EFG Hermes expects Damac to face cashflow and operational problems

Operational and financial challenges at Damac Properties, one of the UAE’s biggest listed real estate developers, are expected to continue this year after the company reported a 25 per cent drop in full-year net profit for 2017, a report from EFG Hermes bank said.

“We think the company will face operational challenges and, potentially, see pressure on its cashflows over the coming 12 to 24 months; this might, in turn, place pressure on the company’s future dividends starting 2018, and on sustaining its historical attractive dividend yields,” the report said.

The developer’s net profit dropped to Dh2.76 billion in 2017 from Dh3.69bn in 2016, Damac said in a filing last week to the Dubai Financial Market, where its shares are traded. It attributed the drop to a higher cost of sales coupled with rising expenses and depreciation charges.

Revenues for the 12-month period to December 31 rose to Dh7.45bn from Dh7.16bn reported in 2016.

Damac’s stock is expected to underperform in 2018 for three main reasons, EFG Hermes’ report said – due to the company “losing market share in an already soft market”, being liable for increased accounts payable despite a slowdown in sales, and because of a Dh2.2bn repayment obligation over the coming 24 months.

Damac declined to comment on the report when contacted by The National.

EFG Hermes forecasts contracted sales for 2018/19 will come in at around Dh6.6bn, a 12 per cent drop against 2017 levels, EFG Hermes said. “We believe the company is in need of new land purchases, although its residual land bank will be sufficient for the coming five years (in our numbers), to broaden its product offering, allowing it to compete in a relatively soft market.”

Accounts receivable have been on a consistent uptrend since the first quarter of 2016 despite slower sales activity in the same period, EFG Hermes said, indicating that the company has more extended payment terms versus historical averages.

“Damac has, historically, collected around 40 to 50 per cent [of the cost of sold units] within the first 24 months, which we think is no longer the case,” the bank said, adding that it has “concerns” over the company potentially offering further relaxed terms.

Dubai developers are offering increasingly attractive payment plans to off-plan buyers, prompting warnings of a property bubble ahead.

Off-plan projects with attractive sales prices and payment plans have “transformed the residential market in 2017” said consultancy JLL’s fourth quarter 2017 market update. “Although attractive to investors, it could result in a future ‘real estate bubble’.”

However, Damac’s management indicated in its fourth quarter earnings call to analysts and shareholders that it would prioritise payment plans over increasing sales volumes, EFG Hermes said in its report.

The developer is also expected to raise debt in the coming 12 months to refinance Dh1.1bn in 2018 and Dh1.6bn in 2019 of debt obligations – a total of Dh2bn due to be repaid over the next two years.

“With the current inflationary interest rate environment, and what we think is a stable/ cautious operating market environment, we highlight the challenge of securing cheap financing,” the report said.

Liquidity could be a challenge for Damac in 2018 given the repayment schedule, despite plans to deliver 5,500 units between June 2017 and the end of 2018, it added.