HSBC calls Emaar value at Dh23

(SUPPLIED)   

The authors of the report blame Emaar’s ongoing malaise, which has seen the stock gain just 40 fils in the past 12 months, on sales by retail investors who fail to comprehend the company’s potential.

The company is currently trading at a net asset value that prices in a Dubai property crash, something HSBC describes as highly unlikely.

“We think institutional involvement and improving corporate communication should lead to a strong recovery,” HSBC said in a report on the status of Emaar and its share value.

Emaar closed up 6.6 per cent at Dh12.10 yesterday.

Last year, the market was euphoric about Abu Dhabi players (Aldar, Sorouh) and nervous about an oversupply of real estate in Dubai. In reality, the two markets are essentially one.

But while Aldar and Sorouh have yet to build a track record, Emaar is a global player.

That means the current housing shortage is here to stay at least until 2010, according to the report. A negative real rate environment (-8 per cent) should further support the property market.

And with 50 per cent of housing controlled by the government, supply can be managed to match demand.

Even if the market were to melt down in Dubai and the company cancelled all future projects and halted construction on unsold developments, theoretically only Dh8.5 would be taken off the target price and Dh6.4 off the estimated 2008 NAV.

The report conveys that most of the negative news is already in the price. The shares-for-land swap has been called off.

The company’s struggling business in the US has only a marginal effect on the valuation (Dh0.1 per share).

Negative earnings revisions – margins to bottom in Q2 2008, it is estimated – should be over. And the Indian IPO was postponed and a lower-than-expected dividend payout has already been made.

The current price seems to ignore potential margin recovery and foreign subsidiaries, HSBC found. Emaar is valued at Dh23, implying a potential total return of 102 per cent. As a result, margins are expected to bottom out in 2008 and should progressively improve over the coming years.

However, increased contributions from other emerging markets (Egypt, Morocco, KSA) are expected to mitigate the struggling US business.

Also shifting product mix towards investment properties should further support margin improvement in Dubai.