LOWER REVENUES AND HIGHER COSTS SET TO KEEP DAMAC UNDER PRESSURE
▶ EFG Hermes does not see a positive trigger that can support the stock performance of the developer
Damac Properties will remain under pressure for the rest of the year and 2020 on the back of lower revenue, according to EFG Hermes.
The Dubai developer, which owns and operates the Middle East’s sole Trump-branded golf club, reported on Wednesday a 87 per cent slide in second-quarter net profit owing to lower revenue and rising expenses as well as costs.
“Damac has continued to report disappointing numbers over the past three quarters, a trend we think will continue in 2019-20 because of the current revenue recognition,” the investment bank said in a report on Thursday.
Net profit attributable to the owners of the company for the three-month period ending June 30 dropped to Dh50.6 million as revenue plunged 46 per cent to Dh971m from a year earlier, while expenses increased to Dh238m.
Second-quarter “contracted sales were the lowest quarterly reported sales number, underperforming the company’s peer and the wider market trends, yet we expect minimal upside from such levels and, thus, pressure on the various projects’ sales and profitability”, EFG Hermes said. “Hence, we see no positive trigger that can support the stock performance over the coming 12 months, especially with unattractive trading multiples and dividend yield.”
Damac’s shares fell 2.92 per cent at midday on Thursday to 0.93 fils. The company’s 52week low share price is 0.842 fils.
EFG Hermes said contracted sales during the second quarter are disappointing and are below estimated numbers of Dh700m, “indicating continued pressure on the company to maintain its already weakening market share”. Damac’s sales came in at Dh591m in the second quarter.
“Management indicated that there was a new launch in Business Bay (Zada) during the quarter, yet we see reported sales very weak, especially versus the overall resale market activity during the period and compared to its peer, Emaar Development, which reported sales of Dh3,542m during the quarter (almost six times that of Damac’s).”
EFG Hermes also said it has forecast contracted sales of Dh4 billion in 2019 but it would be challenging to achieve those numbers because of the company’s current market position. Sales in the first six months came in at Dh1.76 bilion.
Damac is targeting deliveries of 4,000 units during the year, with cash releases from the escrow account estimated at $500m, which might indicate a possibility of paying out dividends, especially with no pending debt obligation until 2022.
“However, we opt for not assuming dividend payment in 2019-21, given our operational forecast, which entails continued pressure on sales,” EFG Hermes said.
The developer has struggled to maintain profit growth amid softer property market conditions as supply outweighs demand. The company is realigning its business priorities to cut costs and continue to deliver projects to maintain healthy revenue streams.