What's Up: Investors should buy Sorouh Real Estate shares as the Abu Dhabi developer's "inevitable" merger with larger rival Aldar Properties will boost the stock by about 20 per cent, said Arqaam Capital.
Likely Sorouh and Aldar merger a promising prospect
A one-for-one share exchange is the most likely scenario, although it may dilute the value of Sorouh in the short term, wrote analysts led by Mohammad Kamal.
Abu Dhabi's two biggest developers said they were in advanced talks on the merger, which has the support of the Government and would create a company with US$15 billion in assets. Property companies in Abu Dhabi suffered losses and writedowns when prices in the sector halved in the aftermath of the global financial meltdown in 2008.
The merger will generate "substantial cost synergies in the medium term as overlapping functions are eliminated," the analysts wrote.
Arqaam raised its price estimate on Aldar to Dh1.45 from Dh1 with a hold recommendation to account for increased property sales to the Government as well as the transfer of assets to the state and the repayment of loans, according to the report.
Sorouh's price estimate was increased by about 45 per cent to Dh1.60 with a buy recommendation. Mr Kamal said the company's "margin picture" was underestimated in the past two quarters.
The two developers are not equal, and assuming they continue to complete planned projects, Aldar will be the larger contributor to recurring income, sales revenues and cash flows in the next two years, said Arqaam. However, Aldar will be a junior partner in the combined business in terms of land assets and long-term earnings per share.
A merger would benefit Abu Dhabi's property market as it "allows for a more coherent development plan for the emirate as land assets, balance sheets, and negotiation clout are consolidated", wrote Mr Kamal.
* Bloomberg News