Aldar Properties PJSC June 26, 2008
INITIATING COVERAGE Leading the way Buy Share Data Aldar Properties PJSC (Aldar) is the leading real estate company in Abu Market Cap AED 31.6 bn Dhabi with a large land bank of 34.9 mn sqm. Already the biggest property Price AED 12.60 developer in Abu Dhabi in terms of market capitalisation, land bank, and ADX 4,960.0 development projects, we believe Aldar’s focus on the fast growing domestic real estate market should result in significant shareholder value. Reuters ALDR.AD As the Company works closely with the government, we believe it will Bloomberg ALDAR UH benefit significantly from the real estate boom and further economic Avg. Volume (52 Week) 18.7 mn diversification of the domestic economy. The Company’s strategy to hold 52-Week High/Low AED 13.65 / 5.85 most of its developments in the office, retail and leisure segment as investment properties also provides excellent revenue visibility. We initiate Shares Outstanding 2,506.8 coverage on the stock with a Buy rating. Fair Value Estimate AED 15.5
Key Figures Abu Dhabi real estate market: fundamentally strong and set for growth Year to 31 Dec 2007 2008 A late entrant to the regional real estate boom, the Abu Dhabi property market is enjoying exceptionally strong traction across its entire segment - Revenue (mn) 1,226.8 6,862.2 residential, retail, commercial and hospitality. Buoyed by high oil prices, Gross Profit (mn) 560.0 3,620.5 the country’s economy is one of the fastest growing in the region. The EBIT (mn) 157.9 1,734.6 continued shortage of all types of property, occupancy rates above 90%, Net Profit (mn) 1,941.3 3,721.2 estimated population growth of around 6% - 7% p.a., rising per capita income, and an accumulation of demand over the past five years have EPS (AED) 0.78 1.27 persuaded the government to initiate new property legislation allowing GPM (%) 45.6% 52.8% UAE nationals and foreigners to purchase property and focus on the RoA (%) 14.0% 11.6% development of the sector. RoE (%) 35.4% 36.4%
Major beneficiary of the Emirate’s economic transformation policy P / E (x) 17.0x 10.4x The Company has emerged as a key beneficiary of Government efforts to P / BV (x) 3.8x 2.6x gradually deregulate the real estate sector in Abu Dhabi. The Company Shareholding Pattern (%) received its entire land bank from the Government (except for Al Jimi Mall) without consideration. The Abu Dhabi government intends to diversify the Mubadala Development Company 15.9 economy further and to reduce its dependence on oil and gas by Public & Others 84.1 emphasising construction, tourism, and hospitality industry activities along with real estate. As the Abu Dhabi government owns an indirect stake of 25% in Aldar, we believe the Company holds an important position in the Relative Performance Government’s development plans and is likely to benefit significantly from the targeted economic transformation of the Emirate. 16.0
12.0 Despite the share price run-up, we still see significant upside potential Aldar’s share price has gained almost 87% over the past year, reaching a 8.0 52-week high of AED 13.65 on June 16, 2008. At the current market price, 4.0 the stock stands at a 2008 P/E of 10.4x based on our forecasts, a 0.0 significant discount to its peer group average of 12.8x.
Our fair value estimate of AED 15.5 per share implies an upside potential Jul-07 Apr-08 Oct-07 Jan-08 Jun-07 Jun-08 Aug-07 Feb-08 Sep-07 Nov-07 Dec-07 Mar-08 May-08 of 23% from the current stock price. Rebased Index ALDAR
ALDAR PROPERTIES PJSC
ADCB Wealth Management Group I Research I +97126973525 | [email protected] 1
Valuation
We have used a combination of Net Asset Value (NAV), Discounted Cash Flow (DCF) and Peer-based Multiples to value Aldar Properties. We have assigned subjective weights of 70% to our NAV, 20% to our DCF and 10% to our Peer-based Multiple Valuations to calculate our fair value estimate of AED 15.5 per share, a premium of 23% to the current share price. Consequently, we initiate coverage with a Buy rating.
Weighted average value per share Valuation Method Value (AED) Weight (%)
Net Asset Value (NAV) 15.6 70% Discounted Cash Flow (DCF) 14.8 20% Peer-based Multiple Valuation 16.2 10% Weighted average fair value 15.5 100% Source: ADCB research
Value per Value Value as a NAV Calculation share (AED mn) % of NAV (AED) Sale of Properties Plot Sales 7,420 2.24 14.3% Residential Properties 6,314 1.91 12.2%
Recurring Revenue Stream
Residential Properties 645 0.19 1.2%
Commercial Properties 4,894 1.48 9.5% Retail Properties 4,181 1.26 8.1% Hotel 497 0.15 1.0% Projects not included above (CBRE Valuation) Yas Island 19,089 5.76 36.9% Abraj Towers 33 0.01 0.1% Al Raha Beach - 14% of Phase II 2,261 0.68 4.4%
Associates and JVs 289 0.09 0.6%
Enterprise Value 45,623 Less: Debt (2008) 12,780 Add: Cash (2008) 18,889 Outstanding number of shares - diluted 3,312
Estimated Net Asset Value 51,732 15.62 100.0% Source: ADCB research
ALDAR PROPERTIES PJSC
ADCB Wealth Management Group I Research I +97126973525 | [email protected] 2
Net Asset Value Method
We have calculated the NAV of the Company based on estimated discounted cash flows from completed and ongoing development projects of the Company. We have estimated the selling price or rental income per sqm and the cost of construction in order to measure expected cash flows from projects. We have assumed a time lag between the time when construction starts on a project and the point at which it begins to contribute to revenues, taking account of the expected development period.
Our key assumptions used in this method are as follows:
We have valued all projects for which development plans are available and excluded projects at either concept development or pre-construction stages. Accordingly, we have not included Noor Al Ain (expansion of Al Jimi Mall) and Mina Zayed as they are at pre-construction stages.
We have relied on CB Richard Ellis (CBRE) valuations for developments such as Yas Island, Aldar’s largest project and part of Phase II of Al Raha Beach, pending the release of further details on these projects.
We have estimated the value of recurring revenue-generating properties such as Al Mamoura, Diabetes Centre, and Al Jimi Mall using Net Operating Income (NOI) and Capitalisation rates.
We have incorporated investments in unquoted associates and joint ventures (JVs) (not included under project valuation) at their book value.
Sale of plots and properties We have estimated the present value of expected cash flows from the sale of projects to arrive at an NAV of AED 13.7bn or AED 4.15 per share. The NPV resulting from the sale of projects forms 26.5% of our estimated total NAV of which land sales comprise 14.3 percentages points and sale of properties 12.2 percentage points. Our key assumptions are as follows:
We have used a WACC of 10.33% to estimate the net present value of projects.
We have considered separate capital values for different projects ranging between AED 9,750 and AED 16,000 with annual growth rate of 10% during 2009, falling to 5% from 2011.
We estimate that the Company will sell approximately 3.3 mn sqm of land plots (out of a total area of 7.9 mn sqm) in Al Raha Beach by 2011.
ALDAR PROPERTIES PJSC
ADCB Wealth Management Group I Research I +97126973525 | [email protected] 3
Recurring revenue stream
Residential properties We have calculated rental income from those residential units which are expected to be leased out. Residential leases contribute AED 645mn to our estimated NAV. We have made the following assumptions in estimating the NAV from these projects:
An occupancy rate of 90% and an estimated terminal value based on a capitalisation rate of 7%.
Rentals of around AED 1,100-1,600 per sqm for residential properties.
Conservative rental increases of 5% p.a. from 2010.
Commercial and Retail properties We expect commercial properties to yield a value of AED 1.5 per share or 9.5% of our estimated NAV. On the other hand, we believe retail properties will contribute AED 1.3 per share or 8.1% of our NAV. We have made the following assumptions for the retail and commercial portfolio of the Company:
For Commercial and retail projects, average rental rates of between AED 1,500 - AED 3,000 per sqm, except for Al Jimi Mall and Al Ruwais Shopping Mall where we have used average rentals of around AED 700 per sqm.
An occupancy rate of 90% for all retail and commercial properties and a capitalization rate of 7%.
Hospitality, Hotels and Resorts We expect investments in hospitality, hotels and resorts to contribute AED 497mn to our estimated NAV. We have incorporated the following assumptions in our NAV model:
An average room rate of AED 500 for three-star hotels, AED 800 for four-star hotels and AED 900-1,000 for five-star hotels and hotels in Al Raha Beach. We have assumed a rate of AED 1,500 for all suite hotels in Coconut Island and Al Gurm Resort.
A non-room revenue to room revenue ratio of 60%.
A 65% occupancy rate at launch, gradually rising to 75% in subsequent years.
We have not included the seven proposed hotels in Yas Island and the three further hotels in Al Raha Beach as full details have not yet been published.
ALDAR PROPERTIES PJSC
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CBRE Valuation An independent valuation was carried out by CBRE of the total land bank of the Company totaling 34.9 mn sqm as of December 31, 2007. CBRE valued total planned developments at AED 44.2bn - i.e. AED 18.5 per share based on current shares outstanding and AED 13.2 per share on a fully diluted basis. However, this does not include Al Ruwais or part of the Yas Island projects.
Discounted Cash Flow model (DCF)
We have used a three-stage DCF model with explicit forecasts to 2010 (based on current development plans) and middle period forecasts to 2015. Based on these, we have calculated free cash flows which we have then discounted in order to estimate the fair value of the Company.
We have estimated the Cost of Equity using the Capital Asset Pricing Model. The key assumptions underlying our model are as follows:
Middle period revenue: 7% growth Risk free rate: 4.79% (3 yr. average of 10 yr. US Treasury Bond Rate as benchmark reference rate) Country Risk Premium: 0.9% Equity Premium: 6% Beta: 1.09 Cost of equity: 12.23% WACC: 10.67% Terminal growth rate: 3.5%
Sensitivity of fair value based on DCF valuation, using different rates for Terminal cost of capital and Terminal growth rates: Terminal cost of capital
14.80 9.67% 10.17% 10.67% 11.17% 11.67% 2.50% 14.8 14.5 14.2 14.0 13.8 3.00% 15.1 14.8 14.5 14.2 14.0 3.50% 15.5 15.1 14.8 14.5 14.2 4.00% 16.0 15.6 15.2 14.8 14.5
Terminal growth 4.50% 16.6 16.1 15.6 15.2 14.8 Source: ADCB research Sensitivity of fair value based on DCF valuation, using different rates for Terminal cost of capital and Change in Sale/Rental prices of properties: Terminal cost of capital
14.52 9.67% 10.17% 10.67% 11.17% 11.67% (10.00%) 12.2 11.9 11.7 11.5 11.3 (5.00%) 13.8 13.5 13.2 12.9 12.7 Base Case 15.5 15.1 14.8 14.5 14.2 5.00% 17.4 16.9 16.5 16.2 15.9 in Sale prices
∆ 10.00% 19.4 18.9 18.4 18.0 17.6 Source: ADCB research
ALDAR PROPERTIES PJSC
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Sensitivity of fair value based on DCF valuation, using different rates for Terminal cost of capital and Change in cost of revenues: Terminal cost of capital
14.80 9.67% 10.17% 10.67% 11.17% 11.67% (20.00%) 15.9 15.5 15.2 14.9 14.6 (10.00%) 15.8 15.4 15.0 14.7 14.5 Base Case 15.5 15.1 14.8 14.5 14.2 in Cost of Revenues
∆ 10.00% 15.2 14.8 14.5 14.2 13.9 20.00% 14.8 14.4 14.0 13.7 13.5 Source: ADCB research
Peer-based Valuation method
Aldar is currently trading at a 2008 P/E ratio of 10.4x equal to a 19% discount to its peer group average of 12.8x. Based on a peer group mean P/E multiple of 12.8x for 2008, we arrive at a fair value of AED 16.2 per share.
Comparable Company Trading Analysis Stock Fully Diluted Fully Diluted Price Market Enterprise P/E Enterprise Value/EBITDA P/BV ROAE Company 6/16/08 Cap Value Dec-07 Dec-08 Dec-09 Dec-07 Dec-08 Dec-09 FY07 FY08 FY09 FY07 FY08 FY09 (AED) (AED mn) (AED mn)
Global Market China Vanke Co 4.98 34,239 40,930 20.5x 12.5x 8.7x 9.7x 5.9x 4.2x 2.2x 1.7x 1.4x 22% 25% 29% Country Garden Holdings 2.50 40,856 40,203 19.9x 11.0x 7.6x 11.9x 6.5x 4.9x 4.1x 3.4x 2.8x 36% 34% 40% Unitech 16.91 27,397 29,927 19.3x 12.6x 7.6x 13.5x 9.1x 5.6x 16.1x 5.0x 2.9x NM 61% 48% Shimao Property Holdings 5.41 17,849 21,575 11.1x 9.4x 6.6x 9.6x 7.4x 4.9x 2.1x 1.6x 1.4x 20% 19% 23%
Mean 17.7x 11.4x 7.6x 11.2x 7.2x 4.9x 6.1x 2.9x 2.1x 26% 35% 35% Median 19.6x 11.8x 7.6x 10.8x 6.9x 4.9x 3.1x 2.6x 2.1x 22% 30% 34%
Middle East Emaar Properties 11.20 68,237 67,305 10.4x 9.7x 6.9x 12.5x 9.9x 7.1x 1.9x 1.7x 1.4x 20% 19% 22% Sorouh Real Estate 10.05 25,125 24,244 21.6x 14.5x 9.8x 22.9x 14.6x 9.5x 5.6x 1.4x 1.2x 32% 16% 14% Deyaar Properties 2.23 12,885 13,090 27.9x 14.9x 4.3x 27.9x 16.8x 7.9x 2.0x 1.9x 1.7x 12% 10% 15% Union Properties 5.10 14,185 17,462 22.8x 19.6x 10.5x 39.4x 35.0x 12.6x 2.7x 2.4x 1.7x 13% 14% 15% Qatar Real Estate Investment 67.58 5,839 7,675 19.3x 12.0x 9.8x 19.4x NA NA 3.1x NA NA 17% NA NA
Mean 20.4x 14.1x 8.3x 24.4x 19.1x 9.3x 3.1x 1.9x 1.5x 19% 15% 16% Median 21.6x 14.5x 9.8x 22.9x 15.7x 8.7x 2.7x 1.8x 1.5x 17% 15% 15%
Overall Mean 19.1x 12.8x 7.9x 17.8x 13.1x 7.1x 4.6x 2.4x 1.8x 22% 25% 26% Overall Median 20.6x 13.1x 8.7x 16.9x 11.3x 6.8x 2.9x 2.2x 1.8x 19% 22% 25% Source: Company data, Reuters, ADCB research
ALDAR PROPERTIES PJSC
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Projects overview
Al Gurm Resort Al Gurm Resort is an eco-friendly development on 1.8 mn sqm of land, situated on the western edge of Abu Dhabi Island. The resort, managed by Banyan Tree, will consist of 59 exclusive private villas, a mix of chalets on individual islands along with a 161 suite international luxury hotel.
Nareel Island Developed in a joint venture with The National Corporation for Tourism & Hotels, Nareel Island is a mixed use development comprising 86 villas, 20 condominiums, and a 160 room luxury hotel.
Al Raha Gardens Al Raha Gardens, spread across 1.06 mn sqm, is a community style development incorporating parks, retail centres, schools, and leisure & dining outlets. Built within the Al Raha Beach Development, Al Raha Gardens initially consisted of 1,388 villas to be delivered over three phases to August 2009. Another phase was added in 2007 which laid down the construction of 1,144 residential units, 36,000 square metres of food and beverage outlets, 12,000 square metres of fitness complex, a 200-key five star business hotel, and a 100-key three star Shari’a compliant hotel. The construction of Phase IV is scheduled to commence by July 2008 with expected completion in December 2010. Al Raha Gardens was the first development to be offered as a freehold property to UAE nationals in Abu Dhabi. The first collection of villas offered for sale in 2005 sold out in less than an hour.
Al Raha Beach Located on the beach side of the main highway leading into Abu Dhabi from Dubai, Al Raha Beach is a mixed-use waterfront development, expected to house up to 120,000 residents when completed. The project, with a total land area of 5.6 mn sqm, is being built alongside 8.5 km of natural beach front. It represents one of the first designated areas where expatriates can invest in leasehold property within Abu Dhabi (on a 99- year lease). The development is divided into 11 communities comprising Al Zeina, Khor Al Raha, Al Bandar, Al Seef, Al Dana, Al Rumaila, Al Nakhel, Al Lissaily, Al Razen, Al Sheleela, and Al Thurayya.
Aldar has started construction work on Khor Al Raha, Al Dana, Al Seef and Al Zeina located on the eastern four kilometers of the Al Raha Beach project with phased delivery of completed units starting from the end of 2009.
Yas Island Yas Island, occupying a land area of 24.8 mn sqm, is Aldar’s largest development offering residential, office, hotel, and leisure facilities. The whole development is phased over three stages and features several attractions including a motor sports racetrack, signature hotels, the Ferrari theme park, a water park, a 300,000 sq m retail area, links and parkland golf courses, lagoon hotels, marinas, polo clubs, and residential units.
ALDAR PROPERTIES PJSC
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Central Market Central Market, located in the heart of downtown Abu Dhabi, is a mixed use redevelopment scheme, incorporating luxury apartments, and an Arabian souk, alongside retail, office, leisure, and entertainment facilities. With a total area of 64,264 sqm, the development has three towers that house an 88 storey residential tower, a 58 storey office tower, and a five star hotel with 250 rooms and 200 serviced apartments.
Completion Completed Projects Project type date Description Abraj Towers (Phase I) Mixed use Dec-07 Sold to a JV between the Company and Etihad Airways in January 2008 Al Raha Gardens (Phase I) Mixed use Dec-07 280 residential units completed Al Mamoura (Phase I) Office Building Dec-07 Leased to Mubadala and Environment Agency for 20 years Diabetes Centre Medical Centre Apr-06 Sub-leased to Mubadala for 15 years
Acquired as a completed asset in 2005 and expansion completed in Al Jimi Mall Shopping Mall - March 2006
Estimated Completion % Projects under development Project type Start date date Completed(1) Al Raha Gardens (Phase II, Phase III and Town Centre) Residential, Offices & Retail Q2 2005 Q4 2010 25% Abraj Towers (Phase II) Residential, Offices & Retail Q4 2005 Q1 2009 42% Central Market Residential, Offices, Retail & Souk Q3 2005 Q2 2011 14% Al Gurm Residential & Resort Q4 2005 Q1 2009 15% Al Raha Beach Residential, Offices & Retail Q4 2005 Q2 2019 6% Nareel Island Residential & Resort Q3 2006 Q4 2010 6% Al Mamoura (Phase II) Office Building Q4 2007 Q4 2008 62% Yas Island Residential & Resort Q2 2007 Q4 2014 4% Al Bateen Residential Q3 2007 Q2 2010 1% (1) % completed as of December 31, 2007
Expected Projects at concept development stage or pre-construction stage Project type Start date Noor Al Ain Residential, Retail & Leisure Q2 2008 Mina Zayed Residential & Resort Q3 2008 Source : Company data
Industry Overview
The UAE has emerged as the second largest economy in the Middle East with real GDP increasing at 7.4% and per capita income standing at AED 154,151 in 2007 compared with AED 141,778 in 2006. Since 2002, the country has enjoyed an average real GDP growth rate of 8.2% compared with 5.0% for the Middle East as a whole and a global average of 3.3%. A five-fold rise in oil prices in the past six years, supported by robust growth in non-oil sectors such as construction, infrastructure, financial institutions and real estate has boosted UAE’s economy significantly.
The real estate sector’s contribution to the country’s GDP totalled 8% based on an investment of AED 25.8bn during 2007. High oil prices resulting in enhanced liquidity and
ALDAR PROPERTIES PJSC
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negative real interest rates have spurred the real estate sector, which has emerged as a major driver for the UAE economy.
Inflation in the UAE surged to a 19-year high of 9.3% in 2006 with industry estimates suggesting a further acceleration to around 11% in 2007. A series of interest rate reductions by the US Federal Reserve resulted in negative real interest rates, making real estate investment an attractive proposition. Expansion in the real estate sector has been further fuelled by significant legal and financial deregulation, a steady population growth, a healthy influx of tourists, a growing hospitality & leisure market, and substantial consumer and mortgage loan expansion.
Residential segment Currently, the Abu Dhabi property market is characterized by an undersupply of residential spaces. Led by an influx of workers and a wide range of favorable macro- economic conditions, current demand for all types of residential property has outstripped available supply, with occupancy levels of around 97-98% reported across the city. Notwithstanding the announcement of several master-planned developments, the impact of a two-year construction moratorium imposed between 1999 and 2001 remains visible in Abu Dhabi with pent-up demand accumulating due to the continued dearth of sufficient supply. Rentals have increased steadily over the past six years, especially in the high income segment, with an appreciation of 25% p.a. on an average since 2004.
Office segment The lack of an appropriate supply of office accommodation coupled with unsatisfied demand has pushed up rental levels, resulting in average increases of over 30% between 2005 and 2006, and of around 10% between 2006 and 2007, with occupancy rates approximately 98%. The slower average rental increase in the latter period can be attributed to the imposition of a rental cap by the government.
According to Colliers International, office supply in Abu Dhabi now totals 460,000 sqm of Gross Floor Area (GFA), following a 50% increase since 2000. Given projects under construction (approximately 415,000 sqm of office space GFA across the city) and planned developments, industry estimates suggest that existing office space supply will increase by a further 85% to 850,000 sqm of GFA by 2011. As per Urban Planning Council, office space supply is expected to grow at a faster rate to 2.13 mn sqm in 2011.
Retail segment Rentals at retail destinations jumped by about 30% in 2006, owing to a dearth of quality retail space in the city. Considering expected developments, according to Colliers International the leasable area within Abu Dhabi is set to increase from 526,700 sqm at the end of 2006 to 1.4 mn sqm by 2010 (Urban Planning Council estimates it to reach 1.18 mn sqm by 2010), representing a 165% increase. Abu Dhabi is expected to have 0.87 sqm of GLA per capita in 2010. (source: Colliers International)
With the Abu Dhabi Tourism Authority (ADTA) finalizing plans to market Abu Dhabi as an important tourist venue, we expect current increases in rental rates to continue through to 2010.
ALDAR PROPERTIES PJSC
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Hotel Abu Dhabi is rapidly emerging as a prominent leisure tourist destination after being overshadowed for a long time by Dubai. The Emirate enjoyed average hotel room occupancy rates of 78.5% in Q2 2007, while serviced apartments achieved a level of approximately 80%. Average Room Rates (ARR) rose by approximately 40% y-o-y, to USD 167 and USD 235 for 4 star & 5 star rooms respectively.
Based on the ADTA’s last report, tourists increased to 1.37 million in 2007 compared with 1.17 million in 2006, implying attractive growth of 16%. The ADTA has set a target of 3 million visitors by 2015 and plans to license the construction of 17,000 new hotel rooms in the Emirate in the meantime, of which 45% will be in the 5-star category. We regard such growth as sustainable, as Abu Dhabi becomes more prominent as a more widely acknowledged hospitality destination. (source: Colliers International and CBRE)
Company Overview
Incorporated on February 23, 2005, Abu Dhabi-based Aldar Properties PJSC is a premier real estate development, management and investment company. Currently focused on developments in Abu Dhabi, the Company is the largest developer operating in the Emirate based on market capitalization, land bank, and development projects. The Company was listed on the Abu Dhabi Securities Market in Q2 2005.
Aldar holds a land bank of nearly 35 mn sqm, comprising freehold and leasehold land, which has been received free of charge from the Abu Dhabi government since 2005. The land bank has been valued at AED 44.2bn as of December 31, 2007, based on the valuation carried out by CBRE. The Company also holds land under short-term leases, which it does not consider as part of its land bank.
(1) Land Bank Details Land Bank % of Land Development Type (sqm in '000) Bank Yas Island Freehold 24,848.5 71.2% Al Raha Beach Freehold 5,562.5 15.9% Al Gurm Island Freehold 1,843.9 5.3%
Al Raha Gardens Freehold 1,060.9 3.0%
Nareel Island (Coconut Island) Freehold 689.5 2.0%
504.0 Al Ruwais Freehold 1.4% Al Jimi Mall (including Noor Al Ain) Leasehold (75 years) 177.9 0.5% Al Bateen Freehold 103.2 0.3% Central Market Leasehold (50 years) 64.3 0.2% Abraj Towers Freehold 47.1 0.1% Total 34,901.8 100% (1) Data indicated is as of December 31, 2007 Source: Company data
ALDAR PROPERTIES PJSC
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Area of operation The Company intends to develop projects involving total investments of USD 65bn. These include – the construction and management of offices, residential properties, retail sites, hotels, tourist attractions, leisure facilities, luxury resorts, and schools. The Company’s most prominent projects currently under construction are the Al Raha Beach Development, Al Raha Gardens, Central Market, and Yas Island, which offer a full spectrum of residential, office, retail, hotel, and resort space.
Strategy The short-to-medium-term strategy of the Company is to develop, invest, and manage real estate in Abu Dhabi, as well as gradually expand strategically into international markets. The Company intends to generate shareholder value through a combination of continual optimization of its capital structure and growth through strategic focus. The principal elements of this strategy are as follows:
Land Development • Land reclamation and construction of infrastructure. • Divestment of selected parcels of land within the development for larger scale projects to other developers who will be subject to strict detailed development control guidelines. • Act as master developer in developing master development plans for projects that include the development of offices, residential properties, retail sites, hotels, tourist attractions, leisure facilities, luxury resorts, hospitals and schools. • Strategic alliances and joint ventures with key contractors (Tabreed and FGB).
Increase role as investment manager • Hold and manage majority of offices, retail and leisure portfolio and also part of residential portfolio of developed properties as investment properties. • Invest in business enterprises within and outside UAE.
Continued development of asset management services including property management, facilities management, maintenance, and servicing of developed projects
Consolidate and maintain market position as a property development company in Abu Dhabi through close relationship with Government and strength of management
Expand internationally to diversify geographical risk
ALDAR PROPERTIES PJSC
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Financial Overview
Financial Performance (AED mn except per share data) 2005 2006 2007 CAGR (%) Revenue Sale of properties 328 0 1,187 90.1% Rental Income 8 23 30 97.4% School Revenue 0 0 4 NM Contract revenue 54 155 0 (100.0%) Other income 6 9 6 (3.7%) Consolidated Revenue 397 188 1,227 75.8% Growth (%) (53%) 554% Gross Profit Sale of properties 328 0 539 28.1% Margin (%) 100% NM 45% Rental Income 8111854.2% Margin (%) 100% 50% 61% School Revenue 000NM Margin (%) NM NM 7% Contract revenue 6100(100.0%) Margin (%) 11% 7% - Other income 392(14.8%) Margin (%) 50% 98% 39% Total Gross Profit 345 31 560 27.3% Margin (%) 87% 16% 46% EBITDA 287 (225) 177 (21.5%) Margin (%) 72.4% (119.9%) 14.4% EBIT 287 (228) 158 (25.8%) Margin (%) 72.2% (121.6%) 12.9% Net Profit 677 1,255 1,941 69.3% Margin (%) 170.7% 669.3% 158.2% EPS 0.39 0.73 0.78 40.6% (1) Figures are adjusted for exceptionals Source: Company data, ADCB research
Revenues fluctuate due to early years of operation Aldar Properties reported total revenues of AED 1,226.8mn for 2007, an increase of 554.2% y-o-y. The Company is in its initial years of operation; and consistent with its strategy, revenues are largely driven by plot sales, which totalled AED 919.5mn in 2007. Sales of residential units comprised the other major component of total sales. Unlike 2007 and 2005, the Company did not report any property sales in 2006 so consequently revenue comprised only contract and rental income.
Prospectively, we expect revenue from property sales of AED 1.5bn in 2008, AED 4.2bn in 2009 and AED 4.5bn in 2010. Meanwhile, we forecast revenue from land sales of AED 5.2bn in 2008, AED 2.9bn in 2009 and AED 3.1bn in 2010. We estimate that revenue
ALDAR PROPERTIES PJSC
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from investment properties will increase from AED 182.7mn in 2008 to AED 825.7mn in 2010. Our revenue forecasts include land sales from Al Raha Beach development.
Revenue Breakdown
100%
80%
60%
40%
20%
0% 2005 2006 2007 2008 2009 2010
Land sales Sale of properties Rental Income Hotels Others
EBITDA mirrors the trend in revenue During the Company’s first three years of operation, EBITDA has fluctuated between profits and losses due mainly to changes in revenue and a consistent rise in operating expenses during the period. The Company reported a profit of AED 287.2mn and AED 176.9mn in 2005 and 2007, respectively and a loss of AED 224.9mn in 2006 at the EBITDA level, rendering the corresponding margin non-comparable over the period.
The Company also witnessed an increase in selling and marketing expenses in 2007, due to higher staff costs and sponsorship expenditure, and the launch of new development projects, in line with portfolio growth.
We expect the Company to report an EBITDA margin in the range of 26.7% - 28.5% between 2008 and 2010, driven primarily by increased land sales which enjoy higher gross margins and savings in S,G&A expenses.
Net Profit remains strong, boosted by fair value gains on investment properties Aldar reported a net profit of AED 1,941.3mn in 2007 compared with AED 1,255mn in 2006, growth of 54.7% which was mainly due to an increase in fair value gains on investment properties. In 2007, the Company posted a fair value gain on investment property of AED 1,821.2mn compared to AED 1,414.4mn in 2006.
Expanding asset base
Return on equity (ROE) and return on assets (ROA) declined to 35.4% and 14% respectively in 2007 compared with 46.4% and 33.1% in 2006. This decline in returns was due to a lower net profit margin and the fact that several of the Company’s projects are in the construction phase, the returns from which will accrue at a later stage.
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Total bank borrowing at the end of 2007 amounted to AED 10,562.2mn compared to AED 635.1mn in 2006. During 2007, the Company raised convertible debt worth AED 6.2bn to fund development projects. As a result, the debt-equity ratio increased to 1.4x in 2007 from 0.2x in 2006.
The Company’s total asset balance, led by significant growth in development properties, capital work-in-progress, cash & cash equivalents, and accounts receivable, increased by 344.6% y-o-y from AED 5.1bn in 2006 to AED 22.7bn in 2007. • The value of property, plant & equipment surged from AED 13mn to AED 487.2mn, led by a substantial increase in capital work-in-progress.
• Investment property values more than doubled to AED 3.3bn in 2007 from AED 1.6bn in 2006, reflecting their fair value gain. • The value of investment properties under development surged 256.7% y-o-y to AED 4.5bn in 2007 compared to 2006, reflecting progress achieved in projects over the same period. • Development property values increased nearly 354% to AED 3.9bn in 2007 from AED 854 mn in 2006.
Quarterly Performance (AED mn) Q1'07 Q4'07 Q1'08 q-o-q (%) y-o-y (%) Revenues 8 1,080 2,062 90.9% NM Cost of Sales (3) (575) (785) 36.5% NM Gross Profit 5 505 1,276 152.8% NM Margin (%) 58.3% 46.7% 61.9%
EBITDA (80) 393 834 112.0% NM Margin (%) NM NM 40.4%
EBIT (81) 380 810 113.2% NM Margin (%) NM NM 39.3%
Net Profit 451 528 1,367 158.7% 203.2% Margin (%) NM NM 66.3% Source: Company data
Solid quarterly results as operations gather momentum Aldar reported impressive Q1 2008 results with total revenue of AED 2.1bn compared with AED 1.1bn in the preceding quarter and AED 7.8mn in the corresponding period last year. The Company was able to achieve additional sales from residential units of AED 1.7bn during the quarter but these were not recognized in the income statement in accordance with the Company’s accounting policy. Led by strong growth in revenues, net profit increased 203.2% y-o-y and 158.7% q-o-q to AED 1.4bn. Such substantial growth in net profit was driven by a 342.9% q-o-q rise in fair value gains on investment properties.
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During the quarter, Aldar was assigned a long term local and foreign currency issuer rating of A3 by Moody’s Investors Service. Total debt of the Company increased from AED 10.6bn as of December 31, 2007 to AED 16.4bn at the end of the first quarter. Investment properties including properties under development, and development work increased considerably, reflecting increased traction in the construction process.
Aldar entered into a joint venture agreement with Etihad Airways to develop a purpose- built new staff housing facility. It has also signed hotel management contracts with Intercontinental and Ritz-Carlton concerning hotels at Yas Island and Nareel Island. The Company has also launched a Motor World project, a multi-use development, comprising dealerships from international brands, an auction site, exhibition centre, and residential complex.
Accounting Policy Aldar Properties, like Emaar Properties but unlike Sorouh and Union Properties, recognizes revenue in respect of units sold according to the percentage-of-completion method, subject to certain conditions.
Investment properties under development (i.e. properties in the course of construction for rental and/or for capital appreciation) are initially stated at cost on the balance sheet and transferred to investment properties on completion.
Investment properties, subsequent to initial recognition at cost, are measured at fair value. Gains or losses arising from changes in the fair value of investment properties are included in the Statement of Income for the period in which they arise.
Development work in progress consists of properties being developed principally for sale and is stated at the lower of cost or net realizable value.
Investment Rationale
Abu Dhabi real estate market: fundamentally strong and set for growth In comparison to Dubai, the Abu Dhabi real estate sector is still in an early development stage. After incorporating regulatory changes in 2005 which opened up the sector to the UAE and foreign nationals, and spurred by several other positive factors, the sector has experienced intense market activity over the past 2-3 years with the government undertaking numerous development initiatives. The sector is characterized by the following conditions:
All real estate segments including residential, commercial, and retail sectors are experiencing almost 100% occupancy levels indicating strong demand.
Demand is being primarily driven by local residents.
Increased pre-selling by developers’ further signals toward a strong demand environment.
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There is a shortage of all types of apartments, office and retail space.
Supply shortages are likely to continue until 2010-2012 when most current developments are likely to be completed assuming no major delay in construction.
Rental rates across all categories have increased by around 25% p.a. over the past 2-3 years. According to CBRE, rentals for office space have surged by an average of 20% since Q1 2007.
To ward off inflationary pressures resulting from the surge in rental prices, the government has capped rental increase at 7% p.a. in late 2006 (reduced to 5% for 2008); however, market pressure has resulted in new leases being commonly contracted at premiums of up to 25% over average passing rents of incumbent neighbours (source: Colliers International).
We believe the Abu Dhabi real estate sector will continue to enjoy strong growth in the coming years driven mainly by a demand-supply mismatch. Although the possibility of slight oversupply cannot be ruled out between 2010 and 2012 as major new developments enter the market, we believe the situation is not as advanced as in Dubai which is further along its real estate cycle than Abu Dhabi.
Also, in our view the following factors further support our outlook:
Strong economic growth is likely to continue: GDP is currently estimated to reach USD 159bn by 2010 compared with USD 98bn in 2006 (source: Colliers International). Abu Dhabi enjoys one of the highest GDP per capita levels in the world (around USD 50,000 in 2006) which is likely to swell further driven by soaring oil prices.
Population growth to sustain household demand: The population of Abu Dhabi has grown at a rapid rate in the past and is expected to grow at around 6% - 7% over the coming years.
The negative real interest rate situation makes real estate an attractive investment option.
Economic diversification: Government emphasis on developing tourism, industrial and real estate sectors to diversify the economy away from hydrocarbon revenue dependence provides additional sector support.
The government is keen to tackle the real-estate shortage: The strength of the property rental increase over the past couple of years has forced the government into action. In order to ease inflationary concerns associated with rising property prices, it has committed itself to the development of real estate and to addressing related issues.
Considering the positive outlook for the sector, we believe Aldar (which holds a commanding share of the Abu Dhabi real estate market) is likely to benefit most amongst its regional peer group.
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Major beneficiary of the Emirate’s economic transformation policy The Company has emerged as a key beneficiary of the Government’s efforts to gradually deregulate the real estate sector in Abu Dhabi. It received its entire land bank from the Government without payment (except for Al Jimi Mall).
The Abu Dhabi government proposes to further diversify the economy and to reduce its dependence on oil and gas. The urban structure framework plan ‘Plan Abu Dhabi 2030’ was formulated last year to establish the Emirate as a global cultural, tourism, industry, and services hub. It allocates more than AED 600bn for real estate and infrastructure developments, while total investments in various economic sectors exceed AED 1tn. The plan provides guidelines for the creation of necessary infrastructure, housing, recreational, and business sectors to cater to the requirements of an estimated three million residents in Abu Dhabi by 2030. Aldar Properties intends to work closely with the government to benefit from the buoyancy in the real estate market in the Emirate.
Significantly, the Abu Dhabi government has an indirect stake of 25% in Aldar through the Mubadala Development Company (a wholly-owned investment vehicle of the Abu Dhabi government), Abu Dhabi Retirement Pension and Benefits Fund, Abu Dhabi Investment Company, Abu Dhabi National Hotels Company and the National Corporation for Hotels & Tourism.
We believe the Company has an important position in the Government’s development plans as the Emirate seeks to diversify itself, narrowing its economic dependence on oil and gas and shifting its focus to tourism, aviation, basic industries, and logistics.
Securing long-term cash flows Aldar plans to hold and manage most of its office, retail and leisure developments as well as some residential projects as investment properties as part of its strategy to stabilize long-term cash flows. Although investment properties will exert some strain on short-term cash flows, we believe they will offer a steady income stream in the long run.
To reduce pressure on short-term cash flows, the Company intends to divest selected parcels of land within the development area to other developers, acting as a master developer to the project. As a result of this strategy, we believe short-term revenues will be driven mainly by plot sales and the sale of properties. We expect Aldar to develop and sell an estimated 4.0 mn sqm of net sellable area over the next five years including 2.8 mn sqm of plot sales.
Asset management and other associated services offer further opportunities Aldar intends to develop its asset management services which include property management, facilities management, maintenance, and servicing of developed projects. The Company has formed various joint ventures to leverage opportunities offered in mortgage, district cooling, and associated services.
Mortgage Services The Company holds a 20% stake in Aseel, an Islamic Sharia compliant joint venture, formed in association with First Gulf Bank (FGB), Sorouh Real Estate, and Reem
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Developers. Further, Aldar has agreed with several local parties to enter the conventional home mortgage business.
District Cooling Aldar has recently entered into partnership with Tabreed, the Middle East’s leading district cooling provider to form A&T Cool to provide cooling services of 1 mn tons of refrigeration for two of its major projects, Al Raha Beach and Yas Island.
Real estate development and management services The Company has a 20% stake in Green Emirates, a company jointly owned by FGB, Aldar, Sorouh, and Reem Investments. The purpose of Green Emirates is to perform property management activities including brokerage, maintenance, leasing and advisory and consultancy services for projects not developed by Aldar.
Aldar Laing O’Rourke Construction Aldar entered into an alliance with Laing O’Rourke, a leading international construction firm, in 2006 to enhance its project management and execution capabilities.
Key Risks
No proven track record increases execution risk Incorporated in 2005, Aldar has no proven track record of developing large-scale projects. The Company has an operational history of only three years. Yet in this short period, it has planned major developments which include projects worth USD 65bn in the pipeline.
We believe the size and scale of such development projects entail a risk of delay in execution and could test management’s bandwidth. Any such delays can lead to cost overruns which may hurt our revenue and earnings estimates.
Macro-economic risks Growth in real estate can be directly affected by any measures to tighten monetary policy and by policy changes by the Government to curb inflation, speculation, and over- investment. The UAE Government could take stringent measures to arrest spiralling inflation which may inhibit growth in the real estate sector.
Unexpected appreciation in prices of key construction materials A greater than expected increase in the price of raw materials including cement and steel as well as labour impediments can have an adverse impact on the Company’s margins. We believe the recent rise in prices of cement and other key construction materials could restrict margin expansion.
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Balance Sheet Income Statement (AED mn, Yr. ending Dec. 31) 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Cash and deposits 1,760 895 7,616 18,889 23,779 Revenue 397 188 1,227 6,862 7,569 Accounts and other receivables 173 184 2,375 6,865 6,815 COGS (51) (157) (667) (3,242) (3,707) Development properties 9 854 3,880 3,719 3,195 Gross Profit 345 31 560 3,621 3,862
Available for sale financial assets 77 71 71 71 71 SG&A (59) (259) (402) (1,886) (1,876) Investment properties under devel. 269 1,268 4,523 5,523 7,123 EBITDA 287 (225) 177 1,831 2,116 Property, plant and equipment 4 13 487 896 1,271 Depreciation (1) (3) (19) (96) (131) Investment properties 157 1,572 3,328 5,244 7,256 EBIT 287 (228) 158 1,735 1,986 Investment in associates 0 120 239 277 309 Net interest income 356 68 (72) 12 206 Other long term assets 23 132 195 190 185 Profit from associates 0 0 24 28 31 Total Assets 2,472 5,109 22,715 41,675 50,003 Fair value gains on invest. property 35 1,414 1,821 1,912 2,008 Account and other payables 181 653 3,462 8,790 8,170 Net other non-operating income 0 1 11 34 38 Borrowings (including Convertible debt) 24 635 10,562 17,360 21,235 Profit Before Tax 677 1,255 1,941 3,721 4,269
Other liabilities 1255491,0022,7453,027Tax 0 0000 Share capital 1,5001,7252,2232,5032,664Minority interest 0 0000 Reserves & surplus 642 1,546 5,466 10,277 14,907 Adjusted Net Profit 677 1,255 1,941 3,721 4,269 Total Equity & Liabilities 2,472 5,109 22,715 41,675 50,003 Reported Net Profit 682 1,250 1,941 3,721 4,269
Cash Flow Statement Key Ratios
Net Income before MI (reported) 682 1,250 1,941 3,721 4,269 Per share data (AED) Depreciation and amortization 1 3 19 96 131 Shares outstanding (mn) 1,725 1,725 2,223 2,503 2,664
Change in working capital 71 281 988 2,758 237 Basic EPS 0.39 0.73 1.10 1.57 1.65 Other adjustments, net (390) (1,474) (1,779) (1,987) (2,283) Diluted EPS 0.39 0.73 0.78 1.27 1.40 Cash Flow from Operations 364 60 1,170 4,589 2,353 Book value per share (O/S shares) 1.24 1.90 3.46 5.11 6.60 Capex (360) (1,310) (6,591) (1,503) (2,105) Disposal 0 0 0 0 0 Valuation ratios (x) Additional investments in associates 0 (120) (47) (10) 0 EV/Revenue 35.0x 33.9x 23.2x 4.6x 4.3x Other investing cash flow 250 37 (2,358) 828 1,317 EV/EBITDA 48.4x NM NM 17.2x 15.4x Cash Flow from Investments (109) (1,393) (8,997) (685) (788) P/E 23.0x 5.3x 17.0x 10.4x 9.5x Proceeds from loans 24 602 13,407 9,146 5,791
Repayment of loans 0 0 (741) (757) (1,000) Performance Ratios (%) Dividends 0 (75) (138) (222) (394) Return on Assets 27.4% 33.1% 14.0% 11.6% 9.3% Other Financing cash flows 1,480 (83) (513) (799) (1,072) Return on Capital Employed 14.5% 38.6% 18.1% 15.3% 11.8% Cash Flow from Financing Activities 1,505 444 12,015 7,369 3,325 Return on Equity 31.6% 46.4% 35.4% 36.4% 28.1% Gross Profit Margin 87.1% 16.4% 45.6% 52.8% 51.0% Net Change in cash and equivalents 1,760 (889) 4,188 11,273 4,890 EBITDA Margin 72.4% NM 14.4% 26.7% 28.0% Cash and cash equivalents - beginning 0 1,760 871 5,059 16,332 EBIT Margin 72.2% NM 12.9% 25.3% 26.2% Cash and cash equivalents - end 1,760 871 5,059 16,332 21,221 Net Profit Margin 170.7% 669.3% 158.2% 54.2% 56.4% Source: Company data, ADCB research
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Investment Ratings:
Buy: More than 15% potential return. We recommend that investors buy the stock based on the annualised return to the shareholders over 6-24 months time horizon (percentage change from current price to the projected target price).
Sell: Negative potential return. We recommend that investors sell the stock based on the annualised return to the shareholders over the 6-24 months time horizon.
Hold: Between 0 and 15% potential return. We take a neutral view on the stock over the 6-24 months period.
Other Disclosures:
Abu Dhabi Commercial Bank (ADCB) publishes independent research based on its own opinions. ADCB has, however, conducted corporate and investment banking business with the firm whose security is mentioned in this report within the last 24 months. Additionally, ADCB holds securities of the firm mentioned in this report through it’s fund management activities. ADCB operates strict Chinese walls between its analysts and its corporate and investment banking businesses. Furthermore, ADCB's analysts are bound to maintain their independence through the ADCB's internal guidelines and their own professional (CFA) guidelines. If you choose to use the information in this report, you do so on your own initiative, and you are responsible for compliance with any applicable local laws.
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