Securities & Investment Company (SICO) has released an extensive report initiating coverage on Emaar Properties, the largest listed company on the Dubai Stock Exchange, with a BUY rating and target price of AED 17.10 (presenting a 40% upside to its current market price).
The 56-page report argues that Emaar currently represents a significantly undervalued opportunity for investors seeking to build exposure to the UAE. Open to both foreign and GCC investors, Emaar represents an accessible proxy for both the UAE and the GCC. The company has a market capitalization in excess of USD 20 billion and a 7.1% weight in the MSCI GCC Index. Its free float of 68% and average daily traded volumes of $113m reflects significant liquidity in its shares.
SICO’s research highlights how the Government of Dubai backed company diversifies both horizontally and vertically from a domestic real estate developer to a global developer of master-planned communities.
SICO identifies that Emaar’s stock currently trades at a Price to Earnings ratio of 9.5 times its expected earnings in 2007, representing a 17% discount to the UAE markets and a significant 29% discount to the MSCI Emerging Market Index. In comparison to its global peers, Emaar is trading at a steep 60% discount whilst boasting superior growth prospects and higher profitability levels. At current levels, SICO argues that the share price is pricing in the parent company’s DCF alone and does not capture the significant value that is expected to be generated through its new initiatives.
The report states that increasing growth and value will be delivered by Emaar’s international operations, driven by Saudi Arabia, India and Pakistan amongst others. Emaar aims to have 70% of revenues coming from international operations by 2010. SICO estimates Emaar’s project book to be worth approximately $167bn, with the UAE representing only 18% of this amount. Projects in the UAE comprise just 3.6% of its land bank by area, but a dominant 45% by value. India is the next large value driver comprising 39.2% of Emaar’s land bank by value (though just 7% by area). An IPO in its Indian operations is expected later this year and SICO estimates this alone should add AED 2.35 to the share price of the parent.
SICO also expects to see a structural change in Emaar’s earning streams as rental incomes rise from the current 1.4% of total income to 9.7% by 2010. In addition, non-land related income streams are expected to rise from just 6.4% to 25% of total income by 2010.
The report also expects to see growth in other areas of Emaar’s business. It predicts margins will expand towards 2010 as smart local tie-ups in new markets begin to bear fruit. Emaar’s dual role as developer and property manager will see rental yields for its projects at potentially three times higher than normal yields. The Burj Dubai project becomes eligible for revenue recognition in Q4 2006 and with over 80% of the project already sold to customers, SICO expects the project to be an important contributor to growth in 2007 and 2008.
Securities & Investment Company is offers a selective range of investment banking services, including asset management, brokerage, corporate finance and market-making, on a regional basis and with a particular emphasis on Bahrain. SICO was incorporated in Bahrain in 1995 and holds an investment-banking license from the Central Bank of Bahrain.
