Investors underrate Emaar's stock

The real estate giant has had to be supported by 'outside intervention on a number of occasions in the last month alone, although the share value still failed to hold the Dhs10 mark, at one stage falling to lows of Dhs9.58.

Investor confidence has been shaken in recent months as the markets have followed the downward trends shaking global bourses.

Foreign portfolios in particular, led by the international investment houses, have taken to selling off their Gulf stocks.

The strengthening of the dollar, and a fall in oil prices, has also drawn these big players back to US shares - leaving the Gulf markets to be moved mostly by regional portfolios and institutional investors.

Emaar's mid-August slide caused a panic on the Dubai Financial Market. Being one of the biggest listed companies any fall has large repercussions and the hovering around the Dhs10 mark made investors jittery.

External factors were forced to intervene on a number of occasions towards the end of trading to keep the shares above the mark, but they eventually fell to a low of Dhs9.58 (although outside intervention managed to raise this to Dhs9.90 by the close of the day).

Emaar's underlying potential

Despite Emaar having fallen by 67% from its highest price registered price of Dhs29.10 in the second half of 2005, a report by investment house Morgan Stanley says that investors should see through market blips and grab the shares based on the company's underlying potential.

'We acknowledge investors' concerns, but we think that the market is missing the high growth and lower risk of Emaar's business model,' the report states.

'The shares have underperformed since 2006 on concerns over slowing growth, poorly timed international expansion and disappointments on transparency and corporate governance. Although we understand the rationale behind investors' concerns, we think that the shares have been overpenalised.'

Despite warnings of a possible correction in the Dubai property market by 2010, the report notes that until then prices should increase steadily, benefiting Emaar as the majority of its revenues currently come from the UAE. New launches in the Burj Dubai development are estimated at a 75% gross profit margin - compared to 40% for current deliveries.

Any correction would arrive as the group began to see stronger results from foreign markets. Arif Amiri, Emaar's Senior Director of Investor Relations and Corporate Governance, said in June that the group expected 70% of its revenues to come from outside the UAE within the next two years.

Revenues from outside the UAE

Emaar is the largest real estate developer in the MENA region, it also has exposure to 17 markets. The company has a projected portfolio sales value of $84bn over the next 10 years, according to analyst estimates.

The report concurs that Emaar's acquisition of US firm John Laing was badly timed, but predicts that the market has absorbed any further fallout.

The recall of the Emaar-MGF (the group's Indian subsidiary) IPO is also dismissed as down to market timing rather than financial performance.

'At the current share price, the risk-reward looks very attractive,' says the report. 'We estimate that revenue will increase by 70% and earnings by 85% in 2009. We believe that will be the major trigger for the shares.'

The new Saudi mortgage law, which will boost demand and affordability, and the opening of the exchange to foreign investors will also prove a boon to Emaar's ambitions in the country.

A 31% stake in the Emaar Economic City project, only 10% of which has currently been developed, has enormous long-term potential. Half of Emaar's planned 300,000 deliveries over the next 10 years will be here.

'Emaar has a strong track record in its home market, delivering 22,000 units to date. We believe that this is an unusual attribute among MENA peers, where the majority have no, or a very limited track record. We think that investors will eventually give more weight to this, especially with the recurring delays in delivery schedules for a number of developers across the region.

'Modelling the company on a project-by-project basis we believe that earnings can grow by a four-year average rate of 38% until 2012, with 89% year-on-year growth in 2009 as sales from Burj Dubai and international operations start coming through. Q1 results in 2009 should exceed sellside expectations.'