Emaar is just fabulous

Emaar owns a number of trophy assets in Dubai.

Emaar Properties shares were devastated by an epic selloff between May 2015 and January 2016 that saw the shares fall from Dh8.40 to Dh4.22. However, at Dh4.5, I believed Emaar was grossly undervalued relative to its fundamentals in the Dubai Financial Market since it traded at 0.9 times book value and a 4.7 per cent dividend yield. Emaar bears argued that the shares bottomed at 0.38 times book value due to the effect of the 2008-09 global financial meltdown. Poppycock, I argue. The Emaar of 2008 is not the Emaar of 2016, just as the Dubai market of 2016 is not the property market of 2008-09. After all, the decline in property prices since summer 2014 has been gradual, due to a strong US dollar, lower hotel RevPAR, wider debt/sukuk credit risk spreads, tight banking liquidity, excess supply and job losses in banking/oil and gas, not due to a wholesale meltdown in the global economy and a systemic credit crunch in the banking system.
Emaar cannot fall to 0.4 times book value as in 2008 because its recurrent revenue businesses in hospitality/leasing could well contribute 50 per cent of its bottom line in the next three years. Moreover, in 2009, Emaar had not executed the successful IPOs of Emaar Malls Group and Emaar Misr, making its listed-business model in the DFM more transparent and easier to value. I believe the savage seven-month bear market in Emaar was more due to the UAE stock market's scramble for liquidity, not any fundamental flaw in its business model. In Gulf equities, when times are tough, investors do not sell what they want, they sell what they can - and Emaar is the DFM index's ultimate megacap and 25 per cent index heavyweight. The free-fall in oil prices amplified distress selling in Gulf equities in the second half of 2015 and Emaar, the most liquid and valuable stock on the DFM, was sold to raise cash to slash leverage, meet margin calls or implement asset allocation shifts. As J.P. Morgan (the man, not the bank) once said, "liquidity is like a cab on a rainy night in New York. It disappears when you need it the most". A similar phenomenon is at play in the property market, the reason Springs townhouses have lost 25 per cent in the past two years.
My instinct that Emaar was grossly undervalued at Dh4.5 was vindicated as the shares soared 60 per cent to a recent price of Dh6.74 as I write. In retrospect, the rampant bearishness after the Address Downtown Hotel fire and Brent's collapse to $26 was precisely the moment to aggressively accumulate Emaar. Yet another epic money making opportunity for the Hindsight Harry's of the DFM to smoke in their philosopher's pipes (shishas?)! Emaar's financials were a blowout. Net income of Dh1.39 billion blew away sell-side consensus.
The fire writeoff is a non-issue as the hotel was fully insured and all losses will be compensated. Emaar's property development business remains its crown jewel, with stellar presales until 2017 and a Dh24 billion project delivery backlog from Dubai alone (total backlog is Dh35 billion) that guarantees earnings visibility for the next two years. Emaar's valuation is no longer as compelling as it was in late January when the shares traded at Dh4.5 but 10.6 times 2016 estimated earnings is not an exorbitant price to pay for the Middle East's preeminent property developer. Since I expect a major global equities crash this summer and no Doha oil deal, Emaar could well correct in unison. Profit taking after such a spectacular move is both rationale and prudent.
Hospitality and retailing will be the twins recurrent revenue growth ballasts for Emaar in the next two years. The resilience of rental yields in Dubai's trophy malls owned by Emaar is legendary in global retailing. The hospitality operating environment has also turned ugly, with a 10 per cent fall in RevPAR, a crucial hotel metric. Emaar owns trophy properties (The Dubai Mall) and brands (Fashion Avenue, Address, Vida, Rove hotels) that are world-class. The international land bank and the Indian/Saudi/Turkish affiliates have value. At Dh4.50, Emaar was dirt-cheap and offered investors a money-making feast in Dubai. But there are none so blind as those who refuse to see.