Emaar Properties is in a stronger position than it seems, due to a merger cancellation, assets abroad and alternative financing options, a Deutsche Bank report says. The Dubai master developer, which is building the world's tallest tower, last week announced the cancellation of merger plans with Dubai Properties, Sama Dubai and Tatweer, the property units of Dubai Holding.
The merger scrapping was welcomed by most analysts and Emaar shareholders. The company's stock rose 15 per cent the next day to Dh2.94, the largest gain in 13 months. "Now that the potential merger with Dubai Holding entities is off the table we believe investors can take a fresh look and rediscover Emaar's appealing equity story," Deutsche Bank analysts said yesterday. "Emaar stands out, in our view, among its peers, having heavily invested in the last few years to diversify its income."
The analysts removed their "discount" rating on the stock because of the cancelled merger. As development projects in Egypt, Pakistan, Syria, Morocco, and Lebanon are nearing handover, Emaar is expected to deliver more than 2,100 units abroad over the next two years. That excludes shareholdings in projects abroad, such as one in India where close to 8,000 units are being built, the report. "We believe Emaar's strategy to invest in more recurring income-generating assets and to diversify internationally is paying off," said Athmane Benzerroug, one of the report's authors and the vice president of Deutsche Bank MENA Research. "Emaar is less and less a Dubai developer."
Emaar's non-UAE operations will account for more than 50 per cent of the company's revenues and earnings from 2011. About 2,900 units are expected to be delivered in Dubai over the next two years, the analysts said, and the handover of the Burj Dubai early next year should bring significant cash flow. Emaar also has a rental portfolio that generates a recurring cash flow of about Dh1.5 billion (US$408 million).
"With the opening of Dubai Mall and Dubai Marina Mall in November last year [which now account for two thirds of revenues], rental revenues should continue to grow in 2010, as the malls will benefit from their current 90 per cent leased status over the full year," the report said. Among Emaar's downside risks, the analysts said, were the company's failure to address the short-term financing issue and potential conflict of interest between the Dubai Government and minority shareholders.
"Project delay or cancellation and failure to recover receivables and meet debt repayment could materially impact our earnings/valuation," Mr Benzerroug said. Emaar had Dh8.1bn of debt at the end of September, of which Dh4.1bn is short-term liabilities maturing in the next 12 months. "The majority relate to bridge financing in Egypt and Turkey, which will be repaid from the project financing syndication," the bank's report said.