EUR 39.71 For Business Accounts Only

Value stock, lucrative DY; Set for rerating

Cash flow position at inflection point, supporting potential stock rerating. Cash flow from operations for Emaar Dev. has been in negative territory since 1Q18. The delivery of projects carrying post-handover payment plans kicked-off in 3Q19, and is expected to give some relief to the cash position, given the cash inflow on these projects carries no construction commitments. An improved outlook on cash flows will complement the company’s superior operational performance and dividend offering. This would allow the stock to rerate from the current distressed levels, especially given the overhang from MSCI EM exclusion is behind us. The stock trades at a discount to NAV of 43% vs. its historical average of c33% (since listing).    

Stable contracted sales, reported numbers in the short-term. We expect contracted sales to grow by 10% y-o-y to AED17.5bn in 2020e and stabilise at these levels through 2022e. Emaar Dev.’s strong brand name, diverse product offering, and high construction capacity should continue to differentiate it from the rest of the pack, amid continued market challenges. The company’s backlog stood at AED36.1bn in Sep-19, providing strong visibility on reported numbers. We see 2019-21e revenue CAGR at -3.0%, GPM stable at c39.6%, on average, in 2021-22e, and net income at cAED2.8bn, in line with 2019 levels. We trim our TP by c10% to AED6.33/share, reflecting the company’s latest developments. Our TP offers an upside of c75%.

Dividend commitment to be met. Supported by an ambitious delivery pipeline through 2021e, a reflection of robust sales numbers since 2015, we see little risk on meeting the committed dividends for 2019-20e (cAED4bn in total, after the payment of 2018 dividends, 1.5x covered by cash escrow balance). The dividend yield stands at c14.4% for both years. That said, the pace of execution remains a watch factor, given its significance in determining the health of cash collection and revenue recognition, and hence dividend distribution.

Prefer Emaar Dev. over parent. While we acknowledge that Emaar Properties [Overweight | TP AED7.45] currently trades on similarly attractive levels (c20% discount to the SoTP of its listed subs vs. average historical discount of c13%), we favour Emaar Dev.’s high dividend yield (14.4% vs. 3.8% for Properties) and unleveraged balance sheet (AED0.4bn in net cash vs. AED16.4bn in net debt).