How high can Emaar’s shares go?

I start this column with a true story. Some weeks back, a friend of mine arrived in Dubai – his first time in the emirate since 2006. Jetlagged from the seventeen-hour flight from Los Angeles, he called me on the way to his hotel in Downtown Dubai.

“I’ve no idea where I am. I’ve been in the taxi for fifteen minutes – all I know is I am definitely not in Dubai.”

I quickly explained to him that Downtown Dubai didn’t exist seven years ago. In fact, most of what he was looking out at had only sprung up in the last four years. And most of it had been built by Emaar.

Over the past four years, as the company took a battering at the hands of the stock market, it’s easy to forget just how much Emaar has achieved. Finally, investors, analysts and - dare I say it - a previously sceptical media, is now singing the same tune.  While many of us disagree on the reasons, no one can argue with the numbers: as I write this, Emaar’s share price has once again crossed AED5. On July 1 last year it was AED2.85.  The one-year return is a staggering 74 percent, with January 2013 recording a 30 percent rise in the share price. That’s the best start to a year for the stock since the company went public in 2000. No wonder 46 million shares were traded in a single day earlier this month (three times the daily average) when the price first crossed the AED5 barrier.

So just what are the reasons? The easy, obvious and commonly touted explanation is that Emaar’s resurgence represents a comeback for Dubai’s property market. I just don’t agree. Sure, creating prime real estate assets is what the company does  best, and there is no shortage of gems in the pipeline, including the Modern Art Museum & Opera House District and its involvement in the Mohammed Bin Rashid City project. Sure, there has been huge hype around recent new project launches such as Panorama at The Views, and The Address The BLVD in Downtown Dubai.

But having some fancy projects in the pipeline, coupled with the start of a new property boom, doesn’t give you a 30 percent share price rise in one month. In any case, the jury is still out on exactly how strong the recovery in the property sector is – property prices are rising, but not everywhere.

The reasons, I believe, are laid out clearly in the 2012 results, which saw an 18 percent rise in net profits to $577m, while revenues came in at $2.24bn – very similar to 2011’s figure of $2.209bn.

Break this down further, and you see that the company’s shopping malls and retail business brought in $583m (27 percent up on the previous year) while hospitality and leisure revenues rose 13 percent to $375m.

This is what the experts like to call “recurring” revenues. With 60 million visitors to the Dubai Mall in 2012, Emaar has pretty much guaranteed itself a massive revenue stream for years to come – the same with The Address Hotels + Resorts which ran at 85 percent occupancy last year.

Last year, these “recurring revenues” accounted for half of the company’s entire turnover. While everyone was busy giving Emaar a good kicking during the past four years, chairman Mohamed Alabbar and his team were fundamentally changing the nature of the business. The end result is that Emaar is far more dependent now on the more secure (and lucrative) tourism market. What’s going on in property is certainly a bonus, but no longer key to Emaar’s future.

And what of the future? HSBC Holdings has put a AED6 price estimate on the shares. Given the fundamentals, recent history and current momentum, don’t be surprised to see the price cross AED10 in the next twelve months.

Anil Bhoyrul is the Editorial Director of Arabian Business.