RESEARCH GCC EQUITY REPORT Aldar Properties (ALDR.AU) OVERWEIGHT CMP AED 1.50 Target AED 2.05 Upside 36.8% MSCI GCC Index 425.24 Abu Dhabi Securities Exchange 2,597.08 Key Stock Data Sector Real estate & Construction Reuters Code ALDR.AD Bloomberg Code ALDAR UH Equity Net Out. Shares (bn) 2.578 Market Cap (AED bn) 3.867 Market Cap (USD bn) 1.053 Avg. 12m Vol. (mn) 15.648 Volatility (30 day) 58.266 Volatility (180 day) 42.514 Stock Performance (%) 52 week high / low (AED) 4.64 / 1.26 1M 3M 12M Absolute 14.5-37.0-66.0 Relative 13.4-33.2-63.0 Shareholding Pattern (%) Government 33.33 Corporate and other Investors 11.67 Public 55.00 Aldar and ADX Index Quarterly Update Aldar Properties (Aldar) reported 9.5% YoY decline in total revenues to AED 1,791 million during 2010 from AED 1,979 million in 2009. Net loss was AED 12,658 million, as opposed to a net profit of AED 837 million in the prior year. Our 2011E sales estimate stands revised at AED 5,347 million on the expected completion of various projects during the current year. Our net profit estimate for 2011 is AED 47 million. Since the stock has declined 37% from our last update on January 06, 2011, we are revising our NEUTRAL rating to OVERWEIGHT with a target price of AED 2.05, implying an upside of 36.8%. Overview AED Million 2009A 2010A 2011E 2012E 2013E Revenue 1,979 1,791 5,347 6,610 7,845 EBITDA 712-11,678 977 1,150 1,459 EBITDA Margin 35.9% -652.0% 18.3% 17.4% 18.6% Net Profit 837-12,658 47 161 319 Net Profit Margin 42.3% -706.7% 0.9% 2.4% 4.1% Adjusted EPS (AED) 0.32-4.91 0.02 0.06 0.12 Total Assets 66,345 47,344 52,711 54,036 59,281 RoAE 5.1% -120.3% 0.9% 2.7% 5.3% Revenue Total revenues declined 9.5% YoY to AED 1,791 million during 2010, compared to AED 1,979 million during the prior year. Revenues from the core business, Property and Development Sales, plunged 45.3% to AED 909 million from AED 1,662 million, as the segment s contribution towards total revenues dropped to 50.7% from 84.0% in 2009. However, revenue from commercial and hotel operations is on a steady increase with the Hotels segment contributing AED 314 million and the investment property portfolio AED 416 million. Revenue from the School segment was AED 91 million, up 70.2% from AED 53 million during 2009. The Leisure segment s revenue increased multi-fold to AED 71 million from AED 7 million in 2009, thereby reflecting the company s strong impetus for diversifying revenue sources. Expenses Direct costs declined 2.5% to AED 1,503 million from AED 1,542 million in 2009, although increasing as a percentage of revenue by 601 bps to 83.9% from 77.9% during 2009. Furthermore, finance costs almost tripled to AED 718 million from AED 275 million. General and administrative expenses quadrupled to AED 4,890 million, whereas selling and marketing expenses dropped 42.9% to AED 83 million from AED 146 million in the previous year. Call us on +973 17549499 or email us at research@taib.com
Profitability Gross profit declined 34.1% to AED 288 million from AED 437 million in 2009. Accordingly, gross margin plunged 601 bps to 16.1% from 22.1% because of higher declines in revenues vis-à-vis direct costs. The company s finance income dropped 44.0% to AED 263 million, while other income was down 86.1% to AED 16 million. Further, the company recognised impairment and fair value losses amounting to AED 11,004 million in 2010 (AED 10,883 million in 4Q10). As a result, the company recorded net loss of AED 12,658 million during 2010, as opposed to net profit of AED 837 million during 2009. Peer Comparison For peer comparison, we have considered comparable companies in the real estate sector in the UAE such as Union Properties (UPP) and Emaar Properties (Emaar). Financial Performance of Comparable Companies in Real Estate sector UPP EMAAR Aldar 2009 2010 2009 2010 2009 2010 (AED Million) Sales 4,392 2,868 8,413 12,150 1,979 1,791 YoY change 20.7% -34.7% -21.5% 44.4% -60.2% -9.5% EBITDA 656 460 3,056 3,383 712-11,678 YoY change 110.9% -29.9% -19.3% 10.7% -78.5% NA Net Profit -498-1,529 327 2,448 837-12,658 YoY change NA NA 97.7% 648.7% -75.7% NA Total Assets 17,465 14,888 64,145 62,504 66,345 47,344 YoY change -9.1% -14.8% -3.8% -2.6% 33.3% -28.6% Shareholders' Equity 5,485 3,957 28,677 31,069 16,800 4,247 YoY change -8.3% -27.9% 2.0% 8.3% 4.8% -74.7% Ratios: Operating Profit Margin 14.0% 14.9% 27.8% 19.6% 31.2% NA EBITDA Margin 14.9% 16.0% 36.3% 27.8% 35.9% NA Net Profit Margin -11.3% -53.3% 3.9% 20.1% 42.3% NA RoAA -2.7% -9.5% 0.5% 3.9% 1.4% -22.3% RoAE -8.7% -32.4% 1.2% 8.2% 5.1% -120.3% Market Indicators: Adj. EPS (AED) -0.15-0.45 0.05 0.40 0.32-4.91 P/E (x) -1.96-0.64 59.55 7.96 4.62-0.31 Adj. BVPS (AED) 1.63 1.18 4.71 5.10 6.52 1.65 P/BV (x) 0.18 0.25 0.68 0.63 0.23 0.91 Current Market Capitalization (AED Million) 976 976 19,492 19,492 3,867 3,867 Source: Aldar s, UPP s and Emaar s financial statements
New Projects and Updates During March 2011, Aldar launched Al Ward in Al Raha Gardens and 28 new homes are now available for sale in the property. In the same month, the company delivered IKEA s flagship Mena store on Yas Island. Meanwhile, Standard & Poor s Ratings Services affirmed its B/B long- and short-term corporate credit ratings on Aldar. At the same time, the agency removed the ratings from CreditWatch, with a stable outlook. Risks and Concerns to Valuation: We expect the property market to recover during 2011, but an extended downturn could delay completion of projects currently underway, or defer new projects that could have a material impact on the company s overall performance. Valuation Methodology: We have used the DCF valuation method to arrive at the fair value of Aldar, as explained below: Assumptions: (i) Risk free Rate (Rf) of 3.16%, equivalent to 12-months average yield on a 10-year US T-bill; (ii) Levered Beta of 1.75; (iii) Terminal growth rate of 2.0% Based on the above and using the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 13.19% and a WACC of 5.40%. DCF Calculation DCF Valuation (FCFF Model) (in AED Million) 2011E 2012E 2013E 2014E 2015E NOPAT 393 507 760 1,054 1,610 Add: Depreciation and Amortisation 584 643 700 754 808 Less: Capex 962 992 941 911 902 Less: Change in Net Working Capital 367 204 543 514 978 Operating Free Cash Flows to Firm (OFCFF) -352-45 -25 382 538 Add: Non-Operating Cash Flows (After Tax Non-Operating Income) 85 296 313 327 385 Free Cash Flow to Firm (FCFF) -267 251 289 710 923 WACC (Ko) 5.40% 5.40% 5.40% 5.40% 5.40% Present Value / Discount Factor @ 0.9487 0.9001 0.8540 0.8102 0.7687 Long-Term Growth Rate (g) 2.00% Terminal Multiple 29.97 Nominal Terminal Value 27,670 Present Value of Free Cash Flows -253 226 246 575 710
Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 1,504 Terminal Value: Residual Cash Flow (FCFF of 2015E) 923 WACC 5.40% Long-Term/Terminal Growth Rate (g) 2.00% Divided by Capitalization Rate (WACC - g) 3.40% Equals Nominal Terminal Value 27,670 Implied Multiple of 2015E EBITDA 11.44 Times PV/ Discount Factor 0.77 Present Value of Terminal/Residual Value 21,269 Enterprise Value 22,773 Implied Multiple of 2015E EBITDA 9.42 Less: Market Value of Long-term Debts 19,913 Less: Minority Interest 0.11 Add: Surplus Cash 2,432 Equity Value 5,291 Net shares outstanding (in Million) 2,578 Fair Value Per Share (AED) 2.05 *figures in AED Million unless specified Sensitivity Analysis The following tables present a sensitivity analysis and indicate the probable nominal terminal value, discounted terminal value and enterprise value, given different growth rate and WACC assumptions. The shaded areas represent the most probable outcomes. Sensitivity Analysis of Nominal Terminal Value (AED Million) Discount Factor Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 4.40% 27,399 32,277 39,186 49,725 67,777 4.90% 23,889 27,535 32,436 39,378 49,968 5.40% 21,176 24,007 27,670 32,595 39,570 5.90% 19,017 21,281 24,125 27,806 32,754 6.40% 17,257 19,111 21,386 24,244 27,942 Discount Factor Sensitivity Analysis of Discounted Terminal Value (AED Million) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 4.40% 22,089 26,022 31,591 40,088 54,641 4.90% 18,804 21,674 25,533 30,997 39,332 5.40% 16,277 18,454 21,269 25,055 30,416 5.90% 14,276 15,975 18,111 20,874 24,588 6.40% 12,653 14,012 15,680 17,776 20,487 Discount Factor Sensitivity Analysis of Enterprise Value (AED Million) Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00% 4.40% 23,659 27,591 33,161 41,657 56,210 4.90% 20,341 23,210 27,069 32,533 40,869 5.40% 17,781 19,957 22,773 26,559 31,920 5.90% 15,747 17,447 19,583 22,346 26,060 6.40% 14,094 15,453 17,121 19,217 21,928
Investment Opinion The UAE real estate market is recovering after the supply-demand imbalance witnessed during 2009. Residential rental rates stabilised during the fourth quarter of 2010, declining 3% QoQ the lowest QoQ decline in 2010, according to Asteco, a property management company in the Middle East. Activities in the market are tenant-led as rents are more affordable and oversupply is still high. Prices for apartments fell 2% QoQ in 4Q10. Rents for villas dropped 1.0% QoQ during 4Q10, lower than that of apartments. Commercial property rents continue to dip sharply as supply outstrips demand. Going forward, Qatar winning the bid to host the 2022 FIFA World Cup will provide impetus for the UAE s builders as the Qatari government plans to invest more than USD 57 billion in infrastructure development including building new stadiums, additional hotel rooms, a rail network and road improvement programmes over the next decade. Besides, the local government is also encouraging developers by taking various initiatives to protect the property market such as funding almost one-fifth of the total value of completed buildings during 2010. Further, in March 2011, the Dubai International Financial Centre (DIFC) proposed to establish a mortgage bond market to revive the UAE real estate sector. The new mortgage model will reduce the risk and exposure of real estate developers and lending institutions in the UAE. Meanwhile, Tourism Development and Investment Co. (TDIC), a unit of the Abu Dhabi Tourism Authority, is likley to launch six hotel projects across the emirate this year. In addition, the Municipality of Abu Dhabi and Al Ain recently launched Tawtheeq project for streamlining registration of leasable properties and tenancy contracts. The Tawtheeq system is a platform that aims to regulate relationships and safeguard rights of the parties involved in the leasing process in accordance with a clearly defined mechanism, compile a unified database for all residential, commercial and industrial units and provide accurate information about various types of properties. Overall, we remain cautious on the UAE property sector as oversaturation is expected to continue in the near term and it will take some time for the surplus to be absorbed. During 2010, Aldar reported 9.5% decline in top-line, primarily due to the drop in residential units/land sales, and delayed delivery of properties. Further, the company s total loss was AED 12.66 billion as against a net profit of AED 837.37 million in 2009, due to impairment and fair value losses amounting to AED 11.30 billion in 2010. However, the company has started handing over a number of its flagship projects. In 2010, Aldar completed the Yas Links Golf Course and Ferrari World Abu Dhabi, the world s largest indoor Theme Park. Furthermore, the company handed over Al Bandar and Al Gurm projects. Additionally, the company launched two new projects - Al Bateen and Shiebat Al Watah in 2010. Meanwhile, the company is trying to diversify its revenue stream by focusing on operational business segments. In 2011, Aldar plans to deliver a number of properties, including mixed-use developments Al Muneera and Al Zeina on the Al Raha Beach. Aldar will also handover Al Buteen school in the Al Buteen area this year, as well as the Al Noor Tower - an office complex - in Al Muneera during 2H11. Completion of various development projects over the next two years will start contributing to top-line. Therefore, we expect the company to record AED 5.35 billion revenues in 2011. In addition, after reporting huge losses in 2010 due to impairments, the company expects to return to profit by the end of this year. Accordingly, we estimate net profit of AED 47.12 million for 2011. On the other hand, in January 2011, Aldar converted its non-interest bearing convertible bonds issued to Mubadala Development Co. (Mubadala) on April 29, 2008, thereby increasing its share capital by AED 303.73 million, and share premium by AED 3.26 billion. Going forward, Aldar is likely to overcome funding problems this year as it would receive AED 10.9 billion from the government of Abu Dhabi as sales reimbursement on certain infrastructure assets on Yas Island, and realise AED 5.6 billion through sale of residential units and land to the government of Abu Dhabi. Apart from this, the cash-strapped company intends to issue AED 2.8 billion convertible bonds to Mubadala in 2011. Recently, Standard & Poor s Ratings Services affirmed Aldar s B/B long and short-term corporate credit ratings, and removed the ratings from CreditWatch, reflecting improvements in the company s liquidity and capital structure. Moreover, the stock has declined almost 37% since our last update on January 06, 2011. Therefore, we recommend a buy at current levels. We had initiated Aldar on January 06, 2011 with a NEUTRAL recommendation (target price of AED 2.59 with a 8.8% upside). The stock is currently trading at a P/E multiple of 82.06x and 23.96x for 2011E and 2012E earnings, while at a P/BV multiple of 0.65x for both 2011E and 2012E BVPS. The stock has lost 34.2% since the beginning of this year, as compared to a 5.6% decline registered by the Abu Dhabi Securities Exchange. Based on the above factors, our target price is AED 2.05, implying an upside of 36.8% from the current price of AED 1.50 (as on April 07, 2011). Accordingly, we are revising our earlier NEUTRAL rating to OVERWEIGHT on Aldar Properties.
Financial Statements Consolidated Income Statement (AED Million) 2009A 2010A 2011E 2012E 2013E Revenue 1,979 1,791 5,347 6,610 7,845 Direct cost -1,542-1,503-3,471-4,093-4,700 Gross profit 437 288 1,876 2,518 3,145 Selling and marketing expenses -146-83 -222-275 -326 General and administrative expenses -1,377-4,890-1,886-2,298-2,610 Fair value gain on investment properties 1,797-6,992 1,209 1,206 1,251 Depreciation -94-514 -584-643 -700 Operating income 618-12,192 393 507 760 EBITDA 712-11,678 977 1,150 1,459 Finance costs -275-718 -642-659 -768 Finance income 469 263 243 244 247 Other income 114 16 47 58 69 Share of results of associated companies -88-28 5 11 11 Profit before tax 837-12,658 47 161 319 Attributable to: Equity holders of the parent 837-12,658 47 161 319
Consolidated Balance Sheet (AED Million) 2009A 2010A 2011E 2012E 2013E ASSETS Non-current assets Property, plant and equipment 12,400 6,675 7,057 7,409 7,655 Intangible assets 40 25 21 18 14 Investment properties 2,079 3,022 4,231 5,437 6,688 Investment properties under development 12,661 5,271 5,799 6,378 7,016 Investment in associates and joint ventures 627 543 548 559 570 Available-for-sale financial assets 163 145 535 661 784 Trade and other receivables 2,417 3,546 4,455 5,050 5,448 Other financial assets 36 1 4 5 6 Total non-current assets 30,423 19,228 22,651 25,517 28,181 Current assets Development work-in-progress 10,909 13,878 14,988 15,288 16,052 Inventories 101 422 535 661 784 Assets held for sale 0 5,932 0 0 0 Trade and other receivables 14,598 5,453 9,654 10,099 11,331 Cash and bank balances 10,313 2,432 4,884 2,470 2,932 Total current assets 35,921 28,116 30,060 28,518 31,100 Total asset 66,345 47,344 52,711 54,036 59,281 EQUITY AND LIABILITIES Capital and reserves Share capital 2,578 2,578 4,514 4,514 4,514 Share premium 3,823 3,823 7,082 7,082 7,082 Share issuance costs, net -80-80 -80-80 -80 Statutory reserve 812 812 817 833 865 Hedging reserve -366-98 -98-98 -98 Fair Value Reserve 0-19 -19-19 -19 Convertible bonds equity component 181 181 181 181 181 Non-interest bearing convertible bonds 3,563 3,563 0 0 0 Retained earnings 6,289-6,514-6,493-6,420-6,277 Attributable to equity holders of the parent company 16,800 4,247 5,905 5,994 6,169 Non-controlling interest Total equity 16,801 4,247 5,905 5,994 6,169 Non-current liabilities Convertible bonds liability component 4,290 0 0 0 0 Non-convertible bonds 8,311 8,320 8,330 8,339 4,594 Borrowings 21,400 9,441 18,968 17,240 24,389 Retentions payable 1,438 1,438 2,930 3,622 3,654 Provision for end of service benefit 34 49 146 180 213 Security deposits 26 26 26 26 26 Other financial liabilities 379 26 98 130 154 Total non-current liabilities 35,877 19,300 30,497 29,537 33,031 Current liabilities Convertible bonds-liability component 0 4,338 0 0 0 Advances from customers 2,444 2,688 5,347 5,619 5,844 Borrowings 4,696 10,473 2,266 3,794 3,793 Trade and other payables 6,527 6,171 8,569 8,965 10,316 Other financial liabilities 0 128 128 128 128 Total current liabilities 13,667 23,797 16,309 18,505 20,081 Total liabilities 49,544 43,097 46,806 48,042 53,112 Total equity and liabilities 66,345 47,344 52,711 54,036 59,281
Consolidated Cash Flow Statement (AED Million) 2009A 2010A 2011E 2012E 2013E Cash flows from operating activities Net profit for the year 837-12,658 47 161 319 Adjustments for: Depreciation and amortisation 94 514 584 643 700 Finance income -469-263 -243-244 -247 Dividend income -8-3 0 0 0 Finance costs 248 682 642 659 768 Amortisation of prepaid finance costs 27 36 0 0 0 Fair value gain on investment properties -1,797 6,992-1,209-1,206-1,251 Share of loss/(profit) from associates and joint ventures 88 28-5 -11-11 Project costs impairment and write-off 528 3,703 0 0 0 Provision for impairment of trade receivables 78 605 0 0 0 Exchange losses/(gains) 4-4 0 0 0 Provision for end of service benefit, net 12 15 97 34 34 Cash from operations before working capital changes: -358-354 -88 37 311 Changes in working capital Increase in retentions payable 501 0 1,492 692 32 Additions to development work in progress -1,241-2,702-1,110-300 -764 Decrease/(increase) in trade and other receivables 839 763-5,110-1,040-1,631 Increase in advances from customers 292 244 2,659 272 226 Increase in inventories -101-321 -113-126 -123 (Decrease)/increase in trade and other payables -988-345 2,469 428 1,376 Net cash from operating activities -1,056-2,715 199-36 -574 Investing activities Payments for purchases of property, plant and equipment -837-1,742-962 -992-941 Payments for purchases of intangible assets -10-9 0 0 0 Expenditures on investment properties under development -14,537-2,587-527 -580-638 Payments for investment in available-for-sale financial assets -9 0-393 -127-124 Finance income received 607 364 243 244 247 Dividends received 110 83 0 0 0 Movement in term deposits with original maturities above three months and assets held for sale 1,048 6,083 5,932 0 0 Movement in restricted bank balances 143-216 0 0 0 Net cash used in investing activities -13,485 1,975 4,293-1,455-1,457 Financing activities Proceeds from issuance of non convertible bonds Borrowing net of repayments 15,653 502 1,330-191 3,403 Increase in share capital and share premium 0 0 5,195 0 0 Finance costs paid -1,079-1,386-642 -659-768 Distribution to convertible bond holders including net proceed -245-251 -7,901 0 0 Dividends paid -322-126 -21-73 -144 Directors remuneration paid -28-15 0 0 0 Net cash from financing activities 13,978-1,275-2,039-923 2,491 Net cash (used in)/ from continuing operations -563-2,015 2,452-2,414 461 Cash and cash equivalents at 1 January 3,226 2,663 648 3,101 687 Cash and cash equivalents at 31 December 2,663 648 3,101 687 1,148
Financial Ratios 2009A 2010A 2011E 2012E 2013E Activity Ratios: Debtors Turnover Ratio (x) 0.20 0.18 0.71 0.67 0.73 Creditors' Turnover Ratio (x) 0.22 0.24 0.47 0.47 0.49 Total Assets Turnover Ratio (x) 0.03 0.03 0.11 0.12 0.14 Equity Turnover Ratio (x) 0.12 0.17 1.05 1.11 1.29 Profitability Ratios: Gross Profit Margin 22.1% 16.1% 35.1% 38.1% 40.1% EBITDA Margin 35.9% NA 18.3% 17.4% 18.6% Operating Profit Margin 31.2% NA 7.4% 7.7% 9.7% Net Profit Margin 42.3% NA 0.9% 2.4% 4.1% Return on Average Equity 5.1% -120.3% 0.9% 2.7% 5.3% Return on Average Assets 1.4% -22.3% 0.1% 0.3% 0.6% Leverage Ratios: Debt to Equity (D/E) Ratio (x) 1.55 4.69 3.60 3.51 4.57 Shareholders' Equity to Total Assets Ratio (x) 0.25 0.09 0.11 0.11 0.10 Total Liabilities to Total Assets Ratio (x) 0.75 0.91 0.89 0.89 0.90 Current Liabilities to Equity Ratio (x) 0.81 5.60 2.76 3.09 3.26 Growth Rates: YoY Growth in Revenue -60.2% -9.5% 198.5% 23.6% 18.7% YoY Growth in Operating Profit -81.2% NA NA 29.0% 49.7% YoY Growth in EBITDA -78.5% NA NA 17.8% 26.8% YoY Growth in Net Profit -75.7% NA NA 242.4% 97.9% YoY Growth in Total Assets 33.3% -28.6% 11.3% 2.5% 9.7% YoY Growth in Shareholders' Equity 4.8% -74.7% 39.0% 1.5% 2.9% Ratios used for Valuation: Adj. EPS (AED) 0.32-4.91 0.02 0.06 0.12 Adj. BVPS (AED) 6.52 1.65 2.29 2.32 2.39 P/E Ratio (x) 4.62-0.31 82.06 23.96 12.11 P/BV Ratio (x) 0.23 0.91 0.65 0.65 0.63 Current Market Price (AED)** 1.50 1.50 1.50 1.50 1.50 ** Price as on April 07, 2011
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