Citigroup tries to haul Emaar out
Back in February in this column I highlighted what I still regard as one of the most bullish and positive pieces of investment research I have ever seen from a major financial institution. HSBC, the giant global banking group with a reputation for shrewd analytical research, called Emaar the "most misunderstood and undervalued" company of its kind it had ever scrutinised, and said the shares would double to Dh23. It seemed like the right time, in the old City of London argot, to "fill your boots."
The shares flicked up a little for a couple of days afterwards but then…zilch. After hitting a high point of nearly Dh16 in January, Emaar has remained stuck in the sand, trading within a narrow band from Dh11 to Dh12.50. All those fine words and intricate research from HSBC came to virtually nothing.
Now, it is the turn of Citigroup to hitch its formidable research capabilities to the Emaar stock in an effort to get the wheels out from the dunes. So far, it seems to be gaining little traction. Two days ago, Citi's Dubai-based research team put out a 42-page document on Emaar which, if anything, was more detailed and based on even better access than HSBC. Though perhaps a little more restrained than its rival, Citi's conclusion was the same: Emaar is an obvious "buy" opportunity with a target price of Dh21 in the near term, and even Dh31 in the best-case scenario.
You might have expected a stampede of investors to the Dubai Financial Market, hammering on the doors pre-opening with cash in hand begging for the opportunity to invest in this sure-fire thing. Instead, with the Citi research in the market for 24 hours of trading opportunity, Emaar shares yesterday rose Dh0.10 – that's right, 10 fils – to close at Dh11.70.
Investment bank research is not in theory meant to move markets instantly, but to frame long-term investment strategies and add to the pool of knowledge of a corporate situation. But I never met an analyst who is not gratified by a little show of investor appreciation for his work – say a five per cent rise on publication – just to prove that the market is listening. The guys at Citi must have thought yesterday they were shouting in
Their story will be familiar to anybody who, like I, poured over HSBC's opus back in February. Emaar is the leading property developer in the Middle East and has had more influence on the public face of Dubai than virtually any other corporate entity. Burj Dubai – the tallest building in the world – is the latest evidence of this fact, but there is a string of other achievements, residential and commercial, to back up its claim to be the UAE's most influential realty firm.
Equally significantly, it has begun to successfully export the formula beyond the UAE, with significant projects and operations under way across the Middle East, India and Pakistan, China, the US and Britain. Citi is in no doubt about Emaar's potential. In terms of operational expertise, it says, Emaar is a "mature" company, but in terms of its capacity to realise its very large portfolio of projects, it is "young". "There is a lot of growth left," says Citi.
So why have the shares continued to languish at their current miserly level? Citi says the current price rests on three assumptions, which it then argues persuasively should no longer be used as the basis for evaluating the stock.
The first assumption is that land values in Dubai will fall. This will sound bizarre to anybody watching the almost-daily increases in property values in Dubai and the rest of the UAE, and, indeed, it is bizarre, according to Citi. The analysts there believe that Emaar's commanding position in the Dubai real estate market is a strength, not a weakness, and they see little danger of the often-forecast "oversupply" ever materialising.
Is it possible, then, that Emaar might be squeezed out of its top slot in Dubai? Not according to Citi. Last year's deal with Dubai Holding over the huge Bawadi project has increased its land bank by 40 per cent, Citi estimates.
The second assumption holding back the share price is that there must be no "developer margin" factored into the price. It is true that until the second half of last year Emaar's bottom line was stimulated by some lucrative, but non-recurring sales of land that boosted its earnings. But that has been changed by a "strategic" shift at the company, designed to give it a more regular flow of revenue through the orthodox methods of a traditional developer – the completion and sale of properties.
The change in strategic outlook has affected earnings over the last four quarters, Citi concedes, but the benefits will start to flow through from the second half of this year.
Which brings us to the third negative assumption. Citi says that investment opinion on Emaar is based on current, rather than future, earnings ratios, and looking at the detail, you see what they mean. The historic p/e for 2007 was 10.8, is down a fraction for the current year, but then falls significantly to 8 and 5.8 over the next two years. Even for a company in a sector like property, burned by the sub-prime flames coming from the US, this should be regarded as cheap, against the forecast backdrop of rising earnings and net asset values.
Like HSBC before it, Citi recognised that there are potential risks with Emaar, but it then goes on to refute them persuasively. Emerging market developers have a mixed-track record, true, but Emaar's proven ability to deliver large-scale projects mitigates that; the company's alleged aversion to disclosure and newsflow cuts no ice with Citi either – the bank finds Emaar "far superior" to its peers in this respect; and there appears to be little chance of forecast-bending M&A activity in the near future, though planned IPOs might still take place when global market conditions allow.
But then we get to the crux of it and the reason why, I suspect, the shares have struggled to break out of the narrow band where they languish. In an analysis of the share portfolio, Citi points out that Emaar is nearly 32 per cent government-owned, and the existing cap on foreign ownership is 49 per cent. Of that figure, some 25 per cent of the shares are held by non-UAE nationals, of which only 13 per cent are held outside the Middle East.
Emaar's shares, it seems, are caught in a three-way bear-hug. The government is sitting on a large chunk, while another sizeable proportion is held by UAE and other Middle East investors who are probably awaiting a significant upturn before they can consider selling. The bear's third "arm" consists of western and other international investors who, if they were brave enough to buy a property stock – even one of Emaar's attractions – in the current global climate, would have trouble finding the shares to buy in any meaningful quantity.
Something has to give in this situation, but it will take a radical change of heart by one of those three players to bring about a transformation in the Emaar share price. We will see over the next few months whether this revolution is coming.