: Global Estimates
Aldar NPV Breakdown
Source: Global Estimates
Development Sales, 29%
Retail Lease, 28%
Commercial Lease, 19%
Hotels, 14%
Other, 11%
Global Research - UAE Real Estate Sector
June 2011 34
Recommendation
Aldar operations are solely concentrated in Abu Dhabi and hence, have suffered from the property downturn that hit the market since 2008. In line with our views on the market, we do not see any significant potential for renewable interest in property sales once current projects exit Aldar’s backlog. Although we favor the operational quality of Aldar’s rental and hospitality assets over those of Sorouh, we believe earnings will be significantly hit on the long term on declining sales revenues. We also do not favor Aldar’s high debt service and believe it will create a considerable drag on net income throughout our forecast horizon spanning till the end of 2014. Our SOTP valuation of Aldar Properties yields a fair value target of AED1.51/share implying an upside potential of 10% from the current market price. We initiate coverage with a HOLD recommendation on the stock.
Key Risks to Valuation
Geographic concentration risk
Aldar’s operations have a unilateral geographic concentration posing high risk as all projects are based in Abu Dhabi. Although we do not perceive any political risk evolving in the emirate and prefer its overall economic conditions to those of Dubai, the lack of diversification due to the sole exposure to one market poses a threat in the case of any unforeseen events.
Long term earnings sustainability
Although we like the operational quality of Aldar’s rental and hospitality properties, we believe the contribution from these is incapable of supporting Aldar’s top line over the long term. Recurring income from investment properties represents only 36% of our four year forecasted revenues through to 2014 while the remaining 64% comes from property sales and construction projects undertaken on behalf of the government, both of which are unsustainable over the long term.
Delays in project delivery
Our earnings forecasts for Aldar are based on management guidance of scheduled unit deliveries. Although we have factored in delivery delays where appropriate, deviations in actual deliveries are a common practice and could alter our valuation outcomes of specific projects.
Funding risks
In spite of the hefty recent cash injection from the restructuring program with the government of Abu Dhabi, concerns over Aldar’s ability to achieve its investment targets and meet its debt obligations are high. We see the probability of project cancellations, further asset sales or new rounds of refinancing quite plausible for Aldar.
More provisions and impairments
In spite of the size of the 2010 impairments, we believe that the property market of Abu Dhabi is still prone to further asset price deteriorations over the coming three years. Accordingly, the probability of further impairments on Aldar’s assets cannot be ruled out. Provisions against receivables can also materialize.
Global Research - UAE Real Estate Sector
June 2011 35
Profile Aldar Properties PJSC was established in 2000 as a real estate development and management company headquartered in Abu Dhabi. Aldar raised AED1.5 billion through an IPO in 2004 representing AED675 million subscribed by the founders and AED825 million allocated to the public with a share offer of AED1/share. The issue was the largest in the history of the UAE financial markets at the time and was 448 times oversubscribed raising AED373 billion in demand. The majority of Aldar’s initial founders were government and quasi government entities. Current permitted foreign ownership in Aldar is 40%.
Aldar Ownership Structure
Source: Zawya
Mubadala 27.7%
ADIC 5.7%
NBAD 5.1%
Public 61.5%
Business Model
Aldar was incorporated to lead the development of Abu Dhabi's strategic sites in line with the Abu Dhabi government long term plan. Aldar’s main business activity is real estate development, investment and management services. It is also involved in the ownership and operation of hospitality, retail, leisure and educational properties like resorts, hotels, malls, amusement parks, sport clubs, specialized outlets and schools. Aldar also offers project management services and advisory to the government of Abu Dhabi and its related entities.
Aldar Subsidiaries
Name Country of Incorporation Ownership (%)
Al Raha Gardens Property LLC UAE 100%
Al Jimi Mall LLC UAE 100%
Al Raha Infrastructure Company LLC UAE 100%
Aldar Academics LLC UAE 100%
Aldar Facilities Management LLC UAE 100%
Aldar Commercial Property Developments UAE 100%
Aldar Hotels & Hospitality LLC UAE 100%
Aldar Marinas LLC UAE 100%
Abu Dhabi World Trade Centre LLC UAE 100%
Yas Marina LLC UAE 100%
Yas Yacht Club LLC UAE 100%
Yas Hotel LLC UAE 100%
Yas Links LLC UAE 100%
Al Muna Primary School UAE 100%
Addar Real Estate Services LLC UAE 99%
Farah Leisure Parks Management LLC UAE 85%
Source: Company Reports, Zawya
Global Research - UAE Real Estate Sector
June 2011 36
Aldar, via its subsidiaries, manages seven business divisions solitary operating in Abu Dhabi. The property development division is the company’s largest segment. Aldar developments are mostly fully fledged mix-use sites including residential, commercial, retail, hotels, educational and leisure attractions. The property segment has always been the major contributor to revenues. Property sales contribution dropped from 98% during 2007-2008 to 50% in 2010 on slow deliveries and steadily growing income from other segments. The estates management division manages the company’s rental portfolio, which has exposure to residential, commercial and retail properties. Recurring revenues from the investment portfolio grew consistently from AED23 million in 2006 to AED415 million in 2010 representing 23% of revenues in the latter year. The hospitality segment first contribution to the top-line took place in 2009 when Aldar opened 6 hotels in Yas Island in addition to Hala Arjan hotel in downtown Abu Dhabi. Hotels revenues increased from AED57 million in 2009 to AED314 million in 2010, the first full year of operations. Aldar currently owns three schools, The Pearl, Al Yasmin and Al Muna, which are managed through its subsidiary Aldar Academics LLC. The first school was opened in 2007 and contributed AED23 million to 2008 revenues. In 2010, the schools segment generated AED91 million in revenues representing 5% of aggregate revenues. The leisure segment includes Farah Leisure Parks Management and Aldar Marinas LLC. Aldar developed the Ferrari Theme Park, which was later transferred to the government in the company’s restructuring plan that took place in January 2011. The leisure segment is planned to manage the Yas Water Park when it starts operations in 2013. Aldar marinas LLC manages Yas Marina, on behalf of the Abu Dhabi government and will manage Al Bandar Marina that is scheduled to open in 2011. Leisure revenues stood at AED6 million and AED71 million in 2009 and 2010, respectively. Aldar Segmental Revenue Breakdown 2006-2010
Source: Company Reports
Aldar Revenue & Gross Margin 2006-2010
Source: Company Reports
5%
98% 98%84%
50%
12.2%
2% 2%
10%
23%
3%
17%
0.5% 3%5%
0.3%4%
83%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010
Property & Land Sales Investment Properties Hotels
Schools Leisure Construction
188 1,227
4,978
1,979 1,791
16%
46%
54%
22%16%
0%
10%
20%
30%
40%
50%
60%
-
1,000
2,000
3,000
4,000
5,000
6,000
2006 2007 2008 2009 2010
AE
D m
n
Revenue GPM
Global Research - UAE Real Estate Sector
June 2011 37
Project Profile Property Developments
Aldar residential sales comprise five projects. Al Bandar, the first residential development in Al Raha Beach was completed in 2010 and sold units were handed over in 3Q10. Al Gurm villas comprise 73 villas and was also completed and handed over in 1Q11. Unit sales from Al Gurm and Al Bandar represented the only property sales for Aldar in 1Q11. Al Muneera and Al Zeina are located in Al Raha Beach and are scheduled for delivery between 3Q11 through to 4Q12 representing the only property sales income over the coming six quarters ahead of the scheduled delivery of Al Bateen Park development in 1Q13.
Property Developments Profile
Project NSA sqm Units Percent Sold Completion
Al Bandar 80,202 511 87% 3Q10
Al Gurm Villas 147,191 73 90% 1Q11
Al Muneera 281,014 1,445 75% 4Q11-2Q12
Al Zeina 270,388 1,221 45% 3Q11-2Q12
Al Bateen Park 99,267 348 0 1Q13
Source: Aldar Properties, Global Estimates Investment Properties
Aldar is in the process of developing a high profile investment portfolio of properties, especially on the retail segment. Currently, Aldar has 125,402 sqm of operating retail outlets inclusive of the IKEA store in Yas Island, the largest in MENA region that was delivered in 1Q11 and Motorworld, delivered in 2Q11. Aldar operating retail properties are 100% leased reflecting the undersupply of class A and specialized retail outlets in Abu Dhabi and the high profile of Aldar’s outlets. An addition of 336,906 sqm will be added to the retail portfolio by 3Q13 inclusive of Yas Mall, which will span 228,083 sqm and accommodate 440 stores.
Investment Properties: Retail
Project Type sqm Leased Operational
Al Jimmi Mall Retail 46,500 100% 1Q06
Community Retail Retail 7,116 100% 2Q09
IKEA Store Retail 32,499 100% 1Q11
Motorworld (Phase 1) Retail 39,287 100% 2Q11
Community Retail Retail 44,959
4Q12
Central Market Retail 63,864
3Q13
Yas Mall Retail 228,083
2Q13
462,308
Source: Aldar Properties
The commercial segment spans an operating and leased 84,421 sqm since 2009 and the new addition of the flagship HQ development that was completed in 3Q10 and is currently 75% occupied bringing Aldar’s net area available for lease to 133,774 sqm. The Central Market development will further boost Aldar’s commercial exposure by 74,301 sqm. Although we do not favor exposure to the commercial market, Aldar’s developments are of high quality, which runs a significant shortage in Abu Dhabi.
Investment Properties: Commercial
Project Type sqm Leased Operational
Al Mamoura Commercial 65,466 100% 2Q09
Injazat Data Centre Commercial 52,639 100% 2Q09
Baniyas Towers Commercial 40,617 100% 3Q09
HQ Commercial 49,353 75% 3Q10
Central Market Commercial 74,301
3Q13
208,075
Source: Aldar Properties, Global Estimates
Global Research - UAE Real Estate Sector
June 2011 38
The Central Market 474 residential units scheduled for delivery in 3Q13 will be the only exposure to the residential rental market. Aldar also has a small 5,000 sqm unit of the Imperial College London Diabetes Centre, which is leased on a long term contract.
Investment Properties: Other
Project Type sqm Leased Operational
Imperial College London Diabetes Centre Healthcare 5,000 100% 2Q06
Central Market Residential 474 Units
3Q13
Source: Aldar Properties
Hospitality
The hospitality segment comprises an operating 2,429 rooms spread over 8 hotels that started operations in 2009. The six Yas
Golf hotels serve leisure and corporate visitors to Yas Island and are 3-4 star hotel managed by various global hotel management
brands. The Yas Marina is a 5-star hotel located in the Yas Marina development and is the only development managed by Aldar’s
subsidiary Aldar Marinas. Hala Arjan is a 50:50 joint venture between Aldar and Royal House with 166 hotel apartments. The only
upcoming project in the Hospitality segment will be the Central Market 195 rooms’ hotel scheduled for 2Q13.
Hospitality Properties
Hotel Management Rooms Category Operational
6 Yas Golf Hotels Several Global Brands 1,763 3 & 4 Star 2009
Hala Arjan Global Brand 166 3 Stars 2009
Yas Marina Aldar Marinas 500 5 Star 2009
Central Market TBD 195 5 Star 2Q13
Source: Aldar Properties
Schools
Aldar operates 3 schools with a capacity of 2,850 students that will grow by 1,100 students when the company delivers Al Bateen
School in 3Q11. All Aldar’s schools are managed by its subsidiary Aldar Academics.
Schools
Schools Capacity Management Operating Revenue / student 2010
Pearl Primary School 550 Students Aldar Academics 3Q07
AED 31,845 Yasmina School 1,800 Students Aldar Academics 3Q08
Muna Primary School 500 Students Aldar Academics 3Q09
Al Bateen School 1,100 Student Aldar Academics 3Q11
Source: Aldar Properties
Other Projects
Aldar manages projects on behalf of the Abu Dhabi government for a project management fee. The fee on these projects
averages between 2-7% of the total project value. Reimbursable Projects
Project Type
Interchanges at Al Raha Beach Infrastructure
Shabhat Infrastructure Infrastructure
Cleveland Clinic Healthcare
Sheikha Salama Mosque Mosque
Al Falah Residential
Khalifa University Higher Education
MIST 1A at Masadar City Higher Education
MIST 1B at Masadar City Higher Education
The Courtyard at Masadar City Commercial
Parking Structure at Masadar City Multi-storey Parking
Source: Aldar Properties
Global Research - UAE Real Estate Sector
June 2011 39
Financial Highlights Aldar revenues peaked in 2008 at AED5 billion before sliding 60% in 2009 to AED2 billion then another 10% in 2010 to AED1.8
billion. Gross margins averaged between a low of 16% in 2010 and a high of 54% in 2008. The high margins of 2007 and 2008
were driven by aggressive sales of high margin land plots, which constituted 75% of total revenues in both years. Aldar had an
operating loss of AED1.2 billion and AED5.2 billion in 2009 and 2010, respectively on the back of high provisions and asset
impairments in both years. Aldar reported a project impairment of AED528 million in 2009 followed by AED2.9 billion in 2010.
In 2010, Aldar reported a fair value loss on investment properties of AED7 billion. The loss whipped out the combined revaluation
gains of AED6.6 billion that the company realized since 2006 through to 2009 bringing the investment properties asset values to
below their 2005 level. Accordingly, Aldar reported 2010 net loss of AED12.7 billion. Adjusted for the fair valuation impact, Aldar
would report an adjusted 2010 net loss of AED5.7 billion.
Aldar Revenue and Growth 2006-2010
Source: Company Reports
Aldar Profitability Margins 2006-2010
Source: Company Reports
-124%
13%35%
-60%
-290%
-88%
10%38%
-49%
-316%
16%46% 54%
22% 16%
-350%
-300%
-250%
-200%
-150%
-100%
-50%
0%
50%
100%
2006 2007 2008 2009 2010
Gross Margin EBIT Margin Adjusted Net Margin
188
1,227
4,978
1,979 1,791
-53%
554%
306%
-60%
-10%
-100%
0%
100%
200%
300%
400%
500%
600%
-
1,000
2,000
3,000
4,000
5,000
6,000
2006 2007 2008 2009 2010
AE
D m
n
Revenues Growth
Global Research - UAE Real Estate Sector
June 2011 40
Aldar undertook a restructuring plan in early 2011 to reschedule its maturing loans. The plan was structured such that the
government of Abu Dhabi would inject a cash amount of AED19.2 billion in Aldar. The amount included reimbursements and sales
totaling AED10.9 billion in exchange for the transfer of infrastructure assets on Yas Island including Ferrari World Abu Dhabi
theme park along with roads, bridges, marine infrastructure sites and land. Aldar also issued a convertible bond worth AED2.8
billion to Mubadala. The bond carries a profit rate of 4% and is convertible in December 2011. The last component of the plan was
the sale of residential units and land from Al Raha Beach developments for AED 5.5 billion to the Abu Dhabi Government.
The plan provided Aldar with the needed lifeline in the short term given the company’s stressing debt maturity schedule including
the maturity of AED9.8 billion in 2011 in addition to the convertible liability of AED6.5 billion. According to management, the
company expects to receive another AED5 billion of revenues from property sales over the coming three years bringing the total
cash inflow to AED24.2 billion. This amount will be channeled through an estimated AED12 billion of capex related to investment
properties and the ongoing development sales projects and AED12 billion of debt repayment.
In our view, the restructuring plan saved Aldar from an imminent bankruptcy and rounds of settlement with debtors, which could
have impaired management ability to proceed with scheduled projects as planned. Further, the impairment charges have cleaned
up the asset base positioning the company at a better starting point. However, it came in at a high cost to investors with the
impairment charge depressing BVPS from AED5.7/share in 3Q10 down to AED1.6/share ahead of further dilution on converting
the newly issued Mubadala bond. We are also not proponents of the continuing process of the transfer of operating assets to the
government at low margins after the company incurs the time and cash investment.
Aldar Debt Maturity Schedule - 1Q11
Source: Company Reports
16,311
2,204 4,117
5,511 5,671
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2011 2012 2013 2014 Beyond 2014
AE
D m
n
Aldar Asset Breakdown 1Q11 Aldar Liabilities & Equity Breakdown 1Q11
Source: Company Reports Source: Company Reports
Fixed Assets 30%
Trade Receivables
13%
Gov. Receivables 14%
DWIP 30%
Cash 12%
Other Asstes 1%
Equity 9%
2011 Convertible 14%
Non Convertible 17%
Borrowings 39%
Payables 13%
Other Liabilities
8%
Global Research - UAE Real Estate Sector
June 2011 41
Key Forecast Assumptions
Based on scheduled deliveries, we account for sales form Al Zeina and 30% of Al Muneera in 2011. We also factor in the sale of
the remaining units from Al Bandar along with the sale of 55 units from Al Gurm 73 villas in 2011. In 2012, we factor in the
remaining sales from Al Muneera and Al Gurm villas and in 2013 we account for the sale of Al Bateen Park 359 units concluding
all development sales in Aldar’s backlog. We do not account for any land sales during the four years of our forecast horizon.
For investment properties, we assume 9.5% yield on commercial properties in 2011. We only factor in minor declines in rents over
the next three years on Aldar’s new properties given their high profile and positioning in the Abu Dhabi market. For retail
properties, we assume the delivery of Yas Mall in 2014 will be the significant addition to the segments revenues adding AED500
million and we exclude Motorworld phases 2 & 3 from our valuation.
For the hospitality segment, we assume 2011 occupancy rate of 65% for Yas Island hotels and increase it to 80% in 2014 on
better market conditions and the addition of more leisure attractions in Yas Island. For Hala Arjan, we assume 2011 70%
occupancy rate.
Earnings
Based on our forecasts, we expect Aldar’s revenues from property sales to drop from AED5.8 billion in 2011 to AED1.4 billion in
2013 in line with delivery schedules. Investment Properties revenues will receive a significant 52% boost in 2013 on the delivery of
Central Market followed by a 60% increase attributable to the opening of Yas Mall in 2014. Aldar’s revenues will witness a
declining trend to bottom out in 2014 at AED2.3 billion after which a gradual pick up in revenues should take place on stable
recurring income profile.
Aldar Revenue Forecasts
AED (000) 2011 2012 2013 2014
Development Sales 5,796,470 2,893,160 1,419,178 -
Investment Properties 562,009 568,680 864,510 1,385,458
Hospitality 415,327 427,787 483,338 501,223
Other Revenue 366,267 406,798 412,252 417,869
Total Revenues 7,140,074 4,296,424 3,179,278 2,304,550
Source: Global Forecasts
We expect gross margins to increase from 24% in 2011 to 48% in 2014 on growing contributions from the higher margin segments
and the phase out of property sales. We do not account for any further project or receivable related provisions going forward. Our
operating margin for 2011 comes in at 9.2%, accounting for a growing depreciation expense, and increases to 14% in 2014.
Below EBIT, we believe earnings will suffer from high debt service costs over the coming four years. Net income in 2011 will
register AED838 million with a net margin 12%.
Revenues & Gross Margin Forecasts Net Income & Net Margin Forecasts
Source: Global Estimates Source: Global Estimates
11.7%
2.4%
9.1%8.0%
838
105
290
184
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
-
100
200
300
400
500
600
700
800
900
2011e 2012e 2013e 2014e
AE
D m
illio
n
Revenue Gross Margin
7,140
4,296
3,179
2,305
24.0%28.7%
42.9%
48.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2011e 2012e 2013e 2014e
AE
D m
illio
n
Revenue Gross Margin
Global Research - UAE Real Estate Sector
June 2011 42
Financial Statements
Income Statement Aldar Properties
(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e
Revenues
4,978
1,979
1,791
7,140
4,296
3,179
2,305
Cost of revenues
(2,295)
(1,542)
(1,503)
(5,428)
(3,065)
(1,815)
(1,182)
Gross profit
2,683
437
288
1,712
1,231
1,364
1,122
SG&A
(587)
(917)
(665)
(553)
(365)
(429)
(311)
EBITDA
2,096
(480)
(377)
1,159
866
935
811
Depreciation & amortization
(25)
(94)
(514)
(501)
(519)
(510)
(486)
Provisions
(312)
(606)
(4,308)
-
-
-
-
EBIT
1,759
(1,180)
(5,199)
657
347
424
325
Share of gain from associates and JV's
47
(88)
(28)
33
25
20
16
Fair value gain on investment properties
1,533
1,797
(6,992)
-
-
-
-
Interest income
472
469
263
156
106
78
57
Interest expense
(372)
(275)
(718)
(619)
(528)
(259)
(247)
Other income
8
114
16
455
23
27
33
Net profit before tax
3,447
837
(12,658)
683
(27)
290
184
Taxes
-
-
-
-
-
-
-
Net profit after tax
3,447
837
(12,658)
683
(27)
290
184
Minority interest
-
-
-
-
-
-
-
Net profit excluding minority
3,447
837
(12,658)
683
(27)
290
184
Source: Company Reports & Global Research
The company's Financial Year ends in December
Global Research - UAE Real Estate Sector
June 2011 43
Balance Sheet Aldar Properties
(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e
Cash and bank balances 3,226 2,663 648 26 80 1,454 1,051
Marketable securities 8,841 7,650 1,783 - - - -
Work in progress 7,172 10,909 13,878 9,081 6,188 3,094 -
Receivables 5,639 14,598 5,453 5,998 3,599 1,367 1,272
Inventories 1 101 422 357 215 95 46
Assets held for sale - - 5,932 - - - -
Total current assets 24,878 35,921 28,116 15,462 10,081 6,011 2,368
Net Fixed assets 22,801 27,141 14,969 15,981 16,313 17,959 20,445
Intangible assets 163 40 25 15 15 14 14
Investments in associates and JV 875 627 543 597 597 597 597
Other Assets 1,109 2,616 3,692 3,692 3,692 3,692 3,692
Total long term assets 24,947 30,423 19,228 20,285 20,617 22,263 24,748
Total assets 49,825 66,345 47,344 35,748 30,698 28,274 27,117
Short term bank loans & bank overdrafts
2,663 4,696 10,473 3 3,754 4,590 1,000
Accounts & notes payables 7,412 6,527 6,171 7,069 4,253 3,147 2,282
Other short term liabilities 2,178 2,444 7,153 2,311 1,456 - -
Total current liabilities 12,253 13,667 23,797 9,383 9,464 7,737 3,282
Long term debt 19,928 34,001 17,761 15,483 9,437 8,380 11,367
Other liabilities 1,546 1,876 1,539 1,688 1,852 2,033 2,231
Total long term liabilities 21,474 35,877 19,300 17,171 11,289 10,413 13,598
Other 10,213 10,512 10,761 15,483 16,251 16,251 16,251
Retained earnings 5,885 6,289 (6,514) (6,289) (6,305) (6,127) (6,014)
Shareholders' equity 16,098 16,801 4,247 9,194 9,946 10,124 10,237
Total liabilities & equity 49,825 66,345 47,344 35,748 30,698 28,274 27,117
Source: Company Reports & Global Research
The company's Financial Year ends in December
Global Research - UAE Real Estate Sector
June 2011 44
Cash Flow Statement Aldar Properties
(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e
Net profit before tax 3,447 837 (12,658) 683 (27) 290 184
Depreciation & amortization 25 94 514 501 519 510 486
Interest income (472) (469) (263) (156) (106) (78) (57)
Interest expense 163 248 682 619 528 259 247
Share of gain from associates & JV's (47) 88 28 (33) (25) (20) (16)
Other adjustments (1,519) (1,157) 11,343 (28) 28 (603) (532)
Operating CF before changes in WC 2,112 (358) (354) 1,586 916 359 312
Change in work under progress (3,115) (1,240.84) (2,702) 4,796 2,893 3,094 3,094
Changes in accounts & notes receivables (4,048) 838.71 763 (545) 2,399 2,231 96
Change in inventories - (100.74) (321) 65 142 119 49
Changes in accounts & notes payables 4,281 (987.68) (345) 898 (2,815) (1,106) (866)
Other changes 2,121 792.07 244 6,339 (855) (1,456) -
Operating cash flow 1,350 (1,056) (2,715) 13,138 2,680 3,242 2,685
Additions to fixed assets (1,485) (15,374) (4,329) (1,012) (332) (1,646) (2,486)
Other investing activities - 1,889 6,304 - - - -
Investing cash flow (19,385) (13,485) 1,975 (1,012) (332) (1,646) (2,486)
Net financing raised 17,378 15,653 502 (12,748) (2,295) (221) (603)
Other financing activities (1,176) (1,674) (1,778) - - - -
Financing cash flow 16,202 13,978 (1,275) (12,748) (2,295) (221) (603)
Net changes in cash (1,833) (563) (2,015) (622) 54 1,374 (404)
Beginning cash 5,059 3,226 2,663 648 26 80 1,454
End cash 3,226 2,663 648 26 80 1,454 1,051
Source: Company Reports & Global Research
The company's Financial Year ends in December
Global Research - UAE Real Estate Sector
June 2011 45
Ratio Analysis Aldar Properties
2008 2009 2010 2011e 2012e 2013e 2014e
Liquidity Ratios
Current Ratio (x) 2.03 2.63 1.18 2.01 1.30 0.81 0.79
Quick Ratio (x) 1.44 1.82 0.33 1.00 0.63 0.40 0.77
Cash Ratio 0.98 0.75 0.10 0.37 0.25 0.22 0.38
Working Capital (mn) 12,625 22,254 4,319 9,482 2,872 -1,472 -702
Profitability Ratios
Total Assets Turnover (x) 0.10 0.03 0.04 0.18 0.13 0.11 0.08
Total Net Fixed Assets Turnover (x) 0.22 0.07 0.12 0.45 0.26 0.18 0.11
Gross Profit Margin 53.9% 22.1% 16.1% 24.0% 28.7% 42.9% 48.7%
Operating Margin 35.3% -59.6% -290.3% 9.2% 8.1% 13.3% 14.1%
Net Profit Margin 69.2% 42.3% -706.7% 9.6% -0.6% 9.1% 8.0%
Return on Assets 6.9% 1.3% -26.7% 0.6% -0.1% 1.0% 0.7%
Return on Equity 21.4% 5.0% -294.7% 4.3% -0.3% 2.8% 1.8%
Leverage Ratios
Times Interest Earned (x) 4.73 -4.29 -7.24 1.06 0.66 1.64 1.32
Debt / Equity (x) 1.40 2.30 7.67 1.67 1.33 1.28 1.21
Degree of Total Leverage (x) 0.25 1.26 169.48 -0.34 2.79 45.06 1.32
Ratios Used for Valuation
Diluted EPS (AED) 0.83 0.20 (3.06) 0.16 (0.01) 0.07 0.04
Diluted Book Value Per Share (AED)
0.06 0.08 0.08 0.06 (0.00) 0.03 0.02
EV/Revenue 2.11 14.34 14.41 1.69 2.53 3.54 4.82
EV/EBITDA (x) 5.02 na na 10.40 12.54 12.05 13.69
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Market Price (AED) 4.39 5.04 2.33 1.38 1.38 1.38 1.38
Market Capitalization (AED mn) 11,317 12,993 6,006 3,558 3,558 3,558 3,558
P/E Ratio (x) 5.30 24.90 na 8.37 na 19.74 31.05
P/B (x) 1.10 1.20 0.60 0.57 0.60 0.60 0.60
Source: Company Reports & Global Research
* Market price for 2011 and subsequent years as per closing prices on Jun 21, 2011
Global Research - UAE Real Estate Sector
Sorouh Real Estate
June 2011 46
Market Data
Bloomberg Code: SOROUH UH
Reuters Code: SOR.AD
CMP (20 June 2011): AED1.34
O/S (mn) 2,881.6
Market Cap (AED mn): 3,517.5
Market Cap (USD mn): 957.6
P/E 2011e (x): 5.9
P/B 2011e (x): 0.5
Price Performance 1-Yr
High (AED): 2.01
Low (AED): 0.99
Average Volume: (000) 7,977.8
1m 3m 12m
Absolute (%) -0.7 29.5 -29.5
Relative (%) 2.0 21.5 -35.4
Price Volume Performance
Short term earnings visibility a positive
Stable liquidity position alleviates funding concerns
Revenues and earnings to peak in 2013
Initiate with a Buy recommendation and TP of AED1.52
Short term earnings provide short term visibility
Sorouh property sales will witness a high degree of activity between 2011 and 2013 as the delivery of 7,187 units across its various projects materialize. In 2011, we see complete sales from the completed towers of Shams Abu Dhabi towers. Deliveries from Al Ghadeer and the Gate residential towers will contribute to the top line as scheduled on 2012, but we factor in some delayed deliveries and shift part of the recognized revenues to 2013. In addition to the near term visibility, we like Sorouh’s growing investment portfolio with its high exposure to the Abu Dhabi rental market given our expectations of high absorption rates in spite of our concerns over the lower trending yield.
Stable liquidity position alleviates funding concerns
Sorouh’s liquidity position is sound given the company’s financing arrangements in 2010 through which it raised AED2.7 billion four-year loan facility bearing an interest rate of EIBOR + 4.5% repayable over a period of 48 months starting September 2012 after a grace period of 27 months. We believe that by the time the first installment is due, Sorouh would have collected sufficient cash from property sales to meet its obligations. Further, we see 2012 as the last year of Sorouh’s hefty capex requirements, which should ease any pressures on debt repayments going forward.
Earnings to peak in 2013 concluding development sales contributions
We expect Sorouh’s revenues to peak in 2013 at AED3,514 million as the majority of the current projects under construction are due for delivery. We also do not factor in any land sales in our revenue forecasts given the current stagnant market. We forecast 2011 EBIT of AED499 million with an associated margin of 16%. Our margin forecasts improve going forward given lower development sales revenues. We expect 2011 Net income of AED709 million reflecting a margin of 22% followed by AED625 million in 2012 with a margin of 18%. We expect net income to peak in 2013 at AED777 million reflecting a margin of 20% before registering 1,500 bps improvement in 2014 at 35%.
Initiate coverage with a BUY recommendation and TP of AED1.52/share
We value Sorouh at a fair value target price of AED1.52/share implying an upside potential of 13% over the current market price. Initiate with a BUY recommendation.
Investment Indicators
2010 2011e 2012e 2013e 2014e
Revenue (AED mn) 1,205 3,097 3,127 3,762 1,932
Net Profit (AED mn) 7 709 646 824 742
Diluted EPS (AED) 0.00 0.23 0.20 0.26 0.23
Diluted BVPS (AED) 2.14 2.56 2.75 3.01 3.25
EV/EBITDA (x) 11.5 6.7 6.2 2.1 na
P/E (x) 631.4 5.9 6.8 5.2 5.8
P/B (x) 0.8 0.5 0.5 0.4 0.4
Source: Company Annual Reports & Global Research
Mostafa El-Maghraby Senior Financial Analyst [email protected] Tel.: (965) 22951279
Buy Target Price
AED1.52
0
0.5
1
1.5
2
2.5
-
10,000
20,000
30,000
40,000
50,000
Ju
n-1
0
Aug-1
0
Oct-
10
Dec-1
0
Feb-1
1
Apr-
11
Jun-1
1
Volume (000) Sorouh (AED)
Global Research - UAE Real Estate Sector
June 2011 47
Valuation & Recommendation
For arriving at our fair value of Sorouh Real Estate share, we have used a Sum Of The Parts approach by valuing each project separately given its credentials. We have used the Capital Asset Pricing Model (CAPM) to arrive at the cost of equity for Sorouh Real Estate and adjusted our WACC to the upside based on our projections for the degree of riskiness of the project. The following inputs were used to arrive at the SOTP value of Sorouh Real Estate:
A risk-free rate of 4.2% has been assumed which is the yield on Abu Dhabi Government Bond maturing in 2020.
A market risk premium of 7% has been assumed.
Adjusted beta assumed at 1.7.
The cost of equity derived from the above assumptions using the Capital Asset Pricing Model is 12.1%.
The cost of debt has been assumed at 7%.
On the basis of above assumptions we have derived a WACC of 13.6%.
Sorouh Real Estate - Equity Valuation
AED (000) Value /share Methodology
Development Sales 1,755,832 0.67 DCF
IP 2,119,594 0.81 DCF
Other Subsidiaries 426,472 0.16 DCF
Total NPV 4,301,897 1.48
Subsidiaries 1Q11 482,904 0.18
Add: 1Q11 Cash 964,737 0.37
Less: Debt 1Q11 1,641,346
Less: Minority Interest 118,760
Total Equity 3,989,432 1.52
CMP
1.34
Upside Potential
13%
Source: Global Research
Sorouh NPV Breakdown
Source: Global Estimates
Development Sales 41%
Investment Properties 49%
Other Revenues
10%
Global Research - UAE Real Estate Sector
June 2011 48
Recommendation
Sorouh’s 2011 revenues offer a high degree of visibility given the scheduled property deliveries of the Shams Abu Dhabi projects. We also like Sorouh’s growing investment portfolio despite its high exposure to the Abu Dhabi rental market given our expectations of high absorption rates in spite of our concerns over the lower trending yield. We also prefer the low exposure to the commercial market and the growing retail portfolio. Our SOTP valuation of Sorouh Real Estate yields a fair value target of AED1.52/share implying an upside potential of 13% over the current market price. Accordingly, we initiate coverage on Sorouh with a BUY recommendation.
Key Risks to Valuation
Geographic concentration risk
Sorouh’s operations have a high geographical concentration risk as all the company’s projects are based in Abu Dhabi. Although we do not perceive any political risk evolving in the emirate and prefer its overall economic conditions to those of Dubai, the sole exposure to one market poses a threat in case of any unforeseen events.
Long term earnings sustainability
Although we like the gradual shift towards more recurring income, we see the contribution from investment properties as minor and incapable of supporting Sorouh’s top line over the long term. Recurring income from investment properties represents only 14% of our four year forecasted revenues through to 2014 while the remaining 86% comes from property sales and construction projects undertaken on behalf of the government, both of which are unsustainable over the long term.
Delays in project delivery
Our earnings forecasts for Sorouh are based on management guidance of scheduled unit deliveries. Although we have factored in delivery delays where appropriate, deviations in actual deliveries are a common practice and could alter our valuation outcomes of specific projects.
Global Research - UAE Real Estate Sector
June 2011 49
Profile Sorouh Real Estate was established in July 2005 with the aim of capturing a share of the growing real estate market in the UAE capital. Sorouh develops real estate projects in Abu Dhabi with a vision of turning the Emirate into a regional business and lifestyle destination in sync with the Abu Dhabi plan 2030. Sorouh went public in December 2005 via raising USD374 million for a 55% offering of the company. Current ownership is broken into 11.6% to Al Joud Investment Company, 7% owned by Abu Dhabi Investment Company, a 98% government owned entity and 81.4% owned by the public. Permitted foreign ownership is 15%.
Sorouh Ownership Structure
Source: Zawya
Abu Dhabi Investment
Company 6.97%
Public 84.40%
Al Joud Investment Company 11.63%
Business Model
Sorouh, through its subsidiaries, is involved in real estate development, investment and management. The company is also engaged in the hospitality sector via the ownership and management of hotels and resorts as well as providing financing solutions services. The Emirate of Abu Dhabi represents the sole geographical exposure to Sorouh’s offerings, to date. Sorouh, however, is currently in the process of evaluating the feasibility of two projects that are in the predevelopment phase located in Egypt and Morocco.
Sorouh Subsidiaries
Name Country of
Incorporation Ownership
(%)
Sorouh International Limited UAE 100
Gate Towers - Shams Abu Dhabi LLC UAE 100
Sorouh Abu Dhabi Real Estate LLC UAE 100
Sorouh International Development Limited UAE 100
Sorouh International Morocco Limited UAE 100
Lulu Island for Project Development UAE 100
Tilal Liwa Real Estate Investing LLC UAE 100
Al Seih Real Estate Management LLC UAE 91.4
Seih Sdeirah Real Estate LLC UAE 91.4
Sorouh Egypt for Investment and Tourism Development JSC Egypt 80
Khidmah LLC UAE 60
Pivot Engineering & General Contracting Co. (WLL) UAE 60
Source: Company reports
Global Research - UAE Real Estate Sector
June 2011 50
Initially, Sorouh revenues were highly reliant on land sales, which peaked in 2008 at AED3.5 billion representing 95% of total revenues before sliding down to AED367 million in 2010 representing only 30% of revenues. Sorouh land bank was acquired in the form of raw land at almost no cost from the government of Abu Dhabi. The company’s strategy, in its early years of operations, was to generate cash from land sales to utilize it in the high capex requirements associated with property developments. The first property sales revenue was realized in 2009 from the sale of phase 1 of the Golf Garden project. Sorouh reported development sales revenues of AED1.2 billion and AED284 million in 2009 and 2010 respectively reflecting slower sales and declining prices. Development sales gross margins stood at 16% and 25% in the same two years. Contract revenues are generated from low margin construction and project management services undertaken by the company on behalf of the Abu Dhabi government as in the ongoing project of Watani and the newly awarded projects by the Urban Planning Council for AED2.9 billion to build 1,470 villas for UAE nationals in Al Ghuraibah and Al Sila’a. The recurring income Investment portfolio comprises units designated for rent in Sorouh’s developments along with the hospitality segment. Lease income stood at AED139 million and AED210 million in 2009 and 2010, inclusive of service charges, representing 4.5% and 17.4% of total revenues in both years, respectively. The hospitality segment only includes the 4-star Tilal Liwa Hotel in Al-Gharbia region. The hospitality segment contributed 1% of Sorouh 2010 revenues. As of 1Q11, Tilal Liwa had an occupancy rate of 74%.
Sorouh Revenue Breakdown 2007-2010
Source: Company Reports
38%
13%
86%95%
51%
31%
3% 6%37%
14%
2%5%
7%1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010
Property sale Land sales Contract revenue Lease income Hotels
Sorouh has two international projects located in Morocco and Egypt. Both projects were scheduled to commence construction in 2010 but have been put on hold till market conditions become more favorable.
International Operations
Area sqm BUA sqm
Designated for Sale
Investment Properties
Morocco 2,005,253 545,193 294,440 281,782
Egypt (Sorouh City) 4,910,000 4,651,159 3,240,246
Source: Sorouh Real Estate
Global Research - UAE Real Estate Sector
June 2011 51
Project Profile Sorouh residential sales developments consist of a total of 7,187 units to be delivered between 2011 and 2013 generating most of the company’s revenues over the next ten quarters. Shams Abu Dhabi developments encompass 5,055 of the aggregate residential units designated for sale including 1,522 units of Sun, Sky and Tala Towers that started delivering in 2011.
Residential Sales
Development BUA sqm Designated for Sale sqm Units Delivery
Al Ghadeer 257,468 202,361 2,132 2012
Shams Abu Dhabi
Sky Tower 207,632 66,247 474 2011
Sun Tower 119,493 83,669 673 2011
Tala Tower 42,825 42,825 375 2011
The Gate 741,302 372,898 3,533 2012
Source: Sorouh Real Estate
The only commercial space designated for sale in Sorouh’s developments is the 74,302 sqm of Sky Tower in Shams Abu Dhabi development. Sorouh’s commercial space is expected to be delivered in 2011.
Commercial Sales
Development BUA sqm Commercial Space Designated
for Sale sqm Delivery
Sky Tower 207,632 74,302 2011
Source: Sorouh Real Estate
Sorouh’s investment portfolio exposure is relatively higher to Abu Dhabi’s residential market and very low to the commercial market, our least preferred segment in the capital’s real estate sector. We believe that despite the declining rental yield in Abu Dhabi, the present under supply situation guarantees high absorption of residential units in the short term. Over the medium term, we see Sorouh residential exposure as a positive given a scenario of tenants relocating from Dubai to Abu Dhabi as supply is made available at affordable levels. The upcoming additions to the retail segment comprise 63,445 sqm, which should be operative during 2011 and 2012.
Investment Properties
Development Residential Commercial Retail Other Delivery
Khalidiya Village 48,132
Completed
Al Oyoun Village 40,601
Completed
Sas Al Nakhl Village I & II 170,636 298
Completed
Al Ain Mall
47,422
2011
Al Rayyana 213,000
3,000 2011
Danat Abu Dhabi 30,081
2,522
2011
Podium
13,501 12,412 2012
The Gate: Storage Area
13,675 2013
Source: Sorouh Real Estate
Existing properties designated for rent are comprised of Khalidiya Village, Al Oyoun Village and Sas Al Nakhl 1& 2 developments spread over 259,369 sqm. The three developments have a blended average occupancy rate of 95% and generated AED171 million of income in 2010 solidifying our view on the continuing absorptions for Sorouh’s upcoming residential units.
Global Research - UAE Real Estate Sector
June 2011 52
Operating Investment Properties
Development
Number of Bedrooms
Total Units Rental Income 2010
(mn) Average
Occupancy 3 4 5 6
Khalidiya Village 0 69 69 12 150 AED37.1 98%
Al Oyoun Village 128 16 4 0 148 AED12.3 97%
Sas Al Nakhl Village I & 2 307 244 37 0 588 AED121.5 95%
Source: Sorouh Real Estate
Other projects undertaken by Sorouh include the low margin construction and project management services on behalf of the Abu Dhabi government for the construction of projects like Watani that was awarded in 2009 and is due for completion in 2013.Sorouh was also awarded two projects with a similar scheme by the Urban Planning Council for AED2.9 billion to build 1,470 villas for UAE nationals in Al Ghuraibah and Al Sila’a.
Global Research - UAE Real Estate Sector
June 2011 53
Financial Highlights Sorouh revenues dropped sharply in 2009 and 2010 after peaking in 2008 at AED3,732 million to AED3,103 million and AED1,205 million in the two years, respectively. The large drop was mainly due to a sharp slowdown in land sales over the two years with the realization of revenues from property sales not keeping pace and the absence of any significant improvements in contributions from other segments. Revenue Performance 2007-2010
Source: Company Reports
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2007 2008 2009 2010
AE
D 0
00
Property sales Land sales Contract revenue sale
Lease income Hotels Growth
Gross margins were pressured downwards in 2009 by the low 38% margin on land sales versus 73% in 2010. Other segments all reported higher margins with the leasing segment reporting 86% gross margin and development sales at 26% in 2010 compared to 16% in the comparable period. EBIT and EBIT margin were also pressured downwards by the continuously growing impairments accounts created against fair value adjustments to investment properties and PP&E along with provisions against doubtful debts. Net income peaked in 2008 at AED1.9 billion up 48% over the comparable 2007 period. 2009 and 2010 witnessed sharp declines, in line with the declining revenues, reporting AED483 million and AED7.4 million in both years, respectively. In line, net margin dropped from 54% in 2007 down to 16% in 2009 and 1% in 2010.
Gross Margin 2009-2010 EBIT & EBIT Margin 2007-2010
Source: Company Reports Source: Company Reports
38%
16%
78%
9%
73%
26%
86%
11%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Land Developments Leasing Subsidiaries
2009 2010
1,102
1,610
443
-42
47%43%
14%
-3%-10%
0%
10%
20%
30%
40%
50%
60%
-200
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2007 2008 2009 2010
AE
D 0
00
EBIT Growth
Global Research - UAE Real Estate Sector
June 2011 54
Sorouh’s liquidity position is sound given the company’s financing arrangements in 2010 through which it raised AED2.7 billion four-year club loan facility. The loan bears an interest rate of EIBOR + 4.5% per annum and is repayable over a period of 48 months starting September 2012 after a grace period of 27 months. We believe that by the time the first installment is due, Sorouh would have collected sufficient cash from property sales to meet its obligations. Further, we see 2012 as the last year of Sorouh’s hefty capex requirements, which should ease any pressures on debt repayments going forward. The company’s current ratio stands at 1.73x as of 1Q11 with a net positive working capital of AED4.5 billion. 62% of Sorouh’s current assets, however, are non-liquid assets representing inventories, land held for sale and development WIP. Trade and other receivables stood at a high 259% of revenues in 2010, a figure we expect to shrink significantly in 2011 as Sorouh realizes higher revenues on growing property sales and settles down pending receivables on land and property sales.
Sorouh Assets Breakdown 1Q11 Sorouh Liabilities & Equity Breakdown 1Q11
Source: Company Reports Source: Company Reports
Net Fixed Assets 15%
Receivables 24%
Cash 7%
DWIP 43%
Other Current Assets 4%
Other Non Current Assets 7%
Equity 44%
Other Non Current Liabilities 0.4%
Current Liabilities 44%
LT Debt 12%
Global Research - UAE Real Estate Sector
June 2011 55
Forecast Assumptions
We expect Sorouh development sales to witness a high degree of activity between 2011 and 2013 as the delivery of its ongoing
7,187 units across its various projects materializes. In 2011, we factor in complete sales from the three completed towers of
Shams Abu Dhabi. The Sun, Sky and Tala towers will hand over 1,522 units during the year along with the sale of the 74,300
sqm of commercial space in Sky tower. Beyond 2011, deliveries from Al Ghadeer and the Gate residential towers will contribute to
the top line. Although the scheduled delivery date for both projects is 2012, we factor in some delayed deliveries and shift part of
the recognized revenues to 2013.
Sorouh’s current residential investment properties of 259,369 sqm will be boosted significantly with the addition of Al Rayyana
development, Danat Abu Dhabi and Al Ain Mall in 4Q11/1Q12. Collectively, the three projects will add 296,700 sqm to Sorouh’s
portfolio of rental properties. Sorouh’s rental portfolio is characterized by high exposure to the residential segment, which we
expect to witness declining yields over the coming 3 years although we forecast a high absorption rate at affordable rental prices.
Earnings
Based on our previous forecasts, we expect Sorouh’s revenues to peak in 2013 at AED3,514 million as the majority of the current
projects under construction become due for delivery. In our view, 2012 revenues would be pressured downwards by a gap in
delivery of development sales as we factor in a delay in the delivery of The Gate towers and Al Ghadeer till 2013 and accordingly,
expect only partial contributions to materialize in 4Q12. We also do not factor in any land sales in our revenue forecasts given the
current slow market conditions although we maintain the view that sales from Saraya project could materialize.
Sorouh Revenue Forecasts
2011e 2012e 2013e 2014e
Development Sales 2,312 1,241 2,234 498
Investment Properties 216 428 432 437
Other Revenues 569 849 847 847
Total Revenues 3,096 2,518 3,514 1,782
Source: Global Forecasts
We forecast 2011 EBIT of AED499 million with an associated margin of 16% before peaking in 2013 at AED647 million with a
margin of 17%. EBIT margin will improve considerably in 2014 at 26% given lower development sales revenues. Our expected
2011 net income stands at AED709 million reflecting a margin of 22% and ROE of 9% followed by AED625 million in 2012
reflecting a net margin of 18% and ROE of 7%. In line with our revenue and EBIT forecasts, we expect net income to peak in 2013
at AED777 million reflecting a margin of 20% before registering a 15% improvement in 2014 at 35%.
Revenues & Gross Margin Forecasts Net Income & Net Margin Forecasts
Source: Global Estimates Source: Global Estimates
3,097 3,127
3,762
1,932
0%
5%
10%
15%
20%
25%
30%
35%
40%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2011e 2012e 2013e 2014e
AE
D m
illio
n
Revenues Gross Margin
709646
824
742
17%
19%
21%
23%
25%
27%
29%
31%
33%
35%
37%
-
100
200
300
400
500
600
700
800
900
2011e 2012e 2013e 2014e
AE
D m
illio
n
Net Income Net Margin
Global Research - UAE Real Estate Sector
June 2011 56
Financial Statements
Income Statement Sorouh Real Estate
(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e
Revenues 3,723 3,103 1,205 3,096 3,018 3,514 1,782
Cost of revenues (1,427) (2,190) (674) (2,326) (2,179) (2,628) (1,122)
Gross profit 2,297 912 532 771 839 886 659
SG&A (631) (287) (206) (217) (241) (211) (125)
EBITDA 1,677 651 365 1,042 1,081 1,096 784
Depreciation & amortization (12) (26) (39) (55) (78) (76) (73)
Provisions (56) (183) (367) - - - -
EBIT 1,610 443 (42) 554 598 675 534
Share of gain from associates and JV's 51 (51) 49 187 57 57 57
Interest income 121 83 60 46 30 80 128
Interest expense (80) (123) (103) (65) (49) (20) (8)
Other income 83 142 53 - - - -
Net profit before tax 1,784 495 16 723 636 791 711
Taxes - - - - - - -
Net profit after tax 1,784 495 16 723 636 791 711
Minority interest (74) 12 9 13 11 14 13
Net profit excluding minority 1,858 483 7 709 625 777 698
Source: Company Reports & Global Research
The company's Financial Year ends in December
Global Research - UAE Real Estate Sector
June 2011 57
Balance Sheet Sorouh Real Estate
(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e
Cash and bank balances 5,517 1,606 1,133 1,599 1,244 2,795 4,268
Marketable Securities 1,322 1,158 174 - - - -
Work in progress 2,475 3,778 5,273 4,640 3,898 1,754 702
Receivables 2,393 2,813 3,117 2,941 2,777 2,635 1,514
Inventories 30 13 36 77 75 70 36
Other Assets 787 659 617 615 615 553 553
Total current assets 12,523 10,027 10,350 9,873 8,609 7,807 7,072
Fixed assets 88 172 153 157 159 160 162
Intangible assets 652 613 445 445 445 445 445
Investment properties 930 1,240 1,675 2,495 2,495 2,495 2,493
Other noncurrent assets 2,746 1,645 1,011 662 652 642 633
Total long term assets 4,416 3,670 3,284 3,760 3,751 3,743 3,733
Total assets 16,939 13,698 13,634 13,632 12,359 11,550 10,805
Short term bank loans & bank overdrafts 105 19 13 13 13 13 13
Accounts & notes payables 6,727 5,437 5,762 4,644 3,169 2,284 1,158
Non-convertible sukuk 2,011 971 - - - - -
Total current liabilities 8,844 6,427 5,774 4,657 3,182 2,296 1,171
Long term debt 115 113 1,630 1,422 1,066 426 171
Non-convertible sukuk 1,874 970 - - - - -
Other financial liabilities 148 63 52 52 52 52 52
Total long term liabilities 2,137 1,146 1,682 1,473 1,118 478 222
Paid up capital 2,500 2,500 2,625 2,625 2,625 2,625 2,625
Other Adjustments 372 522 559 573 584 598 610
Retained earnings 3,086 3,103 2,994 4,305 4,851 5,553 6,177
Shareholders' equity 5,958 6,125 6,178 7,502 8,060 8,776 9,413
Total liabilities & equity 16,939 13,698 13,634 13,632 12,359 11,550 10,805
Source: Company Reports & Global Research
The company's Financial Year ends in December
Global Research - UAE Real Estate Sector
June 2011 58
Cash Flow Statement Sorouh Real Estate
(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e
Net profit before tax
1,784
495
16
723
636
791
711
Depreciation & amortization
18
35
44
55
78
76
73
Interest income
(121)
(83)
(60)
(46)
(30)
(80)
(128)
Interest expense
80
123
103
65
49
20
8
Provisions & Impairments
1,383
1,133
379
-
-
-
-
Other adjustments
(23)
(76)
34
1
-
-
-
OCF before changes in working capital
3,122
1,626
517
797
733
807
665
Changes in DWIP
(1,315)
(1,456)
(1,485)
633
742
2,144
1,052
Changes in accounts & notes receivables
(2,027)
373
215
(176)
(165)
(142)
(1,121)
Change in inventories
4
17
(22)
(42)
2
5
35
Changes in accounts & notes payables
2,689
(2,267)
303
(1,117)
(1,475)
(885)
(1,126)
Other changes in working capital
358
119
24
(2)
-
(61)
-
Operating cash flow
2,832
(1,589)
(449)
93
(163)
1,868
(495)
Additions to fixed assets
(208)
(397)
(493)
(825)
(2)
(1)
1
Other investing activities
(1,751)
383
1,075
1,407
165
324
2,223
Investing cash flow
(1,958)
(15)
582
582
163
323
2,224
Net financing raised
3,495
(1,975)
(591)
(208)
(355)
(640)
(256)
Dividends Paid
(308)
(293)
(6)
-
-
-
-
Other financing activities
0
(40)
(10)
-
-
-
-
Financing cash flow
3,187
(2,309)
(606)
(208)
(355)
(640)
(256)
Net changes in cash
4,060
(3,912)
(473)
466
(355)
1,551
1,473
Beginning cash
1,458
5,517
1,606
1,133
1,599
1,244
2,795
End cash
5,517
1,606
1,133
1,599
1,244
2,795
4,268 Source: Company Reports & Global Research
The company's Financial Year ends in December
Global Research - UAE Real Estate Sector
June 2011 59
Ratio Analysis Sorouh Real Estate
2008 2009 2010 2011e 2012e 2013e 2014e
Liquidity Ratios
Current Ratio (x) 1.42 1.56 1.79 2.11 2.60 3.25 5.77
Quick Ratio (x) 1.04 0.87 0.77 0.97 1.21 2.28 4.75
Cash Ratio 0.77 0.43 0.23 0.33 0.33 1.13 3.45
Receivables Outstanding (Days) 0.0 330.9 944.1 346.8 335.8 273.8 310.3
Working Capital (mn) 3,680 3,600 4,576 5,174 5,269 5,525 6,048
Profitability Ratios
Total Assets Turnover (x) 0.22 0.23 0.09 0.23 0.26 0.33 0.18
Net Fixed Assets Turnover (x) 3.66 2.20 0.66 1.19 1.24 1.54 0.81
Gross Profit Margin 61.7% 29.4% 44.1% 24.9% 27.8% 25.2% 37.0%
Operating Margin 43.2% 14.3% -3.4% 16.1% 17.3% 17.2% 26.2%
Net Profit Margin 49.9% 15.6% 0.6% 21.1% 18.2% 19.9% 34.6%
Return on Assets 10.5% 3.6% 0.1% 4.9% 4.8% 6.6% 6.3%
Return on Equity 31.2% 8.0% 0.3% 9.0% 7.3% 8.8% 7.3%
Leverage Ratios
Times Interest Earned (x) 20.06 3.61 -0.40 7.74 11.16 32.73 61.43
Debt / Equity (x) 0.60 0.31 0.43 0.37 0.28 0.11 0.05
Degree of Total Leverage (x) 0.69 4.33 1.47 25.66 -13.57 1.57 0.22
Ratios Used for Valuation
EPS (AED) 0.71 0.18 0.00 0.23 0.20 0.26 0.23
Book Value Per Share (AED) 2.27 2.33 2.14 2.56 2.75 3.01 3.25
EV/Revenue (x) na 0.71 3.48 1.21 1.23 0.40 na
EV/EBITDA (x) na 3.38 11.50 6.75 6.20 2.11 na
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Market Price (AED) 3.01 2.48 1.63 1.34 1.34 1.34 1.34
Market Capitalization (AED mn) 8,674 7,146 4,697 3,861 3,861 3,861 3,861
P/E Ratio (x) 4.70 14.80 631.40 5.90 6.80 5.16 5.77
P/B (x) 1.50 1.20 0.80 0.52 0.49 0.44 0.41
Source: Company Reports & Global Research
* Market price for 2011 and subsequent years as per closing prices on Jun 21, 2011
Global Research - UAE Real Estate Sector
June 2011 60
Disclosure
The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant
disclosures which apply to this particular research have been mentioned in the table below under the heading of disclosure.
Disclosure Checklist
Recommendation Bloomberg
Ticker Reuters Ticker Price Disclosure Company
Emaar Properties STRONG BUY EMAAR UH EMAAR.DU AED 3.15 1,10
Aldar Properties HOLD ALDAR UH ALDR.AD AED 1.38 1,10
Sorouh Real Estate BUY SOROUH UH SOR.AD AED 1.34 1,10
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Brokerage
Fouad Fahmi Darwish (965) 2295-1700 [email protected]
Wealth Management - Kuwait
Rasha Al-Qenaei (965) 2295-1380 [email protected]
Wealth Management - International
Fahad Al-Ibrahim (965) 2295-1400 [email protected]
Global Kuwait
Tel: (965) 2 295 1000 Fax: (965) 2 295 1005 P.O.Box 28807 Safat, 13149 Kuwait
Global Bahrain
Tel: (973) 17 210011 Fax: (973) 17 210222 P.O.Box 855 Manama, Bahrain
Global UAE
Tel: (971) 4 4477066 Fax: (971) 4 4477067 P.O.Box 121227 Dubai, UAE
Global Egypt
Tel: (202) 24189705/06 Fax: (202) 22905972 24 Cleopatra St., Heliopolis, Cairo
Global Saudi Arabia
Tel: (966) 1 2994100 Fax: (966) 1 2994199 P.O. Box 66930 Riyadh 11586, Kingdom of Saudi Arabia
Global Jordan
Tel: (962) 6 5005060 Fax: (962) 6 5005066 P.O.Box 3268 Amman 11180, Jordan
Global Wealth Manager
E-mail: [email protected] Tel: (965) 1-804-242