I have seldom seen a more bullish, even exuberant, research report from a stockbroker than yesterday’s document from HSBC on Emaar. If the company had written the analysis itself, I doubt it could have been more positive.
The fact that a bank of HSBC’s global stature produced such a glowing recommendation on Emaar is a wake-up signal to investors in the UAE and around the world: Emaar is still the leading corporation in Dubai, and if you want a slice of the action in the booming city, you should consider Emaar as your best vehicle.
In short, if you want to buy Dubai, then buy Emaar.
The report is all the more remarkable because it comes after a period of some confusion at Emaar. HSBC acknowledges this with its opening words that Emaar is “one of the most misunderstood and undervalued companies” in the world. Confusion and misinterpretation over trading prospects led to mildly negative stances from some UAE brokers; the badly timed and ineptly explained decision to withdraw from Emaar’s planned $15 billion Indian flotation also dented its reputation.
HSBC, in its first ever analysis of the company, had access to exactly the same information and data as other brokers, but has come out with a drastically different interpretation. The bank is to be commended for a comprehensive and accessible report; Emaar should also share some credit for at last getting its essential message across to investors.
Investors should also note that the HSBC analyst who produced the analysis, Walid Khalfallah, has a good track record in stock-picking – shares in the UAE’s other property giant Aldar have nearly doubled since he “called” them a year ago. The reasons for the bank’s positive stance can be summed up pretty concisely: the Dubai property market will remain the main contributor to Emaar earnings, and the market shows no sign of slowing down. The oft-predicted “oversupply” of residential property has not materialized, and is unlikely to do so before 2010, in a market where the three leading players can regulate delivery dates.
The core residential business will be increasingly complemented by Emaar’s hospitality and malls business, and the land bank topped up by the Bawadi joint venture. Overseas Emaar has exciting growth opportunities in India, especially in mall development, in Egypt, Saudi Arabia and in Morocco.
Some 60 per cent of revenue will come from abroad by 2010, the bank predicts. The overall optimism of the HSBC analysis is made all the more credible because the bank does not pull its punches on the negatives and the risks that are inherent in any corporate, especially one of Emaar’s size and visibility.
So investors are advised that Emaar is entering a different phase of its evolution, where unit sales will replace land sales as the main source of revenue; that margins might dip slightly – though still at nearly 40 per cent – this year as a result; that inflation and currency factors could tilt the figures; and that there is the ever-present risk of delay in development projects the size of Emaar’s. And there is still room for improvement in investor relations, it seems: “Emaar still operates in an undeveloped regulatory environment, where minority interests can be overlooked.”
That is a serious reservation, and Emaar must address the issue. But I believe the situation will be improved as the company attracts a different class of shareholder to its register – global, institutional investors who will expect, even insist on, access and transparency.
The shares rose to Dh12.0 – 6 per cent up – on the DFM yesterday, but they have further to go to reach HSBC’s target of Dh23.
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