EUR 51.62 For Business Accounts Only

EMAARDEV UH | Peak likely behind us; Recovery largely factored in

Downgrade to N. This follows the stock’s well-deserved market outperformance (+60% y-o-y vs. +27% for DFMGI). We set our TP at a 30% discount to NAV (vs. its current discount of c39% and the four-year historical average [since listing] discount of c50%). This, in our view, is a fair reflection of the ongoing market recovery, with a peak (for both contracted sales and reported numbers) likely to be registered in FY21e. We expect dividend distribution to be reinstated this year (FY21e DY: 3.3%).

FY21: A uniquely stellar year. As a market leader, Emaar Development benefited from: i) pent-up demand post a slow post-COVID-19 period, ii) desire for bigger housing space on WFH/online schooling trends, iii) accumulation of wealth for nationals/residents, iv) competitive mortgage rates, and v) a positive spill-over effect from a healthier secondary market. Going into FY22, these factors will not endure at the same magnitude, in our view. Thereby, we factor in: i) a slowdown to contracted sales starting FY22e (down 18% y-o-y, albeit c50% higher than FY16-19 average), ii) a 23% y-o-y drop to revenue in FY22e and slower reductions through FY24e, with iii) gross margins averaging 38.1% in FY21-24e (c3.7pp below FY16-19 average), on lower contribution from high-margin and complete/close-to-completion projects.

Cash flow pressures are behind us. We expect CFO to continue to be in the black, backed by: i) growing share of delivered units carrying post-handover payment plans, implying pure cash inflows post-handover, ii) limited/shorter post-handover payment plans vs. prior years, as the company capitalises on improved market conditions, iii) successful delivery of delayed units carrying front-loaded payment terms through FY20, and iv) construction completion rate exceeding collection rate across existing projects (c59% vs. c48%, respectively, as of Sep-21). 

Prefer parent at current valuation. Emaar Properties [OW | TP AED6.90] bids a: i) more diversified segmental exposure, offering a play on the recovery in retail and hospitality, as well as the development business, and ii) cheaper exposure to the latter. We also note Emaar Properties’ steeper-than-average trading discount to subsidiaries’ aggregate market caps (c25% vs. the historical average of c18%), marking a rather attractive entry point to the stock.