· Overall Weak: As expected, 2Q2009 results were reflective of weaker market conditions and tighter liquidity evident in balance sheet and sales data. While there were some income statement surprises, these were mostly of low quality or pertained to one-offs. Meanwhile balance sheets illustrated weak underlying sector-wide trends that included: i) slower collections, ii) lower cash reserves and iii) the use of expensive short-term funding. We have amended our forecasts and valuations to incorporate 1H2009 numbers, and adjust our assumptions relating to delivery, design, pricing, volume and timing.
· Stocks Stage Strong Recovery: The sector at large has performed relatively well with all stocks up YTD by at least 11% and by 51% on a weighted average basis. Panic selling at the end of the 2008 and through most of 1Q2009 was strong and indiscriminate, while the recovery from the bottom has been rational and gradual as valuations re-rated dismissing a bankruptcy scenario for some developers. While positive performance until the end of the year on the back of still attractive risk-adjusted valuations is possible, we believe balance sheet constraints will put an effective cap on short-term performance until liquidity conditions improve.
· Arabtec Remains Our Top Pick: The stock is up 35% YTD and c300% from its lowest point this year. On the back of stronger than expected 1H2009 revenue and margin numbers, we increase our FY2009 revenue forecasts by 8% to AED8,093 million, gross margin to 15.0% and raise earnings slightly to AED672.2 million. We believe future expansion in the region is taking shape, but slowly. Based on attractive near term multiples, strong financial results, an expectation of positive announcements regarding new contract wins, and successful operational and geographic diversification, we re-iterate our ST/LT Buy with a revised target price of AED3.90.
· Up for a Contrarian Call on Emaar?: Emaar’s 2Q2009 results (excluding the write-down on its US business) positively surprised on strong contributions from rental income and unit deliveries. Our ST/LT Neutral position reflects continued ambiguity surrounding the potential merger with three Dubai Holding companies and a perceived risk of dilution. However, the valuation could be done on favourable, and hence potentially less dilutive, terms. For those with an appetite for some risk, perhaps buying on dips could prove a profitable trade over the longer term.
· Sorouh Going with the Flow: While Sorouh’s 1H2009 results were reasonably strong and 2H2009 profits are expected to improve, the weaker sales environment and slower collections have resulted in weaker operating cash flows. We believe further funding will be necessary for projects due for delivery beyond 2011e and we therefore maintain our ST Neutral stance. However, our downwardly revised LTFV of AED5.7 per share still offers c62% upside, and we re-iterate our LT Buy.
· Risks Remain to Aldar's Long-Term Story: Downward forecast revisions to reflect project design/pricing, volume and timing changes results in a 33% cut to our LTFV. In the short to medium term, Aldar may find debt repayment difficult, necessitating the issuance of further, potentially dilutive, new funding. However, as our revised LTFV of AED6.14 per share offers c12% upside over the current share price, we lower our LT Buy to Accumulate, with an unchanged view that Aldar is a long-term play on the structurally sound Abu Dhabi real estate story, complimented by its government parentage.
· Still No Visibility on ST Funding for UP, Risks Appear to the Downside: While we remain cautious on UP, we upgrade our ST Reduce recommendation to Neutral given the recent strong price performance. However, we maintain our LT Neutral position due to unanswered concerns relating to: i) liquidity with significant short term liabilities and a very modest cash position, ii) management changes with the resignation of it’s CEO and iii) project delays in terms of completion and handover. Underpinned by delivery delays, we slash our 2009e revenue and earnings estimates by c50% and 100%, and reduce our LTFV by 17% to AED1.11 per share.
