Complex Made Simple

Emaar shares: a case of deja-vu all over again

HSBC 'initiated' coverage of Emaar Properties last week, perhaps forgetting its original groundbreaking research note published in February 2001. The AME Info article commenting on this note still ranks highly in a Google search of 'HSBC Emaar'. Then as now HSBC was positive on the stock but was proven wrong in its conclusions.

For the record, in 2001 HSBC’s bullish report targeted a near doubling of the share price, just as in its latest note. But Emaar’s stock did not move as the global banking giant predicted.

First, the shares fell back and then drifted sideways for two years before moving lower again. Only then did Emaar stock power higher, and deliver a sensational 12-fold rise in value to its more patient shareholders.

Times have indeed moved on a long way since then. As an HSBC spokesman reminded AME Info: ‘Then DFM was one year old; Emaar was four years old, and had only been listed for 12 months; the entire Gulf markets probably had a market capitalisation of less than Emaar’s today; and there was precisely zero western or institutional interest in the region.’

Deja-vu

Quite, but if you look back at the AME Info comment at the time on HSBC’s outlook for Emaar, you can sense a feeling of deja-vu: ‘For one thing, interest rates are on a falling trend, and that will help sales of Emaar Properties’ developments on 99-year leases, as the buy or rent equation will shift towards buy. And for another global equity markets seem like poor places to put money right now, and real estate is an alternative asset class.’

In fact, we later suggested that any long term investor based in Dubai ought to include Emaar in their portfolio, and as mentioned above, this proved excellent advice to the more patient investor.

However, the latest HSBC report on Emaar Properties does fly in the face of the recent cautious profit forecasts from the company itself, and chooses to ignore the deteriorating outlook for international profits on which Emaar is basing its future revenue growth.

You would almost think that buying shares in one of the world’s leading property developers at this time carries no risk. But we know that Emaar’s entry into the US market was badly mis-timed and that its $1.6bn IPO in India was pulled recently.

Rising prices

It may well be, as HSBC argues that rising property prices in Dubai help to maintain profits in the emirate. But then again with construction costs soaring this year, Emaar may need that additional cash for its huge building programme.

Emaar has promised to pay investors a minimum dividend of 1.8 per cent and could choose to raise this. Yet why would you put your money at risk in a major property developer for this type of return when the company concerned has already told investors that its days of big profit increases are over?

However, surely the risk for investors is not that Emaar shares will crash and burn but rather that like in 2001, its share price will drift sidewards over the next couple of years. HSBC was too optimistic in 2001 and history could be about to repeat itself all over again.