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Sun 22 Oct 2017 12:08 PM

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Emaar board approves IPO of development unit

The flotation would be the third of an Emaar business unit

Emaar board approves IPO of development unit
Emaar Group's shareholders have approved listing its property development unit, Emaar Development, in an initial public offering next month.

Emaar Group's shareholders have approved listing its property development unit, Emaar Development, in an initial public offering next month.

Emaar Properties, which spearheaded a building boom in the emirate over the past 15 years and built the world’s tallest skyscraper in Dubai, will sell 20 percent of its real-estate development business, according to emailed statement on Sunday.

Emaar Development is targeting the distribution of aggregate dividends of no less than $1.7 billion, to be paid over the next three financial years ending December 2020.

The retail offering subscription period will be open for 11 days starting November 2. Emaar Properties’s shares advanced more than 25 percent since the plan was first announced in June.

Emaar’s development business “has continued to do well despite an economic slowdown with offplan sales growing at double-digit rates, which shows what a strong brand it is,” said Ayub Ansari, an analyst at Securities & Investment Co. in Bahrain.

“There is a delivery backlog of 40 billion dirhams ($11 billion) that’s going to be recognized over the next four years, so clearly there’s earning” potential, he said.

Excluding Orient UNB Takaful PJSC, which hasn’t traded since it was listed in June, there have been no IPOs in the UAE since 2014.

What exactly is being listed?

The real estate business’s share sale will be the fourth of Emaar’s units to break away from the mother company - including one in Egypt and another in Saudi Arabia - but the second in the UAE. The first, Emaar Malls, is one of eight companies to have sold shares in an IPO since the start of 2010, almost all of which are trading below their offer price.

The UAE real-estate arm contributed 40 percent of Emaar’s revenue and 31 percent of its gross profit in the first half, while the malls business provided 20 percent of income and 34 percent of profit, according to its results presentation. The hotels business contributed 10 percent of revenue.

Why list the property development arm separately?

Emaar, the parent company, has traded at a persistent discount to consensus fair net asset value. But spinning off its subsidiaries has helped reduce that discount, said  Mohammad Kamal, an analyst at Dubai-based Arqaam Capital Ltd. The plan to sell the domestic development arm has already helped unlock value, he said.

Are there any risks to this strategy?

Carving out a business that’s fully focused on property development means it will no longer have access to recurring income Emaar’s other units, said Kamal at Arqaam. If demand for real estate in the UAE wanes and sales slow, the company may need to increase borrowings to complete projects.

“The earnings of a carved out entity are more volatile than the holding company that has access to diverse and recurring income streams,” Kamal said.

But also, investors would be able to gain exposure to one segment without taking on others such as Emaar Malls and Emaar Misr, says Issam Kassabieh, an equities analyst at Menacorp Financial Services in Dubai.

“If I were to look at one critical factor, I would look at off plan sales, which has been growing for Emaar, and that’s very reassuring,” said Ansari at SICO Bahrain.

Wouldn’t the hotels business be better for an IPO?

Hotel room rates in Dubai have been falling for the last three years amid increased supply, said Ansari at SICO Bahrain.

“Hospitality may be a compelling story in a couple of years, in the run up to the Expo2020,” Ansari said.

So is Emaar Development a good buy?

Emaar’s UAE development’s adjusted net asset value is 24.1 billion dirhams as of September, the company said in an emailed statement on Sunday. The business looks “fairly valued,” according to SICO’s Ansari, but a decision on how attractive the IPO would depend on its offer price.

Considering the Expo 2020 factor and the segment’s exceptional results, "the stock is a good call,” Menacorp’s Kassabieh said. “It’s the first IPO in a while and it will restore appetite."