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Stronger Q4 Ahead for Emaar: Credit Suisse

Citigroup cautions on lack of information about Emaar’s merger with Dubai Holdings’ property units

DUBAI — Emaar Properties will likely see a further improvement in profitability in the fourth quarter, thanks to its scheduled completion of Burj Dubai and other high-margin properties before the end of the year, investment bank Credit Suise said on Friday, one day after Emaar bounced back from a year-ago loss to rack up Dh655 million in third-quarter earnings.

Citigroup, however, is more restrained in its outlook for the property company, citing a lack of material disclosure about progress in Emaar’s protracted merger with the three real estate units of Dubai Holdings — Dubai Properties, Sama Dubai and Tatweer.

Analysts at the two banks drew somewhat diverging conclusions from the latest results of the Middle East’s biggest property developer. Emaar’s financial performance is a pulse beat of Dubai’s vast real estate industry, which is finally seeing some signs of stabilisation after the collapse in home and office prices from last year’s lofty levels.

Emaar’s third-quarter results beat Credit Suisse’s estimates by 5.7 per cent and consensus estimates by 70 per cent. This positive outcome arose largely due to the early completion and delivery of a high-priced villa project in the Arabian Ranches community that generated better than exepcted profits. Emaar’s return to profit comes after it lost Dh417 million during the same July-September period in 2008.

Credit Suisse maintained its ‘neutral’ rating for Emaar shares, with a target price of Dh4.60. The bank said in an investor note that Emaar would continue to recover in the current fourth quarter as it hands over more projects. Emaar is set to open the world’s tallest skyscraper Burj Dubai on December 2.

“We expect the fourth-quarter results to be a strong catalyst, since the company will start the delivery of properties in Burj Dubai by December 2009...,” Credit Suisse analysts Ahmed Badr and Hans Zayed said in the note. “The company would only be able to maintain high profitability through recurring revenue once it delivers its pre-sold property portfolio in Dubai.”

Emaar reported on Thursday that its third-quarter revenues rose to Dh1.95 billion, up 12 per cent from the same quarter in 2008. Credit Suisee said that Emaar achieved a gross profit margin for the third quarter of 56.3 per cent, compared to the bank’s earlier estimate of 50.9 per cent, due to revenue from high-margin, pre-sold properties.

Emaar’s malls and hotels portfolio also did well in the last quarter, though the company did not provide details, the bank said.

“We expect recurring income from malls and hotels to reach 19 per cent of revenue in 2009, and increase to 40 per cent of revenue by 2012,” Credit Suisse said.

Citigroup Global Markets, meanwhile, kept its ‘buy’ rating for Emaar, with a target price of Dh7.70. Citigroup said the developer’’s near-term focus would be on completing Burj Dubai and to hand over additional homes in Downtown Burj Dubai.

In spite of its ‘buy’ rating, Citigroup expressed concern about the dearth of information about the status of Emaar’s merger with the Dubai Holdings property units.

“The proposed merger with Dubai Holdings’ subsidiaries brings uncertainty over whether more exposure to Dubai will be offset by potentially greater government support,” Citigroup said in a note. The proposed merger holds risks, as it is still not known if the deal will be negotiated on commercial terms or if non-government shareholders will have a vote that reflects their financial stake, the bank said.

Another, more fundamental risk for Emaar is the continued downturn in Dubai’s real estate market.

“Dubai rent and off-plan prices are unlikely to recover until local mortgage lenders are relaunched,” Citigroup said.

What’s more, Emaar’s expansion into emerging markets will take time and encounter “teething problems,” the bank said. Emaar investments overseas include the Emaar MGF in India and Emaar Economic City in Saudi Arabia.

· rocel@khaleejtimes.com