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Aldar target price at Dh15.7 as land bank value goes up

By Parag Deulgaonkar



The 12-month price target for Aldar Properties to Dh15.70 from Dh14.4 is on the back of increase in appraised land bank value from Dh38 billion to Dh44 bn in 2007, Goldman Sachs said in a note.

Rapid progress in both sales and construction activity means that Aldar is set to deliver rapid earnings growth mid term, with fewer revenues from land sales and revaluations and more from development and investment properties, the United States-based investment bank said. “Our 2008-2009 sales forecasts are more back-end loaded, reflecting this trend. We expect Aldar to issue further disclosure on the 2007 year-end land valuation, which should allow new and revised projects to be reflected in financial forecasts and in consensus valuation.”

Aldar trades at 5.7x 2008 earnings on Goldman’s revised estimates, making it the least expensive stock in the regional coverage universe. “We increase our 12-month price target to Dh15.7 from Dh14.4 to reflect the appraised land bank value of Dh44bn at year-end 2007. Eventually, we believe that our value might rise further, as details of new projects and revisions are released.”

Furthermore, the bank believes that rapid progress in both sales and construction activity should enable Aldar to deliver strong earnings growth over the next few years, with fewer revenues contributed from land sales and revaluations and more from development and investment properties. “We expect the company to issue further disclosure on the 2007 year-end land bank valuation, which should result in new and revised projects being reflected in financial forecasts and hence in consensus valuation,” Goldman said.

The 2008-2009 revenue forecasts are now more back-end loaded, reflecting developments in Aldar’s sales strategy, as more land is retained for development rather than sold as plots to secondary developers.

“We have reduced our sales forecast by six per cent for 2008 to reflect lower land sales, but this results in higher mid-term revenues from property development as more land is retained. Our 2009 sales estimate increases by 20 per cent.”

Aldar’s 2007 financial statements reveal that the company secured Dh1.8bn of sales in 2007 that were not recognised on the profit and loss. In fact, the company recorded only Dh268 million in residential property sales (the bulk of revenue coming from land sales). This compares to the bank’s estimate of Dh1bn in property sales recognised for the year.

Management stated at the recent annual general meeting and analyst presentation that unrecognised year-to-date sales are already north of Dh2bn. This is supported by the announcement that the company secured more than Dh850m in sales in one week at the International Property Show in Dubai in February. These are in the Al Muneera and Al Zeina precincts of the Raha Beach development, and those in the latter are due for handover by December 2009.

In contrast to many construction sites in Dubai, Aldar’s sites stood out for their order and organisation which, according to its executives, match best practices globally, contributing to efficiency and cost control.

As an anecdotal point, workers appeared better trained and supervised than at other Dubai sites, where they usually learn “on the job”. Aldar sends new workers to a training centre to learn their specific skills before being allowed on site, which also contributes to efficiency as well as cost control in the longer term, the bank noted.

While sales at Aldar’s developments are running ahead of expectations, purchases by investors will ultimately need to translate into end-user occupancy for Abu Dhabi’s real estate market to flourish. Competition is growing in the GCC region to attract businesses and tourism, and high levels of construction activity are putting a strain on resources and prices. “We believe that greater infrastructure planning and sustainable development initiatives should avoid some of the growing pains that Dubai is experiencing, but Dubai’s early start in redevelopment means that many industries and services may prefer to maintain their regional presence in Dubai. Longer term, we believe there is sufficient growth potential from abundant financial capital to attract a great deal more human capital to the Gulf,” the bank said.