EMAAR MALLS GROUP IPO

Transcription

1 INVESTMENT RESEARCH EMAAR MALLS GROUP IPO Fair Value: AED 2.28 Likely Listing Premium: 15%

2 EMAAR MALLS GROUP PJSC (EMG) under formation WEALTH MANAGEMENT We arrive at a NAV of AED 2.28 per share for EMG based on income capitalisation. We expect a listing premium of 15% to our NAV owing to the Group s holding of premium retail assets in a strong macro environment and a robust development pipeline IPO NOTE September 2014 DUBAI REAL ESTATE REGIONAL MALLS OUR NAV (AED) : 2.28 LIKELY LISTING PREMIUM : 15% INVESTMENT CASE Valuation: Our estimated net asset value for Emaar Malls is AED 2.28 against the valuation of AED 2.55 arrived at by Jones Lang LaSalle, an independent real estate valuer. Due to the Group s holding of premium retail assets in a strong environment, a robust development pipeline and positive sentiment surrounding the IPO, the stock could see an upside of 15% from our estimated NAV, resulting in a price of AED Valuation Methodology Carried out by Method Net Asset Value Individual Property Valuation Valued using of DCF, Income Capitalisation and AED 2.55 per Jones Lang Residual Land Value Methods depending on Share LaSalle individual property (June ) Net Asset Value = Market Value of Assets - Net Debt Fincorp Income Capitalisation Approach on an overall portfolio basis Gross Net Asset Value = Net Pro Forma NOI/Economic Cap Rate Net Asset Value = Gross Net Asset Value - Net Debt AED 2.28 per Share (FY 2014) US regional malls enjoy a higher average 2014E P/FFO multiple of 18.8x compared to the Asian and European comparables of 16x and 10.52x respectively. Based on a high 2014E P/FFO multiple of 22.4x, EMG may trade up to AED ANALYSTS Nandakumar Chenicheri Asst. Vice President - Research nandakumar@fincorp.org Tel: (+968) Ext. 353 Gaurav Ramaiya Asst. Vice President - Research gaurav@fincorp.org Tel: (+968) Ext. 348 Mable C. Pereira Asst. Vice President - Research mable@fincorp.org Tel: (+968) Ext. 342 Key expansions include addition of around 600 thousand sq. ft. of GLA in the Fashion Avenue area of Dubai Mall which is expected to get completed in June 2016 and add around AED 307 million in rental income on an annual basis. We have also estimated the income from Arabian Ranches 2 and Spring Village Centre. However, we have excluded the Boulevard Expansion, Zabeel Expansion and Al Reem shopping centre projects as these are yet to materialize. KEY ESTIMATES (AED MN) Total revenue FFO P/FFO ,395 1, x 2014E 2,641 1, x 2015E 2,797 1, x 2016E 3,088 1, x CAGR 8.8% 11.0%

3 COMPANY OVERVIEW Emaar Malls Group (EMG) is the leading owner and operator of shopping malls in Dubai, UAE. Its portfolio of properties comprises four shopping malls, 30 community shopping centers and other retail properties, which together had a total Gross Leasable Area (GLA) of approximately 5.5 million sq ft. as at 30 June 2014 and a GLA occupancy rate of 95% in the six months ended 30 June EMG s properties include some of the most iconic malls, entertainment and community integrated retail centers in the Middle East, including The Dubai Mall, its flagship asset, which has been the most visited shopping and entertainment mall worldwide in each of the last three years with approximately 75 million visitors in EMG s properties developed as an integral part of the master plan developments of its controlling shareholder, Emaar Properties, are strategically located in key areas of Dubai that benefit from favorable socio-economic demographics and increasing tourism. EMG manages and operates its business through four primary divisions - Super-Regional Malls, Regional Malls, Community Integrated Retail and Specialty Retail. The following chart shows the revenue contribution of each of the four divisions along with a summary of its key properties and their respective occupancy rates: Dubai Mall The Flagship Asset The Dubai Mall is a regional and global retail and fashion destination located in the prestigious Dubai Downtown area. It has more than 1,000 main units, of which 26 are anchor tenants, including Bloomingdale s and Galeries Lafayette. Among its tenants are more than 80 international luxury fashion brands conveniently located in Fashion Avenue, The Dubai Mall s destination shopping area for international luxury fashion brands. The Dubai Mall s retail units also include more than 40 high-end jewellery and watch brands, and more than 400 apparel and accessories stores and electronics retailers. It has more than 170 food and beverage outlets located throughout the mall and in two large food courts, including over 25 casual dining restaurants located on the Waterfront Promenade, which enjoy views of the Dubai Fountain and Burj Khalifa, the world s tallest building. F I N C O R P W E A L T H M A N A G E M E N T Page 2

4 AED' million EMAAR MALLS GROUP PJSC IPO NOTE Key Highlights of Dubai Mall Dubai Mall was the most visited shopping and entertainment mall worldwide in 2011, 2012 and 2013 The Dubai Mall accounted for approximately 50% by value of all luxury goods sold in Dubai during 2013 It is the largest shopping mall in the world by total built-up area (approximately 12.1 million sq. ft.) It is the sixth largest in the world by GLA (approximately 3.7 million sq ft.) Emaar Malls Group - Key Financials 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, CAGR ( E) 8.8% CAGR ( E) 10.3% Total revenue EBITDA FFO E 2015E 2016E CAGR ( E) 11.0% Source: FINCORP Investment Research, IPO Prospectus SHAREHOLDING PATTERN The following table illustrates the Company s ownership structure and distribution of share capital between shareholders before and after Offering: Shareholding Pattern - Pre & Post IPO Shareholders Pre-IPO Post-IPO Emaar Properties PJSC / Emirates Property Holdings Limited Holding % being offered through IPO No. of shares held post IPO (FV AED 1.00) 100% 84.6% 15.4% bn Subscribing Shareholders % - 2 bn F I N C O R P W E A L T H M A N A G E M E N T Page 3

5 EXPANSION PLANS With a view to maximize returns from its existing portfolio through expansions and development of new assets, EMG currently has the following development pipeline: Development Description Expected Completion Fashion Avenue Expansion of the Fashion Avenue area in The Dubai Mall which can accommodate over 200 units for some of the world s top luxury brands and add approximately 600 thousand sq ft. of GLA to Fashion Avenue March 2016 Springs Village Redevelopment of the existing mall in Springs Village 2015 Arabian Ranches II Development of a new community shopping centre adjacent to the existing Arabian Ranches development End 2014 In addition, EMG, together with Emaar Properties, is currently evaluating the following projects which would be developed by Emaar Properties. These projects comprise: Project The Boulevard Expansion The Zabeel Expansion Description Conversion of a portion of the existing parking space of The Dubai Mall into retail space and constructing a connection to the retail space in the adjacent Fountain Views development, which, if undertaken, would add 400 thousand sq ft. of additional retail space to The Dubai Mall. Expansion of The Dubai Mall in the adjacent Zabeel area on land which has been made available by the Government. If undertaken, the expansion could add 400 thousand sq ft. of new retail space and 4,000 car parking spaces. The expansion of parking facilities could be completed as early as Al Reem Development of the Al Reem community shopping centre with an approximately 65 thousand sq ft. of GLA. COMPETITIVE ADVANTAGES EMG s business benefits from Dubai s high growth consumer oriented retail market that is forecast to grow at a CAGR of 11.1% between 2013 and 2017 based on forecasts by Business Monitor International. EMG s key assets are iconic global retail and leisure destinations integrated within Dubai s best known attractions. The Dubai Mall has been the most visited shopping and entertainment mall worldwide for each of the last three years. EMG s management has developed a best-in-class shopping mall portfolio and a track-record of creating significant shareholder value, with double-digit annual revenue growth during the last five years. EMG enjoys a strong, reputable and committed major shareholder in the form of Emaar Properties and has an excellent working relationship with the Government. EMG has unique access to attractive growth opportunities through its relationship with its parent Emaar Properties, which are expected to drive future growth of the company. F I N C O R P W E A L T H M A N A G E M E N T Page 4

6 EMG s strong balance sheet and prudent investment policy allows the Company to capitalize on growth opportunities. RISKS & CONCERNS All of EMG s properties are located in Dubai, and its financial performance is almost entirely dependent upon trading at The Dubai Mall EMG generated 83%, 84%, 83% and 82% of its rental income in 2011, 2012, 2013 and the first six months of 2014, respectively, from The Dubai Mall. Hence, any event that negatively affects the occupancy rate, rental yields or the performance of The Dubai Mall would ultimately have an adverse effect on EMG s financial performance. Poor economic conditions generally result in decreased consumer spending and tenants seeking to renegotiate the terms of their leases in their favour. The value and operating results of EMG s properties is dependent in part on the economic conditions that affect the Dubai economy and the conditions in the Dubai commercial and retail real estate markets Since all of EMG s properties are located in Dubai, EMG s results of operations can be significantly affected by financial, economic and political developments in or affecting Dubai and the UAE. The Dubai commercial and retail real estate markets may be affected by macroeconomic events, including the impact of adverse changes in global and local economic conditions, real estate market conditions, changes in interest rates, consumer spending, inflation rates, real estate taxes and other operating expenses, and the availability and cost of financing. EMG s results of operations depend on tourism in Dubai Approximately 40% of the visitors to The Dubai Mall in 2013 were tourists, including from countries such as China, Saudi Arabia, Russia and India. Accordingly, a decline in the attractiveness of The Dubai Mall as well as certain of EMG s other properties to international visitors, and a decline in tourism generally, would have a material adverse effect on total footfall levels, tenants trading performance, occupancy rates and rental income. The revenues of EMG s properties depend on anchor tenants and other major retail, entertainment and leisure tenants ability to attract shoppers Shopping malls are typically anchored by department stores and other large nationally and internationally recognized brands. As such, EMG s business depends on its relationships with major retail groups that franchise prominent or luxury brands and lease multiple units in its properties. EMG s business and results of operations could therefore be adversely affected if an anchor tenant or any of the major retail groups fail to comply with their contractual obligations, seek concessions in order to continue operations, or cease or reduce their operations. Delays in completion of development projects can impact our forecasts Delays in completion of development projects within the anticipated time frame and budget can have an adverse effect on our forecasts. Competition from other retail real estate assets in Dubai and elsewhere in the GCC Any oversupply of competing shopping centers in Dubai or the GCC region (either as a result of new F I N C O R P W E A L T H M A N A G E M E N T Page 5

7 developments or a decrease in the number of tenants or other occupants due to a decline in economic activity) may adversely affect EMG s rental income. Upcoming retail spaces in Dubai from Mall of the Emirates (8 million sq.ft. area project), Nakheel Mall and Citywalk may pose competition. VALUATION Following assumptions have been taken in our valuation Rental Income Growth in Rental income from existing properties is estimated at 10% YoY in FY With GLA occupancy rate at 99% for Dubai Mall and 95% for Dubai Marina Mall, we expect rental income growth for the existing properties at 5% in FY 2015 and FY 2016 (coming from expected hike in lease rentals). We expect the development of Arabian Ranches 2 community shopping centre to get completed in FY 2014 and contribute AED 23 million in rental income from FY We expect the development of Springs Village Centre to get completed by the end of June 2016 and have estimated a rental income of AED 22 million for the second half of FY We expect the development of Fashion Avenue area of Dubai Mall to get completed by June 2016 and generate a rental income of AED 153 million during the second half of FY We have excluded the Boulevard Expansion, Zabeel Expansion and Al Reem shopping centre projects as these are yet to materialize. We have estimated development costs of AED 58 million for Arabian Ranches 2, AED 142 million for Springs Village Centre and AED 1.3 billion for Fashion Avenue extension from FY 2014 to FY Average CIP refers to the average cost of the property under development. (AED Million) E 2015E 2016E Property under development ,170 0 Average CIP Source: FINCORP Investment Research F I N C O R P W E A L T H M A N A G E M E N T Page 6

8 Emaar Malls - Valuation (AED Million) 2014E 2015E 2016E Rental Income Existing properties 2,625 2,756 2,894 Arabian Ranches 2 23 Springs Village 22 Dubai Mall Fashion Avenue 153 Other income Total revenue 2,641 2,797 3,088 Expenses Operating exp (449) (461) (510) Sales and marketing exp (53) (56) (62) General and admin exp (158) (168) (185) Total expenses (660) (685) (757) Core NOI 1,981 2,111 2,332 Construction in Progress (CIP) Est. Yield 10% 10% 10% CIP NOI Pro Forma NOI 2,010 2,195 2,390 Leasing commissions and structural reserve (79) (84) (93) Tenant improvements (100) (100) (100) Net Pro Forma NOI 1,830 2,011 2,197 Economic Cap Rate 5.06% 5.06% 5.06% Gross Net Asset Value of Assets 36,174 39,741 43,418 Net Debt 6,560 6,560 6,560 Net Assets Value 29,614 33,181 36,858 No. of Shares (Million) 13, , ,014.3 NAV per Share Premium/(Discount) from IPO Price of AED % -1.9% -11.7% Premium/(Discount) from IPO Price of AED % 13.7% 2.4% Assumptions 2014E 2015E 2016E Rental Income Growth from Existing Properties 10% 5% 5% Operating exp/revenue -17.0% -16.5% -16.5% Sales & Marketing/Revenue -2.0% -2.0% -2.0% General & Admn/Revenue -6.0% -6.0% -6.0% Source: IPO Prospectus, FINCORP Investment Research Our estimated net asset value for Emaar Malls is AED 2.28 against the valuation of AED 2.55 arrived at by Jones Lang LaSalle, an independent real estate valuer. Due to the Group s holding of premium retail assets in a strong environment, a robust development pipeline and positive sentiment surrounding the IPO, the stock could see an upside of 15% from our estimated NAV, resulting in a price of AED F I N C O R P W E A L T H M A N A G E M E N T Page 7

9 While valuation of REITs can also be carried out using a dividend discount model, we have not employed the same for EMG as dividend stream is not clear at this point. EMG did not pay any dividends in FY 2011 to FY Company paid dividends of AED 3.55 billion till date in FY 2014, of which AED 2.75 billion was funded by receipts from Sukuk. While the company anticipates paying 50% to 70% of its funds from operations as dividends, dividend payments can vary based on the capital expenditure needs, operating expenses including interest and debt repayments. Estimation of beta is also difficult as there is no past trading history. PEER VALUATION We have also conducted a peer analysis based on Price to Funds From Operations (FFO) Multiple. We estimate FFO of AED 1.57 billion for FY 2014 for EMG which amounts to AED per share. US regional malls enjoy a higher average 2014E P/FFO multiple of 18.8x compared to the Asian and European comparables of 16x and 10.52x respectively. Based on a high P/FFO multiple of 22.4x, EMG may trade up to AED Name Ticker Country Mkt Cap Last Price Dividend Price/T12M FFO per Share Yield 2014E FY 2013 FY 2012 FY 2011 USD Mn LC High Low High Low High Low GLIMCHER REALTY TRUST GRT UNITED STATES 1,980 $ % 18.20x 22.88x 13.76x 21.63x 17.10x 17.69x 8.80x SIMON PROPERTY GROUP INC SPG UNITED STATES 52,056 $ % 18.17x 21.25x 16.17x 22.32x 17.29x 24.59x 17.60x TAUBMAN CENTERS INC TCO UNITED STATES 4,731 $ % 20.94x 27.71x 17.51x 24.52x 12.76x 21.93x 12.78x MACERICH CO/THE MAC UNITED STATES 9,175 $ % 18.23x 17.75x 13.85x 22.33x 14.61x 21.13x 15.12x US Regional Mall Average 3.1% 18.88x 22.40x 15.32x 22.70x 15.44x 21.33x 13.57x FORTUNE REIT FRT SINGAPORE 1,708 HK$ % 19.50x MAPLETREE COMMERCIAL TRUST MCT SINGAPORE 2,314 SGD % 19.60x AEON MALL CO LTD 8905 JAPAN 4,591 2, % 8.90x Asia Mall Average 16.00x CORIO NV CORA NETHERLANDS 5, % 14.60x KLEPIERRE LI FRANCE 8, % 8.84x HAMMERSON PLC HMSO BRITAIN 6,922 GBp % 8.12x Europe Mall Average 10.52x Source: Bloomberg, Fincorp Investment Research F I N C O R P W E A L T H M A N A G E M E N T Page 8

10 FINANCIAL SUMMARY Year ended 31 December AED 'mn E 2015E 2016E REVENUE Rental income 1,521 1,944 2,386 2,625 2,779 3,069 Other income Total revenue 1,525 1,950 2,395 2,641 2,797 3,088 Operating expenses (354) (362) (437) (449) (461) (510) General and administrative expenses (108) (102) (155) (53) (56) (62) Sales and marketing expenses (25) (39) (64) (158) (168) (185) EBITDA 1,037 1,446 1,739 1,981 2,111 2,332 Depreciation of property, plant and equipment (19) (17) (58) (75) (80) (85) Depreciation of investment properties (297) (297) (249) (252) (255) (296) EBIT 721 1,132 1,432 1,654 1,777 1,951 Finance costs (458) (401) (333) (410) (410) (410) PROFIT FOR THE YEAR/ PERIOD ,099 1,244 1,367 1,541 Earnings per share (AED): -basic 878 2,436 3,665 -diluted 878 2,436 3, Reconciliation to Funds from Operations Net Income ,099 1,244 1,367 1,541 Depreciation of property, plant and equipment Depreciation of investment properties Funds from Operations 579 1,045 1,406 1,571 1,701 1,922 FFO/Share Funds from Operations growth 81% 35% 12% 8% 13% Rental Income Growth 28% 23% 10% 6% 10% Operating exp/revenue 23% 19% 18% 17% 17% 17% Sales & Marketing/Revenue 2% 2% 3% 2% 2% 2% General & Admn/Revenue 7% 5% 6% 6% 6% 6% Source: IPO Prospectus, Fincorp Investment Research F I N C O R P W E A L T H M A N A G E M E N T Page 9

11 RESEARCH CONTACT DETAILS Nandakumar Chenicheri (+968) Ext: 353 Gaurav Ramaiya (+968) Ext: 348 Mable C Pereira (+968) Ext: 342 mable@fincorp.org BROKERAGE CONTACT DETAILS Mohammad Al Ghalayini (+968) Ext: 333 mohammad@fincorp.org Deena Omeir (+968) Ext: 334 deena@fincorp.org The Financial Corporation Co SAOG (FINCORP) PO Box 782, PC 131, Sultanate of Oman Tel: Fax: Disclaimer The research team of The Financial Corporation, SAOG (hereto referred as FINCORP) has prepared the information, analysis and expressed its opinion on the subject matter of this report. The information contained has been obtained from sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, FINCORP makes no guarantee, representation or warranty, whether express or implied, and accepts no responsibility or liability as to its accuracy or completeness of the data, being provided. All investment information and opinions are subject to change without notice. The investor will indemnify FINCORP and its directors, officers, and employees against any loss or damage or other liabilities (including costs), which they may suffer as a result of reliance on this report. This report is not to be relied upon in substitution for the exercise of independent judgment. Also, not all customers may receive the material at the same time. This document is for private circulation and information purposes only. It does not and should not be construed as an offer to buy or sell securities mentioned herein. FINCORP will not be liable for any direct or indirect losses arising from the use thereof, and the investors are expected to use the information contained herein at their own risk. FINCORP and its affiliates or their officers, directors and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. FINCORP and its affiliates may act as market makers or underwrite securities of companies discussed herein (or investments related thereto), and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. Authors or contributors of this report could have direct interest in the capital market or in the securities mentioned herein. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position, and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. This document is strictly for the use of recipients only. None of the material provided herein may be reproduced, rewritten, rehashed, published, resold or distributed in any manner whatsoever without the prior and explicit written permission of FINCORP. F I N C O R P W E A L T H M A N A G E M E N T Page 10