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Page 1 Emaar Properties United Arab Emirates Equities | Real Estate | Initiation of Coverage Sunday, 3 July 2016 Source: Company reports, MubasherTrade Research estimates Stock Performance & Details Buy Moderate Risk Price Target: AED9.48 ETR: +53% Mahmoud Ibrahim Senior Equity Analyst Mubasher International [email protected]• Strong fundamentals supported by a huge presales backlog and ambitious expansions in the malls and hotel segments. • Booking sales of AED15.3bn in 2015 despite this current weak market underlines EMAAR’s strength, thanks to its projects’ strategic locations and well-recognized brand. • Total revenues set to grow by a 3-year CAGR (2015-2018) of 17% with recurring business accounting for 69% of our enterprise value. • EMAAR’s market price implies “unrealistic” negative value for development properties. • Initiate with Buy/Moderate Risk; PT of AED9.48 (+53%). Poised to deliver robust results despite current headwinds: Capitalizing on its highly profitable recurring portfolio (average gross profit margin of +70% over the coming three years) and prime located land bank in Downtown Dubai with exposure to non-UAE property markets, Emaar Properties’ (EMAAR.DFM) revenues are set to grow by a 3-year CAGR (2015-2018) of 17%. This solid growth is attributed to its sizeable land bank of 196mn sqm in the UAE and international market, impressive presales backlog of AED37.3bn at end of December 2015, Emaar Malls Group’s (EMAARMALLS.DFM) plans to add 845,000 sq ft of retail spaces through 2018) and an ambitious plan to add 3,374 rooms in the UAE through 2019. Well positioned to benefit off Expo 2020: EMAAR is set to benefit from Expo 2020, particularly after setting a joint venture with Dubai World Center (DWC) to develop 6.76mn sqm. Moreover, Dubai expects to attract 20mn tourists annually, which should boost the performance of the hospitality and retail segments. We expect profitability margins to stabilize over the coming three years with more contribution from international markets. Furthermore, EMAAR has a healthy balance sheet with a low net debt-to-equity ratio of c.9% in 2015. However, we expect a stronger USD and hence AED may reduce FDIs in the UAE property sector as it becomes expensive for foreign investors. We set our SOTP-based PT at AED9.48/share, implying upside potential of 53%; initiate coverage with Buy/Moderate Risk: Applying a sum-of-the- parts (SOTP) methodology, we reached a price target (PT) of AED9.48 for EMAAR. We used the discounted cash flow (DCF) for all ongoing projects and income capitalization and/or DCF methods for recurring revenues generating assets. We did not assign neither a terminal growth rate nor a perpetual value for the residential segment. However, we assumed a terminal growth rate of 2% for EMAAR’s recurring business. As for most of raw land plots, we used net asset value (NAV) in case of lack of information. Accordingly, our enterprise value (EV) came in at AED79.9bn, 69% of which is attributable to recurring business (malls, retail and hotels). The upside risks to our PT are: the use of Dubai JV land and a higher IPO valuation of the expected spinoff or divestiture of Hospitality and/or Emaar MGF in India. Our mark-to-market PT is AED7.83/share, and NAV is AED8.09/share. EMAAR’s listed subsidiaries represent 89% of its current market cap, implying an unrealistic value for the un-listed segments (UAE development, hospitality, retail and international operations in many countries). In view of that, we are initiating coverage on EMAAR with a Buy/Moderate Risk rating and a price target (PT) of AED9.48/share (+53%). Strong fundamentals remain intact — Initiate with Buy/Moderate Risk mn EMAAR (AED) vs. DFMGI Rebased Stock Details Last price (AED) 6.20 52-W High (AED) 8.16 52-W Low (AED) 4.22 6M-ADVT (AEDmn) 69.16 % Chg: M o M -0.8 % Chg: YoY -21.32 % Chg: YTD 9.0 M ubasher Ticker EMAAR.DFM Bloomberg Ticker EMAAR UH Capital Details No. of Shares (mn) 7,159.7 Mkt Cap (AEDmn) 44,390.4 M kt. Cap (USDmn) 12,085.9 Free Float (%) 70.8% - 10 .00 20 .00 30 .00 40 .00 50 .00 60 .00 0.0 0 1.0 0 2.0 0 3.0 0 4.0 0 5.0 0 6.0 0 7.0 0 8.0 0 9.0 0 Jun-15 Jul-15 Aug -15 Sep -15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Ma r-16 Apr-16 Ma y-16 Volume (RHS) EMAAR DFMGI Rebased AED mn 2013a 2014a 2015a 2016e 2017e 2018e Revenues 10,328 9,893 13,661 16,857 20,313 22,054 Net Income 2,568 3,293 4,082 5,282 7,088 7,478 Revenues Growth (%) 25.3% (4.2%) 38.1% 23.4% 20.5% 8.6% Net Income Growth (%) 21.2% 28.2% 24.0% 29.4% 34.2% 5.5% Gross Profit Margin (%) 49.9% 59.7% 53.2% 52.2% 53.6% 51.2% Net Margin (%) 24.9% 33.3% 29.9% 31.3% 34.9% 33.9% Net Debt (Cash) 6,604 3,484 3,272 (2,717) (4,024) (4,184) EPS (AED) 0.36 0.46 0.57 0.73 0.98 1.04 BVPS (AED) 4.79 4.58 5.29 5.88 6.67 7.45 PER (x) 8.9x 16.6x 12.7x 8.5x 6.3x 6.0x PBV (x) 0.7x 1.7x 1.4x 1.1x 0.9x 0.8x
Transcript
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Page 1
Emaar Properties United Arab Emirates
Equities | Real Estate | Initiation of Coverage
Sunday, 3 July 2016
Source: Company reports, MubasherTrade Research estimates
Stock Performance & Details
Buy
Moderate Risk
Price Target: AED9.48
ETR: +53%
Mahmoud Ibrahim Senior Equity Analyst Mubasher International
• Strong fundamentals supported by a huge presales backlog and ambitious expansions in the malls and hotel segments.
• Booking sales of AED15.3bn in 2015 despite this current weak market underlines EMAAR’s strength, thanks to its projects’ strategic locations and well-recognized brand.
• Total revenues set to grow by a 3-year CAGR (2015-2018) of 17% with recurring business accounting for 69% of our enterprise value.
• EMAAR’s market price implies “unrealistic” negative value for development properties.
• Initiate with Buy/Moderate Risk; PT of AED9.48 (+53%).
Poised to deliver robust results despite current headwinds: Capitalizing on its highly profitable recurring portfolio (average gross profit margin of +70% over the coming three years) and prime located land bank in Downtown Dubai with exposure to non-UAE property markets, Emaar Properties’ (EMAAR.DFM) revenues are set to grow by a 3-year CAGR (2015-2018) of 17%. This solid growth is attributed to its sizeable land bank of 196mn sqm in the UAE and international market, impressive presales backlog of AED37.3bn at end of December 2015, Emaar Malls Group’s (EMAARMALLS.DFM) plans to add 845,000 sq ft of retail spaces through 2018) and an ambitious plan to add 3,374 rooms in the UAE through 2019.
Well positioned to benefit off Expo 2020: EMAAR is set to benefit from Expo 2020, particularly after setting a joint venture with Dubai World Center (DWC) to develop 6.76mn sqm. Moreover, Dubai expects to attract 20mn tourists annually, which should boost the performance of the hospitality and retail segments. We expect profitability margins to stabilize over the coming three years with more contribution from international markets. Furthermore, EMAAR has a healthy balance sheet with a low net debt-to-equity ratio of c.9% in 2015. However, we expect a stronger USD and hence AED may reduce FDIs in the UAE property sector as it becomes expensive for foreign investors.
We set our SOTP-based PT at AED9.48/share, implying upside potential of 53%; initiate coverage with Buy/Moderate Risk: Applying a sum-of-the-parts (SOTP) methodology, we reached a price target (PT) of AED9.48 for EMAAR. We used the discounted cash flow (DCF) for all ongoing projects and income capitalization and/or DCF methods for recurring revenues generating assets. We did not assign neither a terminal growth rate nor a perpetual value for the residential segment. However, we assumed a terminal growth rate of 2% for EMAAR’s recurring business. As for most of raw land plots, we used net asset value (NAV) in case of lack of information. Accordingly, our enterprise value (EV) came in at AED79.9bn, 69% of which is attributable to recurring business (malls, retail and hotels). The upside risks to our PT are: the use of Dubai JV land and a higher IPO valuation of the expected spinoff or divestiture of Hospitality and/or Emaar MGF in India. Our mark-to-market PT is AED7.83/share, and NAV is AED8.09/share. EMAAR’s listed subsidiaries represent 89% of its current market cap, implying an unrealistic value for the un-listed segments (UAE development, hospitality, retail and international operations in many countries). In view of that, we are initiating coverage on EMAAR with a Buy/Moderate Risk rating and a price target (PT) of AED9.48/share (+53%).
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 3
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
Shareholder structure
Dubai Government29.22%
Others70.78%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
EMAAR | Corporate Structure
Emaar Properties (EMAAR.DFM) was established in 1997 and is considered the largest listed developer in the UAE and a global property developer with a significant presence in the MENA region and Asia. In addition to building residential and commercial properties, the company also has proven competency in shopping malls, retail, hospitality and leisure. Burj Khalifa (the world’s tallest building) and The Dubai Mall (the world’s largest shopping and entertainment destination) are among EMAAR’s well-known projects. EMAAR possesses an impressive land bank of more than 169mn sqm in international markets and over 27mn sqm in the UAE. Moreover, EMAAR has a
well-diversified portfolio of commercial and hospitality assets over 690,000 sqm of recurring revenue generating assets and 13 hotels with over 1,950 rooms, added to serviced apartments. EMAAR has delivered 40,000+ residential units in Dubai and global markets since 2001. Furthermore, it has presales backlog of AED37bn with 27,961 under-construction units. After floating 15.4% of Emaar Malls Group (EMG) (EMAARMALLS.DFM) in 2014 and 13% of Emaar Misr for Development (EMFD.EGX) in 2015, EMAAR is still targeting to monetize its core assets (IPOs or REITs) in the hospitality sector in Turkey and India to provide further capital growth and to reduce leverage.
Source: Company’s reports
Corporate structure
Source: DFM Source: Company’s reports
Milestones
Emaar lists on Dubai Financial Market
Emaar launches Dubai Marina, a magnificent
waterfront development
Emaar launches Emirates Hills, a
breathtaking master-planned community
Dubai-Based EmaarProperties is established
June 1997 June 1999 April 2000 July 2000
Emaar unveils Uptown Cairo, its flagship project in Egypt
Emaar launches 500-acre Downtown Dubai,
its flagship mega-development
Emaar launches the Dubai Mall, the world’s
largest shopping destination
Emaar launches Arabian Ranches, a desert-
themed development set over 1,650 acres
August 2005 January 2004 November 2003 December 2002
Burj Khalifa becomes the tallest structure in the Middle East and
Europe
Emaar launches Tuscan Valley Houses in Turkey
Emaar, The Economic City launches King
Abdullah Economic City
Emaar launches the Eighth Gate in Syria
October 2005 December 2005 March 2006 March 2007
Armani Hotel Milano opens at Palazzo at Via
Manzoni 31 in Milan
With 390,000 sq ft of leasable area, Dubai Marina Mall opens
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 4
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
SOTP – Proportionate EV
SOTP - EV
EMAAR | Valuation
We set EMAAR’s PT at AED9.48/share, using SOTP valuation: We used sum-of-the-parts (SOTP) valuation to reach our PT of AED9.48 (+53% upside potential) for EMAAR. All details of our valuation assumptions are mentioned under each segment in the following sections. Generally, we used the DCF method for all ongoing projects and recurring revenue generating assets. Due to the lack of disclosure, we used the NAV method for most of raw land plots in local and international markets. Accordingly, our EV came in at AED79.9bn with an equity value of AED67.9bn. We derived cost of equity of each country based on a build‐up method, starting with:
10‐year US Treasury yield (UST10).
+ the inflation differential between each country and the US.
+ Equity Risk Premium (ERP) of each country (consisting of a US market ERP multiplied by Beta+ a country risk premium based on the spread between the US and the UAE 5‐year Credit Default Spread levered by 30% to account for inherent volatility in equity returns). As for beta, we used EMAAR Beta for Development properties valuation and hotel portfolio while our valuation for Emaar Malls was prepared according to EMG’s stock Beta.
We applied the following valuation methods and assumptions on EMAAR’s SOTP-based valuation:
• DCF for all local and international ongoing projects with
development details without assigning perpetual value to the residential segment.
• NAV for EMAAR’s raw land located in local and international markets, which are not factored in our DCF models of ongoing projects due to limited information.
• DCF for launched projects in Dubai Hills Estate and Dubai Creek Harbor, excluding unutilized land bank in both developments. The JVs, which did not yet start its operations, are not considered in our valuation.
• We assigned no value to EMAAR’s investments and loans provided to its associates in India as the potential fine on EMAAR could pass its Indian investment.
• In valuing EMG, we used equal weights of the DCF and the income capitalization methods.
• Income capitalization method for Emaar Retail & Leasing segment.
• DCF of EMAAR Hotel portfolio.
• Market value (MV) of listed entities, namely Emaar the Economic City (4220.TDWL) and Amlak Finance (AMLAK.DFM).
• Book values (BV) of some of EMAAR’s unlisted entities (Emaar Industries and Investment, Dead Sea Company for Tourist and Real Estate Investment, Turner International Middle East and other associates).
Breakdown of EMAAR’s EV
Source: MubasherTrade Research estimates
Source: MubasherTrade Research estimates
Recurring segments (Malls, Hotel and Retail) account for 69% of our EV
* Excluding India. Source: MubasherTrade Research estimates.
Source: MubasherTrade Research estimates * Other associates & JVs (exc. India) including loans, and investment in securities
Segment (AED mn) EV (AED mn) Per share (AED) Comment
UAE Development 7,721 1.08 DCF for ongoing projects, NAV for raw land International Development 9,929 1.39 DCF for ongoing projects, NAV for raw land
63% of which is related to Emaar Misr 6,238 0.87 DCF, Income capitalization methodEmaar Malls Group 43,794 6.12 DCF, Income capitalization methodEmaar Retail & Leasing 6,390 0.89 Income capitalization methodEmaar Hotel Portfolio 4,660 0.65 DCFEmaar The Economic City (EEC) 3,696 0.52 Market value of EMAAR's stakeAmlak 966 0.13 Market value of EMAAR's stakeOther associates & JVs 832 0.12 Book value, excluding IndiaInvestment in securities 1,652 0.23 Book valueLoans to associates & JVs 291 0.04 Book value, excluding IndiaMinority (8,764) (1.22) Proportionate according to our valuation Excess Cash 10,002 1.40 Book valueInterest bearing debt (13,274) (1.85) Book value
Total - Emaar Equity Value 67,895 9.48 Price Target (PT)
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Page 5
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
Net Asset Value (NAV) stood at AED8.09/share
* EMAAR's stake, ** After excluding the land bank of Emaar's listed subsidiaries, We assigned discount rate of 50% for considering land BV Source: MubasherTrade Research estimates
Net Asset Value (NAV)
We estimate EMAAR’s NAV at AED8.09/share as of end of December 2015, implying a P/NAV of 0.77x based on current stock price and 1.17x based on our PT. We reached our NAV for EMAAR (based on shareholders’ equity as of 31 December 2015) by adding the market value of its listed subsidiaries and our conservative land valuation. Furthermore, we excluded the BV of EMAAR’s listed subsidiaries and associates in addition to the intangible assets.
Mark-to-market valuation
Market price implies “unrealistic” negative value for development properties: At a current market price of AED6.20/share, we believe that all of EMAAR's development properties are not priced in. The current price implies a negative value for development properties, which we believe is unrealistic. The market value of EMAAR’s stakes in its listed subsidiaries represent 89% of EMAAR’s market value. If we were to exclude the market cap of EMAAR's stakes in listed subsidiaries
and associates, namely Emaar Malls Group (EMAARMALLS.DFM) (AED31bn), Amlak Finance (AMLAK.DFM) (AED0.97bn), Emaar the Economic City "EEC" (4220.TDWL) (AED3.7bn), and Emaar Misr for Development (EMFD.EGX) (AED3.7bn) from EMAAR's market cap (AED44.4bn), the remaining value (only AED4.98bn) should represent the value of EMAAR's UAE and international development properties (ex-EMFD and EEC) as well as its hospitality and retail (entertainment) segments. As for the hospitality and retail segments, our base case valuation for both segments came in at AED11bn. This leaves a remaining negative value of AED6.1bn for the UAE and international development properties (ex-EMFD and EEC), which we believe is unrealistic for the largest real estate developer that has vast land bank.
Our mark-to-market valuation came in at AED7.83/share (+26% upside potential): Applying our base case scenario to EMAAR’s un-listed operations, our mark-to-market valuation for EMAAR came in at AED56bn (or AED7.83/share), implying an upside potential of 26%.
2016e P/BV for EMAAR (1.1x) trades at a justified premium to its local peers (2016e P/BV: 0.80): As per our estimates, EMAAR trades at 2016e P/BV of 1.1x, a 25% premium to its peers. We believe that this premium is justified by the following:
• Higher contribution from recurring revenues.
• Higher gross profit margin vs. its local and regional peers.
• Impressive growth prospects.
• Better location of domestic land vs. its local peers.
• Vast land bank.
• Stronger brand name and deliveries track record.
• UAE developers (ex-EMAAR) report their assets at fair value, while EMAAR reports its assets at cost (book value), which puts it in unique position among its peers in terms of earnings quality.
Source: Company’s report, MubasherTrade Research, * Including the NAV of unutilized land, ** Excluding Egypt and EEC
Mark-to-market valuation stood at AED7.83/share
EMAAR | NAV and Mark-to-Market Valuation
Emaar Properties 6.20 7,160 44,390 44,390
Market caps of listed subsidiaries and associates
Emaar Malls Group (EMG) 2.82 13,014 36,700 85% 31,048
Amlak Finance 1.34 1,500 2,010 48% 966
Emaar the Economic City (EEC) 14.22 850 12,083 31% 3,696
Emaar Misr for Development (EMFD) 0.90 4,619 4,155 89% 3,697
Total equity value of listed subsidiaries and associates 39,408 39,408
Implied equity value for UAE, other international Real Estate, Hospitality & Retail Segments (1) 4,982
MTRe valuation for …
Hospitality (2) 100% 4,660
Retail and leasing Segments (3) 100% 6,390
Other international Real Estate (ex. EMFD & EEC) * 3,692
UAE Development * 7,467
Other associates and JVs 832
Investment in securities - BV 1,652
Loans to associates and Jvs (exc. India) - BV 291
Prop. Minority (ex. EMG & EMFD) (8,662)
Excess Cash (ex. EMG & EMFD) 6,180
Interest bearing debt (ex. EMG & EMFD) (5,863)
MTRe valuation for Emaar's un-listed asset portfolio 16,638 16,638
Emaar Properties' mark to market equity valuation (AED mn) 56,046
MTRe mark to market PT (AED/share) 7.83
Upside potential 26%
Implied equity value for UAE, other international Real Estate, (1)-(2)-(3) (AED mn) ** (6,067)
* Including the NAV of unutilized land ** Excluding Egypt and EEC
MTRe
Valuation
(AEDmn)
Overall
Valuation
(AEDmn)
Company Name
Stock
price
(AED)
No. of
shares
(mn)
Market
cap/FV
(AEDmn)
EMAAR
stake (%)
Market
Value
(AEDmn)
Emaar's Net Assets Value (NAV) (AEDmn)
Equity (31 December 2015) 38,114
Add (Less):
Market caps of listed subsidiaries and associates* 39,408
EMG 31,048
AMLAK 966
EEC 3,696
EMFD 3,697
Mubasher valuation of land ** 2,029
Book value of listed subsidiaries and associates* (16,718)
EMG (13,065)
AMLAK (362)
EEC (783)
EMFD (2,509)
Book value of India total investment (Equity and loans) (4,864)
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
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Page 7
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
EMAAR | Positives and Negatives
Positives
• Strong fundamentals with a solid liquid balance sheet (cash balance of AED17.9bn with a net debt-to-equity ratio of 8.6%) and well-diversified sources of revenues (42% and 58% of total revenues and EBITDA, respectively, were generated from recurring business in 2015). Furthermore, EMAAR has diversified geographical operations that span across the MENA region and several global market.
• Huge presales backlog (AED37.3bn at the end of 2015, representing 4.7x of 2015 properties development revenues) in addition to current expansions in hotel and retail segments ensures clear earnings visibility with a robust margin.
• EMAAR possesses a sizeable land bank of more than 169mn sqm in international markets, and over 27mn sqm in the UAE.
• Setting JVs with other UAE developers enable EMAAR to secure land area of 17.5mn sqm in “Dubai Hills Estate” and “Dubai Creek Harbor”. As per our estimates, EMAAR would have paid c.AED50bn had it bought this land.
• Recurring revenues are set to improve due to (1) Base rent renewal at preferred terms added to picking up tenant sales will enhance turnover rent in the mall segment and (2) hotel room additions in more affordable segments.
• Other potential spin-offs (Emaar Hospitality and/or Emaar MGF in India) should unlock further value.
• EMAAR is well positioned to benefit from Expo 2020 as it owns land around Expo location.
• Mega developments like “MBR City” and “Dubai Creek Harbor”, which focus on retail and tourism, could fuel the growth over the coming years and enhance company’s valuation.
• EMAAR has strong brand name and track record with timely handover and superior after-sales operations as the company introduced high quality of life and infrastructure.
• Strong capital adequacy as the company adopts off-plan sales model, which results in limited external funding needs.
• Emaar Hospitality Group should benefit from tapping more affordable segment in the hotel sector.
• Lifting Iran sanctions will benefit Dubai real estate sector as multinational companies targeting business in Iran will likely base their operations in Dubai. Furthermore, we expect the UAE real estate sector will attract a lot of foreign direct investment from Iranian investors.
Negatives
• Growing maturity of Dubai's property market clarifies that demand will come from affordable segment rather than high-end segment, where EMAAR focuses its operation.
• Tighter lending regulation could hinder the demand particularly in Dubai where the properties are expensive.
• The huge construction activities in preparation for the “Expo 2020” in addition to delivering huge presales to clients might expose the company to execution risk.
• In its international markets, EMAAR is focusing mainly on the high-end segment, particularly in Egypt, which might exposes it to price bubble.
• EMAAR investments in its Indian associates (Equity and provided loans), which jointly amounted to AED4.84bn (AED0.68/share) as of 31 December 2015, remain at risk on high leverage and Potential fine for violation of the Foreign Exchange Management Act .
• Existence in many markets in MENA region could expose the company to geopolitical risk that could depress company’s valuation.
• Oil price drop and macro slowdown in GCC continue to play on investor sentiments and hence real estate prices. Additionally, further decline in oil prices may result in lower tourist flows from oil-rich GCC countries and will lead to lower average spending per customer, which could negatively affect the retail and hospitality sector.
• Mortgage penetration remains very low in the company’s international markets, particularly in Egypt which could dampen strong demand.
• The expected oversupply in hotel rooms particularly after Expo will raise the concern of stiff competition in the hospitality sector
• Securing additional debt for expansion of EMAAR’s investment properties portfolio in its international markets could prove challenging.
• Stronger USD and consequently GCC currencies, which are pegged to the USD, will reduce the inflows of foreign direct investments (FDIs) to the GCC property sector, which will become more expensive for foreign investors.
• Expected higher interest rate and consequently mortgage rate will result in the following negative effects:
1. Reduce buyers' capacity to acquire new properties
2. Hindering demand.
3. Reducing developers' appetite to acquire and develop new land plots.
4. Reducing the attractiveness of properties' rental yield.
5. Depressing the valuation of real estate investments due to the higher discount rate.
6. Decreasing developers' profitability due to the higher cost of borrowing.
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Page 8
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
0%10%20%30%40%50%60%70%80%90%
100%
20
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e
GP contribution -Hospitality
GP contribution -Leasing and relatedactivities
GP contribution -properties
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Recurring revenues
Growth rate
EMAAR | Business Model
GPM to flatten on growing handover in international markets
EMAAR’s total revenues are set to grow by a 17% 3-year CAGR (2015-2018) with stable profitability margin: We see impressive growth for EMAAR’s total revenues over the coming three years as a result of 1) Growing development properties segment in UAE and international markets with vast presales backlog of AED37.3bn as of December2015, 2) EMG’s expansion plan of adding 845,000 sq ft of retail spaces (2016-2018), 3) Ambitious plan of adding 3,374 rooms in UAE (2016-2018). As for profitability, we expect that EMAAR’s gross profit margin would rotate around 50% over the coming three years as the impressive margin of recurring business will be offset by lower margin that will be generated from international developments. We highlight that EMAAR’s international operations will have more contribution as most of the upcoming deliveries are in the international markets where EMAAR has acquired its land plots through cash payments, rather than granted land in the UAE. Nonetheless, higher contribution of recurring revenues with focusing on prime located development could maintain EMAAR’s
gross profit margin at solid level (above 60%) over the long term. We highlight that the expected upcoming launches are not considered in our valuation as we consider EMAAR’s land in our NAV. Therefore, our estimated cash balances over the coming years will be absorbed in utilizing EMAAR’s raw land
EMAAR’s revenues are still dominated by residential segment with growing recurring revenues: Historically, most of EMAAR revenues were generated from real estate segment (53% of total revenues during 2013-2015). We expect this trend to continue over the coming three years as the revenues of development properties segment are set to increase by a 21% 3-year CAGR (2015-2018) compared to 12.2% and 12% CAGRs for hospitality and leasing segments, as per our estimates. Moreover, we expect that development properties segment will account for 63% of EMAAR’s total revenues over the coming three years vs. 10% and 26% for hospitality and retail segments, respectively.
However, in absolute terms, recurring revenues is set to increase by a 3-year CAGR of 11.8% (2015-2018): As per our estimates, EMAAR’s recurring revenues from hospitality, malls and retail should increase from AED5.8bn in 2015 to AED8.1bn in 2018, increasing by a 3-year CAGR of 11.8% (2015-2018). This expected growth is mainly attributed to ambitious expansion plan across malls and hotels segment.
Accordingly, we expect net income to grow at a 22.5% 3-year CAGR of (2015-2018): Although development properties segment has more contribution to EMAAR’s top line, we expect that bottom line will be positively affected more by recurring revenue-generating assets that recognized impressive margin particularly from malls, retail and leasing segment, which is expected to realize average gross profit margin of 83% (2015-2018). As per our estimates, we expect net income to grow by a 3-year CAGR of 22.5% (2015-2018) with net income of AED5.3bn, AED7.1bn and AED7.5bn in 2016, 2017 and 2018, respectively.
Source: Company’s report, MubasherTrade Research
EMAAR total revenues are set for upcoming impressive growth EMAAR total revenues are dominated by properties segment
EMG to recognize impressive GPM over the coming years Recurring revenues to grow by a 3-year CAGR of 11.8% (2015-2018)
Source: Company’s report, MubasherTrade Research Source: Company’s report, MubasherTrade Research
Source: Company’s report, MubasherTrade Research Source: Company’s report, MubasherTrade Research Source: Company’s report, MubasherTrade Research
Gross profit also are also dominated by properties segment
0
4,000
8,000
12,000
16,000
20,000
24,000
20
13
20
14
20
15
20
16
e
20
17
e
20
18
e
AED
mn
Revenues fromhospitality
Revenues from leasingand related activities
Total revenues fromproperties sales
0%
20%
40%
60%
80%
100%
20
13
20
14
20
15
20
16
e
20
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e
20
18
e
%
Revenues contribution -Hospitality
Revenues contribution -leasing and relatedactivities
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 9
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
UAE Properties Development
• Launch prices of EMAAR’s new projects are broadly unchanged despite current headwinds.
• EMAAR has seen a strong pick-up in its UAE launched units despite current conditions (+4,000 units launched in 2015 (+16% YoY).
• Launched units with price below AED1,500/sq ft represented 63% of total UAE launched units in 2015 vs. 49% in 2014.
• Supported by vast UAE pre-sales backlog of AED25.8bn (end of 2015), we expect domestic development revenues will grow at a 3-year CAGR (2015-2018) of 44%.
• UAE property development revenues will be dominated by Downtown Dubai (56% average contribution over 2016-2018).
• We set our proportionate EV for EMAAR UAE Property Development at AED6.95bn (AED0.97/share).
EMAAR is the largest developer in the UAE with a significant presence in the MENA region and Asia: EMAAR’s concept of establishing integrated communities that feature retail, hospitality, and leisure segments, taking into consideration all residents needs, is well-perceived in both local and in international markets. EMAAR sold 79% of its total units offered in Dubai during 2014/2015, given its prime location and strong track record. In 2013, EMAAR signed three joint venture agreements with Dubai-based developers, aiming to replenish its land bank in the UAE without considerable cash outflow. EMAAR, which built “Burj Khalifa”, the world’s tallest tower, is currently developing four major projects in the UAE, namely:
1) Downtown Dubai.
2) Arabian Ranches.
3) Dubai Hills Estate (JV with Meraas Holding).
4) Dubai Creek Harobr (JV with Dubai Holding).
At the end of December 2015, EMAAR owned a land bank of 27mn sqm in the UAE with presales backlog of AED25.8bn in its local markets which will help it maintain strong financial and operating performance over the coming years. Based on the strong sale momentum of EMAAR’s impressive launches, we expect UAE property revenues to growth at a 3-year CAGR (2015-2018) of 44%, dominated by Downtown Dubai.
Our proportionate EV for UAE Properties Development came in at AED6.95bn, translating into AED0.97/share): Using the DCF method for ongoing development and adjusted book value and NAV for land plots, we calculated EV for EMAAR UAE properties at AED7.7bn, translating into AED1.08/share. Considering the minority stake in JV developments, our valuation for EMAAR’s UAE Properties Development results in attributable (proportionate) EV of AED6.95bn (AED0.97/share), 66% of which is driven by Downtown Dubai and its land plots in addition to Al Lusaily land plot.
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 10
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
We set our proportionate EV for Properties Development at AED6.95bn (AED0.97/share): We applied a sum-of-the-parts (SOTP) method to EMAAR’s Dubai Properties Development business, using DCF method over the life cycle of each project with a cost of equity of 13.2% and no terminal growth rate. We valued the projects launched until the end of 2015, using the DCF method. As for the unutilized land on which there are no details about its development schedule and master plan, we used inflation-adjusted book value or/and NAV. Accordingly, we reached an EV of AED7.7bn, translating into AED1.08/share. Considering the minority stake in JV developments, our valuation for EMAAR’s UAE Development Properties results in attributable (proportionate) EV of AED6.95bn (AED0.97/share).
Land plot valuation (excluding JV) came in at AED2.90bn: We adjusted the 2007 historical book value of Al Lusaily land plot (48mn sq ft) by the UAE inflation from 2007 to 2015 to derive its value. Despite the strategic location of Al Lusaily land, which we believe will benefit from Expo 2020, we chose this conservative method to evaluate this land given the lack of disclosure.
That said, the adjusted book value of Al Lusaily land plot came in at AED2.5bn (AED0.35/share). As for the remaining land plots located in Downtown Dubai (0.25mn sqm), our NAV model resulted in after-discount-valuation of AED395mn (AED0.06/share). We assume land price of AED500/sq ft and utilization period of five years. We highlight that most of EMAAR’s proportionate EV is attributable to Downtown Dubai which contributed 29% of our valuation for EMAAR’s UAE development properties. We consider the phases that were already launched for sale in Dubai Hills Estate and Dubai Creek Harbor, excluding the raw land in both JVs. Moreover, we did not consider the other JVs, namely Dubai World Central (DWC), Dubai World Trade Central (DWTC) and Dubai's Al Mamzar.
Considering raw land in Dubai Hills Estate and Lagoons should add AED9.2bn (AED1.3) to our valuation: If we consider the valuation of JVs raw land in Dubai Hills Estate and Dubai Creek, our proportionate EV for EMAAR’s UAE development would jump to AED16.2bn, translating into AED2.26/share, representing our best case valuation compared to AED0.97/share in our base case scenario.
We based our base case valuation on the following general assumptions:
• Cost of equity: 13.19%.
• We considered the average launch prices, payment plan and handover date provided by EMAAR in our assumptions. In case of insufficient information from EMAAR, we use the data provided by property agents or advisories (REIDIN and LOOKUP).
• We determined our gross profit margin (GPM) for EMAAR’s UAE according to the value of contracts awarded by EMAAR to contractors to construct the projects. Absent details of some awarded contract, we assumed a GPM of 33% for villas, 41% for condominiums, and 70% for sold land plots. These margins reflect our conservative valuation assumptions.
• For sold areas with no details of its floor area, we assumed an average area of 150 sqm for apartments and 500 sqm for villas.
• Most of revenues are recognized in the last two years of the payment plan.
• Our assumptions for construction progress are pro-rated to the project timeline after awarding the construction contract. If the
time of contract award is unknown, we assumed that the projects will be awarded to contractors one year after launch date. It is worth noting that many of EMAAR’s projects were awarded to contractors almost one year after launch.
• In case we have no details about the payment plan, we assumed that 20-30% of the units value will be paid in the first year, while the remaining amount will be paid over 3-5 years.
• We assumed SG&A-to-presales of 6.8% in the year of launch.
• As for joint venture developments, we considered only the launched phases in the two agreements with Dubai Holding for developing Dubai Creek Harbor and Meraas to develop Dubai Hills Estate in MBR City. We used the DCF method for ongoing developments. We shed more light on our valuation method for EMAAR’s JV with its local partner in the following section (Valuation of JV Developments).
UAE Properties Development | Valuation
Source: MubasherTrade Research Source: MubasherTrade Research
We set our EV for EMAAR’s UAE Properties Development at AED7.7bn Proportionate EV came in at AED6.95bn; dominated by Downtown Dubai and raw land plots
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 11
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
UAE Properties Development | Business Model
Presales
Investor appetite, affected by the current negative sentiment, resulted in lowered local presales in 2015; 2,000-3,000 units to be launched annually in the UAE: With excellent sale response, EMAAR launched impressive development in Dubai in the last three years, booking sizeable presales of AED12bn and AED12.3bn in 2013 and 2014, respectively. However, the current weak sentiment and slowdown prevailing in the UAE property sector negatively affected EMAAR sales which amounted to AED10.23bn in 2015 (-17% YoY). Despite these headwinds, EMAAR sold 79% of Dubai total units launched in 2014/2015. Moreover, we believe that EMAAR could regain its impressive sale amount over the coming yeas which is evident by the strong progress of EMAAR’s UAE sales in Q4 2015 and Q1 2016. The presales over the coming years are not factored in our estimates as we evaluated most of the unutilized land bank, which will be developed over the coming years, through NAV. However, we will consider the upcoming launches in our presales, projected financial statement and valuation, once announced by the company. Conservatively speaking, we expect EMAAR will be launching units at an average of 2,000-3,000 per year. This should result in annual presales of AED6.5-9.7bn in the UAE, assuming an average price of AED1,500/ sq ft and average units area of 200 sqm (2,151 sq ft).
Launching a higher number of units at lower prices to support EMAAR’s solid sales over the coming years; EMAAR is well positioned to benefit from Expo 2020: As per our follow-up on EMAAR’s new launches in the UAE, 4,000+ units were launched in “Downtown Dubai”, “Arabian Ranches”, “Dubai Hills Estate”, and “Dubai Creek Harbor” in 2015, compared to 2,892 and 3,527 units launched in 2013 and 2014, respectively. However, we note that 63% of the units launched in 2015 were offered at a price below AED1,500/sq ft compared to 49% and 50% in 2013 and 2014, respectively. This strategy demonstrates the capability and efficiency of EMAAR’s management to adapt to changing market conditions. The company launched fewer units in “Downtown Dubai” in 2015 (1,235 versus 1,968 and 1,753 in 2013 and 2014, respectively). On the other hand, the units launched in “Dubai Hills Estate”
jumped to 2,065 in 2015 compared to 97 and 664 in 2013 and 2014, respectively. Going forward, we expect substantial pick-up in low-price units launches, particularly in “Dubai Hills Estate”, which should fuel presales growth. We also believe that EMAAR is set to benefit from its land bank near Expo 2020 site, which was secured though its JVs with Dubai World Central (DWC) and Dubai World Trade Center (DWTC), in addition to its land in Al Lusaily, which should also support its presales growth over the coming years.
Off-plan units prices are broadly unchanged; price compression of upcoming launches is not likely: We believe the prime-located properties in Dubai should keep attracting buyers due to its well-established infrastructure in addition to regional macro and political instability, which would redirect vast investments into the UAE as a safe haven. After the Arab Spring, a lot of high net worth individuals (HNWIs) directed their investments to the UAE property. Overall, we rule out any collapse in EMAAR units prices as we believe the new off-plan sales will continue to appeal to buyers’ appetite. Moreover, its prime-located land bank that can be easily monetized, impressive track record, and well-known brand name should all put EMAAR in a unique position on the presales front.
A more regulated market would enable of long-term demand growth: In November 2013, EMAAR banned local real estate agents from selling off-plan properties, that are purchased under their names, until handover. However, there would be no restriction on resale after handover. The main purpose of this measure was to control properties “flipping” in the market. Moreover, the maximum loan-to-value ratio for mortgages was 75% for the first home, 60% for the second home, and 50% for off-plan purchases by expatriates. Additionally, Dubai Land Department (DLD) doubled the property registration fees from 2% to 4% in an effort to reduce speculative activities. Although this restriction hindered demand in the short term, we believe that a more regulated market would support long-term demand growth. On the other hand, we believe that low oil prices would remain the major concern that negatively affects GCC investments in the UAE real estate sector.
… however, EMAAR UAE presales started to improve again in Q4 2015 and Q1 2016
Current market condition put pressure on EMAAR’s local presales in 2015…
Source: Company’s report Source: Company’s report
Launched units declined in Downtown Dubai (2013-2015)
EMAAR launched higher number of units at cheaper prices in 2015
Higher contribution of launched units in Dubai Hills Estate in 2015
63% of units below AED1,500/sq ft was launched in 2015 vs. 49% in 2014
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Page 12
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
UAE Properties Development | Business Model (Cont.’d)
Early adoption for “IFRS 15” since Q1 2015: EMAAR had opted for an early adoption of “IFRS 15” starting Q1 2015. This system enabled the company to recognize revenues based on the “percentage of completion” versus the “revenue upon handovers” methods. We believe that this will result in more stable reported revenues for the company. Referring to EMAAR’s investor presentation showing the details of its under development projects in 2015, it is clear to us that most of the company’s development revenues are recognized in the last two years of the payment plans after substantial construction progress. Thus, we built our forward estimated and upcoming financial statements on recognizing revenues of development properties in the last two years of their payment plans.
Local “presales backlog-to-development revenues” reached 3.3x and in 2015, implying an impressive top line over the coming three years: EMAAR’s development properties segment offers 3-4 years of earnings visibility as the company’s presales backlog stood at AED22.6bn and AED25.8bn in 2014 and 2015, respectively. This implies local “presales backlog-to-development revenues” of 5x and 3.3x in 2014 and 2015, respectively, which implies an impressive growth for the company’s total revenues over the coming three years. This vast local presales backlog is mainly attributed to booking sizeable sales of AED12bn, AED12.3bn and AED10.23bn in 2013, 2014 and 2015 respectively.
We expect a 3-year CAGR of 44% in UAE property revenues, dominated by Downtown Dubai: Based on projects launched up to 31 December 2015, EMAAR should deliver 8,727 units in the local market between 2016 and 2019, according to EMAAR’s estimates. As per our estimates, we expect that EMAAR’s UAE property development revenues will amount to AED7.2bn, AED8.4bn, and AED9.8bn in 2016, 2017, and 2018, respectively. This impressive performance implies a 3-year CAGR (2015-2018) of 44%. We expect EMAAR’s UAE development revenues will be dominated by revenues from Downtown Dubai projects, which should amount to AED3.8bn, AED3.6bn, and AED07.1bn, representing 52%, 44%, and 73% in 2016, 2017 and 2018, respectively. As for profitability margins, we expect that EMAAR will maintain its healthy GPM from UAE development (i.e. above 40%) over the coming two years.
We expect 44% CAGR (2015-2018) in UAE development revenues on vast presales backlog and early recognition of revenues
Source: MubasherTrade Research
UAE Delivery Schedule
Revenues from development of Downtown Dubai to reach AED7.1bn in 2018
Downtown Dubai to dominate 73% of EMAAR’s UAE development revenues mix in 2018
Source: MubasherTrade Research Source: MubasherTrade Research
Source: Company’s reports, 2019 deliveries are based on projects launched up to31 December 2015 and may change as more projects are launched.
4,4
08
3,1
43
3,2
53 7
,18
8
8,3
66
9,8
12
1,7
23
1,9
02
2,3
87
3,2
00
3,7
89
3,6
19
0%
50%
100%
0
5,000
10,000
15,000
2013 2014 2015 2016e 2017e 2018e
GP
M%
AED
mn
Revenues from UAE developments Gross profit Gross profit margin %
0
2,000
4,000
6,000
8,000
10,000
12,000
2016e 2017e 2018e
AED
mn
Emirates Hillsrevenues
Arabian Ranchesrevenues
Dubai HillsEstate revenues
DowntownDubai revenues
52%44%
73%
25%23%
20%23%
29%3%
5% 4%
0%
20%
40%
60%
80%
100%
2016e 2017e 2018e
%
Emirates Hillsrevenues %
Arabian Ranchesrevenues %
Dubai Hills Estaterevenues %
Downtown Dubairevenues %
No. of units Completed Under development Cumulative till 2014 2016 2017 2018 2019*
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 13
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
UAE land 27mn sqm
14%
International land
169mn sqm86%
UAE Properties Development | Business Model (Cont.’d)
Sizeable land bank to enhance the company’s operations over the coming years: EMAAR is the largest listed developer in the MENA region in terms of land bank, enjoying a huge area of land bank: 196mn sqm in the UAE and international markets at end of December 2015. We highlight that only 14% of EMAAR’s total land bank is located in the UAE while the remaining 86% is located in international and regional markets. EMAAR’s associate Emaar the Economic City (EEC) (4220.TDWL) has the lion’s share, owning 126mn sqm of raw land or 65% and 75% of EMAAR’s total land bank and international land bank, respectively. As for the local market, EMAAR enjoys a land bank of 27mn sqm, 83% of which is associated with its JVs with local partners, while the remaining 17% (4.7mn sqm) is owned solely by EMAAR.
14% of EMAAR’s land bank is located in the UAE
83% of EMAAR’s local land bank is associated with its JVs with local partners
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 14
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
UAE Properties Development | Joint Ventures
• Through its JVs with local partners, EMAAR has access to 33mn sqm in Dubai without cash payments.
• Minimal execution risk as all of the partners are government-backed entities.
• Our conservative valuation for Dubai Creek Harbor and Dubai Hills Estate implies a very low land price of only AED116/sq ft.
• EMAAR would have paid around AED50bn had it purchased land located in Dubai Hills Estate and The Lagoons, according to current land price.
In 2013, EMAAR signed three joint venture agreements with Dubai-based developers aiming to replenish its land bank in UAE without considerable cash outflow. Furthermore, EMAAR involved in other JVs with Dubai Municipality and Dubai World Trade Center (DWTC) in 2014 and October 2015, respectively. These five agreements provided EMAAR with access to 33 mn sqm in Dubai as following:
(1) Dubai Hills Estate at Mohammed Bin Rashid (MBR) City is set on 11.3mn sqm (JV with Meraas).
(2) Dubai Creek Harbor (The Lagoons) is set on 6.2mn sqm (JV with Dubai Holding).
(3) Developing integrated urban center spreading over 13.6mn sqm at Dubai World Central (DWC), the home to Expo 2020 (JV with Dubai World Central).
(4) Planning mall and hotel venture for Expo 2020 in DWTC (JV with DWTC).
(5) Developing 0.8mn sqm mixed-use beachfront development in Dubai's Al Mamzar district in cooperation with Dubai Municipality.
On the global front, EMAAR entered into a JV with a Vietnamese property developer “Bitexco” in December 2015 to develop a new urban area in "Ho Chi Minh City" (HCM City) at an estimated investment of at least USD1.34bn on a total area of 427 hectare (4.3mn sqm) in the "Thanh Da Peninsula" on the city's east side. The construction is expected to begin next year and the project's first stage will be completed in 2020. Moreover, the urban area is anticipated to accommodate 45,000 residents upon its completion in 2030. It is worth noting that Bitexco owns the tallest building in HCM City's downtown.
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 15
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
UAE Properties Development | Valuation of JV Developments
We set our proportionate EV for EMAAR’s under development JVs at AED10bn (AED1.4/share), only 7.7% of which is considered in our valuation: The JVs, which are already launched, are factored in our valuation. Accordingly, we only considered the ongoing launched projects in “Dubai Hills Estate” and “Dubai Creek Harbor”, overlooking DWC, DWTC and Al Mamzar district. We pro-rated the EV of under-development JVs launched projects, while assigning 50% of their EV to EMAAR’s valuation. We valued EMAAR’s under development JVs using the DCF model, which yielded an EV of AED20bn (AED2.8/share) for under-development projects and unutilized land. We considered only JV’s ongoing projects that were launched for sales, accounting for only 7.7% of JVs total valuation and coming at AED1.5bn (AED0.21/share). Considering EMAAR’s stake in Dubai Hills Estate and Dubai Creek Harbor, the proportionate EV of these JVs came in at AED10bn, only 7.7% of which (AED0.8bn) is considered in our base case valuation translating into AED0.11/share. In the meantime, we did not consider these JV’s raw land in our valuation absent sufficient details about them.
However, un-utilized land in Dubai Hills Estate and Dubai Creek Harbor should add AED9.2bn (AED1.3/share) to our base case valuation: The proportionate EV of unutilized land in Dubai Hills Estate and Dubai Creek Harobr came in at AED9.2bn (AED1.29/share), implying a blended gross land price of AED116/sq ft, which reflects our conservative valuation approach. We will shed more light on the valuation of these JVs developments as follows:
Dubai Hills Estate at Mohammed Bin
Rashid City (MBR) — JV with Meraas
Dubai Hills Estate is a master-planned development in Mohammad Bin Rashid (MBR) City that is being developed by a JV between EMAAR and Meraas (both government-backed developers) with a development value of
AED56bn, according to EMAAR’s estimates at the end of 2014. The project will be a mixed-use development set around an 18-hole championship golf course. The project consists of a park that is 30% larger than London’s Hyde Park, a retail complex that can accommodate 80mn visitors per year in addition to 100 hotels. According to unconfirmed reports, Dubai Hills Estate is set for completion in 2023 and will include 20,000 apartments and 2,000 villas. EMAAR has already launched numerous developments (villas, apartments, and land plots up for sale) with growing sale activities in 2014 and 2015. At the end of December 2015, 82% (9.25mn sqm) of the project’s total land area was still unutilized.
Dubai Hills Estate proportionate EV came in at AED3.3bn, 16% of which is considered in our valuation: We valued Dubai Hills Estate project (utilized and unutilized land) using the DCF model which yielded a total EV of AED6.5bn (AED0.91/share) for under-development projects and unutilized land, using cost of equity of 13.2%. Accordingly, the EV of EMAAR’s stake (50%) in Dubai Hills Estate stood at AED3.3bn (AED0.46/share), only 16% of which is considered in our valuation as we only accounted for the ongoing launched phases in Dubai Hills Estate, excluding the un-utilized land area. Our proportionate valuation for the under-development projects in Dubai Hills Estate resulted in an EV of AED0.5bn (AED0.07/share). We highlight that the valuation of ongoing launched phases in Dubai Hills Estate were considered in our projected financial statements as EMAAR consolidates the Dubai Hills Estate as a subsidiary. On the other hand, our valuation for the un-utilized land came in at AED5.5bn with proportionate valuation of AED2.7bn (AED0.38/share), considering EMAAR stake of 50%. We assume that this unutilized land will be totally developed over the coming 20 years. Although this un-utilized land is not considered in our valuation, it acts as upside potential for
our base case valuation once the company starts to develop it or provide more details about it.
Despite the lack of information about the raw land in Dubai Hills Estate, we used the DCF method as the company already launched many phases in Dubai Hills Estate with notable growing sales in 2014 and 2015. We assumed a floor-to-area ratio (FAR) of 40% for gross land area (80% for net land area), which resulted in total available-for-sale Built-Up Area (BUA) of 3.7mn sqm. Conservatively, we assumed that 90% of BUA will be residential, and the remaining 10% will be allocated for non-residential purposes. Our main assumptions of the DCF valuation of this unutilized land are:
• SG&A-to-pre-sales: 6.8%.
• Annual price and cost escalation rate: 1%.
• This unutilized land will be developed over 20 years to be completed by 2036.
• Apartments and villas current prices stand at AED1,400/sq ft and AED1,050/sq ft, respectively. These prices are in line with launched developments in Dubai Hills Estate (Mulberry, Acacia, and Maple).
• Units will be delivered four years after sale.
• Payment plan entails 30% of the property value in the first year, while the remaining payment will be linked to construction progress.
Our valuation of the undeveloped land in Dubai Hills Estate implies a land price of AED123/sq ft for NLA and AED61/sq ft for GLA. This affirms our conservative assumptions in evaluating this land as the current price range of land plot offered for sale in Dubai Hills Estate in “Fairway” and “The Parkways” was AED430-480/sq ft for NLA.
We fully acknowledge the limitations and lack of accuracy of these assumptions considering the limited disclosure from EMAAR. However, this acts as a rough directional indication of the valuation of this unutilized land. For more clarification, we ran a sensitivity analysis for the effect of changing the utilization period and FAR on the valuation of Dubai Hills Estate’s unutilized land (9.6mn sqm) as follows:
Sensitivity of Dubai Hills Estate un-developed land valuation to the change in FAR and utilization period
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 16
Emaar Properties | UAE | Initiation of Coverage
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6,520
87 264 158 264 256 5,491
0
4,000
8,000
Views and Grove - Villa Mulberry Park Heights -Apartment
Acacia Park Heights -Apartment
Maple 1 - Townhouse Maple 2 - Townhouse Residentia & commercialraw land - Not considered
in our valuation - Rawland
Total EV of Dubai Hills
EV (
AED
mn
)
UAE Properties Development | Valuation of JV Developments (Cont.’d)
Dubai Creek Harbor (The Lagoons)
(joint-venture with Dubai Holding)
Dubai Creek Harbor at the lagoon, which is spread over 1,482 acres (6.2mn sqm), will be co-developed through a joint venture between EMAAR and Dubai Holding with a development value of AED158bn, according to EMAAR estimates. According to Emirates 24|7, this mixed-use development will house 3,664 office units, 8mn sq ft of retail space, 39,000 residential units and 22 hotels with 4,400 rooms. Moreover, it will feature ‘The Dubai Twin Towers’, an iconic mixed-use development billed to be the tallest twin towers in the world. The Lagoons master
development was originally launched in April 2006, covering an area of 70mn sq ft and comprising seven detached islands that were to be interlinked with bridges. At the end of December 2015, the Lagoons had underdeveloped 2,644 units that will be delivered during the 2018-2019 period. Additionally, 90% (5.57mn sqm) of the project’s land area remained unutilized at the end of December 2015. Accordingly, a lot of upcoming projects will be launched in Dubai Creek Harbor over the coming years.
Our proportionate EV for Dubai Creek Harbor came in at AED6.7bn: Using the DCF method,
our EV of Dubai Creek Harbor came in at AED13.5bn (AED1.89/share) for “under development” projects and unutilized land. Our valuation for “under development” project in Dubai Creek came in at AED508mn (AED0.07/share), while our valuation for the unutilized land (5.57mn sqm at the end of December 2015) came in at AED13bn (AED2.08/share).
Given the limited details on the capital structure of this JV, we pro-rated the EV of this development to reflect EMAAR’s stake assigning 50% of Dubai Creek’s EV to EMAAR’s valuation. That said, the EV of EMAAR stake in Dubai creek
stood at AED6.8bn (AED0.94/share), 4% of which is related to ongoing launched phases and considered in our valuation, while the remaining 96% is not considered in our valuation.
We assumed that the project’s FAR of GLA is 125%, attributed to the high-rise building in Dubai Creek Harbor. Accordingly, we estimated the total BUA of undeveloped land in Dubai Creek Harbor at 7.6mn sqm, 26% of which will be allocated for non-residential purposes (retail, office and hotel). We based our DCF valuation for the raw land on the following assumptions:
Source: MubasherTrade Research
Overview of development projects in Dubai Hills Estate
Breakdown of Dubai Hills Estate valuation
Source: Company’s report, MubasherTrade Research
Considered in our valuation AED1,029mn
Not considered in our valuation
Development Status TypeNo. of
Units/plots
Sale Value
(AED mn)
Date of
Launch
Expected
Completion Date
%
Completion
recognized
Launch
price
(AED/sq ft)
Payment
plan
(Years)
Valuation
Methodology
MTRE Valuation -
EV (AED mn)
Emaar
share %
Attributable EV
proportionate
(AED mn)
Per share
(AED)
Views and Grove Under Development Villa 399 Dec-13 2016 33% DCF 82 50% 41 0.01
2015 Views and Grove Under Development Villa 19 Q1 2015 2016 33% DCF 5 50% 2 0.00
Mulberry Park Heights Under Development Apartment 664 1,248 Mar-14 2018 0% C 1,400 5 DCF 264 50% 132 0.02
Acacia Park Heights Under Development Apartment 477 1,001 Feb-15 2019 0% C 1,426 5 DCF 158 50% 79 0.01
Maple 1 Under Development Townhouse 646 1,745 Apr-15 2019 0% C 1,050 5 DCF 264 50% 132 0.02
Maple 2 Under Development Townhouse 666 na Oct-15 2019 0% C 909 5 DCF 256 50% 128 0.02
Total - Under development project - Considered in our valuation 1,029 50% 514 0.07
Residentia & commercial raw land - Not considered in our valuationRaw land DCF 5,491 50% 2,745 0.38
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
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Emaar Properties | UAE | Initiation of Coverage
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13,501276 135 97 12,9920
10000
20000
DCR North T1,2,3& South T1
DCR South T2,T3& podium
DCR "Creekside 18A"
Un-utilizedResidential &
commercial land
Total EV of DubaiCreek
EV (
AED
mn
)
UAE Properties Development | Valuation of JV Developments (Cont.’d)
• The raw land in Dubai Creek will be utilized over 30 years. We highlight that the company launched 1,093 units in Dubai Creek Residence from November 2014 to December 2015, when the UAE property sector slowed down.
• Apartment price of AED1,468/sq ft according to the average price of launched projects in Dubai Creek Harbor.
• Property prices are to increase by 1% every year over the project's lifetime.
• Property value is collected over four years.
• Units will be delivered four years after sale.
• We assigned a cost escalation rate of 1% per annum for
construction and infrastructure cost.
• SG&A-to-presales: 6.8%.
Our valuation implies land price of AED433/sq ft for NLA, indicating our highly cautious valuation of ‘The Lagoons’ undeveloped land as the current price range of land plot offered for sale in area close to DCH stands at AED1,400 – 1,900/ sq ft.
Joint venture with Dubai World Central (DWC) for a mixed-use
development In December 2013, EMAAR and Dubai World Center (DWC) had signed a memorandum of understanding (MOU) to develop a mixed-use development in a prime location at Dubai World Central, home to Expo 2020 and the Al Maktoum International Airport. This development is spread over an area of 13.6mn sqm with the first phase of the project comprising a golf course villa community, several hotels, and high-end shopping malls. In 2014, EMAAR introduced “Legacy Park”, a 6.5mn sqm integrated urban center in DWC which is located in close proximity to the Expo 2020 venue at Al Maktoum International Airport. “Legacy Park” is planned to feature 7,000 residential units in addition to 250 hotel rooms. Since the company did not offer any project for sale in DWC, we did not consider DWC in our valuation.
Joint venture with Dubai World Trade Central (DWTC) for hotel and malls In October 2015, EMAAR was appointed to set a plan for the mall and hotel venture for Expo 2020 in DWTC on an area of 1mn sqm. However, we excluded this project from our valuation due to the lack of details as well as the figures of its sold under-development projects.
Joint venture with Dubai Municipality for a waterfront development in
Dubai's Al Mamzar In May 2014, EMAAR announced its plan to develop 0.8mn sqm mixed-use beachfront development in Dubai's Al Mamzar district in cooperation with Dubai Municipality. The project is expected to have a preliminary cost of AED10bn (USD2.72bn). Moreover, the project will have 4,000 residential units, 300 hotel rooms, and 250,000sqm of retail outlets. The valuation of this project is not factored in our valuation as the company did not yet launch any phase.
Overview of development projects in Dubai Creek Harbor
Source: Company’s report, MubasherTrade Research
Source: MubasherTrade Research
Breakdown of Dubai Creek Harbor (DCH) valuation
Sensitivity of The lagoons un-developed land valuation to the change in FAR and utilization period
Considered in our valuation AED508mn
Not considered in our valuation
Development Status Type
No. of
Units/plot
s
Sale Value
(AED mn)
Date of
Launch
Expected
Completion
Date
%
Completion
recognized
Launch price
(AED/sq ft)
Payment plan
(Years)
Valuation
Methodology
MTRE Valuation -
EV (AED mn)
Per share
(AED/share)
Emaar
share %
Attributable EV
proportionate
(AED mn)
Per share
(AED)
Under development project
Dubai Creek Residences North T1,2,3 & South T1Under Development Apartment 598 1486 Nov-14 2018 0% C 1,450 5 DCF 276 0.04 50% 138 0.02
Dubai Creek Residences South T2,T3 & podium Under Development Apartment 274 734 Jan-15 2018 0% C1,600 4 DCF 135 0.02 50% 68 0.01
Dubai Creek Residences "Creekside 18 A" Under Development Apartment 221 424 Sep-15 2019 0% C 1,325 5 DCF 97 0.01 50% 49 0.01
Total - Under development project - Considered in our valuation 508 0.07 50% 254 0.04
Residential & commercial raw land - Not considered in our valuation DCF 12,992 1.81 50% 6,496 0.91
Total - Dubai Creek Harbour DCF 13,501 1.89 0.50 6,750 0.94
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Page 18
Emaar Properties | UAE | Initiation of Coverage
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EMAAR International Operations
• Our EV of EMAAR’s major international subsidiaries came in at AED9.9bn (AED1.39/share).
• Egypt is the key driver of the international segment valuation and profitability.
• We estimate international revenues to grow at a 4-year CAGR (2015-2019) of 16.8%.
• Profitability margins of international operations are set to improve over the coming years, supported by high margins generated from recurring revenues generating assets.
EMAAR’s footprint reached more than 10 countries in MENA region and Global markets: To stimulate growth and reduce its dependency on the local market, EMAAR has penetrated several international markets with higher growth opportunities. At present, EMAAR has operations in more than 10 countries in the MENA region and global markets through its subsidiaries, associates and JVs. EMAAR’s current strategy aims to replicate its Dubai business model in international markets through co-operation with strong local partners in these markets.
Since 2006, EMAAR has delivered more than 6,000 units in its international markets, selling 90% of its launched units in these markets through its subsidiaries, associates and JVs. This proves that EMAAR is on track to achieve its major target of increasing its international contribution to group revenues. In June 2015, EMAAR raised the capital of its Egyptian subsidiary Emaar Misr For Development (EMFD.EGX) through an IPO by offering 600mn shares, generating gross proceeds of EGP2.28bn at an IPO price of EGP3.80/share, thus raising the number of outstanding shares to 4,619mn shares. EMFD stock was listed on the Egyptian Exchange (EGX) on 5 July 2015. Moreover, EMAAR targets to monetize its core assets in international markets, including Turkey and India, to provide further growth capital and create significant value for its shareholders.
At the end of December 2015, EMAAR’s unutilized land bank stood at 169mn sqm in its international markets, of which 75% (126mn sqm) is related to EMAAR’s Saudi associate Emaar the Economic City (EEC) (4220.TDWL) and 18% (30.11mn sqm) belongs to its Indian associates. EMAAR’s major subsidiaries in Turkey, Lebanon, Pakistan, Saudi Arabia and Egypt own jointly 12mn sqm, representing 7% of EMAAR International land bank. Moreover, EMAAR has presales backlog of AED11.5bn for its international operations, which will enhance its top line over the coming three years. EMAAR’s international assets accounted for 30% of the company’s total assets as of 30 December 2015.
Using DCF and NAV methods, we set our EV for EMAAR International subsidiaries at AED9.9bn (AED1.39/share), considering only the following major subsidiaries:
• Emaar Turkey, a 100% owned by EMAAR– Turkey.
• Metn Renaissance, a 65% owned by EMAAR– Lebanon.
• Emaar Dha Islamabad Limited (EDIL), a 100% owned by EMAAR– Pakistan.
• Emaar Giga Karachi Limited (EGKL), a 73.1% owned by EMAAR– Pakistan.
• Emaar Middle East (EME), a 61% owned subsidiary by EMAAR.
• Emaar Misr For Development (EMFD.EGX) , 89% owned by EMAAR– Egypt.
Structure of EMAAR’s International Operations
Canada
USA
Morocco
Italy
Egypt
Jordan Lebanon
Syria
Pakistan
India
Turkey
Saudi Arabia
Source: Amchats, MubasherTrade Research
EMAAR’s International footprint is extended to more than 10 regional and global markets
Source: Company’s reports
International Major Subsidiaries (considered in our valuation)
Other Subsidiaries Associates & Affiliates
Emaar International
Emaar MGF-India48.86% (JV with MGF)
India
CCCPL, EHTPL, BHLPL, Hyderabad-India74% (JV with APIC)
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 19
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
TurkeyAED1,885mn
19.0%
LebanonAED348mn
3.5%
PakistanAED504mn
5.1%
EME-KSAAED954mn
9.6%
Emaar Misr - EMFDAED6,238mn
62.8%
Total EV of AED9,929mn
EMAAR International Operations | Valuation
Emaar Misr EV came in atAED6.3bn, representing 63% of EMAAR International total valuation
Source: MubasherTrade Research
The bulk (68%) of EMAAR International valuation comes from the development properties segment
Source: MubasherTrade Research
Our EV for EMAAR International major subsidiaries came in at AED9.9bn (AED1.39/share): We set our EV for EMAAR International major subsidiaries in Turkey, Lebanon, Pakistan, Saudi Arabia, and Egypt at AED9.9bn (AED1.39/share) using the DCF method for the projects that have a master plan and sufficient details published by the company. As for unutilized land, we used net asset value method (NAV) for raw land evaluation. Our valuation yielded a proportionate EV of AED8.7bn (AED1.21/share), if we consider the minority stake of EMAAR subsidiaries.
Emaar Misr has the lion’s share, representing 63% of our valuation for international subsidiaries. Emaar Misr is followed by Emaar Turkey with an EV of AED1.9bn, representing 19% of our valuation for international subsidiaries. On a segmental basis, the development properties segment represents 68% of our valuation.
Conservatively speaking, we have considered only the under-development units in Turkey, Lebanon, Pakistan and Saudi Arabia in our valuations using a DCF method, while the remaining raw land plots were considered in our valuation according to NAV. Exceptionally, we evaluated Emaar Misr using the DCF method for all planned unsold units added to under-development units as the company has already published the entire master plan of its ongoing projects (Marassi, UTC and Mivida). That said, the planned unsold units across all countries are not considered in our forecasts, except for Egypt.
Retail, office and hotel segments represented 23%, 4.4% and 4.6% of our valuation, respectively. We derived the net value of the unutilized land plots, which are owned by EMAAR’s international subsidiaries, at AED1.96bn, using the NAV model after applying a discount factor that considers our
expectation for utilization period. This NAV valuation implies a blended price of AED265/sqm for gross land area. EMAAR’s proportionate ownership in this raw land amounted to AED1.4bn (AED0.20/share)
We built our valuation for EMAAR International development on the following assumptions:
• The Cost of Equity (CoE) for Turkey, Lebanon, Pakistan, Saudi Arabia and Egypt assumed at 20.3%, 12.9%, 17.9%, 13.6%, and 22.4%, respectively. COE is calculated as follows: Adding US 10-year Treasury yield to inflation differential (between countries and USA), US equity risk premium (ERP), country risk premium as implied by its credit default spread, levered up by 30% to account for inherent volatility in equity returns).
• SG&A-to-presales of 8%, expensed in the same year of sale.
• Tax rates of 20%, 15%, 33% and 22.5% for Turkey, Lebanon, Pakistan and Egypt, respectively.
The following assumptions are assumed in case of insufficient details about the project:
• The average area for an apartment is 150 sqm, while the average area for a villa is 500 sqm.
• Appointing a contractor one year after sale.
• Payment plan extended over four years with a 20-30% down payment.
• Handover four years after presales. Mall segment AED2,297mn
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Page 20
Emaar Properties | UAE | Initiation of Coverage
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EMAAR International Operations | Valuation (Cont.’d)
Source: Company reports, MubasherTrade Research estimates, * Hospitality, medical center and school
More focus on NAV of raw land plots located in EMAAR’s international markets
AED1,107/sqm
AED553/sqm
AED530/sqm
AED265/sqm
NLA
GLA
3.61
7.22Area
(mn sqm)
Before Discount After Discount
3,998 1,916
Net Value of land (AED mn)
Land locationArea (GLA)
mn sqm
Area (NLA)
mn sqm
Land price
(AED sqm)
Net Value of
land (AED mn)
Uti l i zation
period (Year)
Impl ied
Discount %
Net Value of land
after discount
(AED mn)
Per share
(AED/share)
Emaar
Properties
s take %
Propo. EV
(AED mn)
Per share
(AED/share)
Turkey - Raw Land 0.49 0.245 1,285 233 5 44% 130 0.02 100% 130 0.02
Lebanon - Raw land 0.33 0.165 3,670 476 5 30% 332 0.05 65% 216 0.03
Pakistan - Raw land in Karachi -EGKL 3,670 387 5 40% 232 0.03 73% 170 0.02
Pakistan - Raw land in Islamabad -EDIL 918 372 5 40% 223 0.03 100% 223 0.03
KSA - Raw land in Jeddah Gate - EME 2,940 422 15 55% 191 0.03 61% 117 0.02
KSA - Raw land in Al Khobar Lakes - EME 980 1,290 20 62% 490 0.07 61% 299 0.04
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Page 21
Emaar Properties | UAE | Initiation of Coverage
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EMAAR International Operations | Business Model
Vast presales backlog and unutilized land bank to drive EMAAR’s international revenues at a 4-year CAGR (2015-2019) of 16.8%; 80% of presales backlog is concentrated in Egypt: We expect revenues from EMAAR’s international subsidiaries to grow at a 4-year CAGR (2015-2019) of 16.8%, supported by vast deliveries in Egypt and Saudi Arabia. We expect Egypt would represent 55% of EMAAR International revenues over 2016-2019. EMAAR’s total presales backlog stood at AED37.3bn at the end of 2015, 31% (AED11.5bn) of which came from its international operations. We highlight that Egypt represents around 80% of international presales backlog, 58% of under-construction units, and 66% of its to-be-developed units. Furthermore, we believe EMAAR’s vast unutilized land bank related to its international subsidiaries will enhance its operations over the coming years. The company owns unutilized land bank of 169mn sqm in its international markets through its subsidiaries, associates, and JVs. EMAAR’s international subsidiaries have 12mn sqm of unutilized land bank at the end of December 2015, 54% of which is located in Egypt.
Gross profit margin of international developments to recover on delivering higher margin developments in Egypt and Saudi Arabia; developing recurring revenues generating assets should boost margins in the long run (beyond 2020): Generally, EMAAR recognized a lower profitability margin in its international developments as purchases of the international land plots are made in cash, unlike the UAE, which were granted to the company. That said, the gross profit margin of EMAAR International developments came in at 9.3%, 27.6%, and 28.4% in 2013, 2014 and 2015, respectively. However, we expect that delivering units with higher quality and margin in Egypt and Saudi Arabia will improve the gross profit margin of international development to 36% and 41% in 2016 and 2017, respectively. We highlight that
Emaar Misr had a significant margin contribution over the last three years. Excluding Emaar Misr, EMAAR International developments would have recognized a gross profit margin of -11%, 24%, and 26% in 2013, 2014, and 2015, respectively. According to the company’s estimates, EMAAR International subsidiaries are expected to deliver 12,137 units between 2016 and 2019 with a substantial contribution from Egypt, which should represent 60% of units delivered by EMAAR International subsidiaries over the coming three years. Meanwhile, EMAAR plans to develop a number of considerable investment properties and hotels, which could boost its international profitability and enhance the company’s valuation over the long run. Generally, EMAAR targets a minimum equity IRR of 15% on non-property development businesses.
90% of EMAAR’s released units were sold by its international subsidiaries: By end of December 2015, EMAAR had sold a cumulative 90% of units offered for sale by its international subsidiaries. This impressive performance was led by its Egyptian subsidiary Emaar Misr which sold a cumulative 8,111 units, representing 96% of total released units since the start of its operations in 2005. On the other hand, in Saudi Arabia, clients responded well to the company’s launched units, which enabled EMAAR’s Saudi subsidiary Emaar Middle East to sell 90% of all released units since inception.
66% of to-be-developed units are concentrated in Egypt
Egypt has the lion’s share of international revenues contribution
Profit margin of international operations is set to improve over the coming years
Source: MubasherTrade Research Source: MubasherTrade Research
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Page 22
Emaar Properties | UAE | Initiation of Coverage
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EMAAR International Operations | Emaar Turkey
In June 2006, EMAAR’s wholly-owned Turkish subsidiary Emaar Turkey established its first office in Istanbul. The developments that EMAAR accomplished in Turkey consequently include the following:
(1) Tuscan Valley: Located in Büyükçekmece, Western Istanbul, Tuscan Valley is merely 20 km away from Ataturk International Airport and 50 minutes far from Istanbul's city center. Tuscan Valley constitutes of a variety of 19 different types of accommodations, totaling 493 villas, townhouses and apartments with areas ranging from 149 sqm to 940 sqm. Moreover, this development encompasses 25 stores and approximately 3,700 sqm of leasable commercial area. The first two phases of the project have been delivered and occupied in 2009.
(2) Emaar Square: Emaar Square is located in the Çamlıca district on the Asian side of Istanbul. Its location is remarkable, being in one of the prime areas in the city center and near various transport stations including a 900-meter-far metro station and 25 km away from the airport. Emaar Square spreads over a land area of 67,000 sqm. Sales in Emaar Square commenced in January 2013, receiving a strong response for both residential units and retail spaces. We highlight that Emaar Turkey acquired the land of Emaar Square for USD403mn. The project, which is set for completion in 2016, features the following:
• 1,073 residential units.
• 44,000 sqm of office space, accommodating around 4,000 professionals.
• Five-star ‘The Address’ Hotel (183 rooms).
• Shopping mall with 150,000 sqm of total rentable space, 65% of which is pre-leased. This mall features an underwater zoo and entertainment and recreation center, taking inspiration from EMAAR’s flagship retail asset “The Dubai Mall”.
Our EV for Emaar Turkey amounted AED1.9bn, 67% of which is associated with Emaar Square Mall: We have set our EV of Emaar Turkey at AED1.9bn (AED0.26/share) using the DCF method with no terminal value calculations for residential segment (all under development units). As for recurring revenues generating assets (mall, office space, and hotel), we used the DCF method and our terminal value for these assets was determined using a terminal growth rate of 2%. Finally, we used the net asset value (NAV) approach to evaluate the remaining unutilized land located in Turkey.
The following are further details on the valuation of Emaar Turkey’s projects:
Emaar Square Mall: According to JLL, Turkey’s gross leasable retail area (GLA) stood at 10.9mn sqm at the end of 2015 across 368 units. By the end of 2018 and with expected additions of 2.8mn sqm, Turkey’s retail area is expected to reach 13.7mn sqm across 442 units. As for retail market in Istanbul, the total shopping center’s GLA reached 4mn sqm across 108 units. The prospect for shopping center development is expected to be strong during the 2015-2018 period with a total stock of retail
area reaching 5.4mn sqm across 140 units as of end-2018. Prime monthly rental rate registered EUR90/sqm, which translates into AED367/sqm or an annual rate of AED4,403/sqm. Emaar Square Mall (150,000 sqm), one of the major pipeline retail project in Istanbul, is expected to start operations by the end of 2016, with an expectation to add on average AED660mn of rental income each year, according to our estimates. Using the DCF method, our valuation for Emaar Square malls came in at AED1.8bn (AED0.29/share).
We based our valuation on the following assumptions:
• Start-up date of operations: 2017 (conservative assumption).
• Monthly rental rate of EUR90/sqm, in line with the average prime market rate in Turkey without applying an escalation rate over our valuation horizon.
• Despite the depreciation of the Turkish lira (TRY) against the US dollar (USD), currency risk was not considered in our valuation as the retail leasing transactions in Turkey are implemented on EUR and USD basis for both shopping centers and prime shopping streets (i.e. an implicit currency hedge).
• Perpetual occupancy rate of 85%.
• Gross profit margin of 68%, in line with 2008-2015 average gross profit margin of Akmerkez Gayrimenkul (AKMGY TI). Turkish commercial real estate developers generate most of their revenues from shopping malls based in Istanbul. We note that gross profit margin is notably lower than EMG’s average gross profit margin of 82.9% over 2012-2015.
Tuscan Valley is merely 20 km away from Ataturk International Airport, while Emaar Square is located in the Çamlıca district
Emaar Square Mall represents 67% of our valuation for Emaar Turkey
Source: Google Earth, MubasherTrade Research Source: MubasherTrade Research
Asian side of Istanbul
Emaar Square Western side of Istanbul
Tuscan Valley
1,885
1,270 130 43130
313
0
400
800
1200
1600
2000
Emaa
r Sq
uar
eM
all
Emaa
r Sq
uar
e-O
ffic
e
Emaa
r Sq
uar
e-H
ote
l
Raw
lan
d(0
.5m
n s
qm
)
Dev
elo
pm
ent
pro
per
ties
Tota
l EV
-Tu
rkey
EV (
AED
mn
)
• SG&A as a percentage of total revenues: 8%, which is close to the SG&A-to-revenues ratio of Akmerkez Gayrimenkul. This is higher than Emaar Malls’ SG&A-to-revenues of 7.4% over 2012-2015.
• Conservatively speaking, we ignored the rental income accruing due to turnover rents, specialty leasing, sponsorship and outdoor area.
• A tax rate of 20%, cost of equity of 20.3%, and a terminal growth rate of 2%.
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 23
Emaar Properties | UAE | Initiation of Coverage
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EMAAR International Operations | Emaar Turkey (Cont.’d)
Emaar Square Hotel
As discussed above, Emaar Square project features a five-star hotel, The Address Hotel, which is set to open in 2016 with 183 rooms. Hotel rooms and suites are located in the first nine levels of Emaar Square in Istanbul which was ranked as the third most visited city in Europe and the fifth in the world, according to the MasterCard Global Destination. Moreover, according to JLL, Istanbul has over 48,000 rooms in 489 graded hotels as of December 2015. The market is traditionally dominated by the upscale and upper-upscale hotel segments as five-star hotels hold a market share in excess of 48.5%. The total room stock in Istanbul is expected to increase by 15% by the end of 2016.
Using the DCF method, our conservative valuation (EV) for the hotel amounted to AED43mn (AED0.01/share). Taking into consideration the concern of geopolitical risk, the valuation is based on the following assumptions:
• Start-up date of operations: 2017.
• Terminal growth rate: 2%.
• SG&A-to-total revenues: 13%.
• ADR: EUR126, with stable outlook over our valuation horizon.
• The occupancy rate of this hotel is assumed to have a low initial occupancy rate of 50%, increasing over our valuation horizon to stabilize at 71% by the terminal year.
• Perpetual occupancy rate of 70%, in line with the average Istanbul hotel market over 2008-2015.
• F&B and other revenues: 140% of room revenues.
Emaar Square Office Area
Using the DCF method, our valuation for Emaar Square Office Area amounts to AED130mn (AED0.02/share). The valuation was based on the following assumptions:
• Start-up date of operations: 2017
• Monthly rental rate: EUR35/sqm with a stable outlook over our valuation horizon.
• Occupancy rate: 85%, in line with average office market in Istanbul which is the most developed office market in Turkey providing approximately 80% of the country’s high-quality modern office stock, according to JLL.
• Tax rate of 20% and a terminal growth rate of 2%.
• We did not consider the FX risk in our valuation as most of the
developers favor dealing through USD-based contracts, wit no pressure from tenants to change the currency.
EMAAR’s unutilized land in Turkey
EMAAR still owned unutilized land of 0.49mn in Turkey as of December 2015. The company did not publicly reveal the location of this land; however, we believe that it is in the Tuscan Valley project. Emaar Square has a gross land area of 66,000 sqm and is set to be completed by the end 2016. Our conservative valuation of this land is USD35.5mn (AED130mn). We based our valuation on a current land price of USD350/sqm for net saleable land area which represents 50% of gross land area. This price is determined according to the current price of land, allocated for villa building in the Büyükçekmece district in Istanbul. Additionally, this price is in line with our “sub-developer model” with a net margin of 20%. A full utilization of this land is expected to be in five years. Accordingly, we have applied a discount factor of 44% to land valuation after deducting Tax and SG&A.
Residential Segment
We assumed the under-developed units in Turkey will be sold over four years payment plan as the handover is triggered four years after sales. In view of that, our valuation for sold under-development units stood at AED313mn (AED0.04/share).
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Page 24
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
EMAAR International Operations | Emaar Lebanon & Pakistan
Emaar Lebanon
Lebanese “Metn Renaissance”, a 65%-owned subsidiary of EMAAR, was established in 2009, developing a residential community known as “BeitMisk” in Beirut. Set on the mountains, this project spreads over 655,000 sqm, revolving around a vast area of retail and public facilities. Moreover, 70% of the project consists of green space.
By the end of December 2015, the project still had raw land of 0.33mn sqm with 228 units to be developed. Up until December 2015, 75% of the units were successfully sold.
Our EV for “Metn Renaissance” came in at AED348mn, most of it is concentrated in the unutilized land valuation: We valued the EV of Lebanese EMAAR’s subsidiaries “Metn Renaissance” at AED348mn (AED0.05/share), 96% of which comes from the raw land’s NAV, which stood at 0.33mn at the end of December 2015. The valuation is based on the following assumptions:
• We used an average price of USD2,500/sqm for units and USD1,000/sqm for raw land.
• We evaluated the unutilized land area of 0.33mn sqm using the NAV approach. Therefore, planned units (76 units) were not taken into consideration in our assessment.
• In our NAV model, we assume that the project will be fully utilized over five years as 50% of the land has been already utilized from 2009 through 2014. These assumptions resulted in an estimated land value of USD91mn (AED332mn).
Emaar Pakistan
In 2005, EMAAR established subsidiaries in Islamabad and Karachi to develop two projects with strategic local partners. The “Canyon Views” project in Islamabad is developed by Emaar Dha Islamabad Limited (EDIL), a 100%-owned subsidiary of EMAAR. The “Crescent Bay” project in Karachi is developed by Emaar Giga Karachi Limited (EGKL), a 73.1%-owned subsidiary of EMAAR. By the end of December 2015, EMAAR had sold 70% of its offered-for-sale units, while 30% (498 units) remained us-sold. Moreover, the company still owns unutilized land of 1.65mn sqm in Karachi and Islamabad.
Canyon Views in Islamabad
According to REIDIN, The Highlands and Canyon Views spread over 1000 acres (4.2mn sqm), consisting of 4,500 units (2,650 townhouses and villas and 1,850 units) in mid-rise buildings in diversified architectural styles with easy access to amenities, including retail centers, community club houses, parks, lakes, schools and mosques. Moreover, the Highlands development is located within the Defense Housing Authority Islamabad (DHAI) Phase 1 extension and Canyon Views is located within the DHAI Phase 2 extension. We evaluated the raw land in Canyon views at a price of USD250/sqm, utilizing a cost of equity of 17.9%. Moreover, we assume that this land bank will be utilized over the next five years.
Crescent Bay in Karachi
Crescent Bay, a 453,600-sqm complex located in Karachi’s DHA Phase 8 and in close proximity to the DHA golf course, consists of high- and mid-rise residential towers that provide over 4,000 residential units, offices, a shopping center and a five-star beach hotel. Moreover, we assumed a land price of USD1,000/sqm for the valuation of unutilized land in Crescent Bay in Karachi, depending merely on the average of current land
price in DHA phase 8. However, we believe that Crescent Bay land price may be higher due to its impressive location and sea view. It is significant to highlight that we evaluated the “under development” units using DCF and a payment schedule of 48 months. In addition, we evaluated the current unutilized land without considering the planned units over the coming years. Finally, according to construction progress on satellite map, we concluded that around 20% of EMAAR total unutilized land in Pakistan (1.65mn sqm) is located in Karachi, while the remaining 80% is located in Islamabad.
Our EV for Emaar Pakistan subsidiaries came in at AED504mn (AED0.07/share): Considering the abovementioned assumptions, our valuation for Emaar Pakistan came in at AED504mn (AED0.07). However, if we consider the minority stake in EGKL, EMAAR’s proportionate EV would stand at AED435mn (AED0.06/share). It is important to note that the selling price of Canyon Views project stand at USD500/sqm for BUA, while the land plots have price of around USD250/sqm.
The BeitMisk development combines 13 plots spread over 655,000 sqm of steep topography
NAV of raw land represents 96% of Metn Renaissance valuation
Raw land is the largest contributor to our valuation for EMAAR investment in Pakistan
Crescent Bay has more than 4,000 units, while Canyon views encompasses 4,250 units
Source: Google Earth, MubasherTrade Research Source: MubasherTrade Research Source: MubasherTrade Research Source: Google Earth, MubasherTrade Research
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EMAAR International Operations | Emaar Middle East - Saudi Arabia
Emaar Middle East (EME), a 61%-owned subsidiary of EMAAR, develops prime real estate featuring residential, commercial, retail, hospitality, and leisure components in Saudi Arabia. EME has two flagship integrated communities, namely “Jeddah Gate” and “Al Khobar Lakes”. Moreover, EME is also offering the high-end “Emaar Residence at Makkah Clock Tower” in the Holy City of Makkah. At the end of December 2015, EMAAR had unutilized land of 3.24mn sqm in Jeddah Gate and Al Khobar Lakes. Furthermore, up to December 2015, 90% of a total offered units were sold, leaving only 10% (94 units) unsold.
Our EV for EME came in at AED0.95bn: We have set our EV for EME at AED0.95bn (AED0.13/share) using the DCF method for under-development units and NAV for raw land. The following is a detailed discussion of EME developments and valuation:
Jeddah Gate is located in Jeddah's new downtown, spreading over 413,000 sqm of land. This project will comprise 4,000 residential units in addition to 230,000 sqm of commercial space and 75,000 sqm of gross leasable area for retailers.
EME has handed over homes in Abraj Al Hilal 1 (273 apartments), the first residential development in Jeddah Gate, starting operations in 2007. Additionally, the company launched
“Abraj Al Hilal 2” (308 units) in February 2013 at an average selling price of SAR8,000/sqm. In May 2013, EME had awarded the construction contract for the Abraj Al-Hilal 2 residential complex in Jeddah Gate to Azmeel Contracting & Construction Corporation. In June 2014, EMAAR launched ‘Emaar Square’ development, its first commercial project in Jeddah Gate, which was met with strong demand from investors and sold out in the first few hours of its launch. This is explained by the large gap in Jeddah for a vibrant ‘Central Business District’ that offers luxury commercial real estate space. In August 2014, EME had awarded a SAR150mn contract to Arabian Construction Company (ACC) for the development of “Emaar Square”, spanning over a BUA of 45,000sqm across three low-rise buildings. Currently, “Emaar Square” is still under construction and is expected to be delivered in 2016. Moreover, in November 2015, EME has commenced sales in its third development in Jeddah Gate “Emaar Residence” which is a cluster of three high-rise towers featuring 283 residential units, including luxurious penthouses.
In view of the unutilized land valuation in Jeddah Gate, we assumed SAR3,000/sqm, according to Coldwell Banker valuation for the land owned by Alandalus Property (4320.TDWL) in “Old Airport District” where Jeddah Gate project is located. It is important to highlight that EMAAR launched 918 units for sale from 2007 until 2015 in Jeddah
Gate. However, we expect EMAAR will accelerate its launches in this development over the coming years. Accordingly, we assume that this project will be fully utilized after 15 years. As for the third phase development in Jeddah Gate (Emaar Residence), we set our EV for this development at AED70mn (AED0.01/share), assuming that the average saleable area per unit is 150 sqm with a current selling price of c.SAR9,300-9,350/sqm without applying any price escalation rate over the coming years. We assume the units will be sold out by the end of 2017 and that the handover will be triggered by the end of 2018. Our EV for “under development” units in Emaar Square and Abraj Al Hilal 2 is estimated at AED203mn (AED0.03/share).
Al Khobar Lakes is a premier master-planned community on 4.3mn sqm in the Eastern Province. Its first phase covers 2.6mn sqm with 80,000 sqm of lakes and consists of over 2,000 private villas in nine villages with retail and leisure amenities, spanning over 110,000 sqm. In addition to educational complexes spanning over 28,000 sqm. EME has handed over its first residential cluster “Al Nada Village” which was launched for sale in 2008. Al Khobar Lakes is located just 43 km away from King Fahd International Airport and in close proximity to Al Khobar City, Dhahran and Dammam.
Conservatively speaking, we assumed a price of
SAR1,000/sqm for raw land in Al Khobar Lakes development. We also highlight that the current land price for land plots that are offered for sale in Al Shu’la Neighborhood where EMAAR’s Al Khobar Lakes development is located, ranges from SAR1,400 to SAR1,900/sqm. On a conservative basis, we assume that the land will be fully utilized over 20 years.
Emaar Residences at Makkah Clock Tower is locates on the 30th to the 41st floors of the Makkah Clock Royal Tower. Remarkably, the building is one of the world’s tallest buildings, reaching 601 meters with a highly-distinctive 40-meter clock. Moreover, Emaar Residences offers views of the Haram and the Holy Kaaba and has 316 fully-furnished apartments which are managed by luxury global hospitality operator Fairmont Hotels & Resorts through an exclusive agreement with EMAAR. The size of these apartments ranges from 40 sqm to 230 sqm, varying from studios up to a three-bedroom apartments. Although these units are available for sale, we could not reach exact details about the quantity owned or their sizes due to the lack of disclosure. That said, we did not consider this development in our valuation.
EMAAR has prime located developments in Saudi Arabia 71% of EME’s EV is attributed to unutilized land in Jeddah Gate and Al Khobar Lakes
Source: Google Earth, MubasherTrade Research Source: MubasherTrade Research
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EMAAR International Operations | Emaar Misr
Emaar Misr for Development (EMFD.EGX) is a 85%-owned subsidiary of EMAAR. It started operations in Egypt in 2005 as a joint venture between EMAAR and a local partner, but the latter was fully bought out in 2007. Emaar Misr’s land bank spreads over 15.4mn sqm divided between four locations, mainly in Cairo and the North Coast:
(1) Uptown Cairo (UTC) is a 4.5mn sqm residential development in Mokkatam hill in Cairo embracing retail, office and hospitality developments.
(2) Mivida is a 3.8mn sqm residential development in the eastern side of Cairo comprising retail, office and hospitality developments.
(3) Cairo Gate is a 0.7mn sqm mixed-use development still in the master planning phase located on Cairo-Alexandria Desert Road in West Cairo.
(4) Marassi is a 6.5mn sqm second-home development in North Coast, comprising of retail and hospitality developments.
At the end of 2015, Emaar Misr has sold cumulative gross internal floor area (GIFA) of 2.2mn sqm, generating cumulative net sales of EGP30.6bn since its inception. The company still has an under developed GIFA of 6.3mn sqm, while the unsold GFA areas amounted to 4.46mn sqm at the end of 2015. Moreover, Emaar Misr has unutilized land area of 6.5mn sqm across its four projects. In June 2015, Emaar Misr raised its
capital through an IPO, by an offering of 600mn shares, generating gross proceeds of EGP2.28bn, at the IPO price of EGP3.80/share, raising the number of outstanding shares to 4,619mn shares. Following the IPO, Emaar Misr bought back 90mn shares (15% of its IPO size) in August 2015, after the stock price drop post trading on EGX on 5 July 2015. Accordingly, the outstanding shares declined to 4,529mn shares, with a par value of EGP1/share and free float of 10.94% at the end of 2015. Around 70% of IPO proceeds is utilized in developing the non-residential components of its projects, with the bulk allocated to “Emaar Square” in Uptown Cairo, in addition to the planned marina and hotels in Marassi project and the downtown area in Mivida project. The remaining 30% will be used
to fund the pre-launching expenses of Cairo Gate project in addition to land bank replenishment. Emaar Misr is targeting the development of more than 250,000 sqm of retail gross leasable area, 150,000 sqm of office gross leasable area, and 4,000 hotel keys across its projects. According to management estimates, the company targets a minimum equity IRR of 16% on non-property development businesses. Furthermore, the recurring revenue generating assets could start significantly contributing to Emaar Misr’s revenues mix by 2023-2024.
Projects Details Projects Location
MARASSI • Land Area: 6.5mn
sqm • GIFA: 2.6mn sqm • Residential GIFA:
2.06mn sqm • Unsold Residential:
1.20 mn sqm
CAIRO GATE • Land Area: 0.6mn
sqm • GIFA: N/A • Residential GIFA:
N/A • Unsold Residential:
N/A
UPTOWN CAIRO • Land Area: 4.5mn
sqm • GIFA: 2mn sqm • Residential GIFA:
1.55mn sqm • Unsold Residential:
1.15mn sqm
MIVIDA • Land Area: 3.7mn
sqm • GIFA: 2.6mn sqm • Residential GIFA:
1.43mn sqm • Unsold Residential:
0.49mn sqm
Source: Emaar Misr, MubasherTrade Research estimates, * Till Dec 2015, ** For Emaar Properties (EMAAR.DFM) Source: Emaar Misr, MubasherTrade Research
Uptown Cairo Marassi Mivida Cairo Gate Total
Location Mokattam North Coast New Cairo 6th of October
Total land area sqm (mn) 4.5 6.5 3.8 0.6 15.4
Project composition %
Residential 79% 81% 82% N/A
Retail 11% 2% 5% N/A
Office 5% - 6% N/A
Hospitality 5% 16% 2% N/A
Others - 1% 5% N/A
Construction commenced 2007 2008 2009Master planning
phase
Target completion date 2026 2024 2021 -
Land bank paid Yes Yes Largely Paid
Fully paid except
land under
negotiation
Net sales since inception (EGPbn)* 6.5 12.3 11.7 - 30.5
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EMAAR International Operations | Emaar Misr (Cont.’d)
Our EV for Emaar Misr came in at AED6.24bn, representing (AED0.87/share) for EMAAR : We value Emaar Misr using a combination of DCF and land valuation methods, deriving an enterprise value of AED6.24bn (AED0.86/share). As for Emaar Misr’s equity value, we set our price target for Emaar Misr at EGP4.04/share as our valuation results in an equity value of AED18.3bn, considering the IPO proceeds and payment for treasury shares buyback. We used the sum-of-the-parts (SOTP) approach to value Emaar Misr, according to the following assumptions:
• In our valuation, we still used both the DCF and DNAV valuation methods. We used the former to evaluate the master-planned residential development without incorporating terminal value. On the other hand, we applied the latter on the undeveloped land (Cairo Gate and other saleable land plots in Mivida and Uptown Cairo “UTC”). As for recurring revenue-generating assets (malls, offices and hotels), we used a DCF model with terminal value calculated according to an exit yield of 12% for retail and office segments. The hotel segment’s terminal value was determined at average global and regional EV-to-EBITDA multiple of 10x.
• We use a WACC of 22.4% across all projects.
• In the NAV-based valuation, we value Cairo Gate at current market prices of land and applied a discount of 42%, assuming a utilization period of five years, starting from 2017.
• Conservatively speaking, we estimated that the selling price will stabilize over 2017-2019, entering into a cooling-off period. Starting 2020, we have assumed a price escalation rate of 5% per annum across all residential projects. Furthermore, we assumed the amount of sold GIFA will decline by 10% from 2017 to 2019 after
which it will regain momentum, growing by annual rate of 5%.
• We utilized tax rate of 22.5% and SG&A-to-presales of 5%.
Development properties represent 72% of our EV; UTC has the largest share: From a segmental point of view, 72% of our valuation of Emaar Misr is driven by the residential segment (EGP10.8bn), while hospitality, retail, and office account for 7%, 16% and 5% of the valuation, respectively. From a projects’ point of view, UTC valuation came in at EGP5.7bn (38% of total valuation), while valuation of Marassi, Mivida, and Cairo Gate stood at EGP4.7bn (31%), EGP4.2bn (28%), and EGP0.4bn (3%).
Emaar Misr’s DNAV stood at EGP2.91/share: Excluding the book value of land, we reached a conservative DNAV of EGP2.91/share, implying a P/DNAV of 0.95x based on the current market price and 4,529mn outstanding shares (excluding treasury shares). This DNAV implies a 39% discount rate to a NAV of EGP4.75/share. We estimated Emaar Misr’s DNAV using the net land area (NLA) of residential, retail, office and hotel across all current projects. Meanwhile, we used gross land area (GLA) for the Cairo Gate project, which is yet to have a master plan.
UTC valuation estimated at AED2.4bn, 38% of Emaar Misr’s total valuation
Source: MubasherTrade Research
The bulk (72%) of Emaar Misr’s valuation comes from the Development Properties segment
Source: MubasherTrade Research, *Development properties include NAV of Cairo Gate project and land plots that will be sold across all projects
We set the equity value of Emaar Misr at EGP18.3bn, implying price target of EGP4.04/share
Source: MubasherTrade Research, ' NAV of other assets include the land plots that will be sold in Mivida and UTC, ** Payments of treasury stocks buyback were excluded from IPO proceeds
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Emaar Properties | UAE | Initiation of Coverage
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Investment Rationale
• Diversified land bank in terms of location, featuring recurring revenue-generating assets.
• Benefitting from the ownership by EMAAR, the MENA-based premier developer.
• Introduced the best quality in the Egyptian property market in terms of building finishing quality.
• Anchoring its project by landmarks such as Emaar Square in UTC, Marassi Marina in Marassi and Mivida Downtown in Mivida.
• Clear earnings visibility on the vast presales backlog (EGP21.9bn at the end of 2015), in addition to a strong balance sheet with low leverage.
• Emaar Misr is set to benefit from an underpenetrated high-quality retail market, which will enhance the performance of its investment properties over the coming years.
• Emaar Misr targets to increase contribution from recurring revenue-generating assets to around 40% of its total revenues by the end of 2021.
• Tax exemption (until 2018) on Marassi and Mivida projects should enhance net margin.
• Experienced management team with a strong track record of delivering profitable growth.
• An opportunity to penetrate the middle income and upper middle income housing segments and its ancillary industries, to capitalize on the market’s current urgent needs.
Key Risks
• Emaar Misr’s properties are mainly targeting the high-end income segment, which is more exposed to the risk of price bubble.
• The difficulty to replenish its prime-located land bank at moderate cost.
• Restricted built up area (BUA) in Cairo Gate. However, Emaar Misr is trying to amend this limitation.
• The current low contribution of recurring revenue-generating assets makes Emaar Misr more vulnerable to any systemic shock in the real estate sector. However, we expect that the contribution of recurring revenues will increase gradually to reach 11.5% of Emaar Misr’s total revenues in 2019.
• The expected oversupply in hotel rooms in the North Coast could have a negative impact on Emaar Misr’s hotels performance.
Strong balance sheet with earnings visibility on a vast unsold residential area of 2.84mn sqm: Unsold GFAs amounted to 2.84mn sqm at the end of 2015, representing 56% of total gross floor area of company’s master planned projects. This provides a platform for a strong earnings visibility over the coming years, secured by a vast presales backlog, which stood at EGP21.9bn at end of 2015 (5,673 units). We note that 44.5% of historical presales backlog is concentrated in Mivida. Moreover, EMFD has a strong financial position with a net cash position of EGP1.4bn by end of 2015. This low leverage provides the company with headroom for additional borrowings to finance any potential investments.
Residential sales dominate the revenue mix, but recurring revenues are set to rise on notable progress of developing commercial assets: Revenues from development properties dominate EMFD’s total revenues in 2015. However, we expect recurring revenues from retail, office and hotel segments to increase to EGP2.8bn by 2021, representing 35% of total revenues, as per our estimates. We highlight that EMFD targets recurring revenues to be 40% of its total revenues by end of 2021. The growth in recurring revenues will be supported further by the execution of EMFD’s concrete plan to expand its recurring revenue-generating assets. We highlight that EMFD has also achieved a notable progress in developing its commercial assets and hotel portfolio. This is evident by the completion of the construction of a new traffic axis for “Emaar Square” project in UTC, which is accompanied by the commencement of paving the land of the project. Moreover, “Marassi Marina” is already launched for sales with expectation to start the construction of hotel expansion in Marassi by end of 2016, according to last announcement from the company.
EMFD maintained its position as the largest developer in presales but we remain concerned on the long-term outlook: EMFD could maintain its position as the largest listed developer in terms of presales amount of EGP8.6bn in 2015 (+21% YoY) through selling 1,869 units (+13% YoY), 37% of which were sold in “Mivida” project. However, sold floor area declined by 7.6% YoY in 2015 to 414,000 sqm. The lower sold GFA in 2015, accompanied by higher units sold affirm that the company moved toward minimizing area of offered units. This mitigates the concerns around weak Egyptian economic situation and sector lower growth momentum that prevailed during 2015.
Going forward, we expect EMFD’s presales to decrease by a 5-year CAGR (2015-2020) of -12.2% in view of the recent weaker growth momentum that prevails in the market in addition to expected lower remittances from Egyptian expats, particularly from the GCC countries. This should all negatively impact the Egyptian property sector and depress property developers’ presales. Moreover, the saturation of “Mivida” sales beyond 2017 would negatively affect EMFD’s presales growth, notwithstanding the effect of any potential new projects.
EMAAR International Operations | Emaar Misr (Cont.’d)
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EMAAR International Operations | JVs, Associates & Affiliates and Other Subsidiaries
Emaar IGO (Syria) Established in 2005, Emaar IGO is a 60%-owned subsidiary of EMAAR. This subsidiary is developing “The Eighth Gate”, a mixed-use master-planned communities in Damascus. We did not consider this project in our valuation due to the ongoing civil war in Syria.
Emaar MGF (India)
Historically, Emaar MGF was established in 2005 as a joint venture between EMAAR and MGF Developments. Emaar MGF, which is 48.86% owned by EMAAR, has vast unutilized land bank of 30.1mn sqm across Indian State Capitals/Cities as of December 2015.
Emaar MGF was established at the peak of Indian real estate market with an equity investment of USD1bn. Since inception through December 2015, Emaar MGF succeeded to sell 91% of all its total offered units (18,982 units). We highlight that Emaar MGF had IPO plans in 2008 and 2010 to repay loans as the company had low liquidity to finance project development and interest expense. However, the IPO was delayed twice, delivering a negative sentiment on the company. In June 2013, the Indian government announced that Emaar MGF violated the central bank's foreign direct investment rules under the Foreign Exchange Management Act (FEMA) as the company used overseas funds to buy agricultural land instead of developing projects. Accordingly, Emaar MGF is facing a potential fine of around USD1.3bn (AED4.7bn), according to "The Economic Times News". However, this potential fine is expected to be highly debatable.
EMAAR to reorganize its India unit through a demerger; positive decision amid the current headwinds in India: In mid April 2016, EMAAR announced its plan to end its joint venture with the Indian partner, Motor & General Finance Developments (MGF), through a demerger process for Emaar MGF. As per EMAAR's announcement, this reorganization will enable
EMAAR to implement a focused strategy for its real estate business in India and will allow the business to undertake future expansion strategies. It will also enable EMAAR to drive the development of ongoing projects in India. EMAAR did not provide further details or a time frame for the implementation of said demerger, and it is not clear how the projects will be divided between the two partners. We are not surprised with this news which was speculated in Indian media in July 2015, while EMAAR had declined to deny or confirm the split. However, Emaar confirmed its commitment toward the success of its current projects in India. In our view, this decision is considered a step that could enable EMAAR's associate to raise its capital through an IPO. Moreover, EMAAR may avoid the associate's problems related to the delays in construction and the inability to generate sufficient income to repay its debt. Potential fine is almost equal to its investment in India: This potential fine (AED4.7bn) is approximately equal to the total of EMAAR's investment and loans in Emaar MGF. Emaar's carrying value of investment in Emaar MGF reached AED2.1bn (AED0.29/share) by end of 2015, significantly retreating from AED3.8bn in 2007 as a result of huge losses during the last years. Although the company sold 91% of its offered units over the previous years with positive operating profit, most of these losses are mainly attributed to higher finance cost due to its high debt leverage. According to Reuters, Emaar MGF reported a lower net loss of INR3.53bn in 2015 compared to a net loss of INR3.84bn in 2014, according to the ICRA ratings agency. By end of 2015, EMAAR provided loans to its Indian associate, Emaar MGF, amounting to AED2.7bn (AED0.38/share), which is higher than the equity exposure of EMAAR in Emaar MGF. Thus, EMAAR has total investment of AED4.84bn (AED0.68/share) (equity and loans provided to Emaar MGF).
Emaar The Economic City “EEC” (Saudi Arabia) EEC (4220.TDWL) is a Saudi joint-stock company that was established and listed on the Saudi stock exchange (Tadawul) in 2006. EMAAR is the master developer of the King Abdullah Economic City (KAEC). • KAEC is the largest of the four economic cities
coming up with a long-term strategy plan adopted by the government to diversify the Saudi economy and reduce dependence on oil as a source of national income and to enhance the global competitiveness of the Saudi market.
• KAEC is strategically located on the Red Sea coast on an area of 168mn sqm with unutilized bank of 126.25mn sqm - between major shipping routes with access to over 250mn consumers across the region - 90 Km off the northern area of Jeddah city, between the two holy cities of Makkah and Madinah.
• KAEC will be a mixed-use development and will have six distinct components: 1. Seaport – covering an area of 14sqkm similar
in size to the world’s top 10 ports. 2. Industrial District – covering an area of 64.8
sqkm. 3. Resort – covering an area of 27sqkm 4. Financial Island – covering an area of 13.5
sqkm.
5. Residential District – on a fully integrated 48sqkm residential zone.
6. Educational Zone – covering an area of 5 sqkm.
• KAEC is targeting 2mn population by 2035.
• Total cost of building KAEC is projected at USD100bn.
KAEC is located on the Red Sea coast on an area of 168mn sqm with unutilized bank of 126mn sqm
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Emaar Malls Group (EMG)
Emaar Malls Group (EMG) (EMAARMALLS.DFM), the developer of premium shopping malls and retail assets, was established in 2005. EMG’s properties have been developed by EMAAR as an integrated part of its master plan developments. In 2014, EMAAR sold 15.4% of EMG via an IPO, yet EMAAR is still a major shareholder with a 84.6% stake. EMG’s portfolio of properties comprises four shopping malls and 30 community shopping centers, and other retail outlets in Dubai. These properties include some of the leading malls, entertainment and community integrated retail centers in Middle East, with a GLA of 5.92mn+ sq ft in Dubai. EMG’s mall assets include The Dubai Mall (TDM), Dubai Marina Mall, Souk Al Bahar, and Gold & Diamond Park. EMG’s expansion plan to add 845,000 sq ft of retail space is underway, which could boost its rental income to grow at a 5-year CAGR of 9% through 2020, with EBITDA margin impressively averaging 77% over 2015-2020. We expect
EMG’s expansions to sustain the impressive margin as the company’s current expansions are concentrated in Super Regional Mall Segment (TDM Fashion Avenue: 600,000 sq ft) and Community Integrated Retail Segment (Springs Village: 245,000 sq ft). These segments have impressive EBITDA margins of c.80% compared to other segments (Regional Mall and Specialty Retail Segments which have EBITDA margin below 75%). We highlight that EMG’s expansion plan (currently under-evaluation) to add 865,000 sq ft is not considered in our base-case valuation.
We set our EV for EMG at AED43.8bn, using DCF method and income capitalization method. Considering EMAAR’s stake (84.6%) in EMG, our valuation for EMAAR’s investment in EMG came in at AED37.1bn which translates into AED5.18/share for EMAAR. We highlight that potential plan “under evaluation” of adding 865,000 sq ft could add 8.9% or AED3.9bn to EMG’s EV.
• Expansion plan by super regional mall and community integrated retail segments could sustain impressive profitability margins.
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Sunday, 3 July 2016
Emaar Malls Group (EMG) | Valuation
Valuation models: We used two different valuation models to value EMG: (1) discounted cash flow (DCF) and (2) income capitalization.
DCF – EV of AED43.1bn: We first built a three-stage forecasting model: a high-growth 4-year period through 2019, a transitional 5-year period through 2024 then a stable-growth terminal period. We discounted the free cash flow to the firm (FCFF) at an average WACC of 9.6% and a terminal growth rate of 2%. As for equity value of EMG, DCF yielded price target of AED3.0/share.
Income Capitalization – EV of AED44.5bn: We applied a sustainable cap rate of 7.6% (WACC less TGR) to 2019e EBITDA, then discounted this value to the present. We reached EV of AED44.5bn with a fair value of EMG at AED2.40/share. We used 2019e EBITDA as the expansion plan will be completed in 2018 by opening Springs Village.
An average EV of AED43.8bn with a proportionate EV of AED37.1bn: Given the two valuation models, we reached an average EV of AED43.8bn. Considering EMAAR’s stake in EMG of 84.6%, proportionate EV amounts to AED37.1bn which translates into AED5.18/share for EMAAR.
Conservatively speaking, expansion plan “under evaluation” could add another AED3.9bn to EMG EV: We note that our forecasts do not incorporate the under-evaluation expansion plan of adding over 865,000 sq ft to EMG’s GLA, which we believe would be an upside risk to our PT. Utilizing direct capitalization method with a cap rate of 7.6%, we reached a valuation of AED3.9bn. Our valuation exercise for these potential expansions was built on the following conservative assumptions:
• Start of construction: 2017.
• Start of operations: 2020.
• Estimated construction cost: AED600/sq ft for gross floor area (GFA). We assume that
GLA will represent 45% of GFA.
• Effective rental rate in 2020: AED889/sq ft for super regional segment expansion (TDM Boulevard Expansion and TDM Zabeel Expansion). As for community integrated retail expansions (Al Reem), we expect rental rate of AED316/sq ft in 2020.
• Occupancy rate: 90% for super regional expansion and 85% for community integrated retail expansions.
• EBITDA margin: 75%.
• EGM’s Financial Performance: We expect that this expansion, once completed, could add AED658mn to total rental income, raising our 5-year CAGR (2015-2020) rental income from 9% to 11.9%.
Investment Rationale
• Benefiting from the high-growth consumer-oriented retail market of Dubai, one of the most attractive global economies.
• A strong, reputable and committed major shareholder and an excellent working relationship with the Government of Dubai. As a subsidiary of EMAAR, EMG enjoys the support of a strong, reputable and committed major shareholder.
• Strong balance sheet and flexible investment policy allows EMG to capitalize on growth opportunities.
• Delivering long-term growth through active tenant portfolio management, and maximizing returns from EMG’s existing portfolio through active asset management and expansions as well as development of new assets.
• The expansion plan of EMG is concentrated in the Super Regional Malls and Community Integrated Retail, which have higher EBITDA margin of c.80% vs. Regional Mall and Specialty Retail, which have margin below 75%.
• The growth expected in the UAE’s non-oil economy over the next 5 years is an opportunity for international retailers and could mitigate the risk of oil price drop.
• The Dubai “Expo 2020” is seen as future growth for tourism (20 million tourists per annum by 2020) and retail.
• The lifting of the Iranian sanction could enhance the Iranian tourist flow to UAE, which will positively affect EMG’s operations.
Key Risks
• Concentration risk is high with all EMG’s properties located in Dubai. Also, the financial performance is almost entirely dependent upon trading at The Dubai Mall (83% of revenues).
• Any oversupply of competing shopping centers in Dubai or the GCC region may adversely affect EMG’s rental income.
• Most of oversupply is dominated by extensions to existing Super Regional Malls, which could expose Dubai Mall (83% of EGM’s rental income in 2014) to stiff competition.
• Terms of indebtedness contain restrictions that may limit flexibility in operating the business.
• Continued instability and unrest in the MENA region may adversely affect the UAE economy if regional volatility leads to an outflow of expatriate residents or capital. This would in turn lead into a reduction in tourism to Dubai.
• The decline of oil prices and a strengthened USD against many of the world currencies is negatively affecting the overall spending of residents and tourists.
• Applying value-added tax (VAT) could reduce the tenant sales and consequently turnover rental income, recognized by EMG.
• Notable change in the tourists mix (higher proportion of Asian tourists versus declining number of tourists from Europe and Russia) could negatively affect tenants sales.
• Dubai is set to see additional 597,000 sqm of retail spaces. This raise the risk of oversupply and stiff competition as UAE is one of the largest countries in term of Retail space per capita in GCC and MENA.
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
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Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
Emaar Malls Group (EMG) | Valuation (Cont.’d)
Source: Ccompany reports, MubasherTrade Research estimates * This represents the valuation of EMAAR’s investment in EMG subdivided by EMAAR’s number of shares
Discounted Cash Flow (DCF) Sensitivity Analysis of EMG's Fair Value
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 33
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
Emaar Malls Group (EMG) | Business Model
Source: Company reports, MubasherTrade Research estimates
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 34
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
Emaar Retail
Emaar Retail, a 100%-owned subsidiary of EMAAR, manages a world-class portfolio of leisure assets and provides premium entertainment. Emaar Retail’s asset portfolio includes “Dubai Aquarium & Underwater Zoo”, “Dubai Ice Rink”, “KidZania®”, “SEGA Republic”, and “Reel Cinemas” at The Dubai Mall. Emaar Retail also operates “Reel Cinemas” and “Njoi” in Dubai Marina Mall.
1. The Dubai Aquarium & Underwater Zoo is one of the largest indoor aquariums in the world. This 10mn-liter tank, located on the Ground Level of The Dubai Mall, showcases hundreds of sharks and rays.
2. Dubai Ice Rink is an Olympic-size ice rink at The Dubai Mall offering world-class facilities for a variety of ice-skating abilities.
3. KidZania® is an 80,000 sq ft interactive mini-city in “The Dubai Mall” that provides children aged 4 to 16 with a safe, unique, and realistic educational environment that allows them to do what comes naturally to them (role-playing), while parents have peace of mind,
knowing their kids are learning in safety. KidZania® combines play with learning through an innovative approach.
4. Reel Cinemas is the largest cinema operator in the UAE with a portfolio comprising 22 screens at “The Dubai Mall”, six premier screens at “Dubai Marina Mall”, and ten screens at Reel Cinemas, The Beach.
5. SEGA Republic in “The Dubai Mall” marks the partnership of Emaar Retail with Japan’s SEGA Corporation, bringing exciting and unforgettable leisure experiences in a safe environment.
6. Njoi is the latest retail and entertainment destination in Dubai Marina, developed by Emaar Retail as an enjoyable, exciting fun hub for kids and the whole family. Njoi, which is located on the second floor of Dubai Marina Mall, offers over 8,000 sq ft of leisure activities, as well as birthday party facilities.
Our valuation of Emaar Retail & Leasing segment came in at AED6.4bn (AED0.89/share): Using direct capitalization method, we set our EV of Emaar Retail & Leasing segment at AED6.4bn,
implying a per share value of AED0.89/share. We applied a sustainable cap rate of 11.2% (WACC of 13.2% less TGR of 2%) to 2016e EBITDA. As per the historical performance of Emaar Retail over 2013-2015, we expect a gross profit margin of 75% and SG&A-to-total revenues of 19% over our valuation horizon. We noted that the performance of Emaar Retail & Leasing usually matches EMG’s performance as most of Emaar Retail asset portfolio is located in EMG’s malls. If we assign our estimated EMG’s revenues growth rate to the revenues of Emaar Retail & Leasing and using a DCF method with a perpetual growth rate of 2.0% and WACC of 13.2%, our valuation would increase to AED8.8bn (AED1.23/share). Conservatively speaking, we did not consider this method in our valuation.
Emaar Retail & Leasing is well positioned to benefit from Dubai strong retail and tourism sectors: Emaar Retail & Leasing segment recorded higher revenues of AED1,195mn in 2015 (+13% YoY). Meanwhile, the retail and leasing segment’s profitability improved significantly as evident in higher EBITDA margin of 65.2% in 2015 vs. 62.5% in 2014. We attribute
this strong performance to the growing tourist number in Dubai, added to the prime locations of Emaar Retail assets portfolio in The Dubai Mall which set another record with 80mn visitors in 2015—the highest footfall compared to any other mall all over the world. However, we highlight that low oil prices and a stronger USD versus many of the world currencies are two main negative factors affecting overall spending of residents and tourists. Furthermore, changes in consumer spending due to a fall in Russian tourists and squeezed Chinese spending (currency fluctuations) affected both household and tourists’ purchasing power, which could affect Emaar Retail’s operations negatively. Moreover, geopolitical risk remains a major concern.
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Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
Dubai Hospitality Sector
Hotel segment faces severe headwinds amid weakening market sentiment
The Emirate of Dubai is poised to become one of the world’s top tourism hubs, thanks to the government’s pro-tourism initiatives, availability of various leisure and entertainment options, a safe environment, quality-branded hospitality offerings, ease of access and modern infrastructure. According to MasterCard’s latest Global Destination Cities Index, Dubai, fourth in the world, is the top-ranked destination city in the Middle East and Africa region. Moreover, Dubai is ranked third according to “connectivity” (ability to attract visitors). Furthermore, it is ranked first amongst the international cities, in terms of “visitor arrivals per city resident”. Additionally, Dubai leads the world in terms of “international visitor spending per city resident”, estimated at USD4,668 in 2015. As a part of its tourism strategy and Dubai 2020 Vision for Tourism and as per The Department of Tourism and Commerce Marketing (DTCM), Dubai is seeking to attract 20mn international visitors annually by 2020. This could easily put the Emirate in the first place in terms of international visitors. Moreover, the UAE is expected to attract 25mn tourists between October 2020 and April 2021 to attend “Expo 2020”.
The UAE has become the most reliable safe haven in the region, following the political unrest of the Arab Spring, making it attractive to investors. Furthermore, the popularity of Emirates Airlines, which continues to expand its seat capacity and number of destinations, is facilitating tourist access to Dubai. With 78mn passengers passing through Dubai International Airport in 2015 and the number expected to cross over 100mn by 2020, we estimate Dubai will have to double its hotel room capacity versus 2012 levels to meet the growing demand from business and leisure travellers, which underlines its growth story over the long term. However, we believe that the eventual stability in the Arab
Spring countries could threaten growth in the UAE tourism sector.
Supply side
At the end of 2015, Dubai’s hotel capacity stood at 67,100 rooms, with an increase of 4,250 and 2,700 additional rooms in 2014 and 2015, respectively. Dubai’s hospitality segment is on track to boost its capacity with expected future supply of 33,536 additional rooms from 2016 to 2018, the majority of which is concentrated in the high-end segment. We highlight that the government encourages the expansion of mid-scale (affordable 3- and 4-star) hotel segment because:
(1) Dubai is one of the most expensive cities in the world for hotel stay. Therefore, focusing on affordable hotel segment will increase city’s competitiveness.
(2) Demand in the mid-income segment is assured by notable change in the tourists mix (higher proportion of Asian tourists versus a declining number of tourists from Europe and Russia). In the same context, we highlight that Chinese visitor numbers jumped 29% in Dubai to 0.45mn in 2015.
In view of that, Dubai government has launched several initiatives, encouraging the investor to build more mid-scale (affordable 3- and 4-star) hotel to achieve its goal of annual 20mn visitors by 2020. These initiatives include:
• Allocating land plots to 3- and 4-star hotel developments.
• Introduction of a four-year tax exemption on new 3- and 4-star hotels through waiving of 10% municipality room tax for four years upon completion of mid-level projects.
• Speeding up the approval processes for construction permits.
Dubai ranked first amongst international cities, according to visitor spending per city resident …
Moreover, it leads the world in terms of visitor arrivals per city resident
Source: Master Card
Source: Master Card
35,536 new rooms to enter the market between 2016-2018, 53% higher than 2015 stock
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Dubai has benefited from its leisure and business facilities, especially since introducing mega retail centers, such as “The Dubai Mall” and “Mall of the Emirates”, which started to attract a large number of guests for their popularity. Dubai’s hotel sector had a strong year, with a record breaking 14.3mn tourist arrivals in 2014 (+20% YoY), which is expected to reach 20mn in 2020, doubling its 2012 number, according to DTCM. This corresponded to a 1.6% YoY rise in average length of stay to 3.84 nights in 2014 as Dubai's hotels recorded 44.7mn guest nights (+7.4% YoY) in 2014. The growth continues in 2015 but with weak momentum as the tourist number increased by only 8.3% YoY to 14.3mn visitors. On the other hand, Dubai continues to attract an increasing number of visitors as evidenced by Dubai International Airport toppling London Heathrow for the top spot in international passenger traffic with 78mn passengers passing through the airport in 2015 vs. 70.5mn in 2014 (+10.7% YoY). This is expected to reach 100mn in 2020, according to Coalition of Airline Pilots Associations (CAPA). The UAE government target of tourist number implies an expected 5-year CAGR (2015-2020) of 6.9%, which is lower than 2015 tourist number growth of 8.3% YoY. Accordingly, we believe this target could be achieved despite of the current headwinds. Furthermore, if the number of Dubai passengers increase to 100mn in 2020, this will imply a 5-year CAGR (2015-2020) of 4.9%.
In view of that, we believe the increase in number of hotel rooms will not lead to oversupply in Dubai tourism segment as Dubai will double its both tourist number and hotel room stock compared to 2012 by the end of 2020. Moreover, if Dubai’s hotel and apartment stocks amount to 150,000 rooms and flats by the end of 2020 (according to our estimates), this will offer 54.8mn nights. On the other side, if Dubai succeeds in attracting 20mn visitors by the end of 2020 with an average length of stay of 3.8 nights, this means the nights required will be around 79
nights. Accordingly, the oversupply concern will be mitigated by a higher number of tourists. However, we highlight that these room additions should be concentrated in the more affordable segment to avoid the oversupply dilemma.
However, any further potential slowdown due to a stronger US dollar, an oil price drop, more stabilization in competitor market (such as Egypt), and rising geopolitical risk, all could increase the concern of oversupply over the coming years.
Operational performance
Although Dubai continues to record a strong performance on the tourist and passenger numbers, Dubai hotels posted a decline ADR in 2015 to USD278 (-6.7%) with a stable occupancy rate at 80%.We attribute this slowdown to:
• Vast competition amongst the current players as most of Dubai’s hotel stock is concentrated in the high-end segment.
• Oversupply exerting a downward pressure on the sector as 35,563 additional rooms will enter the market from 2016 to 2018. This represents 53% of 2015 stock level.
• Oil price drop reduced the spending on tourism from GCC tourists (23% of total tourists number in 2015 ex-the UAE).
• The Russian rubble devaluation led to lower tourist inflow from Russia. Furthermore, recent Chinese yuan decline is expected to put more pressure on Dubai’s tourism segment.
Moreover, we highlight that stabilization in competitive markets, such as Egypt, could threaten growth in the UAE tourism sector.
Passengers passing through Dubai International Airport are expected to cross over 100mn by 2020
Source: TRI
Dubai tourist numbers grew 8.3% YoY in 2015 …
Source: TRI
Source: CAPA
Dubai tourism indicators improved notably after the Arab spring …
… however, they started to lose their impressive momentum in 2014
Source: TRI
MENA, GCC and Western Europe make up 56% of Dubai visitors
Source: TRI
India and KSA are the largest contributors (both represent 22% of Dubai’s visitors)
Source: TRI
-20%
-10%
0%
10%
20%
30%
40%
50%
2011 2012 2013 2014 2015
Dubai tourism KPIs started to lose itsimpressive momentum
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Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
050
100150200250300350400
Jan
uar
y
Feb
ruar
y
Mar
ch
Ap
ril
May
Jun
e
July
Au
gust
Sep
tem
ber
Oct
ob
er
No
vem
ber
Dec
emb
er
Strong performance Weak performance dueto hot weather
Strongperformance
Rev
PAR
(U
SD)
RevPAR 2011 RevPAR 2012 RevPAR 2013
RevPAR 2014 RevPAR 2015
Dubai Hospitality Sector (Cont.’d)
Seasonality
Weather is the main factor of seasonality, with the peak season occurring between October and April due to the cooler winter weather, while lower performance is seen amid the summer heat between May and September. Furthermore, the month of Ramadan tends to reduce the hotel demand and affects performance.
Outlook
We expect Dubai will maintain its cemented position as one of the best tourism destinations, especially after securing Expo 2020. Furthermore, major infrastructure and development projects, including airport improvement and expansion, and the tram system could maintain Dubai’s position as one of the best tourism destinations globally. However, oversupply, a strong US dollar and a weaker oil price could all negatively affect Dubai’s tourism segment over 2016-2018. Furthermore, we expect occupancy rates to regain their normal level of around 75% over the long term.
Strengths
• Diversified economy with growing GDP. Additionally, Dubai’s strategic location remains a strong catalyst for its growth.
• Hosting the Expo will support the sector, as Dubai is expected to welcome 25mn international visitors during the event.
• The hotel sector is benefiting from the government’s initiatives to attract more tourists.
• The Arab Spring puts Dubai in a unique safer position vs. its peers, as international tourism traffic has been redirected from other unstable regional destinations, such as Egypt, Tunisia, Lebanon, Syria and Bahrain to Dubai. Both Abu Dhabi and Dubai are benefiting from the UAE's status as a safe haven, following political unrest in the wider MENA region. However, eventual stabilization in some of Arab Spring countries (e.g. Egypt) could threaten Dubai’s tourism sector.
• Dubai’s second airport Al Maktoum International at Dubai World Central could boost the total number of passengers by 200mn p.a.
• Dubai is set to benefit from expected unifying GCC visa (currently under study) that allows tourists to use one visa to visit all GCC states.
• Shift towards a more affordable mid-scale segment (3- and 4-star hotel) is underway, which should enhance the competitive advantage of Dubai’s hotels.
Weaknesses
• Hosting Expo 2020 will lead to further hotel development in 2016 and beyond, which could increase competition and oversupply, depressing the RevPAR.
• The summer heat between June and September heightens the seasonality of the UAE's hotel performance.
• Geopolitical risk remains a major concern.
• The effect of stronger US dollar and consequently a weaker UAE dirham (which is pegged to USD) is a key challenge for Dubai’s hotel segment, forcing hoteliers to reduce their ADRs in order to maintain strong occupancy levels.
• An oil price sharp decline negatively affects Dubai hotel segment as GCC visitors represented 23% of Dubai total tourists in 2015.
• Notable political stability in competing markets could lead to a revival in tourism activity in these countries.
• The upscale and upper-upscale hotel segments dominate Dubai supply and represent c.70% of total inventory of hotel rooms, which reduces the competitive advantages of the city amid the current headwinds.
Source: TRI
Dubai still beats its regional peers in terms of occupancy rate and ADR
Seasonality leads to weak performance from May to September
Weak performance in 2014 and 2015 was due to lower ADRs
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
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Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
EMAAR Hotel Portfolio
• Venturing into a more affordable segment (e.g. Rove Hotels) would help it maintain its solid performance, amidst rising challenges and competition.
• Dubai’s hospitability business in focus as the government embarks on an ambitious plan to double tourist numbers by 2020.
• Adding 3,374 rooms in the UAE over 2016-2018 is the main growth catalyst.
• Floating EHG via an IPO could result in a special dividend of AED0.09/share.
• Yet, 'The Address Downtown' hotel fire blaze could delay EHG’s IPO — Minimal impact on EMAAR; Negative for EHG.
Emaar Hospitality Group (EHG), the hospitality and leisure subsidiary of EMAAR, is a hotel owner, manager and operator of EMAAR’s hotel portfolio of 13 hotels (over 1,950 rooms) in local and global markets, 1,522 room of which is located in the UAE and Italy. The company owns and manages a diversified portfolio of hospitality assets, including hotels, serviced residences, golf retreats, a polo and equestrian club, lifestyle dining outlets, and the Dubai Marina Yacht Club. Accordingly, the company creates a robust portfolio of word-class hotel brands across the MENA region. These brands include:
• 5-star premium global brand “The Address Hotels and Resorts”.
• 5-star Armani branded hotels and resorts (the first Armani Hotel in Burj Khalifa and the second Armani opened in Milan, in Italy).
• 4-star premium upscale global brand “Vida Hotels and Resorts”.
• 4-star brand “Manzil”.
• Launched an affordable-stylish hotel brand “Rove”.
• EHG also manages several leisure and food and beverage (F&B) assets, including the Arabian Ranches Golf Club and The Montgomerie Dubai, the Dubai Polo & Equestrian Club, and the Dubai Marina Yacht Club.
That said, EHG has a portfolio of 10 currently operating hotels and resorts in the UAE and Italy with total rooms of 1,522. Moreover, the company has an expansion plan of adding 3,374 rooms in the UAE from 2016 to 2019, 712 rooms of which will be 100% owned by EHG, while the other 2,662 rooms will be added through a JV with Meraas under the “Rove Hotels” brand (formerly Dubai Inn). We note that EMAAR has many hotels in global and regional markets, such as Egypt, KSA, Turkey and India. All in all, EMAAR has a total of 13 hotels enclosing over 1,950 rooms, in addition to serviced apartments across local and global market.
In this section, we will focus on the valuation of EMAAR’s hotel portfolio in the UAE and Italy through EHG and Emaar Hotels & Resorts. The other hospitality investments are considered in EMAAR’s international developments under their related countries.
Source: Company’s report
The Address Downtown
(196 rooms)
The Palace Downtown
(242 rooms)
The Address Dubai Mall
(244 rooms)
The Address Dubai Marina
(200 rooms)
The ManzilDowntown (197 rooms)
The Vida Downtown (156 rooms)
The Address Montgomerie Dubai
(21 rooms)
Arabian Ranches Golf Club
(11 rooms)
Armani Hotel at BurjKhalifa
(160 rooms)
Armani Hotel at Via Manzoni (Milan.Italy)
(95 rooms)
The Address The BLVD –Downtown Dubai
(196 rooms)
The Address Sky View –Downtown Dubai
(166 rooms)
The Address Fountain View – Downtown Dubai
(193 rooms)
Vida Hills – The Greens
(157 rooms)
Vida Hills -Downtown Dubai
Emaar Hotel portfolio
Emaar Hospitality “Currently operating”
1,267 rooms)
Emaar Hotel & Resorts “Currently operating”
(255 rooms)
Planned Hotels “100% by Emaar”
(712 rooms)
Rove – Za’abeel
(420 rooms)
Rove – Port Saeed
(270 rooms)
Rove – OudMetha
(286 rooms)
Rove – Jaffliya
(270 rooms)
Rove – Al Wasl
(480 rooms)
Rove – Dubai Marina
(384 rooms)
Planned hotels “Rove” (JV with Meraas)(2,662 rooms)
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
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Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
Source: Google Earth, MubasherTrade Research
The Address Sky View
Vida Downtown Dubai
Manzil Downtown The Palace Downtown Armani Hotel Dubai
The Address Dubai Marina
The Address Montgomerie Dubai
The Address Fountain View The Address Dubai Mall Rove - Za'abeel
The Address Boulevard Hotel
The Address Downtown Dubai
EMAAR Hotel Portfolio | Locations of EHG hotel portfolio in the UAE
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Page 40
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
EMAAR Hotel Portfolio | Business Model
Hotel Portfolio
EMAAR hotel portfolio has maintained its impressive performance during the last years with an average annual occupancy rate above 80%. However, seasonality of the UAE hospitality sector still depresses the performance of EHG during Q2 and Q3 over the summer due to hot weather. Furthermore, excess supply in the market could mute growth if most of room additions are concentrated in the high-end segment.
Expansion plans
Although EMAAR’s hotel local portfolio is at a peak occupancy and ADR, potential growth is still evident via new capacity additions. Thereby, EMAAR expects to pursue an ambitious expansion plan in the hospitality segment, targeting to add 3,374 rooms during the period from 2016 to 2019. As Dubai targets to welcome over 20mn annual visitors by the end of the decade, EHG has vast expansion plan to complement Dubai’s tourism 2020 Vision. This expansion plan has two parallel phases: The first phase is to add 712 rooms solely by EMAAR in Downtown Dubai and the Green over 2016-2018. The second phase is tapping the upscale affordable segment to add 2,662 rooms under the new “Rove Hotels” brand through a JV with Meraas Holding over 2016-2019.
Adding 712 keys, solely by EMAAR over 2016-2018 will fuel growth in the hospitality segment: EHG will solely add 712 keys over 2016-2018, 78% (555 rooms) of which will be under “The Address” brand in Downtown Dubai as follows: (1) The Address “The BLVD” with 196 rooms, (2) The Address “Sky View” with 166 rooms, and (3) The Address “Fountain Views” with 193 rooms.
The aforementioned planned hotels represent 39% of the current portfolio in the UAE. Furthermore, EMAAR is adding “Vida Hills Hotel & Residences” in The Greens with 157 rooms. We highlight that all of the aforementioned hotels are 5-star hotels, except the “Vida Hills Hotel & Residences” which is a 4-star hotel. Despite the current challenges in Dubai’s tourism segment, EMAAR’s hotel portfolio still has a solid performance beating its local market. That said, we believe that these additions could fuel growth of EMAAR’s hospitality business over the coming years.
… Moreover, EMAAR is penetrating the affordable segment through “Rove Hotels” by adding 2,662 keys, which could support the solid performance”: EMAAR is set to benefit from tapping the more affordable tourism segment where the supply is limited. Therefore, EMAAR has joined hands with Meraas Holding to launch a new hotel brand “Rove Hotels” (formerly Dubai Inn), focusing on more affordable segment (4-star hotels) and targeting the under-supplied, mid-priced accommodation in Dubai as the large percentage of Dubai’s hotel supply is concentrated in the high-end segment at present. We highlight that Rove Za’abeel, the first property featuring 420 rooms in 14 floors, marks a significant progress in construction. Upcoming Rove Hotels properties will be located in Al Wasl, Port Saeed, Al Jafiliya, Oud Metha , Dubai Marina and Dubai Parks and resorts. That said, EMAAR is planning to add 2,662 rooms by adding six new 4-star hotels. Accordingly, 84% of EMAAR’s total planned rooms will be within the upscale affordable segment. Moreover, EHG targets to roll out Rove brand in 10 different locations inside and outside Dubai by 2020.
EHG has adopted a plan to strengthen its footprint across global growth markets, capitalizing on the strength of its existing brands: EHG is tapping other global markets to diversify its hotel portfolio. These diversification endeavors are evident in the company’s announcements during the last year. In May 2015, EHG announced its plan to strengthen its global footprint by adding other hotels in Nigeria and Bahrain under its “The Address Hotels + Resorts” and “Vida” brands. That said, EHG has signed management contracts for hotels and serviced residences in Nigeria and Bahrain with “Eagle Hills”, an Abu Dhabi-based private investment company. In September 2012, EHG had signed a management contract to operate a uniquely-designed resort near the world-famous “Masai Mara” in Kenya, under the flagship 5-star premium hotel brand of EMAAR, The Address Hotels + Resorts. On a conservative basis, these expansions in Nigeria and Bahrain are not factored in our valuation. Moreover, EMAAR plans to build “The Address Hotels + Resorts” in Egypt. EMAAR announced earlier that it expects to pursue an ambitious plan to open 10 new Armani branded hotels over the coming years in international markets. Furthermore, a new 190-room 5-star hotel under The Address Hotel + Resorts in Turkey is still underway and is set to open in 2016.
Source: Company’s report
Bull Case | 2,662 new rooms will be added under the “Rove Hotels” brand in addition to 712 rooms to be solely added by EMAAR; total rooms could reach to 4,896 rooms in 2020
Base Case | EMAAR to solely add 712 rooms in the UAE
1,522
4,896
1,172 786864
552
0
2,000
4,000
6,000
2015 2016 2017 2018 2019 2020
* The Address TheBLVD
* Rove - Za'abeel,Port Saeed and
Oud Metha
* The Address SkyView
* The AddressFountain Views
* Vida Hills Hotel& Residences
* Rove - Jaffliya
Rove DubaiMarina, Satwa
Rove- Dubai Parks
No. ofcurrent rooms
Added rooms each year (totaling 3,374 rooms) Target
No
of
roo
ms
1,5222,234
196516
0
1,000
2,000
3,000
2015 2016 2017 2018
The Address The BLVD * The Address Sky View* The Address Fountain
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Page 41
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
Floating Emaar Hospitality Group
EMAAR plans to list its hospitality unit (EHG) separately through an IPO, which was planned by end of 2015. However, the company delayed its plan and declared that the timing of the IPO will depend on market conditions. Although the hospitality segment has matured, the IPO of EHG becomes more challenging in the current market conditions. Furthermore, we believe that The Address hotel fire incident that occurred last New Year’s Eve could delay the floating of Emaar hospitality group.
EHG’s IPO could result in a DPS of AED0.09 if the company floats 15% of its shares: We expect EMAAR could raise some AED639mn from the EHG offering if the company floats 15% of its shares in the market (similar to Emaar Malls Group). This could result in a DPS of AED.09/share according to our base case scenario and a 100% payout ratio of offering proceeds. We believe the EV of EMAAR hotel portfolio in UAE and Italy stands at AED4.8bn (AED.68/share).
On a conservative basis, we have used the entire liabilities of EHG as interest-bearing debt to deduce the equity value. This implies a special dividend yield of 1.5%, according to the current market price.
Financial Summary
The notable tourism activities in Dubai have enhanced the performance of EHG over the last few years as Dubai has emerged as one of the best tourism destinations across the world. Furthermore, it is a safe haven and the best place to do business. However, it is exposed to seasonality as the performance of the UAE’s hospitality segment normally weakens during Q2 and Q3
(over the summer) due to rising temperature. Furthermore, excess supply in the UAE tourism market would mute growth if this supply is concentrated in the high-end segment.
Hospitality portfolio amongst the strongest players in the UAE: Against all odds, EHG has maintained its solid performance during the recent years, reporting stable revenues of AED1,677mn in 2014 (-0.4% YoY). This stable performance was mainly attributed to slightly higher food and beverage revenues (+1%) of AED998mn which offset declining room revenues (-3%) of AED679mn. This room revenues decline is mainly attributed to a slightly lower occupancy rate of 82% in 2015 vs. 83% in 2014. Moreover, Hotel portfolio ADR plunged 9% YoY in 2015, affected negatively by the current slowdown. We highlight that the hospitality segment accounted for 12.3%, 9.4%, and 5.7% of group revenues, gross profit, and EBITDA, respectively, in 2015. Going forward, we expect revenues to grow at a 5-year CAGR (2015-2020) of 11.7% compared to a 3-year CAGR (2011-2014) of 11.1%. This growth will be fueled mainly by adding 712 new hotel rooms to be added over 2016-2018. As for key performance, we expect ADR of EMAAR’s hotel portfolio should grow slightly at a 7-year CAGR (2015-2022) of 0.7% to AED1,372 in 2022. However, the average occupancy rate of the company’s hotel portfolio is expected to decline slightly to 80% by 2022 on rising competition. We assume a conservative growth rate for EMAAR hotel portfolio as the market is maturing in our view. On the profitability front, gross profit margin and EBITDA margin declined to 40.8% (-2.6 percentage points) and 19.8% (-10.37 percentage points), respectively, in 2015. Going forward, we believe that profitability margins will not exhibit substantial growth due to: (1) the current stiff competition among current players, particularly in the high-
end segment, (2) recent fuel price subsidies cut, and (3) higher labor costs. Accordingly, we expect gross profit margin to edge lower 39.3% in 2016.
The planned 712 rooms to represent 36% of 2022e revenues; while revenues from “Rove Hotel” to reach c.AED1.8bn by 2022:. According to our view, we believe these planned rooms could add total revenues of AED816mn, representing 36% of 2022 total revenues (excluding Rove hotels). Furthermore, we believe that Rove Hotel, if totally executed, could increase revenues of EMAAR hotel portfolio to an impressive level of AED4,019mn by 2022.
Despite rising rivalry, EHG realized some of the highest occupancy rates in the UAE, beating local peers: In 2015, EMAAR’s hospitality portfolio achieved an average occupancy rate of 82%, +2.1 percentage points above the average occupancy rate of the Dubai market (79.9%). Additionally, EMAAR hotel portfolio’s ADRs stood at AED1,307, outperforming the Dubai hospitality sector by 28%.
Sensitivity analysis for offering and distribution ratio of floating EMAAR hotel portfolio
Source: MubasherTrade Research
EMAAR beats the market on the ADR and occupancy rate front
Source: TRI, Company’s report
EMAAR Hotel Portfolio | Business Model (Cont.’d)
10% 15% 20%
Bull Case 0.08 0.12 0.16
Base Case 0.06 0.09 0.12
Bear Case 0.06 0.09 0.12Val
uat
ion
Sce
nar
io
Expected DPS (AED) Floating ratio of Emaar hospitality
1,2
09
1,2
34
10
22
1,2
46
1,4
25
1,3
07
80% 80% 80%
83% 83% 82%
70%
74%
78%
82%
86%
0
600
1,200
1,800
2,400
2013 2014 2015
Occ
up
ancy
rat
e %
AED
(A
DR
)
Dubai ADR (AED) Emaar hotel ADR (AED)
Dubai occupancy rate % Emaar hotel occupancy rate %
For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.
Page 42
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
(100.00%)(3.88%)
(4.70%) (8.65%) (4.94%)(9.02%)
-118%
-98%
-78%
-58%
-38%
-18%
2%
0
500
1,000
1,500
2,000
2,500
The AddressDowntown
The AddressDubai Mall
The PalaceDowntown
The AddressDubai Marina
The ManzilDowntwon
The VidaDowntwon
AD
R c
han
ge
AD
R (
AED
)
Q1 2015 Q1 2016 Change %
EMAAR Hotel Portfolio | Business Model (Cont.’d)
Profitability margins to stabilize over the coming years
Occupancy rate is stable across most of the EMAAR’s hotel portfolio
Source: Company’s report, MubasherTrade Research
Source: Company’s report
Source: Company’s report
Room additions will lead to stable long term growth over the coming years
By December 2015, 5-star hotel ADR approached AED1,500-2,000; 4-star hotel still below AED1,000
Source: Company’s report, MubasherTrade Research
Source: Company’s report
Source: Company’s report
… but occupancy rate was stable across most of the hotel portfolio
In Q1 2016, all of Hotel’s ADER plunged on current market weak conditions …
15%
25%
35%
45%
55%
0
1,000
2,000
3,000
4,000
2014 2015 2016e 2017e 2018e 2019e 2020e
mar
gin
%
AED
(m
n)
Revenues of hospitality Gross profit of hospitality EBITDA of hospitality
Gross profit margin % EBITDA margin %
0 500 1,000 1,500 2,000 2,500
The Address Downtown
The Address Dubai Mall
The Palace Downtown
The Address Dubai Marina
The Manzil Downtwon
The Vida Downtwon
ADR (AED)
2015 2014 2013 2012 2011
50%
60%
70%
80%
90%
100%
20
11
20
12
20
13
20
14
20
15
20
11
20
12
20
13
20
14
20
15
20
11
20
12
20
13
20
14
20
15
20
11
20
12
20
13
20
14
20
15
20
11
20
12
20
13
20
14
20
15
20
11
20
12
20
13
20
14
20
15
The AddressDowntown
The AddressDubai Mall
The PalaceDowntown
The AddressDubai Marina
The ManzilDowntwon
The VidaDowntwon
Occ
up
ancy
rat
e
-20%
0%
20%
40%
60%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Adding 196five starrooms
Adding 359five starrooms
Adding 157four star
rooms
Expansion plan(100% owned by Emaar)
Growth of Hospitality Revenues 2015-2020 CAGR 2011-2014 CAGR
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Page 43
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
The Address Downtown' hotel accident — Minimal impact on EMAAR; negative for EHG
The Address Downtown' hotel accident — Minimal
impact on EMAAR; negative for EHG
A huge fire had engulfed "The Address Downtown" hotel ahead of a New Year's Eve fireworks display. The fire lasted for almost 14 hours and damaged many rooms. Nonetheless, New Year's celebrations continued as well as related fireworks display in Dubai, just hours after the fire, which demonstrates Dubai's strong commitment to stimulate tourism.
The Address Downtown hotel is a 63-story building which offers sweeping city views across EMAAR's flagship Downtown Dubai. The hotel offers 196 rooms, including 25 suites and 626 serviced residences. The hotel's rooms represent 13.7% of EMAAR's total currently operating rooms (1,427 rooms) in the UAE. The building, which was topped out in 2008, is the 19th tallest building in Dubai.
Our assessment of the fire — Minimal negative impact on EMAAR (only AED0.01/share), but EHG's top line to deteriorate substantially in 2016 amid current slowdown: In our valuation for "The Address Downtown" hotel, we had estimated the pre-accident EV of "The Address Downtown" hotel at c.AED695mn (AED0.10/share). This represented 1.6% of EMAAR's market price
and the maximum negative impact in the case of a total loss of the entire hotel, which is not the case. We set the EV by using the discounted cash flow (DCF) model with stable outlook for occupancy rates and a perpetual occupancy rate of 80% in the terminal year. We used a WACC of 9.1% and terminal growth rate of 2%. On a conservative basis, we assumed that the hotel will be re-opened in 2017, hence eliminating its revenues in 2016. Accordingly, our EV declined to AED695mn (AED0.10/share), coming lower than pre-accident valuation by AED0.01/share.
Impact on financials: Although the cost of repairs will be paid by insurers, we expect a substantial negative impact on EHG as the hotel will likely lose revenues in the last four months of the high season (October-April). Tourism activities in Dubai usually peak in winter and decline to the lowest level in summer (June-September) due to the hot weather. We highlight that "The Address Downtown" hotel generated AED121mn of room revenues in 2015 and was the largest room revenues contributor to EHG's hotel portfolio in 2015.
Impact on EHG's offering plan: EMAAR plans to list EHG — its hospitality unit — through an IPO, which was previously planned for end of 2015. However, EMAAR delayed the IPO due to unsuitable market conditions. We believe this accident could delay the potential offering beyond 2016 until EHG regains its solid performance.
In our conservative view, repair works could last for nine months to be finalized by end of 2016: We highlight that EMAAR announced the appointment of Dutco Group to clear and restore The Address hotel. Moreover, the company affirmed that it is coordinating the process with other government agencies to speed up the restoration work of the hotel. The re-opining date is not yet determined by the hotel. However, If previous fire accidents in the UAE over the last few years are any precedent, we believe the substantial repairs could start after three months from the accident date after conducting full investigations. A case in point is what happened with "The Marina Torch" tower in February 2015, which took three months before repair work started. Furthermore, we expect that the repair works on the building will take up to nine months, similar to the "Tamweel Tower" in nearby "Jumeirah Lakes Towers". Thus, we excluded 2016 revenues of The Address Hotel from our valuation.
Source: MubasherTrade Research
The Address to contribute 14% of EHG 2017total revenues The location of “The Address Downtown Dubai”
The Address Downtown Dubai
Dubai Opera
Burj Khalifa Dubai Mall
Souk Al Bahar
Business Bay
The Palace Downtown Hotel
Tower GFA: 178,000 sqm# of hotel rooms: 196# of apartments: 626
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Page 44
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
EMAAR Hotel Portfolio | Valuation
Income valuation for hospitality
segment
Our base-case valuation came in at AED4.7bn (AED0.65/share): We set three scenarios for the valuation of EMAAR hotel portfolio (EHG and Emaar Hotels & Resorts). These three scenarios yield an EV range of AED4-7bn (AED0.56-0.98/share), using a cost of equity of 13.19% and WACC of 9.1%. Meanwhile, our base-case scenario resulted in an EV of AED4.7bn (0.65/share).
We base our three scenarios on the
following general assumptions:
We based our valuation on stable outlook for occupancy rate and declining ADRs due to the currently weak market conditions (higher USD and lower oil prices). Moreover, we see a notable supply of rooms which we expect will increase by a 3-year CAGR (2015-2018) of 14.5%, while tourist numbers could increase by a 3-year CAGR (2015-2018) of 7% at the best case scenario if Dubai achieves its target of attracting 20mn visitors per annum in 2020. Therefore, we expect strong competition among Dubai hoteliers, particularly in the high-end segment.
• That said, we cap our estimates for perpetual occupancy rate of all EMAAR hotel portfolio at 80% in our base case valuation, which matches the occupancy rate of Dubai hotel portfolio throughout the past years. Moreover, we assume a stable outlook for forward occupancy rates over our valuation horizon (2016-2021), excluding the terminal year. We expect the occupancy rate of Dubai hotel segment will return to normal level of 75%. However, EMAAR hotel portfolio always beat the sector on the occupancy rate front. Therefore, we assume perpetual occupancy rate for EMAAR hotel portfolio at 80% in the terminal years (2022).
• However, during the Expo 2020 duration (October 2020 to April 2021), we assume that
each hotel will achieve its highest level of occupancy rate and ADR.
• As for the hotels, namely “The Address Montgomerie Dubai” and “Arabian Ranches Golf Club” which have no disclosure about their KPIs, we assume a 50% occupancy rate during our forecast horizon.
• Due to the lack of information, the serviced apartments in EMAAR’s expansion plan is not considered in our estimates. Furthermore, we did not consider “Vida Hills Hotel & Residences - Downtown Dubai” as the company does not disclose the number of rooms.
As for expansion plans, we assumed the following:
• We anticipate a low initial occupancy rate of 60% for the new planned hotels to increase throughout the forecast horizon to stabilize at 80% in the terminal year in our base case scenario.
• Regarding capex, we assume capex per room for 5-star hotels at AED1.7mn, according to HVS, while capex per room for 4-star hotels is AED0.9mn. Additionally, we assume an equal percentage of construction is executed each year over the hotel construction period.
• We assume operating expenses (administration, payroll, energy and water) as a percentage of gross revenues at 57%.
• We assume furniture, fixtures and equipment (FF&E) as a percentage of gross revenues of 5% for 5-star hotels and 2.5% for 4-star hotels over our valuation horizon.
• We assume that maintenance capex will be equal to 50% of depreciation for EMAAR’s hotels portfolio.
• We assume SG&A-to-total revenues of 15.8% according to the historical performance of EMAAR’s hospitality segment.
According to our base case scenario, EV stands at AED4.7bn (AED0.65/share)
Source: MubasherTrade Research
Sensitivity of hotel portfolio valuation to sustainable occupancy rate and terminal growth rate
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Page 45
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
EMAAR Hotel Portfolio | Valuation (Cont.’d)
(1) Base case
Under our base case scenario, we value EMAAR’s hotel segment at an EV of AED4.7bn (AED0.65/share), implying an EV/room of AED2.09mn. Under this case, we consider the currently operating hotels only (1,522 rooms) in addition to the under-construction hotels (712 rooms), which are 100%-owned by EMAAR, namely “The Address The BLVD - Downtown Dubai”, “The Address Sky View - Downtown Dubai”, “The Address Fountain Views - Downtown Dubai” and “Vida Hills Hotel & Residences - The Greens”. The new planned hotel “Rove-Formerly Dubai Inn“ is not considered in our base case valuation. The valuation of “Rove - Za'abeel”, which is set to be opened soon, is also not considered in our base case scenario as the company declined to provide details of its profit share and who bears the construction cost in the JV with Meraas. We set our EV for this hotel at AED688mn
(AED0.06/share). In our base case scenario, we also assumed a perpetual occupancy rate of 80% and a terminal growth rate of 2%. Relatively speaking, our hotel’s intrinsic EV implies a 2015 EV/EBITDA multiple of 8.9x, which is below the average of our comparable universe of regional and global listed hospitality companies of 9.5x.
(2) Bull case
Under our bull case scenario, we value EMAAR’s hotel segment at an EV of AED7bn (AED0.98/share). In this case, we consider all currently operating hotels in Dubai and Italy (1,522 rooms) in addition to the net present value (NPV) of under-construction hotels, which are 100%-owned by EMAAR (712 rooms). Furthermore, we consider the NPV of planned “Rove hotels” (2,662 rooms), which will be added through EMAAR- Meraas JV.
We assume a perpetual occupancy rate of 85% and a terminal growth rate of 3% in this bull case scenario.
(3) Bear case
Under our bear case scenario, we value EMAAR’s hotel segment at an EV of AED4bn (AED0.56/share). In this case, we consider all currently operating hotels in Dubai and Italy (1,522 rooms) in addition to the net present value (NPV) of under-construction hotels which are 100%-owned by EMAAR (712 rooms). We have not considered the new planned hotel “Rove- Formerly Dubai Inn”, which will be added through EMAAR- Meraas JV.
We assume a perpetual occupancy rate of 75% and a terminal growth rate of 1% in this bear case.
Detailed valuation for each hotel
Valuation scenarios
Source: MubasherTrade Research Source: MubasherTrade Research
Hotels owned by EMAAR Grade No of
roomsEV (AED mn)
EV/room
(AED mn)EV/share
Emaar
stake %
Emaar
stake
(AED mn)
Currently operating hotels "Emaar Hospitality"
The Address Downtown 5 star 196 689 3.51 0.10 100% 689
The Palace Downtown 5 star 242 434 1.80 0.06 100% 434
The Address Dubai Mall 5 star 244 487 1.99 0.07 100% 487
The Address Dubai Marina 5 star 200 140 0.70 0.02 100% 140
The Manzil Downtwon (Formerly: ManzilDowntown Dubai) 4 star 197 165 0.84 0.02 100% 165
The Vida Downtwon (Formerly: Qamardeen Hotel) 4 star 156 251 1.61 0.04 100% 251
The Address Montgomerie Dubai Standard 21 25 1.19 0.00 100% 25
Arabian Ranches Golf Club Standard 11 13 1.19 0.00 100% 13
Currently operataing hotels "Emaar Hotel & Resorts"
Armani Hotel at Burj Khalifa 5 Star 160 522 3.26 0.07 100% 522
Armani Hotel at Via Manzoni (Milan,Italy) 5 Star 95 449 4.72 0.06 100% 449
Total "currently operating hotels" 1,522 3,175 2.09 0.44 3,175
Planned hotels (owned by Emaar)
The Address The BLVD - Downtown Dubai 5 Star 196 538 2.74 0.08 100% 538
The Address Sky View - Downtown Dubai 5 Star 166 349 2.10 0.05 100% 349
The Address Fountain Views - Downtown Dubai 5 Star 193 405 2.10 0.06 100% 405
Vida Hills Hotel & Residences - The Greens 4 Star 157 193 1.23 0.03 100% 193
Total to planned hotel "Owned by Emaar" 712 1,485 2.09 0.21 1,485
Total 2,234 4,660 2.09 0.65 4,660
Currently Operating Hotels
Total No. of Rooms
Sustainable Occupancy Rate
EV
85% 80% 75%
AED7bn AED4.7bn AED4bn
Bull Case
4,896 2,234 2,234
Perpetual Growth Rate
EV/Share
3% 2% 1%
AED0.98/share AED0.65/share AED0.56/share
Expansion Plan (100% owned by
Emaar)Considered Considered Considered
Expansion Plan “Rove”
(JV with Meeras)Considered Not considered Not considered
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Page 46
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
EMAAR Hotel Portfolio | Valuation (Cont.’d)
We did not assign any weight to the relative valuation of EMAAR hotel portfolio. However, we used it as a reference to check if EMAAR’s hotel portfolio is undervalued or overvalued relative to its peers. Our intrinsic valuation for EMAAR hotel segment implies a 2017 EV/EBITDA multiple of 8.7x, a 8% discount to its global peers average of 9.5x.
EV/EBITDA – EV of AED4.8bn: Based on the global average of
one-year forward EV/EBITDA multiple of 9.5x and EMAAR hotel portfolio’s 2019e EBITDA we reached a fair EV of AED4.8bn (AED0.67/share), 3% higher than our intrinsic EV of AED4.7bn.
We highlight that higher SG&A will depress EHG ‘s EBITDA margin in 2017 to 23.5%, coming 2.7 percentage points lower than global peers’ average of 26.2%.
Our relative valuation considers only the planned 712 rooms in the UAE (under The Address and Vida brands) which are scheduled to open over 2016-2018. Meanwhile, we did not consider “Rove Hotel” in our relative valuation.
Valuation of “Rove” additions
Relative Valuation
Source: MubasherTrade Research
Strengths
Flotation of EHG will unlock value with a potential special DPS of AED0.09, in case the company floats 15% of its shares with a dividend payout ratio of 100% of proceeds.
Adding other 2,374 rooms in the UAE during 2016-2019 is the main growth catalyst.
Penetrating the affordable segment, where supply is limited, could maintain the solid performance over the coming years. We highlight 79% (2,662 rooms) of EMAAR’s planned room will caters more affordable segment.
Weaknesses
EMAAR is exposed to the seasonality factor, which negatively affect its operating performance specifically in Q2 and Q3.
Strong competition (oversupply) put more pressure on EMAAR hotel portfolio’s ADR.
We expect that the occupancy in EMAAR’s high-end hotels will be depressed by the new supply of hotels.
Current political stability in Egypt should attract a number of tourists away from Dubai, given Egypt’s better location and better weather with more affordability.
Lower oil prices and a stronger USD remain the two main concerns for EHG business.
Strengths and Weaknesses of EMAAR hotel portfolio
Planned hotels "Rove" (JV with Meraas ) - Formerly Dubai Inn Grade No of rooms EV (AED mn) EV/room (AED mn) EV/share EMAAR stake % EMAAR stake (AED mn)
Rove - Za'abeel 4 Star 420 688 1.64 0.10 50% 344
Rove -Port Saeed 4 Star 270 442 1.64 0.06 50% 221
Rove - Oud Metha 4 Star 286 468 1.64 0.07 50% 234
Rove - Jaffliya 4 Star 270 291 1.08 0.04 50% 145
Rove - Al Wasl (Satwa) 4 Star 480 427 0.89 0.06 50% 214
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Page 47
Emaar Properties | UAE | Initiation of Coverage
Sunday, 3 July 2016
EMAAR Hotel Portfolio | Valuation (Cont.’d)
EMAAR hotel portfolio misses its global peers on the profitability margin front
Our valuation for EHG 2017 EV/EBITDA of 8.7x vs. Global peers average of 9.5x
Source: MubasherTrade Research Source: Bloomberg, MubasherTrade Research
11.8%
12.3%
17.6%
20.0%
21.7%
23.5%
24.1%
25.5%
25.6%
25.6%
25.9%
33.9%
34.9%
42.6%
45.3%
Av. 2017 EBITDA margin exluding EHG
26.2%
0% 10% 20% 30% 40% 50%
Rezidor Hotel Group AB
Marriott International Inc/MD
Hyatt Hotels Corp
Accor SA
Starwood Hotels & Resorts Worl
Emaar Hospitality
Wyndham Worldwide Corp
Shangri-La Asia Ltd
Shangri-La Asia Ltd
Whitbread PLC
Whitbread PLC
PPHE Hotel Group Ltd
PPHE Hotel Group Ltd
City Lodge Hotels Ltd
InterContinental Hotels Group
EBITDA margin
13.6
12.8
12.0
10.5
10.3
9.9
9.4
8.9
8.8
8.7
7.5
7.5
7.2
5.1
Average 2017 EV/EBITDA
9.5x
0.0 5.0 10.0 15.0
Shangri-La Asia Ltd
Emaar Hospitality
Starwood Hotels & Resorts Worl
Marriott International Inc/MD
Whitbread PLC
Hilton Worldwide Holdings Inc
City Lodge Hotels Ltd
Hyatt Hotels Corp
Tsogo Sun Holdings Ltd
Emaar Hospitality
PPHE Hotel Group Ltd
Wyndham Worldwide Corp
Accor SA
Rezidor Hotel Group AB
EV/EBITDA
Bloomberg Ticker Regional and global peers of Emaar hotel portfolioMkt cap
(USD mn)
Country Company name 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017
REZT SS Equity Belgium Rezidor Hotel Group AB 749 8% 10% 10% 12% 33.2x 17.0x 17.0x 12.3x 6.1x 5.4x 6.0x 5.1xIHG LN Equity Britain InterContinental Hotels Group 7,701 42% 89% 44% 45% 25.5x 7.5x 20.4x 17.6x 14.2x 6.1x 10.6x 9.8xWTB LN Equity Britain Whitbread PLC 10,931 24% 26% 26% 26% 24.0x 25.8x 17.3x 16.5x 15.5x 15.3x 11.1x 10.3xAC FP Equity France Accor SA 10,243 17% 18% 18% 20% 37.7x 44.9x 20.9x 18.1x 9.7x 9.5x 8.3x 7.2x69 HK Equity Hong kong Shangri-La Asia Ltd 3,701 25% 23% 25% 26% 23.9x 24.9x 26.5x 22.5x 17.3x 16.8x 14.6x 13.6xMAND SP Equity Hong kong Mandarin Oriental Internationa 1,727 24% 26% 27% 26% 17.3x 20.8x 19.9x 21.5x 12.8x 13.1x 12.1x 12.8xPPH LN Equity Netherlands PPHE Hotel Group Ltd 492 35% 37% 35% 35% 5.8x 9.3x 10.7x 8.6x 7.9x 8.4x 8.5x 7.5xORB PW Equity Poland Orbis SA 721 29% 26% n/a n/a 22.6x 15.6x 16.3x 15.0x 8.7x 9.2x n/a n/aCLH SJ Equity South africa City Lodge Hotels Ltd 442 41% 42% 42% 43% 19.7x 19.2x 17.0x 16.2x 13.0x 11.5x 10.3x 9.4xTSH SJ Equity South africa Tsogo Sun Holdings Ltd 1,929 35% 33% 34% 34% 14.6x 16.6x 14.3x 12.7x 9.4x 10.2x 9.4x 8.8xHOT US Equity United states Starwood Hotels & Resorts Worl 12,710 19% 18% 21% 22% 26.5x 22.0x 24.7x 23.7x 14.1x 12.8x 12.2x 12.0xWYN US Equity United states Wyndham Worldwide Corp 7,869 22% 23% 24% 24% 19.3x 14.2x 12.3x 11.2x 11.3x 9.1x 7.8x 7.5xH US Equity United states Hyatt Hotels Corp 6,681 16% 15% 18% 18% 66.6x 52.6x 37.4x 32.3x 14.2x 11.1x 9.5x 8.9xHLT US Equity United states Hilton Worldwide Holdings Inc 22,636 22% 25% 26% 26% 37.4x 29.7x 24.1x 20.6x 16.0x 11.2x 10.6x 9.9xMAR US Equity United states Marriott International Inc/MD 17,224 9% 10% 12% 12% 29.9x 21.9x 18.1x 15.6x 19.7x 14.3x 11.2x 10.5x
Global Average 24.6% 27.9% 25.9% 26.2% 26.9x 22.8x 19.8x 17.6x 12.7x 10.9x 10.2x 9.5x
Global Median 23.6% 24.5% 25.5% 25.5% 24.0x 20.8x 18.1x 16.5x 13.0x 11.1x 10.4x 9.6x
(B)Higher than RRR Higher than RRR Higher than RRR
Hold
(H)
Between RRR
and 20% of RRR
Between RRR
and 40% of RRR
Between RRR
and 60% of RRR
Sell
(S)
Lower than 20%
of RRR
Lower than 40%
of RRR
Lower than 60%
of RRR
Not Rated
(NR)
Not Covered
(NC)
We do not currently cover this stock or we are
restricted from coverage for regulatory reasons.
Inv
es
tme
nt
Ra
tin
g
Risk Rating
We have decided not to publish a rating on the
stock due to certain circumstances related to the
company (i.e. special situations).
If
Total Return
is …
Disclosure Appendix
Important Disclosures METHODOLOGY: We strive to search for the best businesses that trade at the lowest valuation levels as measured by an issuer’s intrinsic value on a per-share basis. In doing so, we follow both top-down and bottom-up approaches. Under the top-down approach, we attempt to study the most important quantitative and qualitative factors that we believe can affect a security's value, including macroeconomic, sector-specific, and company-specific factors. Under the bottom-up approach, we focus on the analysis of individual stocks by running our proprietary scoring model, including valuation, financial performance, sentiment, trading, risk, and value creation.
COUNTRY MACRO RATINGS: We analyze the four main sectors of a country’s macroeconomics, then we assign , , and star for low risk, moderate risk, and high risk, respectively. We use different weights for each economic sector: (a) Real Sector (30% weight), (b) Monetary Sector (10% weight), (c) Fiscal Sector (25% weight), (d) External Sector (15% weight), and (e) Credit Rating and Outlook (20%).
STOCK MARKET RATINGS: We compare our year-end price targets for the subject market index on a total-return basis versus our calculated required rate of return (RRR). Taking into account our Country Macro Rating, we set the “Neutral” borderline (below which is “Underweight”) as 20% of RRR for Country Macro Rating, 40% of RRR for Country Macro Rating, and 60% of RRR for Country Macro Rating. That said, our index price targets are based on the average of two models. Model (1): Estimated index levels based on consensus price targets of all index constituents. Stocks with no price targets are valued at market price. Model (2): Estimated index levels based on our expected re-pricing (whether re-rating, de-rating, or unchanged rating) of the forward price-earnings ratio (PER) of each index in addition to consensus earnings growth for the forward year.
SECTOR RATINGS: On the sectors level, we focus on six major sectors, namely (1) Consumer and Health Care, (2) Financials, (3) Industrials, Energy, & Utilities, (4) Materials, (5) Real Estate, and (6) Telecom Services & IT. To assess each sector, we use the SWOT analysis to list the strengths, weaknesses, opportunities, and threats in each country. We then translate our qualitative SWOT analysis into a quantitative model to evaluate all six sectors across countries. Each of the measures we used, although mostly subjective, is assigned a score as either +1 (high impact), 0 (medium impact), or -1 (low impact). At a later stage, when assigning the final rating – Overweight, Neutral, or Underweight – for each sector in each country, we realize that sometimes it is unfair to assign equal weights for the sub-sectors in each major sector assessed. Hence, some of the sub-sectors are given different weights for their significant profile in each country. Additionally, the final rating for each sector in each specific country is assigned based on a relative calculation comparing this sector to all other sectors in this country.
SECURITY INVESTMENT RATINGS: We combine intrinsic value, relative valuation, and market sentiment into a single rating. Our three-pronged methodology involves (1) discounted cash flows “DCF” valuation model(s), (2) relative valuation metrics, and (3) overall sentiment. Whenever possible we attempt to apply all three aspects on the issuers or securities under review. In certain cases where we do not have our own financial and valuation models, we attempt to scan the market for other analysts’ value estimates and ratings (i.e. consensus view) on average. We compliment this with relative valuation and sentiment drivers, such as positive/neutral/negative news flows. For all issuers/securities covered, we have three investment ratings (Buy, Hold, or Sell), comparing the security’s expected total return (including both price performance and expected cash dividend) over a 12-month period versus its Required Rate of Return “RRR” as calculated using the Capital Asset Pricing Model “CAPM” and adjusted for the Risk Rating we attach to each security. Our price targets are subjective and are estimates of the analysts where the securities covered will trade within the next 12 months. Price targets can be derived from earnings-based valuation models (e.g. Discounted Cash Flow “DCF”), asset-based valuation models (e.g. Net Asset Value “NAV”), relative valuation multiples (e.g. PER, PBV, EV/EBITDA, etc.), or a combination of them. In case we do not have our own valuation model, we use a weighted average of market consensus price targets and ratings. We review the investment ratings periodically or as the situation necessitates.
SECURITY RISK RATINGS: We assess the risk profile of each issuer/security covered and assign one of three risk ratings (High, Moderate, or Low). The risk rating is weighted to reflect different aspects specific to (1) the sector, (2) the issuer, (3) the security under review, and (4) volatility versus the market (as measure by beta) and versus the security’s average annualized standard deviation. We review the risk ratings at least annually or as the situation necessitates.
Other Disclosures MFS does not have any proprietary holding in any securities. Only as a nominee, MFS holds shares on behalf of its clients through Omnibus accounts. MFS is not currently a market maker for any listed securities.
Analyst Certification I (we), Mahmoud Ibrahim, Senior Equity Analyst, employed with Mubasher International, a company under the National Technology Group of Saudi Arabia being a shareholder of Mubasher Financial Services BSC (c) and author(s) to this report, hereby certify that all the views expressed in this research report accurately reflect my (our) views about the subject issuer(s) or security(ies). I (we) also certify that no part of my (our) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed in this report. Also, I (we) certify that neither myself (ourselves) nor any of my (our) close relatives hold or trade into the subject securities.
Head of Research Certification I, Amr Hussein Elalfy, Global Head of Research of Mubasher Financial Services BSC (c) confirm that I have vetted the information, and all the views expressed by the Analyst in this research report about the subject issuer(s) or security(ies). I also certify that the author(s) of this report, has (have) not received any compensation directly related to the contents of the Report.
Disclaimer This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Mubasher Financial Services BSC (c) (‘MFS’) has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; MFS makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the document are based upon publicly available information at the time of publication and are subject to change without notice. This document is not intended for all recipients and may not be suitable for all investors. Securities described in this document are not available for sale in all jurisdictions or to certain category of investors. The document is not substitution for independent judgment by any recipient who should evaluate investment risks. Additionally, investors must regard this document as providing stand-alone analysis and should not expect continuing analysis or additional documents relating to the issuers and/or securities mentioned herein. Past performance is not necessarily a guide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognized market, it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. References to ratings/recommendations are for informational purposes only and do not imply that MFS adopts, supports or confirms in any way the ratings/recommendations, opinions or conclusions of the analysts. This document is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MFS or its affiliates to any registration or licensing requirements within such jurisdiction. MFS accepts no liability for any direct, indirect, or consequential damages or losses incurred by third parties including its clients from any use of this document or its contents.
Issuer of Report Mubasher Financial Services BSC (c) is an Investment Business Firm Category 1, licensed and regulated by the Central Bank of Bahrain. Website: www.MubasherTrade.com E-mail: [email protected]
