Emaar is best buy says EFG-Hermes
After a gruelling 18 months for the UAE’s real estate industry which has seen prices nosedive by up to 60 per cent, some property developers have started to break away from the downward trend on the back of new deliveries coming online which has translated into higher property sales.
Dubai’s Emaar properties and Union Properties (UP), as well as Abu Dhabi’s Sorouh Real Estate all recorded robust first quarter results.
Property giant Emaar has had a noticeably strong start to the year, with profit soaring by 221 per cent on an annualised basis to $207m and revenues jumping 87 per cent to $786m.
Emaar posted stronger revenues on the back of more handovers which saw the first full operational quarter of its five Address Hotels in Dubai.
Egyptian investment bank EFG-Hermes has selected Emaar as its best buy in terms of UAE property stocks in 2010 based on its “increasingly well-diversified geographic portfolio, large land bank, greater recurring income and a relatively strong balance sheet.”
It also forecasts that the strong first quarter 2010 results are expected to continue as Burj Khalifa deliveries kick in and the Emaar MGF initial public offering (IPO) remains on track.
However, on 27 April this year, ratings agency Moody’s assigned a probability of default rating of B1 to Emaar, citing concerns over the sale of unsold units in Dubai and in international markets, the cash collection of presold property and refinancing risks.
Sana Kapadia, Vice-President of Equity Research at the Dubai office of Egyptian investment bank EFG-Hermes does not share Moody’s concerns to the same degree.
“With respect to cash collections on presold units, customers have already paid up 70-75 per cent,” says Kapadia. “The only concern is that they may end up with a receivable, so it could take time to collect the payment, but it seems likely to come through.”
Sorouh posted a healthy AED131.6m profit and a 28 per cent annual increase in revenues to AED430.7m, which Kapadia says was “driven by a bigger land sale that we had expected could positively surprise.”
Indeed, the first quarter profit derived mainly from the sale of one plot on Shams Abu Dhabi, recognition of income from 30 units at Golf Gardens and lease income from Sorouh’s investment portfolio.
UP posted a 66 per cent rise in annualised first quarter profit to AED50m and a 48 per cent jump in revenues to AED846m, attributing the increase to handing over units in its Motor City development.
UP’s stock had a positive knee-jerk reaction by jumping 5.2 per cent on 2 May after having announced the results earlier that day.
But although UP’s stock has been trading at an attractive 0.3 times its price-to-book ratio (P/B ratio), EFG-Hermes is cautious about its future growth, liquidity management and debt repayment and therefore maintains a neutral rating on the stock.
The developer is currently in talks to sell its Ritz Carlton hotel in Dubai for around AED1.5bn in order to raise much-needed cash.
Abu Dhabi’s Aldar Properties posted its second consecutive quarterly loss of AED314.2m and a 54 per cent decline in revenue on 29 April, due to lack of property sales and limited deliveries.
Later that day, Aldar’s stock slumped 1.5 per cent to AED3.86, an eight-week low, after reporting the losses.
“Aldar’s stock took a knock on the back of its first quarter results,” says Kapadia. “It hasn’t had any land sales and I don’t expect the sales market to recover for a while. We highlight concerns on Aldar because it’s the most leveraged player and there is also the additional overhang of Yas Island receivable, with the market waiting for some news on when and how that’s going to be paid,”
Meanwhile, Dubai’s second-largest property developer by market value Deyaar saw its profit dive by 73 per cent to announce a first quarter loss of AED100m, compared to AED53.3m in the same period last year, owing to high provisioning levels for bad loans. The news caused its share price to fall by 3.1 per cent.
In February this year, Deyaar postponed a AED500m distressed property fund it had launched in mid-2009 due to the prevailing difficult market conditions.
Along with UP, EFG-Hermes says that Deyaar remains a Dubai-centric business and has a weak future growth profile. It maintains a sell rating on Deyaar’s stock.