Emaar Properties’ shares value emerging again
Explains 10 reasons to believe in property firm
Ithought Emaar Properties shares were grossly undervalued at Dh4.50 last February, an unjustified victim of the global emerging market meltdown triggered by China’s yuan and Shanghai securities free fall. I published successive columns outlining my view that Emaar Properties could rise 50 per cent to Dh6.5 even though oil prices were weak, the US dollar was on a roll and Dubai property prices continued to fall in 2016. Emaar shares rose to Dh7.5 and have now fallen to Dh6.7, where I believe value has once again emerged in the largest capitalised property developer and mall operator in the Middle East. Why?
One, I expect the Federal Reserve to hike interest rates in December and then tone down its monetary policy rhetoric. This could ignite a rally in Emaar as long as Saudi Arabia leads an output cut in the Opec ministerial meeting in Vienna. Global macro shapes both sentiment and financial flows on the Dubai Financial Market.
Two, Emaar is unquestionably the most credible property developer in the UAE. It therefore attracts stronger demand even in the absence of a bull market in real estate.
Three, Emaar chairman Mohammed Al Abbar plans to cut 20 per cent in operating costs in response to market stress in 2017. This is a bullish data point for shareholders.
Four, Emaar management indicates no rise in sales cancellation rates or payment delays despite the malaise in the broader property market.
Five, unlike so many Mom and Pop leveraged property developers, Emaar only begins project construction after 70 per cent of units are sold and 30 per cent of cash in presales. Emaar has a revenue backlog of Dh46 billion. This means the firm has earnings visibility till at least 2019.
Six, Emaar’s recurrent revenue could well rise to 45–50 per cent of total revenues in the next four years, thanks to the expansion of its hotel management and leasing business. This, ipso facto, is a rationale for a valuation increase above its current 13 times forward earnings and 1.4 times book value. The drop in bank earnings, rise in the cost of risk and King Dollar could well pressure the DFM Index and create an optimal entry point in Emaar in the Dh6 level. The UAE Central Bank and the IMF have both slashed the growth rate but the economic slowdown and liquidity crunch is well reflected in Emaar’s 40 per cent fall since its 2014 peak.
Seven, Dubai rents have fallen at a lower rate than capital values, though I notice rents in New Dubai have declined since Ramadan at an accelerating rate. In any case, six per cent rental yields in Dubai are double those in Hong Kong, Singapore and Mumbai. This tells me downside risk in the property market is 15–20 per cent, not the 60– 70 per cent crash we witnessed in 2008-09.
Eight, while secondary mall operators experience a retailing bloodbath, Emaar Malls reported nine per cent year-on-year growth. This is due to the simple fact that
emaar gross margins have risen from 35 per cent in 2007 to 52 per cent in 2016 Dubai Mall is the most attractive shopping mall in the world, a tourist destination and entertainment hub in its own right. The Fashion Avenue extention launch is also a bullish catalyst.
Nine, Emaar gross margins have risen from 35 per cent in 2007 to 52 per cent in 2016. This rise in operating margin has coincided with a significant fall in balance sheet debt.
Ten, Emaar unlisted property assets represent at least 20 per cent of its market capitalisation. As the company unlocks value from its unlisted assets, its share price well rise. Emaar also has a land bank of 195 million square metres in the UAE, Saudi Arabia, turkey, Egypt, Pakistan and India..
Emaar Indian, Turkish and Egypt businesses remain a risk, as do risks of delayed handovers, lower residential property sales and project cost overruns. Global macro risk, as usual, will also determine the value of the DFM — and Emaar. A property market decline enables value, affordability and new investors to return to Dubai. This can only benefit Emaar. To evoke Oscar Wilde, price is not value!