Sico reiterates positive outlook on Emaar

The 16 page report highlights that Emaar properties announced a remarkable rise of 46% in its Net Asset Value (NAV) which surged from Dhs70.35bn (Dhs11.55/share) in 2006 to Dhs102.89bn (Dhs16.89/share) in a span of just one year.

The difference between the book value and fair value implies that an amount of Dhs66.36bn (Dhs10.86/share) remains as unrealized potential gain on Emaar's books.

SICO argues that Emaar's strategy to refrain from land sales had become a cause of concern among the market participants during 2007.

Nonetheless, the implementation of the strategy was performed rather resourcefully as rise in sale of apartments more than compensated for the decline in revenue from land sales.

Moreover, as a result of effective cash management policies of Emaar, operating cash flows grew by a strong 107% (Dhs3.09bn) during 2007.

The report also underlines that increasing expenses led to muted growth in profits.

The benefits of these expenses are likely to be more qualitative in nature providing Emaar with the first mover advantage in these markets and helping to build a stronger brand.
SICO maintains its positive stance on the company and expects net profits to grow at a CAGR of 15% over the next five years. The company with an estimated project book of AED391bn is well positioned to benefit from the impending construction boom in the developing countries (Emaar's target market). SICO believes that the growth will come from (1) projects initiated by associate companies namely Emaar MGF and Emaar Economic City (2) projects planned by subsidiaries mainly in Egypt, Morocco, Pakistan, Libya & Saudi Arabia (3) sustainable income from the Mall and Hospitality Groups and (4) differentiated UAE based projects and these underlie our positive stance on the company.

In conclusion SICO reiterates its "OVERWEIGHT" rating on Emaar which provides a significant upside potential of 67% based on their fair value of AED 18.40 per share. Emaar is currently trading at a steep discount of 35% to its reported 2007 end NAV. The stock is also trading at an attractive P/E multiple of 10.0x based on 2008 earnings forecasts, which is a significant discount of 22% to the broader Dubai Market.

Securities & Investment Company is an investment bank offering a selective range of services, including asset management, brokerage, corporate finance and market-making, on a regional basis and with a particular emphasis on Bahrain. SICO was incorporated in Bahrain in 1995 and holds an investment-banking license from the Central Bank of Bahrain.