Emaar shares, value and macro angst

The 20 per cent rise in the United States dollar index since April 2014, 50 per cent fall in oil prices, the west’s banking sanctions on Russia and 25,000 units of extra oil supply have all contributed to a significant fall in Dubai prop- erty prices and transactions in the past year.

However, the 15 to 20 per cent decline fol- lows a significant valuation rerating from 2012 to 2015, when prices in prime locations rose by 60 per cent. As the property market matures, areas like Downtown and Palm Jumeirah have emerged as the prime high demand niches, akin to London’s Chelsea, Knightsbridge or Belgravia.

Emaar Properties, the real estate blue chip of the Middle East, is an ideal long term holding to capitalise on the secular growth in Dubai’s prime property develop- ment and leasing markets. Emaar’s prime Dubai project launches have been invari- ably pre-sold. It could well deliver 20 to 25 per cent earnings per share in the next three years, given its multiple profit catalysts in the United Arab Emirates and abroad.

The listing of 13 per cent of Emaar Misr via an initial public offering in Egypt will clearly unlock value for shareholders of the parent, as did the initial public offering of Emaar Malls in 2014. Emaar’s Turkish, Saudi Arabian, Indian and hospitality portfolios are obvious candidates for successful future flotations.

The spectacular success of The Armani and The Address hotel brands and the recent joint venture with Meraas suggests hospitality will be a key strategic focus and growth catalyst for Emaar in the next three years, particularly in the international luxury/business market. Global hospitality firms trade above 11 times enterprise value. Far above Emaar’s current metric at eight times enterprise value.

Emaar’s expansion in hospitality is still in its early growth stage although The Address, The Armani and The Palace are all preeminent regional luxury brands.

The financial markets grossly undervalue the value of Emaar’s core development and hospitality businesses. Of course, the rise in US dollar interest rates and the fall in Brent crude to $50 are both deflation shocks for the UAE economy.

Since the dirham is pegged to the greenback, so the burden of adjustment falls on local asset markets. Tourist arrivals from Russia, 400,000 in 2013, have been hugely impacted by the rouble crash and economic sanctions after the Kremlin invaded and annexed Crimea.

The fall in oil prices could also reduce the number of Gulf Cooperation Council tourists visiting Dubai Mall or Emaar owned hotels. Syria, sadly, is mired in a savage civil war with regional shock waves that could spill over into tourism in Egypt, Jordan, Lebanon and Turkey. These are all macro risks but the fact remains that Emaar Property is easily one of the most resilient, diversified, successful and well-man- aged corporates in the Middle East.

Emaar bottomed at an 80 per cent discount to net asset value during the depths of the post Lehman global recession in late 2008 and 2009. Since mid 2014, the shares trade at a 45 per cent discount to net asset value (excluding Emaar Malls IPO). Though Emaar lowered the price range of Emaar Misr from previously indicated levels, its stellar growth prospects and landbank will make it one of Egypt’s top equity offerings in 2015. In any case, Misr will be the largest flotation in Egypt since 2007.

Emaar’s Q1 2015 results were impressive with beats on both revenues and earnings. In addition, the Emaar board has adopted IFRS 15, meaning its accounting will record development rev- enues from handovers to percentage completion. The 21 per cent leasing revenue rates and 92 per cent hotel occupancy rates are both compelling metrics of franchise resilience in a tough macro milieu.

With more than 17,300 units scheduled for delivery by 2018, 25 per cent annual EPS growth is not unreasonable. Emaar offers compelling value at Dhs 7 for a Dhs 9 target.