Saudi Arabia Real Estate

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1 Saudi Arabia Global Research Sector Equities Saudi Arabia June 20, 2013 Saudi Arabia Sector profit grows 31.1%QoQ in 1Q13 Improved policy framework and robust government budget to boost the sector Housing segment to drive the overall real estate sector Saturated office market poses a concern Rating: BUY: Dar Al-Arkan, HOLD: EEC & Akaria Saudi s real estate has bounced back after bottoming out in mid The real estate sector earnings rose handsomely in 1Q13, beating the overall market growth. Rental rates and sales prices continue to rise across the market while occupancy rates have moved up simultaneously as well. The residential market continues to drive the real estate sector as a result of high supply shortage in the Kingdom. The government remains focused on reviving the sector with more favorable policies and boosting lending activity in the Kingdom. However, rising oversupply in the office market particularly in the central region of KSA is a little worrisome. Sector profit grows 31.1%QoQ in 1Q13 Consolidated profit of KSA s real estate sector grew 31.1%QoQ, indicating a recovery in the sector. However, the profitability level remains considerably down (32.1%YoY) from 1Q12. The real estate sector outperformed TASI s earnings that grew 11.1%QoQ. As the real estate sector continues to see rise in prices and rates along with higher occupancy rates, we expect the growth in sector profits to continue. Residential market to drive the overall real estate sector KSA s real estate sector bottomed out around mid-2012 and has been recovering since then. The sector is primarily driven by the residential market due to the considerable housing shortage in the Kingdom. The government also continues to push the sector with the mortgage law and the additional-loan-program. Overall, the sector continues to recover with rental and sales prices increasing across the Kingdom. Improved policy framework and robust government budget to boost the sector The KSA government has continuously working towards implementing the new mortgage law to provide for affordable housing. At the same time, the Additional Loan Program is expected to provide further boost to the residential segment. Apart from this, the government s strong spending plan on infrastructure and construction projects is expected to augur well for the real estate sector. Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel: (965) Hettish Karmani Manager hkumar@global.com.kw Tel: (965) Global Investment House Oversupply to weigh on the Office market in Riyadh The Saudi office segment is experiencing an oversupply situation, mainly in the central region of KSA. As a result, vacancy rates have gone up, pushing down rental rates in the segment. With around 1.44mn sqm of spaces to be added over the coming three years, office rental market is expected to remain under pressure. Dar Al-Arkan remains the most attractive among peers Dar Al-Arkan remains our top pick owing to its ongoing revenue diversification efforts and aggressive capital expenditure plans. At the same time, the company s successful raising of new debt provides it with ample liquidity for acquisitions and development of existing assets. The stock currently offers the highest upside among Global Research Saudi sector and we have a BUY rating on the stock.

2 Valuation Methodology We adopt a SOTP approach to arrive at a 12 month fair value target for Saudi real estate equities. We construct our valuation methodology based on the following criteria: We assigned a RFR of 2.18% and MRP of 7.81%. For investment properties, we utilize a two-stage DCF approach valuing each project according to its respective credentials and discounting it at the project s WACC before arriving at a terminal reversion value based on available market capitalization rates on the fourth year of our forecast horizon. For development properties, we utilize a one-stage DCF approach extended over the life of the project. We discount each project s FCF by the relative WACC and build our assumptions for selling prices and margins based on management guidance and prevailing market trends. Where management guidance is not available on land sales, we use historical patterns and current market trends as basis to our forecasts. Individual prices and margins of land plots differ based on our assessments of factors including location, state of development and available information on comparable sales. We value land bank at historical cost based on its reported book value opting to stay on the conservative side. Market trends of listed real estate equities vary largely across MENA markets. Further, different accounting practices impede the construction of peer valuations. Accordingly, we do not incorporate relative valuations in our fair value targets. Risks to Valuation Land sales are highly volatile and unpredictable and form a key risk factor in forecasting revenues for Saudi real estate developers. The application and the impact of the new package of laws concerning credit extension to real estate developers and the mortgage law could impact future dynamics. 2

3 Dar Al-Arkan Valuation Our valuation for Dar Al-Arkan has yielded a SOTP fair value of SAR11.47/share. With the company currently trading at SAR10.30/share, our fair value target results in an 11.4% upside. Accordingly, we issue a BUY recommendation on Dar Al-Arkan stock. DAAR Equity Valuation Value (SAR 000) /share Methodology Retail Lease 1,553, Capitalization method 8.5% Commercial Lease 74, DCF Residential Lease 468, DCF Development Sales 4,404, DCF Land Sales 8,473, DCF Total NPV 14,974, Add: Investments 744, Book value 1Q13 Add: Cash 834, Book value 1Q13 Less: Debt 4,146, Book value 1Q13 Less: Provision end-of-service indemnity 16, Book value 1Q13 Total Equity Value 12,390, CMP Upside / (Downside) 11.4% Source: Company accounts and Global Research 3

4 Emaar The Economic City (EEC) Valuation Our valuation on EEC has yielded a SOTP fair value of SAR9.12/share. Our fair value target is 8.4% below the stock current market price of SAR9.95/share. Accordingly, we issue a HOLD recommendation on EEC stock. Emaar The Economic City Equity Valuation Value (SAR 000) /share Methodology Development Sales 297, DCF Investment Properties 3,527, DCF Land Sales 5,213, DCF Total NPV 9,038, Add: Investments 4, Book value 1Q13 Add: Cash 3,913, Book value 1Q13 Less: Debt 5,206, Book value 1Q13 Less: Minority Interest Book value 1Q13 Total Equity Value 7, CMP 9.95 Upside/(Downside) -8.4% Source: Company accounts and Global Research 4

5 Saudi Co. (Akaria) Valuation We utilize a SOTP approach to arrive at a fair value target for Akaria. Our fair value target of Akaria is SAR31.18/share implying an 5.0% upside potential from the current share price of SAR We, accordingly, issue a HOLD recommendation on the stock. Akaria - Equity valuation Value (SAR mn) /share Methodology Retail Lease 501, Capitalization method 8.5% Commercial Lease 791, DCF Residential Lease 1,161, DCF Land Sales 11, Book value 1Q13 Total NPV 2,467, Add: Investments 1,263, Add: Cash 10, Book value 1Q13 Less: Debt - - Book value 1Q13 Less: Minority Interest - - Book value 1Q13 Total equity value 3,741, CMP Upside potential 5.0% Source: Global Research 5

6 Peer Group Comparison Ticker Name of the Company PE(x) PB(x) EV/Sales EV/EBITDA Saudi Arabia EMAAR AB Equity Emaar Economic City ALARKAN AB Equity Dar Al Arkan Development SRECO AB Equity Saudi Co TIRECO AB Equity Taiba Co ADCO AB Equity Arriyadh Development Co Kuwait SRE KK Equity Salhia Co KSC MABANEE KK Equity Mabanee Company SAKO UAE EMAAR UH Equity Emaar Properties PJSC ALDAR UH Equity Aldar Properties PJSC SOROUH UH Equity Sorouh Co DEYAAR UH Equity Deyaar Development UPP UH Equity Union Properties PJSC RAKPROP UH Equity RAK Properties PJSC Qatar BRES QD Equity Barwa Co NA Egypt TMGH EY Equity Talaat Moustafa Group AMER EY Equity Amer Group Holding 3.8 NA NA NA HELI EY Equity Heliopolis Housing 17.0 NA 12.2 NA PHDC EY Equity Palm Hills Developments SAE NA NA MNHD EY Equity Medinet Nasr Housing OCDI EY Equity Six of October Development Source: Bloomberg & Global Research Values are on 1-year forward basis 6

7 Saudi Arabia Sector Investors sentiment turns positive towards the real estate sector Saudi real estate equities traded at a historical PBv average discount of 43% to TASI between June, 2008 and June, Currently, TASI PBv stands at 1.9x whereas real estate equities (RE index) trade at 1.3x at a 34% discount. This has been a considerable improvement over the past one year when the real estate equities were trading at a multi-year low discount of almost 55%. The rise in valuation of real estate equities indicates the market is finally factoring in the strong prospects of the real estate sector. TASI PBv & RE Index PBv January 2008 May % -12% -24% -36% -48% % Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Source: Bloomberg TASI PB (LHS) RE Index Discount to TASI (RHS) RE Index PB (LHS) Historical Average Discount (RHS) Akaria, EEC & DAAR Premium/Discount to BVPS 1Q10 1Q13 100% 60% 20% -20% -60% -100% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 DAAR EEC Akaria Source: Bloomberg Sector profit grows 31.1%QoQ, but remains down 32.1%YoY Real estate listed companies continued to outperform TASI s earnings growth by recording a 31.1%QoQ rise in earnings in 1Q13, while TASI s earnings grew 11.1%QoQ rise. This comes after the real estate sector outperformed the TASI in the years 2011 and 2012, clearly signaling a recovery in the real estate sector from the lows seen during the 2008 financial crisis. The rise in 1Q13 earnings was led by Akaria and Arriyadh Development. Meanwhile, EEC also saw a dip in earnings during 1Q13. Despite the stronger performance by the real estate sector, TASI continues to yield a higher return (ROE) than the real estate sector in All the stocks listed on TASI together yielded a return of 13.1% in 2012 while the real estate stocks together yielded a return of 7.2%. However, TASI s ROE declined in 2012 from 14.1% recorded in 2011, while that of the real estate stocks rose in 2012 from 5.4% in Furthermore, the real estate stocks have 7

8 witnessed a steady growth in ROE since We expect the ROE to improve further in 2013 as the industry continues to witness uptrend. TASI Earnings, Earnings & Index Performance % 30% 10% -10% -30% -50% TASI Earnings (LHS) Earnings (LHS) Index Performance (RHS) 40% 20% 0% -20% -40% -60% Source: Bloomberg, Reuters TASI & Listed Equities ROE % 12% 9% 6% 3% 0% TASI Equities Source: Bloomberg In terms of price performance, Saudi listed real estate equities continue to underperform TASI over the past five years since June, 2008 through to June, 2013, even though both the indices declined during this period. TASI declined 24.7% while the Index fell 29.4%. However, the indices have gained considerably since the lows of Meanwhile, both the indices (TASI and Index) underperformed the S&P 500 that gained almost 19.6% over the last five years. TASI, RE Index & S&P Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Source: Bloomberg S&P 500 TASI 8

9 Growing population to drive demand for the residential market Saudi Arabia s population has been growing steadily over the past few years, especially with the inflow of expatriate workers rising every year. The Kingdom s population stood at 29.2mn at the end of 2012, up from 25.8mn in Total expatriate population has grown to 9.4mn in 2012 from 6.7mn in As per the latest IMF estimates, the Kingdom s population is expected to rise up to 32.7mn by Majority of the current population resides in the regions of Makkah (26%) and Riyadh (25%), followed by the Eastern Province (15%). Going, forward, with the expectation of rise in the Kingdom population the demand for residential market is estimated to improve further. Saudi National & Expatriate Population (mn) Saudi Population by Geographic Distribution Other 27% Makkah 26% Saudi National Expatriate Aseer 7% Eastern Province 15% Riyadh 25% Source: Central Department of Statistics & Information Saudi Population % 4% 3% 2% 1% 0% Population (mn) - LHS Growth rate (%) - RHS Source: IMF Improved policy framework and robust government budget to boost the sector The Saudi government realizes the importance of favorable policies to not only attract new investment but also meet the local demand. The demand in the real estate sector is primarily driven by the housing market and the government has come up with measures such as the new mortgage law and Additional Loan Program to cater to the current needs of the market. Strong budget and the Housing Construction Program to aid growth For 2013, the Kingdom has set almost USD219bn for budget spending, up 18.8%YoY from Out of this, almost USD76bn has been allocated for capital expenditure. The Kingdom remains focused on investing in road, railway, power, and housing projects. High oil prices remain an important driver for KSA s economy, which will further drive the real estate sector. Despite a projected fall in oil prices in 2013, the forecasted prices are substantially higher than the estimates for KSA s 2013 budget. Meanwhile, given the increasing housing shortage in the Kingdom, the Saudi government put forward a SAR250bn housing construction program in As a part of this program, 500,000 new housing units are planned to be built across the Kingdom. The Saudi government also continues to work towards more public-private partnerships in order to address the housing shortage in the Kingdom. 9

10 New mortgage law to make a positive impact in the longer term The Saudi government introduced the new mortgage law that will facilitate funding options for the real estate market. The government recently released three of the five laws that make up the overall mortgage law while the other two laws are about to be finalized soon. The new mortgage law is expected to boost residential lending to the tune of USD30-32bn in the coming four to five years. REDF and Additional Loan Program to provide further support The government continues to support lending activity in the Kingdom through REDF and its recently started Additional Loan Program. In recent times, the REDF loan has seen a significant rise, jumping 19.8% to SAR94bn in 3Q12 from SAR79bn in Credit to & Construction REDF Loans (mn) and Loan Growth (%) e 30% % 20% 90 20% 10% 80 15% 0% 70 10% -10% 60 5% -20% Q12 0% % of Total Credit Growth rate (%) REDF Loans (mn) - LHS Growth (%) - RHS Source: SAMA Furthermore, the government has recently set up the Additional Loan Program for its citizens. As per the new program, all the nationals who get an approved loan from REDF, would be eligible to get additional loans from other partnering financial institutions and banks. National Commercial Bank is the first bank to have signed an MoU with the REDF and has already completed its first transaction under the program. Real estate loans have been increasing over the years, taking up a larger share of the Kingdom s total loans. Real estate loans have grown to SAR38.0bn in 2012 from SAR29.3bn in At the same time, real estate loans as a percentage of consumer loans rose to 13.0% in 2012 from 12.1% in 2011, while as percentage of total loans, it rose to 3.8% in 2012 from 3.4% in Saudi Population Growth e 15% 12% 9% 6% 3% 0% % of Consumer Loans % of Total Loans Source: SAMA 10

11 Prices in the residential segment continues to grow We expect Saudi s residential market to drive the overall Saudi real estate sector owing to the substantial housing shortage in the Kingdom. Demand for quality properties remains high, leading to a rise in rental rates and sales prices. During 1Q13, the Jeddah market saw villa prices coming in at the level of SAR4,500 per sqm, with the Western districts leading the market with prices standing at SAR6,300 per sqm. On the other hand, apartment prices grew in the range of 3-5%QoQ during the quarter, aided by better affordability in comparison to villas. Likewise, the Riyadh market also saw an increase in villa prices in the range of 1-2%QoQ around the level of SAR4,300 per sqm. Average price for apartments grew almost 2%QoQ to SAR2,860 per sqm, with strong activity seen in the Eastern, Southern and Western districts. Jeddah Average Villa Selling Prices (SAR/sqm) 5,000 4,600 4,600 4,500 4,500 4, ,200 4,100 3,800 3,400 Riyadh Average Villa Selling Prices (SAR/sqm) ,236 4,112 4,200 3,810 3, ,000 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13* Q11 1Q12 2Q12 3Q12 4Q12 1Q13* Source: Jones Lang LaSalle, Global Research The residential rental market also continued its uptrend in 1Q13 from 4Q12. The Riyadh market witnessed rental rates rise 2%QoQ for villas while that for apartments grew 1%QoQ. Rental rates in the Jeddah market advanced almost 4%QoQ for apartments; while villa rents stabilized during the quarter after having declined in 4Q12. Oversupply to put pressure on office rents The office market is currently seeing an oversupply situation and is expected to deteriorate further in the coming quarters. As a result, rental rates are expected to see downward pressure while the vacancy rates are expected to move up. The oversupply situation mainly remains a problem for the central region of the Kingdom. Riyadh is expected to see an addition of around 1.44mn sqm by 2015 and consequent impact is already visible in the market. Average prime rent in Riyadh declined 5%YoY decline in 1Q13 to SAR1,910 per sqm while vacancy rates rose to 16.0% in 1Q13 from 15.9% in 4Q12. On the other hand, the Jeddah market seems on a better foot with average prime rent rising 3.4%QoQ to SAR1,503 per sqm in 1Q13 while vacancy rates fell to 14.0% from 14.7% in 4Q12. Nevertheless, we remain concerned over the overall market prospects given the new addition of stock in the coming years. Jeddah Office Supply ( 000 sqm) Riyadh Office Supply ( 000 sqm) 1,000 4, ,200 2, , ,669 1,883 1,883 2,490 3, Completed Future supply Completed Future supply Source: Jones Lang LaSalle, Global Research 11

12 Demand continues to rise in the Retail segment leading to higher rentals In the retail market, Riyadh continues to see an upward trend in rental rates and occupancy rates. On the other hand, the Jeddah market has remained primarily stable. Both the markets have not witnessed any major addition of new stock, while demand has been steadily on the rise, especially in Riyadh. We expect Riyadh s market to witness higher rents in the coming quarter, whereas the Jeddah market is expected to remain mostly stable. Jeddah Retail Stock ( 000 sqm) Riyadh Retail Stock ( 000 sqm) 2,000 1,200 1,600 1, , ,138 1,214 1,214 1,332 1, Completed Future Supply Completed Future Supply Source: Jones Lang LaSalle, Global Research Hospitality segment remains mixed In the hospitality segment, Jeddah remained a strong performer, while Riyadh continued to struggle. In Jeddah, ADR jumped almost 5%YoY to USD234, with occupancy levels inching up to 82%. Conversely, Riyadh s ADR declined 2%YoY to USD255, while occupancy fell to 56%. Meanwhile, the Makkah hospitality market could deteriorate in the medium term due to decline in pilgrims arriving this year. The Kingdom recently announced that it plans to reduce pilgrim from the domestic region by 50% and abroad by 20% in order to undertake expansion of the Holy Mosque. However, this is expected to prove beneficial in the long term as the current expansion will add almost 400,000 sqm to accommodate additional 2.2mn worshippers. Consequently, ADR and occupancy rates are expected to be boosted. Jeddah Hotel Performance (YTD) Riyadh Hotel Performance (YTD) % 85% 82% 80% % 75% 70% % 70% 65% 69% 75% 70% 65% % 60% 62% 57% 56% 65% 60% 55% % % ADR (USD) - LHS Occupancy (%) - RHS ADR (USD) - LHS Occupancy (%) - RHS Source: Jones Lang LaSalle, Global Research Key concerns/risks Despite the bright prospects of the real estate sector, we reckon that a decline in oil prices, coupled with an extended period of project slowdown, could affect the sector. 12

13 Saturation in the office market could hurt the sector Saudi s office market is currently experiencing an oversupply situation, mainly in the central region of the Kingdom. We expect this to impact the overall office market and force down rental rates in the coming years. At the same time, vacancy rates are also expected to go up in the market. Decline in oil prices remains a concern Global oil prices have declined in the past few months as a result of rising supply coupled with concerns regarding global demand growth. Shale energy revolution in the US has been driving the current oversupply situation in the global markets. This has been further confirmed by the recent report from the IEA showing that the current oversupply situation has led to a decline in oil prices despite an upward revision in demand forecast. On the other hand, concerns over global oil demand have arisen due to a slowdown in demand from China. Furthermore, continued negative sentiment in the commodities market has been exerting pressure on oil prices. Slower project awards to could hurt the sector in the medium term The overall real estate and construction sector saw a considerable slowdown in projects awarded in the KSA in The government has struggled in taking forward projects from their bidding stages to the approval stages due to a staggering pipeline of projects. If the project awards continue to remain slow in 2013, the real estate sector could be hit hard. Outlook The Saudi real estate seems to have recovered well over the last one year. Rental and sales prices have risen across the sectors with the residential segment leading the way. The improvement can also be seen in the earnings growth of the real estate companies that has outperformed the overall market as well. With further support from the government in the form of more favorable regulatory framework and improved market sentiments, we remain confident of the prospects of the sector going forward. 13

14 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Global Research Saudi Arabia Dar Al-Arkan (DAAR) BUY Target Price SAR11.47 Market Data Bloomberg Code: ALARKAN AB Reuters Code: 4300.SE CMP (18 th Jun 2013): O/S (mn) 1,080 Market Cap (SAR mn): 11,124 Market Cap (USD mn): 2,966 P/E 2013e (x): 10.3 P/BV 2013e (x): 0.6 Price Performance 1-Yr High (SAR): Low (SAR): 7.50 Average Volume ( 000): 27,255 1m 3m 12m Absolute (%) Relative (%) Price Volume Performance Volume (mn)-lhs Source: Reuters Hettish Karmani Manager hkumar@global.com.kw Tel.: (965) Global Investment House Dar Alarkan (SAR) - RHS Earnings rose 65.0% QoQ but fell on a YoY basis Company successfully raised new Sukuk to fund its projects Company focusing on acquisitions & development of existing assets Diversification of revenue mix to continue Revise our TP to SAR11.47/share; upgraded to BUY We are confident about the outlook of Dar Al-Arkan. Successful raising of new Sukuk has provided the company with ample liquidity which will be used carefully for developing existing projects and may also be used for acquiring strategic and attractive land / property assets. The company expects capital expenditure of SAR2bn in 2013 for the land purchases and spending on projects. As of 1Q13, Dar Al Arkan had a land bank worth SAR12.5bn spread across an area of 35mn sq.m, ensuring a continuous inflow of revenues. The company has been highly successful in monetizing its land developments at high margins and generating liquidity when required, especially over the past two years. The company has already embarked upon its strategic plan to focus on diversifying its income stream between recurring income assets and property developments and we expect this to materialize over the next five to seven year period. Thus, we revise our target price to SAR11.47/share and upgrade the stock with BUY rating. Earnings rose 65.0% QoQ but fell on a YoY basis Dar Al-Arkan s net income rose by 65.0% on a QoQ basis to SAR237.6mn compared to SAR144.0mn in 4Q12. The increase in net income was mainly due to higher gross margins achieved on property sales which can be attributed to better geographical location and development status of the properties sold, as well as lower financial charges for the period. However, on a YoY basis earnings were lower because of a reduction in non-operating income and higher operating expenses. These factors were only partially offset by the increase in gross margin from the properties and lease revenues as well as higher rental income from leases. Revenue declined marginally on a YoY basis Dar Al-Arkan s revenue dropped marginally on a YoY basis to SAR835.8mn. This was mainly owing to a fall in land sales, down to SAR810.9mn in 1Q13 from SAR850.8mn in 1Q12 and SAR847.6mn in 4Q12. However, land sales continued to be the biggest contributor (97.0%) to revenue. On the other hand, leasing revenue grew 435.0%YoY to SAR24.9mn compared to SAR4.7mn in 1Q12. The significant rise indicates the company s shift in focus towards generating more revenue from leasing operations. Growth in leasing revenue was also boosted by higher occupancy rates experienced in the areas of Riyadh and Makkah during the quarter. With the opening of the Al-Qasr Mall, we expect to see leasing revenues surge in the coming quarters. As for residential sales, we expect a pick-up in activity boosted by Shams Arriyadh and Shams Al Arous Phase I. 14

15 Revenue (SARmn) e 7,000 6,000 5,000 4,000 3,000 2, E 2014E 2015E 2016E Source: Company accounts and Global Research Higher income on property sales boosted gross margins in 1Q13 Dar Al-Arkan margins rose in 1Q13 compared to those in 4Q12 and 1Q12. Gross margin rose to 44.9% in 1Q13 from 35.2% in 4Q12 and 42.3% in 1Q12. Meanwhile, operating margin improved to 38.1% in 1Q13 (the same level as in 1Q12) from 27.6% in 4Q12. The improvement in margins was driven by a notable rise in land sales margin, which increased to 44.4% in 1Q13 from 34.4% in 4Q12. On the other hand, property leasing margins declined marginally to 63.8% in 1Q13 from 65.3% in 4Q12, but remained considerably higher than the level recorded in 1Q12 (53.4%). Going forward, we expect gross margin to improve in 2013 due to a low base effect from Gross Margin (%) e Operating Margin (%) e 41% 36% 40% 39% 38% 35% 34% 33% 32% 37% E 2014E 2015E 2016E Source: Company accounts and Global Research 31% E 2014E 2015E 2016E Company successfully raised new Sukuk to fund its projects Dar Al-Arkan recently announced that it sold the first tranche of a SAR2.8bn (USD750mn) international Islamic bond. The first tranche was for SAR1.69bn, at a profit rate of 5.75% annually. The remaining tranches of the Sukuk will be issued over the next 12 months. The Sukuk program aims to fund the company's projects and will also be used for acquiring further land / property assets and developing existing assets. In July 2012 the company repaid a SAR3.75bn Sukuk, which was issued as part of its Islamic structured debt program (Sukuk) initiated in 2007 to help finance its projects in the kingdom. In May 2013, international credit rating agency, Standard & Poor's ("S&P"), revised DAAR's Credit rating outlook to Positive from Stable and affirmed it at B+. The revision of DAAR s outlook to Positive was a result of DAAR's operating performance, which is proving to be resilient and stable, thanks to favorable market conditions and an attractive property portfolio. The review highlighted that DAAR's strategic plan will focus on diversifying its income streams by increasing the proportion of revenue from recurring income assets and property developments. The quality of the company s property portfolio has been demonstrated by DAAR's ability to monetize its land developments at high margins and generate liquidity when required over the past two years. DAAR was also successful with the timely repayment of its SAR3.75bn (USD1bn) Sukuk at maturity, which resulted in the reduction of its overall debt and strengthening of its balance sheet position. The company has to repay SAR750mn worth of Sukuk will became due in short term loan 2014 while and 15

16 recently raised SAR1.69bn in 2Q13. Dar Al Arkan other repayment due are in 2015 and 2018 amounting to SAR1.6bn each. Cash & Total Debt Q13 10,000 8,000 6,000 4,000 2, Q13 Cash (SAR mn) Total Debt (SAR mn) Source: Company accounts and Global Research Dar Al-Arkan remains focused on business diversification Dar Al-Arkan continues to emphasize on diversifying its revenue streams and, thereby reduce its dependence on land sales. The company indicated that it is aiming to bring down the contribution of land sales to close to 40% in the next five to seven years, while increasing the level of leasing and residential sales to almost 40% and 20% respectively. Dar Al- Arkan s efforts are starting to pay off - in 2012 leasing revenue surged 252.0%YoY to SAR52.8mn, so the contribution of leasing revenue to overall revenue increased to 1.5% in 2012 from 0.5% in The trend continued in 1Q13, with land sales and leasing revenue accounting for 97.0% and 3.0% of overall revenue respectively. At the same time, leasing revenue continued to grow at a rapid pace. Target price revised to SAR11.47; we upgrade our rating to BUY To arrive at a fair target for DAAR, we utilized a SOTP valuation approach. Our current target price is 11.4% above the current market price of the stock; thus, we upgrade our rating to BUY on the stock. Dar Al-Arkan Equity Valuation Value (SAR 000) /share Methodology Retail Lease 1,553, Capitalization method 8.5% Commercial Lease 74, DCF Residential Lease 468, DCF Development Sales 4,404, DCF Land Sales 8,473, DCF Total NPV 14,974, Add: Investments 744, Book value 1Q13 Add: Cash 834, Book value 1Q13 Less: Debt 4,146, Book value 1Q13 Less: Provision end-of-service indemnity 16, Book value 1Q13 Total Equity Value 12,390, CMP Upside/(Downside) 11.4% Source: Company accounts and Global Research 16

17 Ratio Analysis Cash Flow Balance Sheet Income Statement Global Research Saudi Arabia Financial Statements (SAR mn) e 2014e 2015e 2016e Revenue 4,142 3,313 3,557 3,313 3,549 4,469 5,632 Revenue growth -24.2% -20.0% 7.4% -6.9% 7.1% 25.9% 26.0% Cost of sales (2,378) (1,943) (2,163) (1,988) (2,147) (2,726) (3,463) Gross Profit 1,764 1,369 1,394 1,325 1,402 1,743 2,168 SG&A (106) (91) (154) (148) (176) (244) (322) D&A (40) (28) (55) (21) (21) (23) (25) Operating profit 1,618 1,250 1,184 1,156 1,205 1,476 1,821 Other Income & Expenses (135) (113) (170) (48) (71) (43) (28) Profit Before Taxation 1,483 1,137 1,014 1,108 1,134 1,433 1,793 Income tax (27) (49) (25) (29) (29) (37) (47) Net Profit 1,456 1, ,079 1,104 1,395 1,747 Minority interest Net Profit Attributable to Shareholders' 1,456 1, ,079 1,104 1,395 1,747 Net profit growth -31% -25% -9% 9% 2% 26% 25% Cash and marketable securities 1,189 2, ,948 1,740 2,178 2,368 Receivables and prepayments 1,667 1,228 1,493 1,656 1,775 1,952 2,050 Development WIP 1,013 2,678 1,524 1,635 1,660 1,660 1,660 Net fixed assets 2,005 2,836 2,815 2,810 3,075 3,367 4,030 Land and projects in progress 16,310 13,690 14,869 14,874 14,889 14,904 14,919 Other long term assets 1,164 1, Total Assets 23,349 24,101 21,980 23,669 23,884 24,806 25,772 Accounts payables 1,115 1,107 1,268 1,078 1,086 1,095 1,104 Short-term debt 1,000 4,634 1, Long-term debt 6,721 2,758 3,289 4,979 4,143 3,704 3,644 Other liabilities Retained earnings 2,827 3,806 4,695 5,774 6,878 8,273 9,321 Other Adjustments 11,673 11,782 11,617 11,617 11,617 11,617 11,617 Total Equity & Liability 23,349 24,101 21,980 23,669 23,884 24,806 25,772 Cash flow from operating activities 2,410 2, ,235 1,668 Cash flow from investing activities (1,802) (351) 379 (17) (286) (315) (689) Cash flow from financing activities (1,643) (348) (3,034) 800 (897) (482) (789) Change in cash (1,035) 1,317 (1,970) 1,412 (208) Net Cash at End 1,189 2, ,948 1,740 2,178 2,368 Gross margin 42.6% 41.3% 39.2% 40.0% 39.5% 39.0% 38.5% Operating margin 39.1% 37.7% 33.3% 34.9% 33.9% 33.0% 32.3% Net margin 35.1% 32.8% 27.8% 32.6% 31.1% 31.2% 31.0% Return on assets 6.2% 4.5% 4.5% 4.6% 4.6% 5.6% 6.8% Return on equity 10.0% 7.0% 6.1% 6.2% 6.0% 7.0% 8.3% Current ratio (x) Quick ratio (x) Debt / Equity (x) Times Interest Earned (x) EV/Revenues (x) EV/EBITDA (x) EPS (SAR) Book Value Per Share (SAR) Market Price (SAR) * Market Capitalization (SAR mn) 9,720 7,830 8,910 11,124 11,124 11,124 11,124 Dividend Yield 11.1% 0.0% 0.0% 0.0% 0.0% 0.0% 6.3% P/E Ratio (x) P/BV Ratio (x) Source: Company Reports & Global Research * Market price for 2013 and subsequent years as per closing prices on June 18,

18 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Global Research Saudi Arabia Emaar The Economic City (EEC) HOLD Target Price SAR9.12 Market Data Bloomberg Code: EMAAR AB Reuters Code: 4220.SE CMP (18 th Jun 2013): 9.95 O/S (mn) Market Cap (SAR mn): 8,458.0 Market Cap (USD mn): 2,255.3 P/E 2013e (x): 48.1 P/BV 2013e (x): 1.1 Price Performance 1-Yr High (SAR): Low (SAR): 7.50 Average Volume ( 000): 10,022 1m 3m 12m Absolute (%) Relative (%) Net income dips 30.0%YoY in 1Q13 Revenues drops 89.8%YoY in 1Q13 Infrastructure remains the key to EEC s long-term strategy Revise TP down to SAR9.12/share; HOLD maintained Emaar The Economic City (EEC) continued to struggle in 1Q13. Despite the strong development of the Seaport and rising revenue from land sales, we remain concerned about the residential development projects. As a result, we revise down our EPS estimate for 2013 and our target price of the stock to SAR9.12 per share. Thus, maintain our HOLD rating on the stock. Net income dips 30.0%YoY in 1Q13 EEC posted disappointing results, with net income dropping 30.0%YoY to SAR31.6mn in 1Q13 from SAR45.2mn in 1Q12. The fall is attributed to an 89.8%YoY decline in revenues during the quarter. However, a land transaction with the Port Development Company (PDC) restricted the fall in earnings. Price Volume Performance Revenues plunge 89.8%YoY; continue to deteriorate EEC s revenues plunged 89.8%YoY and 69.4%YoY, posing a major challenge for the company. Despite posting a 33.7%YoY growth in revenues in 2012, the slowdown in revenue generation was visible since 4Q12. Over the last few quarters, EEC adopted a strategy to generate the majority of its revenues from land sales due to its short cash cycle nature. The company launched the second phase of its Al-Talah Gardens project, setting attractive price points around SAR700/sqm. Similarly, EEC progressed well with the sale of industrial land over the last one year, bagging contracts with Cigalah Group and Sheikh Khaled Al Jufali. However, high dependence on land sales backfired for EEC in the previous two quarters, with land sales declining notably. The decline indicates the market s lack of appetite for EEC s land offering. Thus, we have factored in the sale of around 1million sq m from the Industrial Valley. Source: Reuters Volume (mn)-lhs EEC (SAR) - RHS In recent quarters, investment properties have become a key source of revenues for EEC, with most of the development projects nearing completion. In the Investment Properties segment, the development of Industrial Valley and Seaport remains EEC s main focus. In the Industrial Valley, EEC plans to offer around 4.8mn sq m for lease and gradually increase this to 8.8mn sq m in two to three years. We expect rents to remain mostly unchanged from Revenues (SAR mn) e Hettish Karmani Manager hkumar@global.com.kw Tel.: (965) Global Investment House 1, E 2014E 2015E 2016E Source: Company accounts and Global Research 18

19 At the same time, we foresee higher occupancy rates in the Industrial Valley this year. However, we expect activity to pick up in the second half of the year. On the other hand, the Seaport development is on track, with the first phase expected to be launched by the end of EEC plans to expand capacity at Seaport to 20mn TEUs from 4mn in Phase 1. Although utilization rates are expected to be low initially, revenue per TEU is likely to be in line with that at neighboring Jeddah Islamic Port. Recent trends indicate that some global shipping companies are likely to shift operations to the Seaport soon due to existing bottlenecks at Jeddah Islamic Port. The Seaport is expected to contribute to overall revenue mostly from 2014.We revise down our expectations for revenue growth. However, we continue to expect a considerable jump in 2013 revenues. Thereafter, we expect a dip in 2014, as we expect most of the residential development projects to sell out in EEC s revenues are expected to trend upward from Margins to ease with rising supply and competition EEC s margins were boosted significantly in 2012, as the company raised its share of revenues from the highmargin segment of land sales. Gross margin rose to 87.8% in 2012 from 76.4% in 2011, while operating margin increased to 40.2% from 30.6% over the same period. The company s margins were impacted substantially in 1Q13; however, as revenue activity picks up in the later quarters of 2013, we expect annual margins to recover. Gross Margin (%) e Operating Margin (%) e 90% 45% 86% 41% 82% 37% 78% 33% 74% 29% 70% E 2014E 2015E 2016E Source: Company accounts and Global Research 25% E 2014E 2015E 2016E We expect margins to trend downward in the long term due to rising supply of new stock in the market. At the same time, competition is expected to rise considerably, not only locally but also within the GCC region. UAE and Qatar s real estate markets have been witnessing upbeat activity in recent quarters. Meanwhile, Kuwait s real estate market is also on a rebound. Infrastructure development remains the key to EEC s long-term strategy EEC remains committed to its strategy of investing in infrastructure development and attracting investment from businesses to the King Abdullah Economic City (KAEC). The company continues to develop projects ranging from power & gas to railway network and seaport. This is expected to translate into employment growth in the city, which targets to generate 12,000 jobs by 2015 (from 2013). Consequently, the city is expected witness a surge in inflow of growing population from the Jeddah region, thereby resulting in higher demand for EEC s real estate products. This restores our confidence in the company s future prospects. Target price revised down to SAR9.12; we maintain a HOLD rating on the stock We used the SOTP approach to value EEC. We applied a one-stage DCF to development sales based on the life of each project and scheduled deliveries. For investment properties, including residential rentals, the Industrial Valley, the Seaport, and hospitality assets, we applied a two-stage DCF methodology. Our current target price is 8.4% below the stock s current market price. Thus, we maintain a HOLD rating on the stock. 19

20 Emaar The Economic City Equity Valuation Value (SAR 000) /share Methodology Development Sales 297, DCF Investment Properties 3,527, DCF Land Sales 5,213, DCF Total NPV 9,038, Add: Investments 4, Book value 1Q13 Add: Cash 3,913, Book value 1Q13 Less: Debt 5,206, Book value 1Q13 Less: Minority Interest Book value 1Q13 Total Equity Value 7, CMP 9.95 Upside/(Downside) -8.4% Source: Company accounts and Global Research 20

21 Ratio Analysis Cash Flow Balance Sheet Income Statement Global Research Saudi Arabia Financial Statements (SAR mn) e 2014e 2015e 2016e Revenue Revenue growth -65.1% 348.4% 33.7% 13.9% 2.0% 7.9% 2.7% Cost of sales (155) (96) (67) (81) (86) (96) (102) Gross Profit (64) SG&A (185) (142) (213) (261) (273) (301) (312) D&A (58) (45) (47) (65) (68) (70) (77) Other operating income (283) Operating profit (590) Other Income & Expense 12 (36) (25) (34) Profit Before Taxation (578) Income tax (6) (6) (5) (5) (5) (6) (7) Net Profit (584) Minority interest Net Profit Attributable to Shareholders' (584) Net profit growth -89% n/m 129% -7% 17% 12% 9% Cash and bank balance 339 1,710 3,242 3,310 3,448 2,714 1,917 Receivables and prepayments Development properties 1,103 1, Other current assets 14 3, Assets classified as held for disposal Other long term assets Net fixed assets 6,884 7,156 8,154 8,386 8,628 8,881 9,140 Total Assets 8,885 13,746 13,884 14,317 14,711 14,262 13,782 Accounts payables 1,442 1, ,018 1,102 1,246 1,339 Short-term debt Long-term debt - 5,062 5,168 5,271 5,377 4,553 3,729 Other liabilities Share capital 8,500 8,500 8,500 8,500 8,500 8,500 8,500 Retained earnings (1,202) (1,120) (930) (755) (550) (320) (69) Total Equity & Liability 8,885 13,746 13,884 14,317 14,711 14,262 13,782 Cash flow from operating activities (350) (64) (330) Cash flow from investing activities (198) (3,565) 1,862 (358) (380) (404) (430) Cash flow from financing activities - 5,000 (0) (824) (824) Change in cash (548) 1,371 1, (733) (798) Net Cash at End 258 1,711 3,242 3,310 3,448 2,714 1,917 Gross margin n/m 76.4% 87.8% 87.0% 86.5% 86.0% 85.5% Operating profit margin n/m 30.6% 40.2% 34.5% 32.8% 31.8% 30.0% Net Profit margin n/m 20.2% 34.7% 28.3% 32.3% 33.6% 35.7% Return on assets -6.6% 0.6% 1.4% 1.2% 1.4% 1.6% 1.8% Return on equity -8.0% 1.1% 2.5% 2.3% 2.6% 2.8% 3.0% Current ratio (x) Quick ratio (x) Debt / Equity (x) EBITDA coverage ratio EV/Revenues (x) EV/EBITDA (x) EPS (SAR) (0.69) Book Value Per Share (SAR) Market Price (SAR) * Market Capitalization (SAR mn) 6,035 6,248 7,055 8,458 8,458 8,458 8,458 P/E Ratio (x) na P/BV Ratio (x) Source: Company accounts and Global Research * Market price for 2013 and subsequent years as per closing prices on June 18,

22 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Global Research Saudi Arabia Saudi Company (Akaria) Market Data Bloomberg Code: SRECO AB Reuters Code: 4020.SE CMP (18 th Jun 2013): O/S (mn) Market Cap (SAR mn): 3,564.0 Market Cap (USD mn): P/E 2013e (x): 18.1 P/BV 2013e (x): 1.1 Price Performance 1-Yr High (SAR): Low (SAR): Average Volume ( 000): 406 1m 3m 12m Absolute (%) Relative (%) Price Volume Performance 3,000 2,400 1,800 1, HOLD Target Price SAR31.18 Net income rises 10.4%YoY but drops 25.7%QoQ Revenue grows 4.3%YoY; rental portfolio provides strong support Commercial segment remains a concern due to declining rentals Strong balance sheet among peers Revise TP down to SAR31.18/share; HOLD maintained Saudi Co. (Akaria) remains a strong growth story due to its robust rental portfolio. We foresee the company s earnings growing rapidly, aided by its residential projects. But the office rental segment remains weak due to the current oversupply in the market. We feel the overall growth prospects have already been factored into the stock price. Our target price currently stands at SAR31.18 per share and we maintain a HOLD rating on the stock. Net income rises 10.4%YoY in 1Q13 Akaria s net income rose 10.4%YoY to SAR42.2mn in 1Q13. The increase was led by a rise in rental income, coupled with a reduction in SG&A expenses. However, net income was 25.7% lower than that recorded in 4Q12. The decline seems more pronounced due to a one-off gain made from the sale of mutual fund units in 4Q12. Revenues grow 4.3%YoY; rental portfolio to benefit from uptrend in Riyadh Akaria s revenues grew 4.3%YoY to SAR63.2mn in 1Q13, but rose marginally (0.5%QoQ) compared to 4Q12. The rise in revenues has been led by a buoyant residential segment, with occupancy rates touching 90% while rental rates have grown in the range of 4-5%. The retail segment has also supported well witnessing a rise (up to 3%) in rental rates while occupancy rates remained within a healthy range of 70-80% On the other hand, the commercial (office) segment rental rates remain under pressure due to the current oversupply situation in Riyadh s market. Riyadh s commercial (office) market is expected to see an addition of around 1.44mn sqm by 2015, exerting further pressure on the rental rates. Revenue (SAR mn) e Source: Reuters Volume (000)-LHS Akaria (SAR) - RHS Hettish Karmani Manager hkumar@global.com.kw Tel.: (965) Global Investment House E 2014E 2015E 2016E Source: Company accounts and Global Research Going forward, we expect Akaria s revenues to increase. At the same time, the company s strong rental portfolio, especially the residential segment is expected to provide further support. 22

23 Margins to recover in 2013 Akaria s margins contracted in 2012 with a downturn mainly in retail and commercial segments. But the retail segment bottomed out by mid-2012 while the residential segment was already under recovery. Thus, we expect margins to move up in 2013 to almost the levels witnessed in However, we expect margins to soften in the next four to five years, with increasing supply of stock in Riyadh. Gross Margin (%) e Operating Margin (%) e 70% 66% 62% 58% 54% 50% E 2014E 2015E 2016E Source: Company accounts and Global Research 65% 61% 57% 53% 49% 45% E 2014E 2015E 2016E Strong balance sheet among peers, but constrained cash position in the medium term Akaria continues to maintain a strong balance sheet, positioning it strongly among its peers in the Kingdom. At a time when peers such as Dar Alarkan are struggling with high debt balances, Akaria has not carried any debt on its balance sheet over the past few years. At the same time, Akaria has been generating healthy cash flows from operations. Cash Balance (SAR mn) and Cash from Operations (SAR mn) e E 2014E 2015E 2016E Cash Balance (SAR mn) Cash from Operations (SAR mn) Source: Company accounts and Global Research Target price revised down to SAR31.18; maintain a HOLD rating on the stock We value Akaria s retail properties utilizing a capitalization rate of 8.5%. For other properties, we utilize a two-stage DCF methodology. The stock price has risen 14.2% in the past one year; thus, we feel Akaria s growth prospects have already been factored into the stock s price. As a result, our target price of SAR31.18 per share is 5.0% above the current market price of the stock. Thus, we maintain a HOLD rating on the stock. 23

24 Akaria - Equity valuation Value (SAR mn) /share Methodology Retail Lease 501, Capitalization method 8.5% Commercial Lease 791, DCF Residential Lease 1,161, DCF Land Sales 11, Book value 1Q13 Total NPV 2,467, Add: Investments 1,263, Add: Cash 10, Book value 1Q13 Less: Debt - - Book value 1Q13 Less: Minority Interest - - Book value 1Q13 Total equity value 3,741, CMP Upside potential 5.0% Source: Company accounts and Global Research 24