Goldman Sachs, one of the largest global investment banks, has revised its estimates on the property market in the Gulf to reflect the whole year results of realty majors such as Emaar Properties and Aldar Properties.
Goldman Sachs reiterated a “buy” recommendation for Emaar, as it raised the stock’s 12-month price target to Dh17.40 from Dh16.30.
“This is a result of higher margin expectations on non-UAE developments, increased revenues from hospitality and retail businesses, and lower capex and working capital requirements than we previously forecast,” the investment bank said in a new research note.
Emaar’s guidance on 2008 revenue and earnings growth has contributed to an unwarranted sell-off in the stock, leaving it at a highly attractive valuation in absolute terms and relative to peers, the note said. “We think that the pick up in sales from developments outside the UAE in 2008 could result in revenue growth in excess of management’s guidance of 25 per cent and the major factor underlying the company’s forecast of relatively slow earnings growth is the frontloading of marketing costs that should translate into more rapid revenue and earnings growth from 2009.”
The bank has revised its estimates to reflect 2007 results, expecting higher margins in non-UAE developments and acceleration in revenue growth from non-development businesses such as hospitality. These revisions reflect a slower pick up in non-UAE revenue streams as construction thresholds for revenue recognition may not be reached until later in the year, although it implies higher revenues from those sources in later periods. Sales momentum has been strong for the developments that Emaar has released to date, so construction, rather than sales momentum, will probably drive the profile of revenue flowing to profit and loss.
In its estimates, Goldman Sachs has not included forecasts of development revenues from Algeria or Libya, which are potentially large value drivers. “We expect to gain clarity on these developments in the coming quarter or so, or at least to see some value attributed to them in the updated land value appraisal in the coming weeks. We expect further clarity in the contribution from the Bawadi development, as launch is scheduled for March, and suspect that rise in selling price might drive an uplift to the provisionally targeted 15 per cent internal rate of return ascribed to the project on announcement last year.”
The announcement of further development details for Algeria and Libya, the Bawadi development and the update of appraised land value for the end of 2007 will focus market attention on the long-term value creation potential of the stock, rather than near-term earnings growth, which provides an excellent buying opportunity.
Emaar’s development portfolio is stretched over many markets with differing market economics and legal and logistical conditions, presenting management challenges and potentially compromising transparency. The risk of overheating in the UAE and regional property markets is tangible. Although Emaar has not yet released the 2007 year-end appraised value, the investment bank expects a material increase over 2006 to reflect land price appreciation witnessed in its countries of operation and the addition of new projects. Its large land bank in Libya was carried at zero value in 2006, as development planning was not sufficiently advanced.
Emaar’s execution of a very large portfolio of developments in numerous markets is the principal risk, according to Goldman Sachs.
Management may not be able to deliver to market expectations due to events beyond its control or limitations in management capacity. Transparency may be compromised by scale and corporate structure, implying that disclosure of operational data or asset values may not be consistent across the company’s operations.
“This may result in the market ascribing a wider discount to asset value or higher cost of capital than would otherwise be the case. The risk of overheating in the UAE and other property markets is tangible, but do not provide significant potential downside to the stock’s current valuation. This is due to the level of pre-sales, the nature of Emaar’s signature projects and low development costs.” it said.
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