10 March 2011

Real Estate

Navigating the downturn

The UAE property sector continues to undergo a price correction that began in late 2008. We believe while there is more downside risk to property prices, much of this is priced in to the stocks. Emaar and DSI offer up to 16% upside potential from current levels, while Aldar, Sorouh and Arabtec offer neutral risk-reward.

Table 1 : Key forecasts

Close PTRec Potential PER PBR (Dh) (Dh) upside/ 2010 2011F 2012F 2010 2011F 2012F downside Aldar 1.32 1.4 Hold 6.1% NM 4.5 7.5 0.3 0.2 0.2

Arabtec* 1.36 1.45 Hold 6.6% 5.1 6.3 6.9 0.6 0.5 0.5 DSI 0.95 1.10 Buy 15.8% 12.4 9.5 9.1 0.8 0.8 0.7 Emaar 2.68 3.10 Buy 15.7% 6.7 7.1 7.4 0.5 0.5 0.5 Sorouh 1.08 1.15 Hold 6.5% 7.6 7.6 6.1 0.5 0.4 0.4

Priced as close 9 March 2011 *2010 EPS and BPS used for Arabtec are estimated Source: Company reports, Zawya pricing data, Rasmala forecast Equity | United Arab Emirates Range-bound outlook given ‘3D’ challenge We believe UAE house prices are likely to decline by an additional 25-30% (nominal terms) after a peak-to-date 45-55% drop largely due to the ’3D’ challenge of depopulation, deleveraging and deliveries. We believe equity valuations largely account for systemic challenges, but in the absence of significant catalysts – including consolidation, privatisation, banking and immigration reforms, etc – we expect the UAE property sector to remain range- bound in the foreseeable future. Despite our positive view on strong secular trends in the region, the current socio-political unrest in MENA may lead to higher investor risk aversion in the near term, which in turn may be reflected in higher volatility.

Our thesis is conservative and may entail upside potential A key component of our thesis is the reasonable probability of depopulation risk, which, if proven contrary, may provide upside to our estimates and sector view. Our proprietary framework is based on historical case studies like Singapore and Hong Kong, where economic downcycles have coincided with a decline in population growth and depopulation.

Stick with relative quality – we initiate with Buy ratings on Emaar and Drake & Scull We recommend names with relatively stronger balance sheets, stable cash flow trends and above-par execution histories that are likely to drive outperformance. Our preferred picks are Emaar and Drake & Scull (DSI) given their best-in-class growth, margin and funding profiles. We believe risk/reward is largely neutral on Aldar and Sorouh because despite their Analysts discounted valuations, financing and execution challenges have not yet troughed in the Abu Dhabi market. We believe Arabtec will remain a show-me story for the foreseeable future. Saud Masud United Arab Emirates Dubai property appears more attractive, Abu Dhabi more stable +971 55 725 8596 [email protected] Despite Abu Dhabi’s property premium of 25-30% compared with Dubai, we believe both Divya Arora markets are largely correlated in price trends. In our view, Dubai offers broader available United Arab Emirates property options at relatively lower price points, while the Abu Dhabi market has inherent +971 4 424 2784 [email protected] economic cushions in terms of lower oversupply and a stickier population dynamic. However, both markets face near-term liquidity and net new demand challenges, although, in our view, Dubai International Financial Centre, solvency is not a concern. The Gate Village, Building 10, Level 1, P.O. Box 31145, Dubai, United Arab Emirates Important disclosures can be found in the Disclosures Appendix. Distributed outside MENA by The Royal Bank of Scotland N.V. and its affiliates under a strategic www.rasmala.com alliance with Rasmala Investment Bank Ltd.

Contents

Executive summary 2 We believe the UAE property sector is undergoing mid-cycle dynamics; house prices have corrected by 45-55%, but rising oversupply could see a further 25-30% drop in the next two years. We expect continued economic headwinds despite strong long-term secular trends.

Risks to our thesis 4 Volatile market conditions provide meaningful risks to our view. We see the main downside risks as worsening liquidity and end demand, while

Key themes and observations 5 We believe the peak-to-trough price decline for Dubai property is around 70%, which translates into an average clearing price down to approximately Dh650 per sq ft, implying another 30% potential downside to house prices from current levels.

Market dynamics and performance snapshot 9 Depopulation challenge 12

Financing equation still a headwind 25

Peer comparison 34 In the following section, we summarise key metrics for our UAE coverage peer comparison, which include sales dynamics, margin structure, geographical exposure, leverage and sectoral composition.

Valuation methodology 45 We value developers primarily using a SOTP approach and contractors primarily using DCF. Our secondary valuation methodology entails supporting the SOTP with price-to-NAV for developers and the DCF with an EV-backlog multiple for contractors.

Company profiles

Aldar Properties 47

Arabtec Holding 61

Drake & Scull 77

Emaar Properties 91

Sorouh Real Estate 107

Real Estate | Table of Contents | 10 March 2011 11

Executive summary

We believe the UAE property sector is undergoing mid-cycle dynamics; house prices have corrected by 45-55%, but rising oversupply could see a further 25-30% drop in the next two years. We expect continued economic headwinds despite strong long-term secular trends.

Initiating on UAE property sector

Despite economic and systemic The key headwinds we see for UAE property are depopulation risk, deleveraging and heavy challenges, we see value in pipeline-delivery schedules leading to demand/supply imbalances. While supply dynamics may be Emaar and DSI somewhat different for Dubai and Abu Dhabi in terms of volumes, their demand dynamics almost mirror each other – a low appetite for new housing as financing remains tight and negative equity concerns linger. As we see it, the good news is that much of the property correction is already accounted for in current asset transactions – ie house prices and equity prices in the stock market down 50% and 75%, respectively, from peak levels. Furthermore, developers from Emaar to Aldar are currently trading at a 50-75% discount to respective adjusted net asset value (NAV).

Going forward, we expect UAE property stocks to take cues from global markets and local catalysts – the latter tied primarily to recapitalisation of banks, master developers, corporate and quasi-sovereign balance sheets – which may involve sovereign support, consolidation and/or privatisation. In the foreseeable future, as the market digests both systemic issues and micro news flow, we expect the UAE property stocks to exhibit range-bound performance. We believe market valuations and stock performance will be driven first by balance sheet metrics and second by earnings growth. Companies with higher self-financing capacity and access to capital, with the ability to manage free cash flow within a predictable and consistent range, and diversified revenue streams, will likely drive market premiums and lead in both fundamental and risk-driven equity rallies.

We initiate coverage on three property developers and two contractors, as follows.

Emaar Properties (Buy, Dh3.10 price target) Our sum-of-the-parts valuation of Emaar suggests 75% of fair value is driven by recurring revenues, which helps mitigate business model risk. Low leverage, adequate self-funding capacity and access to international revenue streams make Emaar a solid pick among peers, in our view.

Aldar Properties (Hold, Dh1.40 price target) Strong rerating to the downside in the past 12 months and a recent liquidity injection by the Abu Dhabi government position the stock attractively, but we remain cautious on demand health in the Abu Dhabi property market, NAV growth prospects and the rate of deleveraging.

Sorouh Real Estate (Hold, Dh1.15 price target) Despite successful refinancing efforts, we believe Sorouh may face near-term risk due to potential handover delays in 1H011. We believe foreseeable growth prospects are limited, similar to Aldar, and currently the stock appears fairly valued.

Arabtec Holding (Hold, Dh1.45 price target) The company’s ability to increase backlog depends on its success rate in markets such as Saudi Arabia, where new award activity remains the strongest. Low-margin wins and uncertainty on receivables provisioning could dilute earnings and limit stock from trading at a premium to its book value.

DSI (Buy, Dh1.10 price target) We believe that with Dh7.3bn in estimated backlog and our estimated annual growth of 12% until 2014 (vs company guidance of 20-25%), DSI offers the strongest growth potential for earnings in our coverage universe. Despite execution risk given recent and planned M&A, we believe DSI should be able to benefit from a presence in Saudi Arabia and primary exposure to the infrastructure end-market vs residential.

Real Estate | Executive Summary | 10 March 2011 22

Table 2 : Global comp sheet

Type Name Country PE P/BV EV/EBITDA EV/Sales Developer Emaar Properties UAE 6.70 0.53 9.30 2.10 Developer Aldar Properties UAE NM 0.25 NM NM Developer Sorouh Real Estate UAE 7.60 0.47 10.60 3.20 Contractor Arabtec UAE 5.10 0.60 24.00 0.43 Contractor Drake & Scull UAE 12.40 0.83 19.50 1.30

Developer Union properties UAE NM 0.19 NM NM Developer Deyaar UAE NM 0.21 NM NM Developer RAK Properties UAE 4.00 0.22 3.02 2.03 Developer Dar Al Arkan Saudi Arabia 5.23 0.60 9.19 3.68 Developer Hang Lung Properties Hong Kong 17.12 1.42 42.16 NM Developer Sun Hung Kai Properties Hong Kong 9.48 1.17 21.07 7.54 Developer Cheung Kong Holdings Hong Kong 14.30 1.16 39.03 NM Developer Capitaland Singapore 11.28 1.01 16.90 6.30 Developer City Developments Singapore 13.89 1.60 15.71 4.56 Developer Keppel Land Singapore 13.89 1.60 15.71 4.56 Developer Country Garden China 10.01 1.75 8.17 2.28 Developer Shimao Property China 7.24 1.30 8.59 2.50 Developer Agile Property China 6.72 1.80 8.54 2.89 Developer Unitech India 12.65 0.88 NM 4.81 Developer Ansal Properties India 4.19 0.34 10.34 2.05

Contractor Depa UAE 35.05 0.86 34.96 0.61 Contractor Carillion UK 10.11 1.74 7.47 0.33 Contractor Balfour Beatty PLC UK 16.84 2.10 6.64 0.24 Contractor Murray & Roberts South Africa NM 1.63 NM 0.27 Contractor Samsung Engineering South Korea 28.26 NM NM NM Contractor M. Al-Mojil Saudi Arabia NM 1.24 NM 1.39 Contractor Leighton Holdings Australia 17.17 3.85 7.29 0.66 Contractor China Ocmm. Construction China 8.12 1.49 8.24 0.52 Contractor Nass Corp BSC Bahrain 4.66 0.65 2.26 0.29 Contractor Galfar Engineering Oman NM 1.85 NM NM

Priced as of 9 March 2011 Source: Bloomberg data, Rasmala estimates

Real Estate | Executive Summary | 10 March 2011 33

Risks to our thesis

Volatile market conditions provide meaningful risks to our view. We see the main downside risks as worsening liquidity and end demand, while upside risks may largely stem from our conservative view on potential depopulation not materialising as we expect.

Market conditions fluid, with project funding a key challenge

Sustained downturn dynamics Should our assessment of potential depopulation and its related impact on the UAE, and may limit investor appetite until especially the Dubai economy, prove inaccurate or conservative, there would likely be significant much of Dubai, Inc. deleveraging upside to our forecasts and general thesis. and property oversupply materialises Impact from Middle East unrest: Year to date, UAE property and construction stocks in our coverage have declined between 13% and 40% vs the Dubai Financial Market and ADX General Index, down 13% and 5%, respectively, and the broader market with the RBS Middle East Index down 9%. We expect near-term uncertainty to continue to fuel volatility, with the likelihood of a more profound impact on high-beta names in the UAE real estate universe. Aldar and Sorouh are primarily domestic-only stories and may remain insulated from regional operations risk. However, negative sentiment spill over may still have an impact on demand factors. Emaar, DSI and Arabtec have meaningful international subsidiaries and joint ventures in the Middle East, North Africa and South Asia belt, and unrest contagion may lead to investors heavily discounting their respective international franchise values. For DSI and Arabtec, we estimate order book international exposure to be around 69% and 52%, respectively. For Emaar, we estimate that 26% of its value is tied to international projects.

Sustained market pressures and a lack of refinancing traction in both domestic and international markets may lead Emaar to seek sovereign support, likely from its parent holding entity, ICD. This, in turn, could have an adverse effect on the company’s valuation similar to the strong de-rating of Aldar’s stock in the past 12 months.

UAE headline risk, including near-term funding and liquidity raising, remains meaningful and any new or incrementally negative developments in terms of debt refinancing and restructuring could dampen the largely retail-driven investor sentiment.

DSI may experience execution challenges pertaining to acquisition integration and international expansion, and as a result may disappoint on growth outlook.

For Arabtec, we currently provision Dh30m per quarter in 2011, to account for receivables risk stemming from Dubai, primarily centred on ex-Dubai government entities and developers. Should Arabtec avoid further receivable provisioning in 2011, we would expect significant upside to valuation and earnings power.

We see significant upside We believe our view on depopulation, especially in Dubai, is conservative; should Dubai potential to our thesis should our experience even flattish to modest population growth, we would expect upside to our thesis. expectation of depopulation This upside would likely be broad-based, supporting healthier economics and liquidity, and prove to be excessive enhanced resiliency in house prices and rentals.

Real Estate | Investment View | 10 March 2011 44

Key themes and observations

We believe the peak-to-trough price decline for Dubai property is around 70%, which translates into an average clearing price down to approximately Dh650 per sq ft, implying another 30% potential downside to house prices from current levels.

Where are we on the cycle clock?

Expect a peak-to-trough 70% According to Colliers, the average residential property price in the UAE in 3Q10 was Dh951 per sq decline in house prices; to-date ft, which we estimate is down 53% from peak levels of approximately Dh2,000 per sq ft in property market down roughly 3Q08/4Q08. We believe the peak-to-trough price decline for Dubai property is around 70%, which 50% and we expect another 25- 30% downside over the next two translates into an average clearing price down to approximately Dh650 per sq ft, implying another years 30% potential downside to house prices from current levels. In the property cycle clock below, we highlight that the Dubai market will likely experience a couple more years of downtrend before finding a sustainable pricing floor. In our view, post a market trough, the price recovery rate in a potential upcycle will be largely dependent on the effectiveness of Dubai, Inc. deleveraging during the downcycle. History tells us that during the post-war era, a typical housing crisis lasts for an average of four years and certain emerging markets such as Singapore and Hong Kong exhibited protracted recoveries of between five and 10 years. We note that prices traded at significant discount to NAVs for these comparable markets even 10 years after the crisis. Hence, in our view, it would not be unreasonable to assume that the UAE peak-to-trough cycle takes four years, ie 2008-12, followed by several years of flattish and gradual asset price recovery.

Figure 1 : UAE property clock – Dubai as main proxy

Source: Rasmala

Real Estate | Investment View | 10 March 2011 55

Chart 1 : Residential price trends (Dh/sq ft)

2,500 25%

20%

2,000 15%

10% 1,500 5%

0% 1,000 -5%

500 -10% -15%

- -20% 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Dubai Abu Dhabi Dubai q/q% Abu Dhabi q/q%

Source: Colliers, Rasmala

Chart 2 : Apartment rental yields

10.0%

9.0%

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0% 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Dubai Abu Dhabi

Source: Colliers

We are not surprised to see a meaningful correlation between GDP trends and house prices (we estimate around 0.70 for 2003-09), although the housing market experienced a multiplier effect given the flow of liquidity since the freehold market came into effect in Dubai in 2003, followed by Abu Dhabi around 2005. We expect this correlation to stay relatively intact as UAE real GDP growth recovers into mid-single-digit territory in the next two to four years. We believe the asset price floor will likely occur towards the end of 2012 as the market digests systemic risks and oversupply issues.

Real Estate | Investment View | 10 March 2011 66

Chart 3 : UAE GDP vs housing growth, yoy

40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E

Real GDP growth House price change

Source: IMF, Rasmala forecasts

According to Dubai Land Department data, while mom growth in land transactions remains choppy, broader yoy trends have been to the downside since the beginning of 2009. We believe bid-ask spread divergence and low market liquidity are the primary reasons for a lack of transaction activity, despite rising supply and property handovers.

Chart 4 : Land transactions trending down

175.00%

125.00%

75.00%

25.00%

-25.00%

-75.00% Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

Transactions y/y % Transaction value y/y % Value/Transaction y/y %

Source: Dubai Land Department, Rasmala

Chart 5 : Land transactions

300 200%

250 150%

200 100%

150 50%

100 0%

50 -50%

0 -100% Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- 08 08 08 08 08 08 09 09 09 09 09 09 10 10 10 10 10 10 Transactions Transactions m/m %

Source: Dubai Land Department, Rasmala

Real Estate | Investment View | 10 March 2011 77

Chart 6 : Transaction value (Dhm)

2,500 200%

150% 2,000

100% 1,500 50% 1,000 0%

500 -50%

0 -100% Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- 08 08 08 08 08 08 09 09 09 09 09 09 10 10 10 10 10 10 Value Value m/m %

Source: Dubai Land Department, Rasmala

Chart 7 : Value/transactions (Dhm)

30 200%

25 150%

20 100%

15 50%

10 0%

5 -50%

-100% Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- 08 08 08 08 08 08 09 09 09 09 09 09 10 10 10 10 10 10 Value/transaction Value/transaction m/m %

Source: Dubai Land Department, Rasmala

The following chart highlights a global comparison of metropolitan centres. We note that Dubai ranks fairly attractively from the perspectives of affordability and rental yield.

One caveat in this snapshot is that the purchase price for a 1,200 square foot apartment looks only at prime real estate in each city, which may not be indicative of broader market trends in the cities themselves or their respective countries. For example, prime locations like Burj Khalifa in the Downtown Burj Dubai area, the average price may be around US$550/sq ft (Dh2,020/sq ft), or almost twice that of the average Dubai property market.

Secondly, we should recognise that Dubai is a much smaller and nascent market relative to its global peers, with underlying economic and demographic trends that may stand in dramatic contrast to bigger metropolitan cities in the world. Lastly, an investor seeks risk-adjusted returns that incorporate lending vs rental yields, foreign exchange dynamics, perception regarding equity risk, expectations of market reforms and transparency levels, as well as opportunity cost assessments.

Real Estate | Investment View | 10 March 2011 88

Chart 8 : Global price and rental yield comparison

60,000 10.00% 9.00% 50,000 8.00% 7.00% 40,000 6.00% 30,000 5.00% 4.00% 20,000 3.00% 2.00% 10,000 1.00% - 0.00% Paris Cairo Rome Dubai Tokyo Taipei Dublin Athens Madrid Prague London Geneva Toronto Tel Aviv Tel Istanbul Helsinki Sydney Mumbai Monaco Moscow Bermuda Shanghai New YorkNew Singapore Hong Kong Capte Town Luxembourg Buying price ($/sqm) Gross rental yield

Source: Propertyweekonline

Market dynamics and performance snapshot

We find the following when we examine correlations between the Dubai Financial Market Index (DFMGI), a proxy for UAE markets and key macro indicators:

Markets accurately signalled a significant slowdown in real GDP growth rates and inflationary trends almost 12 months ahead of the actual trends.

The housing market appears to have decoupled from the broader DFMGI performance for almost two years before achieving strong correlation in 2008 and beyond. We believe this reflects sustained liquidity flows into the real estate sector, with acceleration in pre-sales and off-plan activity that reached a threshold in 2008.

In 2006-08, DFMGI and oil prices performed relatively in tandem, with DFMGI driving strong outperformance in 2004-05 and oil prices outperforming in 2008-09. Recently, it appears we are beginning to see a convergence of DFMGI and oil price performance again.

Chart 9 : Market signals vs GDP growth and CPI

16% 250% 14% 200% 12% 10% 150%

8% 100% 6% 4% 50% 2% 0% 0% -50% -2% -4% -100% 2004 2005 2006 2007 2008 2009 2010

UAE real GDP growth Inflation DFM perf. (RHS) DFM perf. Adj. 1 yr (RHS)

Source: Bloomberg, IMF

Real Estate | Investment View | 10 March 2011 99

Chart 10 : Market signals vs house prices

30% 250%

20% 200% 10% 150% 0% 100% -10% 50% -20% 0% -30%

-40% -50%

-50% -100% 2004 2005 2006 2007 2008 2009 2010

House prices DFM perf. (RHS) DFM perf. Adj. 1 yr (RHS)

Source: Bloomberg, IMF

Chart 11 : Market signal vs oil prices

120% 250% 100% 200% 80% 60% 150%

40% 100% 20% 0% 50% -20% 0% -40% -50% -60% -80% -100% 2004 2005 2006 2007 2008 2009 2010

Dubai Crude Oil Index DFM perf. (RHS)

Source: Bloomberg, IMF

In the following charts, we highlight the performance spectrum with the following takeaways.

As global and domestic markets recovered from 2008 lows, Emaar outperformed its peers and various regional markets, including emerging markets.

Since November 2009, the UAE market took a hit given debt restructuring challenges at Dubai World and Nakheel. This has led to profit taking post the risk rally, lasting from June 2009 to end-October 2009. The standout among the regional peers is Qatar, which appears to have played catch-up throughout 2010 after underperformance in 2009.

Note that while the Abu Dhabi Stock Market Index outperformed the Dubai Financial Market Index by 500bp in 2009 and by 2,000bp since November 2009, Abu Dhabi property names have sharply underperformed their Dubai peers. Aldar Properties rallied only 25% in 2009 vs Emaar up 71%, and since 25 November 2009 is down 75%, compared with Emaar down 36%. We attribute this to funding challenges at Aldar, especially now that the company has grown increasingly reliant upon government support for its near-term cash flow needs.

DSI and Emaar have shown more resilience compared with their peers Arabtec, Sorouh and Aldar. We believe investors have opted for best-in-class business models with more predictable cash flows.

Real Estate | Investment View | 10 March 2011 1010

Chart 12 : Regional equities and indices’ performance in 2009

80% 71% 66% 70% 60% 50% 36% 40% 27% 25% 30% 19 % 16 % 20% 15% 10 % 10 % 5% 4% 1% 0% -10% -10% -20% -18% -19% -30% Emaar Emg. Egyp t Saudi A ld ar A rab t ec Deyaar A DX DFM UPP Depa Qat ar Kuwait So ro uh B ahrain Mkts.

2009

Source: Bloomberg

Chart 13 : Performance since 25 November 2009

20% 10% 9% 10% 0% -1% -10% -5% -9% -11% -20% -12% -13% -21% -30% -32% -40% -36% -50%

-60% -56% -70% -66% -66% -69% -80% -75% DSI UPP ADX DFM Aldar Depa Qatar Saudi Egypt Emaar Kuwait Sorouh Deyaar Arabtec Bahrain Emg. Mkts. Emg. Since Nov 25 2009

Source: Bloomberg

Chart 14 : Performance in 2010

40% 32% 30% 25% 16 % 20% 15 % 10 % 8% 10 % -1% 0% -1% -2% -10% -8% -10% -20% -30% -26% -40% -37% -50% -46% -49% -54% -60% Depa Qatar DSI Emg. Egyp t Saudi Kuwait A DX B ahrain Emaar DFM A rab t ecSo ro uh UPP Deyaar A ldar Mkts.

2010

Source: Bloomberg

Real Estate | Investment View | 10 March 2011 1111

Depopulation challenge

We believe the depopulation Official public statistics (see table below) suggest UAE and Dubai populations both continued to trend in Dubai is likely given 90% grow in 2009 after the economic crisis surfaced in late 2008, but we assume a more conservative of the population is made up of view. We believe Dubai, especially, experienced population net outflows and, overall, Abu Dhabi expats, and more than 40% are directly and indirectly employed likely experienced flattish population growth. While we acknowledge that UAE and Dubai in by the property and construction particular witnessed population growth rates of 5-9% in the 2002-08 economic boom, we believe sector that since 2009, the population trend has most likely reversed to some extent. Our thesis is driven by our proprietary model as well as on-the-ground anecdotal evidence. The latter suggests a cumulative drop in retail footfall activity, school admissions, health clubs and facilities patronage, etc coupled with rising residential vacancies and outbound relocation services. However, we note that new developments, including Dubai Mall, have performed well in terms of generating footfall and is perhaps a beneficiary of market share gains rather than of a rise in cumulative markets.

Table 3 : Official statistics, UAE population trends 2005-09 (000)

2005 2006 2007 20082009 Abu Dhabi 1,399 1,430 1,493 1,559 1,628 Citizens 350 358 372 387403 Non-citizens 1,049 1,072 1,121 1,172 1,225 Dubai 1,321 1,372 1,478 1,596 1,722 Citizens 138 139 141 145147 Non-citizens 1,184 1,233 1,337 1,451 1,575 Sharjah 794 821 882 946 1,017 Citizens 138 140 143 147152 Non-citizens 655 681 739 799865 Ajman 207 212 224 237 250 Citizens 39 39 41 4343 Non-citizens 168 173 183 194207 Umm Al-Quwain 49 50 52 53 56 Citizens 16 16 16 1617 Non-citizens 33 34 36 3739 Ras al Khaimah 210 214 222 231 241 Citizens 88 89 91 9397 Non-citizens 122 125 131 138144 Fujairah 126 130 137 143 152 Citizens 56 58 60 6164 Non-citizens 69 72 77 8288 Total UAE 4,106 4,229 4,488 4,765 5,066 Citizens 825 839 864 892923 Non-citizens 3,281 3,390 3,624 3,873 4,143

Source: UAE Ministry of Economy

As a case study, we examine population dynamics in Singapore and Hong Kong since the early 1990s, taking into account the Asian crisis and property downturn. We find that in both cases, Historical case studies of population trends shifted significantly, reflecting weaker economic activity mitigating the pre-crisis Singapore and Hong Kong support our depopulation view immigration pattern. Singapore’s population dynamic was meaningfully affected as overall population growth moderated to flattish levels after growing in the mid-single digits during the bull market run prior the economic crisis. Examining the population data more deeply reveals that while the local population, which made up roughly 85% of Singapore’s total population, grew fairly steadily in the low single digits pre- and post-crisis, the real difference affecting overall population growth was the expat demographic.

Expats in Singapore leading up to the Asian crisis comprised roughly 15% of the population and poured into the City State in the mid- to high-single digits during pre-crisis times. However, when the cycle turned south, the same expats were facing unemployment and had to exit Singapore given their temporary work visa status. We believe a similar risk holds true for many of the expat- heavy Gulf Cooperation Council (GCC) economies, especially Dubai. Note that in Dubai, roughly 90% of the population is made up of expats. We estimate that nearly 45-50% of the employed population is directly or indirectly tied to real estate and related services, construction and infrastructure development, all of which are the primary victims of the current economic downturn. We therefore expect net population outflows for the foreseeable future until sustainable financing and net new job creation restarts.

Real Estate | Investment View | 10 March 2011 1212

Chart 15 : Singapore population (m)

5.00 6%

4.50 5% 4.00 4% 3.50

3.00 3%

2.50 2%

2.00 1% 1.50 0% 1.00

0.50 -1%

0.00 -2% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total Total population growth%

Source: Singapore government official data

Chart 16 : Singapore resident vs foreigner population (m)

4.0 25%

3.5 20%

3.0 15% 2.5 10% 2.0 5% 1.5 0% 1.0

0.5 -5%

0.0 -10% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Resident Foreigner Resident population growth% Foreigner population growth%

Source: Singapore government official data

As per the chart above, the peak-to-trough expat population growth in Singapore witnessed a 24% points swing spread over seven years, ie expat population growth declined from a peak of 18% yoy in 1996 to a floor around -6% yoy in 2003. Also note that on the back of an economic recovery, ie. 2003-08, expats began driving population growth once again. Hence we believe it is likely that Dubai can replicate robust economic and population growth after it moves past the current crisis, provided appropriate growth levers are put in place during the current downturn.

With respect to Hong Kong, which has a larger population – 5.6m vs 2.7m in Singapore in 1990 – we find that population growth was more moderate. However, the rate of growth during stronger economic times scaled up by more than 5x, ie 2.6% yoy growth in the mid-1990s compared with only 0.48% growth in 1990. Similar to Singapore post the start of the Asian crisis and housing downturn, population growth in Hong Kong compressed for seven to 10 years to find a natural growth floor. We note that the majority of population inflows for Hong Kong were driven by Chinese migrants who today account for almost 95% of the total population.

Real Estate | Investment View | 10 March 2011 1313

Chart 17 : Hong Kong population trend

8 3.0%

7 2.5% 6 2.0% 5

4 1.5%

3 1.0% 2 0.5% 1

0 0.0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

HK pop. HK pop. y/y%

Source: Hong Kong government official data

Chart 18 : Hong Kong vs Singapore – population growth declines during Asian crisis

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

-1.00%

-2.00% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

HK pop. y/y% Singapore pop. y/y%

Source: Singapore, Hong Kong government official data, Rasmala

Based on our proprietary model, we estimate Dubai will likely face net population outflows of at least 5% annually for the foreseeable future. Mitigating the outflow will depend directly on net new job creation, especially by filling in the economic gap left from the construction and property sectors (25-30% of GDP exposure and nearly 45-50% of total employment). The debate scope then clearly broadens to how to curb depopulation by raising and investing capital into diversified economic sectors. This would entail a strategic approach at perhaps the federal level, requiring the realignment of the seven Emirates’ economic levers, lending practices, balance sheet management and regulatory reforms over several years. The end goal would be the revival of not just Dubai, but the broader UAE economy based on a framework that is sustainable and diversified, and promotes a knowledge-based economy with less reliance on cyclical sectors such as real estate and non-renewable energy resources. Clearly, reinvestments into economic diversification continue in Dubai and Abu Dhabi; however, perhaps in light of current economic stresses, especially in Dubai, there needs to be a more active strategy and enforcement with an underlying sense of urgency.

In the following table we construct our proprietary view, which we may adjust to any new data shared by the government, primarily on rebasing the historical population. Note that in our analysis, absolute population figures are less important than projected trends and rate of net population flows.

Real Estate | Investment View | 10 March 2011 1414

Table 4 : Dubai proprietary population model (000)

2005 2006 2007 2008 2009E 2010E2011E Total population 1,321 1,372 1,478 1,596 1,508 1,410 1,333 Change yoy 4% 8% 8% -5% -6% -5% Non-citizens 1,184 1,233 1,337 1,451 1,359 1,257 1,175 Change yoy 5% 4% 8% 9% -6% -8% -7% Citizens 138 139 141 145 149 154158 Change yoy 2% 1% 1% 3% 3% 3% 3%

Net population flows 51 106 118 (88) (98) (77)

Total employed 978 1,029 1,109 1,197 1,131 1,058 1,000 Employed % of total population 74% 75% 75% 75% 75% 75% 75% Construction and real estate 450 494 554 610 526 465 390 % of employed 46% 48% 50% 51% 47% 44% 39% Change yoy 10% 12% 10% -14% -12% -16% Ex-construction and real estate 528 535 554 587 605 592 610 % of employed 54% 52% 50% 49% 54% 56% 61% Change yoy 1% 4% 6% 3% -2% 3%

Source: Ministry of Economy, Rasmala estimates

We model roughly 5% annual net We believe marginal factors could affect our analysis of Dubai’s population, which may include population outflow for Dubai in inter-Emirate migration, primarily from Abu Dhabi and Sharjah to Dubai, given steeper price the foreseeable future declines in Dubai’s residential sector. We don’t yet foresee international corporates aggressively investing in office expansion and human resources into Dubai – apart from regional macro stresses, there is a significant office space delivery schedule over next two years that will likely depress commercial prices and rents even further. Hence, as economic recovery ensues gradually with lingering uncertainty and scaling oversupply, we believe it will take time for business interests to convert into material business commitment.

Deleveraging Dubai Inc

Total systemic leverage in Dubai According to the IMF, Dubai’s total reported debt as of 2010 is roughly US$110bn, US$30bn of around 170% of GDP which is government based. We believe in addition to the reported debt, there is significant off- balance-sheet leverage that is systemic. We estimate that anywhere between US$10bn and US$15bn in further liabilities exist that either developers or their parent entities would have to account for through further debt issuances or sovereign intervention to complete the existing pipeline of Dubai property, both residential and commercial. We therefore view the total indebtedness of the Dubai Emirate as US$125bn, or 170% of GDP. This debt estimate does not include the potential for further increases in obligations as Dubai Inc entities access capital markets to meet current cash flow needs and invest in growth both domestic and abroad. Note that while balance sheet debt has periodic maturities over the next several years, the off-balance- sheet funding gap we highlight is a cash requirement in the immediate to near term, making it more relevant in terms of short-term liquidity requirements.

Real Estate | Investment View | 10 March 2011 1515

Chart 19 : Dubai’s US$110bn total debt Chart 20 : Government of Dubai’s breakdown US$30bn debt breakdown

Dubai Holding 14% Public notes Others Govt of 16% 17% Dubai 27%

ICD Dubai 18% World 24% Related Syndicated party debt facilities 58% 26%

Source: IMF Source: IMF

Chart 21 : Dubai Inc debt schedule – 75% of debt due 2011-14 (US$bn)

Beyond 2014

2014

2013

2012

2011

2010

0 5 10 15 20 25 30

Source: IMF

Table 5 : Summary of off-balance sheet short leverage analysis for Dubai residential

(US$) Residential units in pipeline 65,000 Average unit price 250,000 Market value of pipeline 16.3bn Developer margin 7% Cost to developer 15.1bn Initial deposit 5% Initial deposit amount 0.8bn Revenue expected after deposit 15.4bn Default/Delinquency rate 40% Lost revenue 6.2bn Net revenues 10.0bn Developer costs 15.1bn Net funding gap 5.1bn

Source: Rasmala forecasts

We believe speculative investing at peak levels drove nearly 75-80% of all transactions including off-plan activity, at the height of the market bubble, while a meaningful share of residential transactions were taking place well above 2x average house prices, ie Dh4,000 per sq ft and higher. Today, development costs in the high-end residential market are about Dh950 per sq ft, which leads to severe economic unfeasibility for peak-market buyers.

Real Estate | Investment View | 10 March 2011 1616

Furthermore, mortgages fuelled the last two years of the bull cycle, with Dubai-based mortgages issuance at Dh110bn or US$30bn in 2008. These figures include both residential and commercial mortgage loans, and were roughly 37% of Dubai’s GDP, or 13% of UAE GDP, in 2008. We believe that during the 2008 peak, mortgages were readily being executed at loan-to-values of 90% or more, with interest rates in the low teens and rental yields for some properties hovering in the mid to high teens. Hence, mortgage rates in low double digits were not a major concern for some investors, especially if the holding period was minimal. We therefore believe that post the house price drop of approximately 50%, many investors facing substantial negative equity could walk away or default on their property. Default rate data is not readily available by developer, but some, including Union Properties, in the past have suggested nearly double-digit defaults on high- end property. We assume, post initial deposits of 5%, the default and payment delinquency rate will reach 40% for all properties sold in 2007-08.

As discussed later in this report, in addition to the existing supply of 45m sq m, we estimate 35m sq m of new office space will be rolled out in Dubai over the next three years. This is well below industry analyst estimates of 55m sq m (Colliers, JLL, Landmark Advisory, etc). We use a similar analysis for office space as we conducted above for residential and arrive at a potential funding gap estimate of US$10bn. Therefore, Dubai residential and office segments collectively may experience a funding gap of US$15bn over the next three years Our analysis excludes any impact to retail and hospitality sectors, and does not factor in project delays and cancellation costs, or the opportunity costs from vacant units. Furthermore, we may be conservative about the new pipeline flow because we are accounting for only half the pipeline for residential and 60% of the office floor space, as per industry view. Given that the funding gap analysis is dependent on several variables with limited data availability, we believe the actual systemic liability may differ considerably from our proprietary view.

In an effort to finance many of the near-term obligations, we believe Dubai Inc. will continue to tap the debt capital markets as IPO activity remains subdued, at least in relation to the UAE property sector. Hence, we may not see a meaningful net deleveraging of the cumulative Dubai Inc balance sheet for some time to come and we will likely witness rescheduling of maturities portfolio. At the end of September 2010, the Dubai government sold a US$1.25bn dual tranche bond with a 6.7% yield on a US$500m, five-year tranche and a 7.75% yield on a US$750m, 10- year tranche. Bond proceeds are targeted at infrastructure investment and were subscribed fairly evenly, ie 35% Asian investors and 30% each by European and Middle East investors. Emaar Properties recently issued US$500m convertible notes due in 2015 and intends to convert short- term liabilities into long-term liabilities. In July 2010, Sorouh Real Estate signed a four-year credit facility worth Dh2.35bn and thereafter executed early redemption of the remaining balance of its 2011 non-convertible sukuk, an Islamic financial certificate similar to a Western financial bond. With this transaction, the company has essentially refinanced and extended its debt maturity profile.

We believe many of the relatively stronger-performing assets within the Dubai Inc portfolio may be up for privatisation as a means to assist in deleveraging. While entities such as Dubai World and Dubai Holding may continue to rationalise their holdings and lines of businesses, there may be fewer wholesale asset sales in the near term, as depressed asset prices well below asking price may prevent transactions. However, we believe there is likely to be investor appetite for cash- generative businesses such as Emirates Airlines, Jumeriah Group, Dubai Duty Free, Dubai Electricity and Water Authority (DEWA), Road and Transportation Authority (RTA), Dubai Aluminium Company (DUBAL), TECOM Investments etc.

Dubai World and Nakheel (part of Dubai World) may be viewed as case studies for debt restructuring and deleveraging for Dubai, Inc entities. Dubai World at a parent entity level is executing on a debt restructuring plan with banks, trade creditors and other lenders, entailing US$23.5bn in obligations. The bank loans of US$14.4bn will be repaid over two tranches, ie Tranche A of US$4.4bn over five years with interest of 1% and Tranche B of US$10bn over eight years with multiple interest rate and payment-on-kind options. Note Nakheel’s trade creditor obligations are approximately Dh10bn, with a payment plan including 40% cash and 60% in tradable security. As of October 2010, Nakheel paid Dh3.4bn in cash to trade creditors with Dh600mn in outstanding cash payments out of the total cash obligation of Dh4bn. Nakheel expects to launch a Dh6bn sukuk in early 2011 to fulfil its trade creditor obligations.

Real Estate | Investment View | 10 March 2011 1717

Delivery schedules and related oversupply Theoretically, stopping all property handovers in a downcycle would make economic sense; however, we view broad-based project cancellations as a secondary risk to the economy. In our view, should developers including Nakheel, Dubai Properties Group and Emaar (which we estimate collectively account for two-thirds of Dubai residential volumes) announce project cancellations, they would be directly liable to refund down payments and deposits in both escrow and non-escrow accounts. This would create an added cash liability in addition to any implicit or explicit obligations pertaining to contractors, secured lenders, bond holders, etc. Furthermore, by leaving projects mid-cycle there is an economic cost - sunk costs are unlikely to be recovered in a reasonable period. Last, there would be a knock-on impact on banks and financial institutions that are tied to the property sector, as well as the direct impact from potential job losses and related deposits.

Dubai’s current residential volume is roughly 320,000 units. Several industry estimates from the likes of Colliers and Landmark Advisory put residential supply in 2010 and beyond between 120,000 and 140,000 units; however, we take a more conservative approach and believe project delays and suspensions, especially in light of financing challenges, will likely actualise in the 60,000-70,000 unit range. Should the handovers come through at much higher levels, clearly our oversupply assumptions would move upwards, thereby adding to the sector’s risk profile. During 2010-13, we expect supply of 45,000 units compared with industry estimates of 95,000.

On the commercial front, Dubai currently has roughly 45m sq m of office and retail space available. We expect another 35m sq m of pipeline to materialise in the coming years, less than the industry analyst estimates of 55m sq m.

Chart 22 : Dubai residential pipeline (units)

450,000 35,000

400,000 30,000 350,000 25,000 300,000

250,000 20,000

200,000 15,000 150,000 10,000 100,000 5,000 50,000

- 0 2009 2010E 2011E 2012E 2013E

Indusrty cumulative residential units Rasmala cumulative residential units Industry residential incremental Rasmala residential incremental

Source: Colliers, Jones Lang La Salle, Aesteco, Rasmala estimates

Real Estate | Investment View | 10 March 2011 1818

Chart 23 : Dubai office pipeline (sq m)

120,000,000 16,000,000

14,000,000 100,000,000 12,000,000 80,000,000 10,000,000

60,000,000 8,000,000

6,000,000 40,000,000 4,000,000 20,000,000 2,000,000

- 0 2009 2010E 2011E 2012E 2013E

Industry cumulative office sqm Rasmala cumulative office sqm Industry office incremental sqm Rasmala office incremental sqm

Source: Colliers, Jones Lang La Salle, Aesteco, Rasmala estimates

Chart 24 : Dubai retail pipeline

3,500,000 350,000

3,000,000 300,000

2,500,000 250,000

2,000,000 200,000

1,500,000 150,000

1,000,000 100,000

500,000 50,000

- 0 2009 2010E 2011E 2012E 2013E

Industry cumulative retail sqm Rasmala cumulative retail sqm Industry retail incremental sqm Rasmala retail incremental sqm

Source: Colliers, Ministry of Labour, Rasmala estimates

Chart 25 : Dubai hotel rooms

70,000 9,000

8,000 60,000 7,000 50,000 6,000

40,000 5,000

30,000 4,000 3,000 20,000 2,000 10,000 1,000

- 0 2009 2010E 2011E 2012E 2013E

Indusrty cumulative Hotel rooms Rasmala cumulativeHotel rooms Industry Hotel rooms incremental Rasmala Hotel rooms incremental

Source: Colliers, Ministry of Labour, Rasmala estimates

Our proprietary supply model for Dubai suggests the residential market reaches 32% oversupply by 2013F, up from 20% currently, and office market rises to 63% vacancies, up from 40% today. We summarise our model assumptions next.

Real Estate | Investment View | 10 March 2011 1919

Table 6 : Dubai proprietary supply model (2010-13F)

Residential (units) Office space (sq m) Current supply 325,000 45,000,000 Current oversupply rate 20% 40% Current oversupply 65,000 18,000,000

Upcoming supply 45,000 35,000,000 Available for occupancy 70% 70% Addressable upcoming supply 31,500 24,500,000

Dubai's population (2010F) 1,410,000 1,410,000 Depopulation factor 6% 6% Time frame in years 3 3 Population outflows 271,066 271,066 Addressable market 35% 35% Household size/Office sqm per capita 4 30 Housing units/Office space impacted 23,718 8,131,968

Oversupply composition Current 65,000 18,000,000 Upcoming 31,500 24,500,000 Depopulation related 23,718 8,131,968 Total oversupply 120,218 50,631,968 % of total market today 37% 113% % of total market end of 2013 32% 63%

Source: Rasmala forecasts

Note that in our model, depopulation accounts for residential oversupply of 6% and office vacancies of 8% (below). We estimate a household of four and office sq m per capita of 30, up from 28 currently, as we expect supply to outpace population growth going forward.

Chart 26 : Dubai oversupply composition by 2013F

70% 63% 60%

50%

40% 31% 32% 30% 23% 18% 20% 9% 10% 10% 6%

0% Current Upcoming Depopulation related Total oversupply

Residential Office

Source: Rasmala forecasts

Real Estate | Investment View | 10 March 2011 2020

Chart 27 : Dubai residential forecasts

6% 40% 5% 35% 4% 3% 30%

2% 25% 1% 20% 0% -1% 15 %

-2% 10 % -3% 5% -4% -5% 0% 2010E 2011F 2012F 2013F

New supply Increment al demand Oversupply (RHS)

Source: Rasmala forecasts

Chart 28 : Dubai office forecasts

16 % 70%

14 % 60%

12 % 50% 10 % 40% 8% 30% 6% 20% 4%

2% 10 %

0% 0% 2010E 2011F 2012F 2013F

New supply Increment al demand Oversupply (RHS)

Source: Rasmala forecasts

Examining the demand and supply dynamics in Abu Dhabi, we find that affordability is higher and quality housing is in relatively short supply, which in turns drives up the premium for Abu Dhabi property in general over Dubai. We believe the Abu Dhabi premium is likely in the 25-30% range; however, comparable housing analysis sometimes reveals substantial piece and rental differences between Dubai and Abu Dhabi, sometimes in the order of 45-65%. Note that low- income households ex-labour force make up more than 60% of total Dubai households, while in Abu Dhabi, low-income households account for only 35% of total households. High-income households account for nearly 20% of Abu Dhabi’s households compared with only 5% in Dubai. This income demographic contrast may also be triangulated via the fact that Abu Dhabi’s GDP per capita is roughly 2x Dubai’s GDP per capita, ie US$62,000 vs US$30,000 (2009).

Furthermore, housing expenses as a percentage of total income is consistently higher in Abu Dhabi compared with Dubai. The gap is widest for low-income households, ie almost 10 percentage points higher than for high-income households. We believe the midrange housing market in Abu Dhabi is underserved, with shortages of quality housing, while the high end of the market is quickly being saturated, with large pipelines being completed and handed over throughout 2010 and beyond.

Real Estate | Investment View | 10 March 2011 2121

Chart 29 : Percentage of households ex labour force

70%

60%

50%

40%

30%

20%

10%

0% Low income Medium-Low income Medium-High income High income

Abu Dhabi Dubai

Source: Colliers, Ministry of Economy 2010

Chart 30 : Housing expense as a percentage of income

60%

50%

40%

30%

20%

10%

0% Low income Medium-Low income Medium-High income High income

Abu Dhabi Dubai

Source: Colliers, Ministry of Economy 2010

We highlight in the following charts our expectations of Abu Dhabi’s various property segment pipelines. We note that our assumptions are significantly below the general industry view because we are conservative in our outlook on financing and pace of development.

Chart 31 : Abu Dhabi residential pipeline (units)

300,000 25,000

250,000 20,000

200,000 15,000

150,000

10,000 100,000

5,000 50,000

- 0 2009 2010E 2011E 2012E 2013E

Indusrty cumulative residential units Rasmala cumulative residential units Industry residential incremental Rasmala residential incremental

Source: Colliers, Rasmala estimates

Real Estate | Investment View | 10 March 2011 2222

Chart 32 : Abu Dhabi office pipeline (sq m)

4,000,000 600,000

3,500,000 500,000 3,000,000 400,000 2,500,000

2,000,000 300,000

1,500,000 200,000 1,000,000 100,000 500,000

- 0 2009 2010E 2011E 2012E 2013E Industry cumulative office sqm Rasmala cumulative office sqm Industry office incremental sqm Rasmala office incremental sqm

Source: Colliers, Rasmala estimates

Chart 33 : Abu Dhabi retail pipeline (sq m)

3,000,000 600,000

2,500,000 500,000

2,000,000 400,000

1,500,000 300,000

1,000,000 200,000

500,000 100,000

- 0 2009 2010E 2011E 2012E 2013E Industry cumulative retail sqm Rasmala cumulative retail sqm Industry retail incremental sqm Rasmala retail incremental sqm

Source: Colliers, Rasmala estimates

Chart 34 : Abu Dhabi hotel rooms

30,000 4,500

4,000 25,000 3,500

20,000 3,000

2,500 15,000 2,000

10,000 1,500

1,000 5,000 500

- 0 2009 2010E 2011E 2012E 2013E Indusrty cumulative Hotel rooms Rasmala cumulativeHotel rooms Industry Hotel rooms incremental Rasmala Hotel rooms incremental

Source: Colliers, Rasmala estimates

Real Estate | Investment View | 10 March 2011 2323

We reiterate our view that Abu Dhabi’s medium-term economic fundamentals relative to Dubai will likely remain strong given less exposure to the property sector, lower expat population exposure at less than 85% vs 90% for Dubai, less foreign ownership off-plan sales activity and less speculative investing. In the near term, however, we believe lack of liquidity and the Dubai substitution effect, ie rising oversupply with greater property options at much lower price points in Dubai, will likely put considerable negative pressure on Abu Dhabi housing. Hence, we believe the asset price correlation between Abu Dhabi and Dubai will remain high despite Abu Dhabi commanding both price and rental premiums.

Note also that in addition to having a solid Sovereign Wealth Fund asset base of US$500bn, 75% of Abu Dhabi’s annual revenues are hydrocarbon based. With oil in the US$80-85 per barrel range, well above budget breakeven of US$55 per barrel, we believe Abu Dhabi has the capital strength to cushion the current economic crisis, support its Government Related Entities (GREs) through funding issues and continue to upgrade the overall infrastructure of the Emirate, albeit at a relatively slower pace than the 2008 pre-crisis levels. This economic stability creates inherent employment stickiness in Abu Dhabi, where we believe the wide-scale corporate downsizing challenges are not nearly as prevalent as in Dubai. Stable employment therefore allows for healthier demand and absorption of the upcoming pipeline, provided financing flows pick up for both end users and developers. In our view, the main challenge with Abu Dhabi’s fundamentals remain one of near-term liquidity rather than solvency, and return of liquidity is largely a function of supply/demand trends and bank lending returning to normal levels.

Our analysis of the Abu Dhabi market suggests a likely oversupply scenario for both residential and office segments by 2013F, ie residential oversupply at 16%, up from a shortage of 5% today, and office oversupply of 30%, up from 12% today. Recall our estimates for Dubai residential oversupply at 32% and office oversupply at 63%. The common factor is that for both Emirates, our office-to-residential oversupply factor is roughly 2x.

Chart 35 : Abu Dhabi residential

8% 20%

6% 15% 4% 10 % 2%

0% 5%

-2% 0% -4% -5% -6%

-8% -10% 2010E 2011F 2012F 2013F

New supply Increment al demand Oversupply (RHS)

Source: Colliers, Jones Lang La Salle, Aesteco, Rasmala estimates and forecasts

Real Estate | Investment View | 10 March 2011 2424

Chart 36 : Abu Dhabi office

30% 35%

30% 25%

25% 20%

20% 15 % 15 %

10 % 10 %

5% 5%

0% 0% 2010E 2011F 2012F 2013F

New supply Increment al d emand Oversupply (RHS)

Source: Colliers, Jones Lang La Salle, Aesteco, Rasmala estimates and forecasts

Financing equation still a headwind

Rental-to-mortgage rate To assess financing dynamics in the UAE, we now examine lending rates, rental yields, mortgage differential unfavourable rates and loan provision rates. We estimate gross rental yields have compressed from 13% at peak levels in late 2008 to around 5% today and we expect net rental yields under 3% for the next couple of years, particularly due to rising maintenance costs despite a housing correction. Average personal loan rates are hovering in the 10-15% range, depending upon end-user credit quality. Average mortgage rates are around 7.5%, down from 9.0% in 2008, with introductory mortgage rates near 5%. However, we believe that similar to personal loan applications, mortgage loan approvals are considerably more difficult to come by, with stricter eligibility requirements than a few years back.

The next chart highlights the rental/mortgage rate differential, which we estimate has declined from 4.0% at the peak market in 2008 to -2.5% currently. While mortgage rates have come down by 150bp, gross rental yields have compressed far more, at around 800bp from peak levels, hence a 650bp rental/mortgage differential swing. We find it unlikely that in light of a negative rental/mortgage differential and potential negative equity, net new lending would be able to trigger demand for the residential and commercial pipelines.

Chart 37 : Dubai residential yield differential unfavourable

14.0% 13.0%

12.0%

10.0% 9.0% 7.5% 8.0%

6.0% 5.0% 4.0% 4.0%

2.0%

0.0%

-2.0% -2.5% -4.0% Gross rental yield Mortgage rates Rental-Mortgage differential

2008 2010

Source: Rasmala

Real Estate | Investment View | 10 March 2011 2525

Loan-to-values have come down to the 70-80% range vs 90% at the peak, reflecting lenders’ elevated risk aversion. At the peak of the UAE property cycle in 2008, mortgages were roughly 15% of the transaction value of the real estate sector, with Amlak and Tamweel accounting for

roughly 60% of mortgage issuances. Note both financial institutions have been largely out of the Cumulative credit exposure market since late 2008, with merger talks and other consolidation efforts being debated. Hence for declining post property-bubble the most part, UAE real estate is a cash-dominated story and will likely remain as such in the burst in 2008 foreseeable future, in our view. The chart below points out cumulative mortgage issuance rising since 2008 – ie up from 14% of total credit to 17% by September 2010. We believe this is largely due to commercial pipelines and includes transactions pertaining to office space, warehouses and storage setups. We believe a significant portion of these commercial transactions may be attributable to bank collaterals for corporate lending. Overall credit exposure, however, appears to be in a declining trend, ie down from 63.8% of UAE bank assets in 2008 to 61.7% at the end of September 2010. We attribute slower credit growth relative to asset base to higher risk aversion and liquidity concerns post the property bubble that burst in 2008.

Chart 38 : UAE assets, credit, mortgages (Dhm)

1,800 70% 1,600 60% 1,400 50% 1,200 1,000 40% 800 30% 600 20% 400 200 10% - 0% 2008 2009 2010

RE Mortgage Loans Total Credit Total Bank assets Credit % of Assets Mortgage % of Credit

Source: UAE Central Bank, Rasmala

Examining the UAE credit composition further, we note that the private sector accounts for nearly 75% of total credit. From an economic activity perspective, personal loans for businesses are 19% of credit, construction 13%, financial institution 9% and others including loans to service sector and non-profit organisations around 21%.

Chart 39 : UAE credit overview (Dhm)

1,000 900 800 700 600 500 400 300 200 100 - 2008 2009 Aug 2010

Private sector Government Official entities Financial institutions

Source: UAE Central Bank, Rasmala

Real Estate | Investment View | 10 March 2011 2626

Chart 40 : Economic activity as a percentage of credit, September 2010

25% 21% 20% 19%

15% 13%

10% 10% 10% 9% 7% 5% 5% 3% 3% 1% 0% 0% Trade Mining Others NPOs) Financial Storage (Services, institutions Agriculture & water business Transport & Government Construction Manufacturing Personal loans Personal loans Electricity, gas Electricity,

Source: UAE Central Bank

UAE NPLs seem understated Nonperforming loans (NPLs) and restructured/rescheduled loans play a key role in the flow of against historical examples of financing available in the market to both corporates and end users. UAE’s reported NPLs and certain Asian economies general provisions have risen from 2% and 0.5% at end-2008, respectively, to 3.8% and 1.4% at end-October 2010, hence total provisions increased from 2.5% to 5.2%. We believe NPLs may continue to rise in the coming quarters as banks may incur provisions on around 20% of their loan books tied to the real estate and construction sector, in addition to the potential for personal loan provisions as employment prospects remain soft. Historical examples of markets such as Singapore, Hong Kong, Indonesia, Thailand, etc, where banks’ real estate exposure was 20% or more and the market underwent a housing downturn, show peak NPLs between 10% and 40%. The UAE market as a whole is somewhat unique – we believe 75% of the loan book entails exposure to sovereign and quasi-sovereign entities, including Nakheel, Dubai Properties Group, Aldar, Emaar etc, and it is unlikely these loans are classified as NPLs, although they may be largely restructured or rescheduled. The remaining 25% of the loan book covers mid-size developers such as Union Properties, Deyaar etc, with meaningful financing via equity. Against the potential of rising losses and provisions, we believe the UAE banking system had a healthy capital adequacy level of 20.4% at end-October 2010.

Chart 41 : Provision dynamics Chart 42 : Capital adequacy ratio

6.00% 25.0%

5.00% 20.2% 20.4% 20.4% 19.2% 4.00% 20.0%

3.00% 15.0% 13.3% 2.00%

1.00% 10.0%

0.00% 5.0% Jul-10 Oct-10 Apr-10 Jan-10 Jun-10 Feb-10 Mar-10 Aug-10 Sep-10 Dec-08 Dec-09 May-10

NPL % of Loans 0.0% Genreal provisions % of Loans Dec-08 Dec-09 Mar-10 Jun-10 Sep-10 Total provisions % of Loans

Source: UAE Central Bank Source: UAE Central Bank

Our house view on UAE banks’ exposure to property suggests that further decline in property prices and potential debt restructuring at Dubai, Inc entities would be manageable. While NPLs may not reach the same levels witnessed by some countries during the Asian crisis, we believe

Debt restructuring will likely the lengthy debt rescheduling process may dampen banks’ ability to freely lend. This in turn suppress bank lending, which in places cash flow pressure on project activity, as the majority of the projects financed during boom turn may force developers to years were either pre-sales and/or debt financed. Today, several developers are facing the engage in asset sales and circular problem of needing cash flows to finish properties, but not being able to secure adequate increase equity financing financing given rising investor defaults and/or payment delays. The Dubai government, working

Real Estate | Investment View | 10 March 2011 2727

with the Dubai Land Department, has guaranteed funds for project completion for certain premium developments under the Tayseer scheme, where in phase one, 40 projects have been short listed. One way to close the near-term funding gap would be for developers to rely more on equity financing than they have in the past. They could also engage in asset sales, eg Union Properties selling Ritz Carlton Hotel and Emaar selling various commercial assets that may be considered non-core.

Other deterrents Industry data suggests Dubai residential property average gross rental yield is roughly 5% today, down from 13% at peak levels, but we believe further yield compression is likely due to declining rents. Exacerbating the yields are the rising maintenance expenses that we believe may range from 2% to 4% of house price value. Our independent study of various developments across Dubai’s high-end market suggests average rental yield for a two-bedroom apartment is 4.5%, with maintenance and service between 1.8% and 3.5%. These costs vary from chiller replacements to pool and common garden upkeep and security staff in closed residential communities.

Beginning early in 2011, property buyers will incur a new housing tax computed at 5% of annual lease value. The rental rate will be based on the Real Estate Regulatory Authority’s (RERA) Rental Index and the tax will be levied upon both empty and occupied units. We believe this will keep investors from bidding further on a transaction.

Furthermore, recent news of various rent hikes at retail outlets and malls across Dubai cause us concern. In some cases, landlords have raised rents 35% for the upcoming year. We view this as counterproductive to the sustainability of retailers. Passing rent hikes on to customers will remain challenging given our macro view of depopulation and declining footfalls, not to mention more gross leasable area (GLA) coming online in the future.

Last, we believe certain immigration reforms may prove counterproductive to end demand in the near term. In December, for example labour card terms were reduced from three years to two years. Should immigration laws allow for longer-term residency or perhaps permanent residency, the UAE as a second home could become a far more attractive second-home proposition for many foreigners, which could have positive consequential effects on population trends and the broader economy.

Abu Dhabi’s role as the economic backstop

Abu Dhabi highly solvent, As mentioned previously, in our view the UAE property story is tied to near-term liquidity, however, immediate-term oversupply and lending issues. However, long-term solvency strength remains intact, in our view. liquidity pressures cannot be The Abu Dhabi Investment Authority (ADIA) is the world’s largest Sovereign Wealth Fund (SWF), ruled out with assets widely estimated at more than US$500bn. There are other SWFs in the UAE – for example, Mubadala and Investment Corporation of Dubai – that may also act as balance sheet cushions for government-backed corporates and holding entities. We have no data pertaining to family assets and how they could provide an added layer of balance sheet protection in a worst- case scenario, but we believe family funds could total tens of billions of US dollars. We estimate that UAE SWFs account for roughly US$569bn in total assets, or 230% of UAE GDP. As in the case for Nakheel/Dubai World debt repayment, for which emergency funding was required, it is likely that Abu Dhabi [government] would be supportive in any other major worst-case scenario at the sovereign and quasi-sovereign level.

Real Estate | Investment View | 10 March 2011 2828

Chart 43 : GCC sovereign estimates assets (US$bn)

600

500

400

300

200

100

0 Abu Dhabi SAMA (KSA) KIA (Kuwait) QIA (Qatar) Mumtalakat Mubadala (UAE) Investment (Bahrain) Authority (UAE)

Source: Rasmala, Council for Foreign Relations, Various internet sources.

The sovereign asset cushion is a key differentiator in UAE compared with some Asia economies that faced the Asian crisis and property down cycle more than a decade ago. Abu Dhabi’s role as the primary liquidity backstop is also reflected in the CDS dynamics highlighted in the charts below. Note that Dubai’s dependence on Abu Dhabi, albeit selective and on a case-by-case basis, is reflected in the rising CDS spread differential between the two, i.e. Dubai sovereign five-year CDS is trading at peak levels of 4.6x Abu Dhabi sovereign five-year CDS.

Chart 44 : MENA region five-year CDS trends

1000

800

600

400

200

0 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11

Dubai Saudi Arabia Bahrain Qatar Egypt Abu Dhabi Peer average

Source: Bloomberg

Real Estate | Investment View | 10 March 2011 2929

Chart 45 : Dubai five-year CDS vs peer average

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11

Source: Bloomberg

Chart 46 : Dubai five-year CDS vs Abu Dhabi

6.0

5.0

4.0

3.0

2.0

1.0

0.0 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11

Source: Bloomberg

We also triangulate the Abu Dhabi premium as reflected in stock market dynamics (see following charts) – ie the Abu Dhabi Stock Market Index has outperformed the Dubai Financial Market Index by a wide margin over the past three years – the former down 47% vs a decline of 76% for DFM. Also note that valuation decoupling has become visible since the beginning of 2009, with Abu Dhabi trading at an average 35% PE multiple premium compared with Dubai. Part of the outperformance and premium is related to the relatively hedged economics of Abu Dhabi – ie less exposure to property sector and debt financing than Dubai. The other important consideration is the solvent nature of its sovereign assets, as mentioned previously. We believe these asset pools have room to grow in the near future, thereby mitigating any rolling risks that may arise from consolidation, deleveraging and refinancing of balance sheets across UAE and especially Dubai. Assuming Abu Dhabi produces 2m barrels of oil per day, with budget breakeven around US$55 and oil prices in the US$80 area, net oil income alone would be roughly US$18bn annually, or 7% of GDP. Hence, the potential for the sovereign asset base to continue to expand is significant even with UAE’s sizeable development mandate of roughly US$35bn annually.

Real Estate | Investment View | 10 March 2011 3030

Chart 47 : ADX vs DFM valuation

18.0

15.0

12.0

9.0

6.0

3.0

0.0 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11

ADX P/E DFM P/E

Source: Bloomberg

Chart 48 : ADX/DFM PE premium

90%

70%

50%

30%

10%

-10%

-30% Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11

Source: Bloomberg, Rasmala

Project activity appears solid despite downturn The UAE continues to lead the Gulf region in terms of project activity planned and under way, totalling about US$3trn (MEED data). The charts below highlight the UAE driving 31% of the regional project activity, followed by Saudi Arabia at 23%, with the construction sector accounting for 57% of the projects, followed by oil and gas a distant second at 23%. However, we note that the UAE has also seen a collective project activity drop of 26% since the peak in 2008, the steepest decline among its regional peers. As financing remains relatively suppressed, we believe projects will continue to be rationalised for the foreseeable future, with a preference towards near- completion projects and infrastructure-related work vs early-stage and residential. While land prices have also come down in line with house prices, we don’t yet see eager investors willing to finance infrastructure on top of land plots for development sale purposes.

For contractors, the Gulf as a whole presents a solid pipeline of long-term activity, but many have found it challenging to switch gears from residential to infrastructure segments and from Dubai to Saudi Arabia, for example. In our view, most local markets are dominated by two or three incumbents, thereby prompting joint ventures and alliances with key local players to gain market entry. These ventures may pose near- to medium-term execution challenges given relationship building, logistics management may not be seamless and the potential margin impact from price wars, especially during down markets, should not be underestimated. We conservatively estimate that of the US$950bn in project activity planned and under way in UAE, 25% is under way and over the next three years, only one-third of this pipeline will materialise. Applying a gross margin

Real Estate | Investment View | 10 March 2011 3131

assumption of 12%, we compute the near-term realisable value added for UAE projects at US$9.5bn – a meaningful opportunity spread across the construction food chain.

Chart 49 : Gulf project activity planned and under way

3,000,000 100%

2,500,000 80%

60% 2,000,000 40% 1,500,000 20% 1,000,000 0%

500,000 -20%

- -40% Bahrain Iraq Oman Qatar Iran Kuwait Saudi UAE GCC total Gulf total Arabia

Nov 2007 Nov-08 Nov-09 Nov-10 Since peak

Source: MEED

Chart 50 : Project activity by region Chart 51 : Project activity by sector

8% 2% 9% 4% 3% 7% 4% 31% 7%

24% 57% 11% 23% 12%

UAE Saudi Arabia Iraq Iran Qatar Kuwait Construction Oil and gas Power Oman Bahrain Petrochemicals Industry Waste and water

Source: MEED Source: MEED

Real Estate | Investment View | 10 March 2011 3232

Currency dynamic and ownership breakdown There are global concerns about the multiple rounds of quantitative easing (QE) in the US leading to potentially a decline in the value of the US dollar, but we believe that would be a favourable outcome for the UAE property sector. Historically, the ownership breakdown of the real estate market among foreigners has been as follows.

Chart 52 : Dubai historical residential ownership profile

Others 7% India Arab and other GCC 20% 15%

Continental Europe Iran 7% 13% Russia 7% UK Pakistan 9% UAE 13% 9%

Source: RERA

Examining the foreign exchange trends, we note that the euro, sterling and the Indian rupee have appreciated against the US dollar over the past two years within a 5-10% range, while the Foreign exchange is not a major Russian rubel and the Pakistani rupee have depreciated roughly 5% and 10%, respectively. catalyst just yet Hence we believe that since the beginning of the property bubble, foreign exchange has had a marginal role affecting demand for UAE real estate. We observe that the market’s concerns about devaluation of the US dollar, driven by multiple rounds of QE, may prove to be incrementally positive for UAE property, although will likely have a negative effect on oil revenues and possible inflation dynamics. Separately, the geopolitical tensions with Iran may also affect demand given Iranians own 13% of Dubai-based real estate and are roughly 12% of the total Dubai population.

Chart 53 : FX dynamics

1.20

1.15

1.10

1.05

1.00

0.95

0.90

0.85

0.80 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010

EURUSD GBPUSD RUBUSD IRRUSD INRUSD PKRUSD

Source: Bloomberg

Real Estate | Investment View | 10 March 2011 3333

Peer comparison

In the following section, we summarise key metrics for our UAE coverage peer comparison, which include sales dynamics, margin structure, geographical exposure, leverage and sectoral composition.

Sales dynamics and business model

Greater top-line visibility at Emaar clearly has been the standout in terms of revenue growth, largely helped by handovers in Emaar due to relatively mature the Downtown Burj Dubai area, despite concerns about delays and a rise investor defaults. We business model note that the Abu Dhabi developers have seen a substantial fall in sales as transactions have been affected by delays and funding issues that we would expect at this early in the downcycle. Furthermore, Sorouh, which was driving a large component of revenues via land sales, the challenging top line results from fewer and choppier land transactions and trickling residential handovers until Sun Sky and Tala Towers are delivered. Contractors have fared relatively better than developers in terms of sales trends given backlog diversification and exposure to multiple sectors outside of residential, although we believe backlog to revenue conversion rates have slowed meaningfully.

Chart 54 : Sales growth (2010 yoy)

60.0% 44.4% 40.0%

20.0%

0.0% -3.3% -20.0% -9.5%

-40.0% -30.0%

-60.0% -61.2% -80.0% Emaar Aldar Sorouh Arabtec* DSI

* yoy sales growth for Arabtec is for LTM starting 3Q10 Source: Company data

Emaar continues to report relatively healthy margins compared with its Abu Dhabi peers. We attribute this to Emaar’s premier positioning in the market as a Tier-1 UAE master developer with primary locations in Dubai, a more mature property portfolio with a solid rental revenue component, and less volatile handover schedule given fewer near-term financing and cash flow issues than peers. Although Sorouh reported higher margins in 2010, the margins were high mainly on the back of higher contribution from high-margin land sales and rental portfolio than property sale. Long term, we expect margin compression at both developers and contractors as both seek growth internationally against incumbent competition and continue to work through the core-market pressures.

Real Estate | Investment View | 10 March 2011 3434

Chart 55 : Business model (2010)

50.0% 44.1%

40.0% 37.4%

30.0% 27.0% 22.9% 19.4% 20.0% 16.1% 16.5%

10.0% 5.3% 6.4%

NM 0.0% Emaar Aldar Sorouh Arabtec* DSI*

Gross margin EBIT margin

* Margins for Arabtec and DSI are for LTM starting 3Q10 Source: Company data

With the exception of DSI, which drives 28% of revenues from international markets, the Emaar executing behind stable remaining names in our coverage universe are primarily UAE focused. Emaar’s penetration into margins and international Saudi, Pakistan, Egypt and other regional markets will help mitigate Dubai-centric sales exposure, expansion but the Abu Dhabi names don’t yet have an executable international expansion strategy in place. Arabtec is also pushing to grow into Saudi, Egypt and Russia, and we would expect geographic diversification to begin in earnest in 2011 onwards.

Chart 56 : Geographical exposure (LTM revenue breakup)

100% 4.7% 2.0% 90% 28.1% 80% 70% 60%

50% 95.4% 100.0% 100.0% 98.0% 40% 71.9% 30% 20% 10% 0% Emaar Aldar Sorouh Arabtec DSI

UAE International

Source: Company data

Leverage While DSI and Arabtec have comparable debt-to-equity levels of around 27%, the master developers have relatively higher debt ratios given the business model is based on significant investments into development and rental portfolios. Emaar and Sorouh are adequately leveraged, in our view, and have room for adding more leverage if capital markets are conducive. Aldar, however, stands out with respect to debt profile, as it has taken the lead in Abu Dhabi’s development mandate. With Abu Dhabi government support and Aldar’s strategic positioning as Abu Dhabi’s largest master developer, we believe the company has scaled its debt aggressively. However, market conditions have clearly changed in the past two years and now the main challenge facing Aldar is managing it debt obligations and matching cash flow needs. We don’t believe Aldar’s debt profile equates to default concerns, as Abu Dhabi government indirectly owns 38% of Aldar shares and will likely act as a backstop. However, debt servicing is eliminating earnings power and will likely do so for next several quarters.

Real Estate | Investment View | 10 March 2011 3535

Chart 57 : Debt vs equity (3Q10)

250.0%

200.0%

150.0%

227.4% 100.0%

50.0%

32.0% 26.1% 27.4% 26.9% 0.0% Emaar Aldar Sorouh Arabtec DSI

Source: Company data

Comparing the master developers From the chart below, we may ascertain that Aldar’s revenue streams are relatively more balanced compared with Emaar and Sorouh, which have driven majority of their revenues through property handovers and land sales, respectively. We believe this may be slightly misleading – going forward, we expect Sorouh to engage in project completions at Sun, Sky and Tala Towers that may essentially switch the current revenue mix between property sales and land sales. We also expect Emaar to continue scaling its recurring revenue and hospitality business, which should further balance out the business model.

Chart 58 : Segment contribution (LTM breakup revenue)

100% 0.2% 7.4% 90% 15.6% 19.8% 19.7% 80% 7.9% 70% 60% 24.7% 50.6% 50%

40% 76.3% 30% 0.7% 48.2% 12.6% 20%

10% 16.2% 0% Emaar Aldar Sorouh

Property development Investment properties Hospitality Land sales Others

Source: Company data

Emaar has the largest land bank of the three developers, as shown in chart below. However, its UAE-based land bank is only 20m sq m, with almost 240m sq m in international markets, India is the largest in this regard. We don’t believe the land bank is value additive for these developers in the foreseeable future because selling land to sub developers, for example, would require investments into infrastructure. Furthermore, the demand dynamics and bank lending remains weak, with oversupply challenges in Dubai, especially. It is difficult to quantify at this stage what the true land bank valuations would look like if transacted in the current market. We believe land bank valuations from third-party sources are outdated, as they go back to 2008, and are not applicable in today’s market. In Dubai, for example, there are cases in which house prices have declined 75% or more. Hence we remain unconvinced that pure land would be a monetisable asset in the near future. We therefore don’t include land bank values in our price target computations. Some of the public land bank valuations by independent parties is not fully up to date, with disclosures dating back to late 2008 and 2009.

Real Estate | Investment View | 10 March 2011 3636

Chart 59 : Land bank (m sq m)

300 260

250

200

15 0

10 0 60 52 50

0 Emaar Aldar Sorouh

Source: Company data

Comparing the contractors DSI’s backlog (ex-Durrat Al Bahrain project) is of higher quality, as based on our estimate 66% of it is tied to relatively higher-margin Mechanical, Electrical and Plumbing (MEP) and Infrastructure, Water and Power (IWP) segments, with Civil only at 34%. Arabtec is predominantly a civil contractor, with 89% of its backlog (ex-Russia based Okhta center project) being exposed to the low-margin civil construction segment in the form of mixed and residential projects. The exposures mentioned here are estimated based on the last declared backlog by the company, new projects won and estimated revenue to be recognised during the last backlog declaration to the February 2011 period.

Chart 60 : Arabtec’s estimated segment exposure as of February 2011 end

Infrastructure & utilities 11%

Residential 46%

Mixed 43%

*Backlog decomposition is ex-Russia Source: Company data, Rasmala forecasts

Real Estate | Investment View | 10 March 2011 3737

Chart 61 : DSI’s estimated segment exposure as of February 2011 end

IWP 12%

MEP Civil 54% 34%

*Backlog decomposition is ex-Durrat Al Bahrain Source: Company data, Rasmala forecasts

Given the falling backlog from Dubai due to significant oversupply, project cancellations and delays, and tight liquidity conditions, both the contractors are working towards expanding their footprints into other high-growth markets such as Saudi Arabia, Egypt, Qatar, Libya, etc to scale their backlogs. Both DSI and Arabtec recently have been able to gain some traction in the Middle East’s construction sweet spot of Saudi Arabia (see Charts 62 and 63) by using different routes, with Arabtec securing contracts by forming JVs with the local players and DSI expanding through acquiring specialist companies in the civil and Mechanical, Electrical and Plumbing (MEP) segments. Also, with Arabtec looking to complete the majority of its existing projects in Dubai over the next two years, we believe wins in Saudi can act as a major backstop for Arabtec to preserve its backlog, which has been hit hard by project cancellations in Dubai. However, internationally ex- Saudi Arabtec (see Chart 64) has not been able to gain traction, with the backlog trending downwards. On the other hand, DSI’s international ex-Saudi backlog (see Chart 65) grew c98% between 4Q08 and 3Q10 both organically and inorganically. This, combined with acquisitions in Saudi has led DSI to trade at a much higher EV-backlog multiple than Arabtec (0.33x vs 0.17x) . We believe any major international ex-Saudi wins by Arabtec can act as an important catalyst supporting stock action in the foreseeable future.

Chart 62 : Arabtec’s Saudi backlog trend Chart 63 : DSI’s Saudi backlog trend

6,000 25.0% 18 0 0 35.0%

16 0 0 30.0% 5,00 0 20.0% 14 0 0 25.0% 4,000 12 0 0 15 . 0 % 10 0 0 20.0% 3,000 800 15 . 0 % 10 . 0 % 2,000 600 10 . 0 % 5.0% 400 1, 0 0 0 5.0% 200

0 0.0% 0 0.0% 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Saudi b acklog Saud i backlog as % of t ot al Saudi b acklog Saud i backlog as % of t ot al

Source: Company data Source: Company data

Real Estate | Investment View | 10 March 2011 3838

Chart 64 : Arabtec’s International ex-Saudi backlog trend Chart 65 : DSI’s International ex-Saudi backlog trend

16 , 0 0 0 70.0 % 18 0 0 45.0%

16 0 0 40.0% 14 , 0 0 0 60.0% 14 0 0 35.0% 12 , 0 0 0 50.0 % 12 0 0 30.0% 10 , 0 0 0 40.0% 10 0 0 25.0% 8,000 30.0% 800 20.0% 6,000 600 15 . 0 % 20.0% 4,000 400 10 . 0 % 10 . 0 % 2,000 200 5.0%

0 0.0% 0 0.0% 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Int ernat io nal ex-Saudi b acklog Int ernat ional ex-Saud i backlo g as % of t o t al Int ernat io nal ex-Saudi b acklog Int ernat ional ex-Saud i backlo g as % of t o t al

Source: Company data Source: Company data

Chart 66 : Arabtec’s Dubai backlog trend Chart 67 : DSI’s Dubai backlog trend

18 , 0 0 0 45.0% 16 0 0 50 .0%

45.0% 16 , 0 0 0 40.0% 14 0 0

14 , 0 0 0 35.0% 40.0% 12 0 0 35.0% 12 , 0 0 0 30.0% 10 0 0 30.0% 10 , 0 0 0 25.0% 800 25.0% 8,000 20.0% 20.0% 600 6,000 15 . 0 % 15. 0 % 400 4,000 10 . 0 % 10 . 0 % 200 2,000 5.0% 5.0 %

0 0.0% 0 0.0% 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Dubai backlog Dubai backlog as % of total Dubai backlog Dubai backlog as % of total

Source: Company data Source: Company data

Real Estate | Investment View | 10 March 2011 3939

Chart 68 : Valuation comparison (current prices and 1Q11 estimated backlog)

4.0 0.35 3.7 3.5 0.33 0.3

3.0 0.25 2.4 2.5 0.2 2.0 0.17 0.15 1. 5

0.1 1. 0

0.05 0.5

0.0 0 Arabtec DSI Book to bill ratio EV/ B ac k l og

Source: Company data, Bloomberg * Arabtec’s backlog is ex-Russia and DSI’s backlog is ex-Durrat Al Bahrain

Performance and valuation Emaar and DSI have outperformed their peers since the beginning of 2009 (see Chart 71), and one may reasonably argue the potential for Arabtec and Abu Dhabi developers to play catch-up going forward. However, we believe balance sheet strength will become a key driver of valuation and stock action.

Chart 69 : Stock price action

18

16

14

12

10

8

6

4

2

0 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11

Emaar Aldar Sorouh Arabtec DSI

Source: Bloomberg

In a price-to-book comparison, Emaar and DSI both have seen their multiples expand in line with stock price appreciation relative to the beginning of 2009, ie post the start of the real estate crisis. For DSI, we use price and valuation data since the company’s IPO in March 2009.

Real Estate | Investment View | 10 March 2011 4040

Chart 70 : Price-to-book-value snapshot

1.8 1.61 1.6

1.4 1.33

1.2

1.0 0.83 0.8 0.7 0.64 0.60 0.53 0.6 0.49 0.47 0.4 0.25 0.2

0.0 Emaar Aldar Sorouh Arabtec DSI

Current At beginning of 2009

Note: current P/B is unadjusted for fair value of investment properties. Source: Bloomberg

Chart 71 : P/BV change and stock performance

60%

38% 40% 22% 19% 20% 8%

0%

-20%

-40% -40% -60% -60% -63% -67% -65% -64% -80% Emaar Aldar Sorouh Arabtec DSI

P/BV change Performance since beginning of 2009

Source: Bloomberg

We highlight monthly outperformance of Emaar’s share price vs its peers in the next chart. Note that in the first nine months, the relative performance was spread somewhat evenly – ie both under- and outperformance. However, since the Dubai World and Nakheel debt issues surfaced in late November 2009, Emaar has most often outperformed its peers, with especially sharp relative outperformance over Aldar. We view this pair trade of long Emaar, short Aldar as the market’s risk aversion to stocks exposed to capital and funding challenges despite their strategic positioning in UAE’s long-term development cycle.

Real Estate | Investment View | 10 March 2011 4141

Chart 72 : Emaar's relative performance

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

-50% Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11

vs. Aldar vs. Arabtec vs. Sorouh vs. DSI

Source: Bloomberg

Aldar decoupling signals liquidity vs solvency concerns While over the past three years, ADX has significantly outperformed DFM General Index, their respective proxies have experienced the opposite – ie, Aldar has significantly underperformed Emaar and even more so the ADX General Index. We attribute this underperformance to liquidity challenges leading to a rise in minority shareholder risk – ie Aldar’s unique funding scenarios suggest meaningful probability of sovereign intervention and the potential for further dilution risk as a result.

Chart 73 : ASDM vs DFM performance – Chart 74 : Aldar vs Emaar performance – past three years past three years

1.2 1.2

1.1 1.0 1.0

0.9 0.8 0.8

0.7 0.6

0.6 0.4 0.5

0.4 0.2 0.3

0.2 0.0 Feb-08 Oct-08 Jun-09 Feb-10 Oct-10 Feb-08 Oct-08 Jun-09 Feb-10 Oct-10

ADX rebased DFM rebased Aldar rebased Emaar rebased

Source: Bloomberg Source: Bloomberg

Real Estate | Investment View | 10 March 2011 4242

Chart 75 : ADX vs DFM performance – Chart 76 : Aldar vs Emaar performance – past 12 months past 12 months

1.5 1.2

1.3

1.1 1.1

1.0 0.9

0.7 0.9 0.5

0.8 0.3 Feb-10 May-10 Aug-10 Nov-10 Feb-11 Feb-10 May-10 Aug-10 Nov-10 Feb-11

ADX rebased DFM rebased Aldar rebased Emaar rebased

Source: Bloomberg Source: Bloomberg

Chart 77 : Price-to-earnings time series

20

18

16

14

12

10

8

6

4

2

0 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11

Emaar Aldar Sorouh Arabtec DSI

Source: Bloomberg

Chart 78 : Price-to-book value time series

9

8

7

6

5

4

3

2

1

0 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11

Emaar Aldar Sorouh Arabtec DSI

Source: Bloomberg

Real Estate | Investment View | 10 March 2011 4343

Chart 79 : Price-to-sales time series

14

12

10

8

6

4

2

0 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11

Emaar Aldar Sorouh Arabtec DSI

Source: Bloomberg

Chart 80 : Enterprise value-to-EBITDA time series

14

12

10

8

6

4

2

0 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11

Emaar Aldar Sorouh Arabtec DSI

Source: Bloomberg

Real Estate | Investment View | 10 March 2011 4444

Valuation methodology

We value developers primarily using a SOTP approach and contractors primarily using DCF. Our secondary valuation methodology entails supporting the SOTP with price-to-NAV for developers and the DCF with an EV-backlog multiple for contractors.

To derive stock price targets, we primarily apply a sum-of-the-parts (SOTP) approach. We believe a valuation-multiples-based approach is less relevant in assessing intrinsic value given near-term earnings volatility, weak outlook and book value visibility, and uncertainty about a company’s ability to generate free cash flow. The SOTP methodology is bottom up and examines the value potential by project and segment via respective DCFs, aggregating a collective value for the company’s portfolio against its outstanding liabilities. Our base-case DCF assumptions are highlighted in the table below, with higher-risk projects receiving a 100-200bp increase in project WACC, with lower-risk or more stable revenue streams including rental portfolios accounting for discount rates 100-200bp below base-case WACC.

For contractors, in addition to DCF analysis, we believe backlog multiples are more relevant and sensitive to stock action than earnings or sales multiples.

Below we summarise our DCF assumptions for coverage, including our base case for developers.

Table 7 : DCF assumptions

Components Emaar Aldar Sorouh Arabtec DSI Debt/assets 24% 65% 21% 22% 21% Equity/assets 76% 35% 79% 78% 79% Risk-free rate 4.0% 4.0% 4.0% 4.0% 4.0% Risk premium 7.0% 7.0% 7.0% 7.0% 7.0% Beta 1.5 1.7 1.6 1.7 1.3 Cost of equity 14.5% 15.9% 15.2% 15.9% 13.1% Cost of debt 5.0% 6.0% 5.5% 6.0% 5.0% Weighted average cost of capital 12.2% 9.5% 13.2% 13.7% 11.4% Long-term growth rate -2.0% -2.0% -5.0% 2.0% 6.0% Terminal growth rate 3.0% 3.0% 3.0% 3.0% 3.0% Long-term operating margin 26.0% 23.0% 20.0% 5.0% 7.6%

Source: Rasmala forecasts

We analyse SOTP composition by company later in the report. A peer comparison summary is as follows. Note that, traditionally, stress markets lead to stock valuations trading at steep discounts to book NAV. Trough discounts of 80% or more are not unusual, as seen in the case of Asian developers during the Asian crisis. In Table 8 we can see that the developers’ price-to-NAV discounts are between 50% and 75% during the ongoing regional crisis.

Real Estate | Investment View | 10 March 2011 4545

Table 8 : SOTP target price vs 4Q10 NAV

Emaar Aldar Sorouh Value Value per Value Value per Value Value per (Dh m) share (Dh) (Dh m) share (Dh) (Dh m) share (Dh) Asset to be sold to the - - 14,652 3.57 - - government Properties for sale 6,104 1.00 4,984 1.22 1,657 0.63 Investment properties 16,649 2.73 6,462 1.58 1,323 0.50 Hospitality 2,732 0.45 2,742 0.67 134 0.05 Others - - 3,538 0.86 - - Total value of the properties 25,484 4.18 32,378 7.90 3,114 1.19 Other assets 386 0.06 4,126 1.01 781 0.30 Total value of the assets except 25,870 4.24 36,504 8.91 3,896 1.48 cash Net debt -6,364 -1.04 -27,608 -6.74 -336 -0.13 Other liabilities -2,879 -0.47 -3,957 -0.97 -944 -0.36 Total equity value 16,626 2.73 4,939 1.20 2,616 1.00 One year price target 3.10 1.40 1.15

Adjusted book NAV (4Q10) 38,244 6.27 15,047 5.22 6,059 2.31 Target price discount to -50.6% -73.3% -50.3% adjusted book NAV

Current prices 2.68 1.32 1.08 Current price discount to -57.3% -74.7% -53.2% adjusted book NAV

Source: Company data, Rasmala forecasts

Real Estate | Investment View | 10 March 2011 4646

10 March 2011

Aldar Properties Initiation of coverage

Hold Outlook likely to remain a mixed bag

Target price Recent liquidity infusion should provide much needed cash flow for both working Dh1.40 capital and to address near-term debt repayments. However, we believe current Price Dh1.32 and near-term demand in Abu Dhabi remains soft with low visibility on financing Short term (0-60 days) and project completions. n/a Market view Key forecasts No Weighting

FY09A FY10A FY11F FY12F FY13F Total property income (Dhm) 1,979 1,791 6,903 5,773 2,889 Price performance Net rental income (Dhm) 200.5 481.7 402.2 625.8 713.0 Normalised PTP (Dhm) 837.4 -12,658 1,206 719.2 201.9 (1M) (3M) (12M) Normalised EPS (Dh) 0.23 -4.39 0.29 0.18 0.05 Price (Dh) 1.81 2.50 3.83 Normalised PE (x) 5.74 n/m 4.49 7.52 26.80 Absolute (%) -27.1 -47.2 -65.5 Rel market (%) -23.4 -43.5 -62.8 Dividend per share (Dh) 0.05 0.00 0.00 0.00 0.00 Rel sector (%) -21.6 -43.2 -64.9 Dividend yield (%) 3.79 0.00 0.00 0.00 0.00

Adj NAV per share (Dh) 4.61 1.47 1.33 1.51 1.55 Mar 08 Mar 09 Feb 10 16 NNNAV per share (Dh) 4.61 1.47 1.33 1.51 1.55 Disc/(prm) to adj NAV (%) 71.40 10.40 0.76 12.30 15.10 12 Net debt to tot ass (%) 54.30 67.40 53.50 40.90 47.20

Accounting standard: IFRS year to Dec, fully diluted 8 Source: Company data, Rasmala forecasts

4 Given a lifeline but near-term questions remain 0 Abu Dhabi government’s liquidity infusion of Dh19.3bn into Aldar and the expected collection ALDR.AD ADX Gen Index of Dh5bn linked to property sales from customers should provide the company with a

somewhat adequate cash cushion for the near term. According to Aldar management, the Market capitalisation Dh3.80bn (€744.81m) Dh24.3bn in recently generated cash would help pursue a capex plan of Dh12bn and Average (12M) daily turnover address debt repayments of Dh12bn over the next three years (2011-2013). However, we Dh39.17m (US$10.66m) believe Aldar’s debt maturities over the next three years total Dh21.4bn with refinancing Sector: ADX Bank & Fin Index potential of around Dh4.5bn, still leaving around Dh17bn of debt repayments or a Dh5bn RIC: ALDR.AD, ALDAR UH Priced Dh1.32 at close 9 Mar 2011. repayment shortfall. We would not be surprised if cash initially allocated for capex is Source: Bloomberg redirected towards debt repayments, which in turn may impact the delivery schedule. We therefore expect potential downside risk to the Dh12bn capex plan and consider it ambitious, given current market dynamics.

Market remains subdued Our main concern offsetting the recent liquidity infusion is the ongoing market liquidity challenge. We believe Abu Dhabi developers, including Aldar, face little incentive to fund developments and deliver rollouts at a time when end-demand remains soft. The correlation Analysts with the Dubai property market and rising supply both in Abu Dhabi and Dubai could depress Saud Masud asset prices further over the next 12 to 24 months. United Arab Emirates +971 55 725 8596 Aldar is strategically important, but geographically one dimensional [email protected] With around 38% of the shares indirectly owned by the Abu Dhabi government, Aldar should Divya Arora United Arab Emirates remain a strategic asset. However, we don’t necessarily equate this advantage with a strong +971 4 424 2784 growth outlook as long as the developer is limited to developments in Abu Dhabi market Equity | United Arab Emirates Real Estate Investment & Services [email protected] which is currently facing challenges such as oversupply and financing constraints.

Dubai International Financial Centre, The Gate Village, Building 10, Level 1, P.O. Box 31145, Dubai, United Arab Emirates Important disclosures can be found in the Disclosures Appendix. Distributed outside MENA by The Royal Bank of Scotland N.V. and its affiliates under a strategic www.rasmala.com alliance with Rasmala Investment Bank Ltd.

The basics

Versus consensus Catalysts for share price performance Although Aldar doesn’t have any meaningful exposure in the Middle East to countries facing Revenue Ours Cons % diff (Dh bn) public unrest, the stock is unlikely to decouple from broader market sentiment and rising investor 2011F 6.9 8.2 -15.9% risk aversion. Therefore, we believe any successful attempts by the Arab nations to keep the 2012F 5.8 6.1 -4.9% situation in check by announcing socioeconomic reforms and providing clarity on the future 2013F 2.8 3.5 -20.0% strategic direction of their countries could restore the investor confidence and act as a primary

Source: Bloomberg, Rasmala forecasts near- to mid-term catalyst to bring investors back to the market. The other important near-term catalyst would be delivery of the proposed units on Al Muneera and Al Zeina islands at Al Raha

beach. Earnings momentum After recognising a net loss of AED12.7bn in 2010, we expect Aldar to report a net profit of Dh1,206m and Dh719m in 2011 and 2012, respectively, mainly on the back of recognising an estimated gross profit of around Dh2.3bn over the 2011-2012 period from the proposed asset sale of Dh16.5bn worth of assets to the government. However, we do not believe steady-state earings power will return for Aldar until the company is able to firm up its handover schedule and complete Forced ranking* its investment properties on time. This schedule is a function of market conditions and the company’s ability to realign cash flow, especially addressing debt repayments. Company Rec Upside / Downside Valuation and target price DSI Buy 15.8% Emaar Buy 15.7% We use a SOTP approach as a primary valuation method to arrive at a target price of Dh1.40. We Arabtec Hold 6.6% estimate 39% of our calculated fair value is driven by the recently proposed asset sale to the Sorouh Hold 6.5% government, followed by the rental and hospitality portfolio combined at 26% and properties for Aldar Hold 6.1% sale at 14%. However, ex-asset sale to the government, 42% of our value is driven by the rental

* By difference to target price as at time of and hospitality portfolio. publication. Recommendations may lie outside the structure outlined in the How we differ from consensus disclosure page. Source: Rasmala forecasts We estimate the company to report a top-line of Dh6.9bn and Dh5.8bn in 2011 and 2012, respectively. However, our estimate remains lower than Bloomberg consensus estimates of Dh8.2bn and Dh6.1bn, respectively, as we expect handovers to be slower than the company guidance. We then expect revenue to fall to Dh2.9bn in 2013 and Dh3bn in 2014 vs consensus at Dh3.5bn and Dh3.3bn, respectively. The top-line forecast during the 2011-2012 period is much higher mainly on account of expected recognition of revenue from the proposed asset sale to the government and delivery of units at Al Zeina and Al Muneera.

Key events Risks to central scenario

Date Event Should population trends surpass our conservative expectations in both Dubai and Abu Dhabi, we 28/04/2011 1Q11 results would likely witness better-than-expected market fundamentals and, in turn, stronger liquidity in the property market. Aldar would likely see upside from liquidity returning to the sector, which we Source: Bloomberg believe is the main risk in the foreseeable future.

Regional unrest spreading or lingering may pose a key short-term risk, however alternatively any indications of appeasement or steps towards resolution and social reform may prove constructive for investor confidence post a meaningful sell-off year to date.

We believe both Aldar and industry peer Sorouh face higher headline risk compared to Emaar, as in our view the latter has a more mature business model with lower financing risk. While Aldar has been able to address its near-term financing needs, we believe the margin of comfort for its capex plan and working capital may be relatively low, which may result in further delays in rollouts and project completions. While delays may not dramatically impact the long-term fundamental value of the company’s share price, they could impact stock action in the near term given a largely retail- driven marketplace.

Aldar Properties | The Basics | 10 March 2011 482

Key assumptions and sensitivities

Our sensitivity analysis for Aldar suggests a neutral risk-reward as our bull case scenario results in upside potential of c32% (fair value Dh1.85), compared with downside potential of c36% (fair value Dh0.89) in a bear case scenario.

Major assumptions Base case: Government receivables to be fully collected with a default rate of 10% on ex- government receivables; fall in rentals by around 13% over the 2010-12 period; average occupancy of 65% in upcoming investment properties; average occupancy of 60% in existing and upcoming hotels.

Bear case: Government receivables to be fully collected with a default rate of 20% on ex- government receivables; fall in rentals by around 13% over the 2010-12 period (ie, unchanged versus base case); average occupancy of 55% in upcoming investment properties; average occupancy of 50% for existing and upcoming hotels; handover volumes 20% below the base case.

Bull case: Government receivables to be fully collected with a default rate of 5% on ex- government receivables; flattish rentals; average occupancy of 70% in upcoming investment properties; average occupancy of 65% in existing and upcoming hotels; handover volumes 10% above the base case.

Table 1 : Sensitivity analysis

Base case Bear case Bull case Value Value per Value Value per Value Value per (Dh m) share (Dh) (Dh m) share (Dh) (Dh m) share (Dh) Asset to be sold to the government 14,652 3.57 14,154 3.45 15.472 3.77 Properties for sale 4,984 1.22 4,785 1.17 5,302 1.29 Investment properties 6,462 1.58 6,268 1.53 6,850 1.67 Hospitality 2,742 0.67 2,659 0.65 2,906 0.71 Others 3,538 0.86 3,396 0.83 3,785 0.92 Total value of the properties 32,378 7.90 31,263 7.63 34,316 8.37 Other assets 4,126 1.01 3,457 0.84 4,235 1.03 Total value of the assets except cash 36,504 8.91 34,719 8.47 38,551 9.40 Net debt -27,608 -6.74 -27,608 -6.74 -27,608 -6.74 Other liabilities -3,957 -0.97 -3,957 -0.97 -4,411 -1.08 Total equity value 4,939 1.20 3,154 0.77 6532 1.59 One year price target 1.40 0.89 1.85 Upside/downside to our base case -36.1% 32.2%

Source: Company data, Rasmala estimates

Aldar Properties | The Basics | 10 March 2011 493

Earnings forecast

We expect income from property sales to be a leading driver of revenue for Aldar over 2011-14, contributing about 72% to total revenue.

Although we expect property We estimate revenue from property sales to be much higher in 2011-12, compared with 2013-14 sales to be the major contributor as during this period the company will be booking revenues from the sale of land and residential of revenue over 2011-14, we units at Al Raha beach to the government. We further expect Aldar to hand over around 3,278 expect the investment portfolio to see a solid CAGR of 42% units between 2011 and 2014, with Al Muneera and Al Zeina on Al Raha Island contributing around 2,360 units during the same period.

We also expect Aldar to significantly ramp up its investment property portfolio from Dh402m in 2011 to Dh1,156m in 2014, a CAGR of c42% over the period, which should provide the company with its main cash cushion against operating costs. The majority of the incremental revenues are expected to be contributed by upcoming investment properties such as Central Market, Motor World and Yas Mall. We further estimate revenues from other segments like hospitality and schools to move up from Dh433m in 2011 to Dh746m in 2014 mainly on account of completion of the Central Market Hotel and the Al Bateen school.

After recognising a net loss of AED12.7bn in 2010 mainly on the back of impairments of Dh11.3bn and lack of handovers, we expect Aldar to report a net profit of Dh 1,206m and Dh719m in 2011 and 2012, respectively. We estimate a considerable proportion of the bottom-line during 2011-12 to be contributed by recognition of around Dh2.3bn of gross profit from the recently announced Dh16.5bn worth of the proposed asset sale/transfer to the government with a margin assumption of 14%.

Table 2 : Forecasts overview

Dh m 2011F 2012F 2013F 2014F Revenue from property sales 6,068 4,637 1,504 1,056 Revenue from investment properties 402 626 713 1156 Revenue from other segments 433 510 672 746 Total revenue 6,903 5,773 2,889 2,958 Gross margin 18.8% 23.6% 33.5% 39.9% EBIT Margin 28.7% 20.6% 19.6% 26.3% EPS 0.29 0.18 0.05 0.09

Source: Rasmala forecasts

Funding gap analysis The Abu Dhabi government’s liquidity infusion of Dh19.3bn into Aldar and expected collection of Dh5bn linked to property sales from customers should provide the company with an adequate cash cushion for the near term. According to Aldar management, the Dh24.3bn in recently generated cash would help pursue a capex plan of Dh12bn and address debt repayments of Dh12bn over the next three years (2011-13). However, we believe Aldar’s debt maturities over the 2011-13 period total Dh21.4bn with refinancing potential of around Dh4.5bn still leaving around Dh17bn of debt repayments or a Dh5bn repayment shortfall. We would not be surprised if cash initially allocated for capex is redirected towards debt repayments, which in turn may impact delivery schedule. We therefore expect potential downside risk to the Dh12bn capex plan and consider it ambitious given current market dynamics. We believe capex spending in the range of Dh6.5bn-7bn is more realistic and will ensure the expected cash inflows to last for the next three years without creating any funding gap (see Table 3 below).

Also note that of the Dh32.6bn in total debt on Aldar’s balance sheet as of 2010 end, c45% needs to be repaid or refinanced over the next 12 months.

Aldar Properties | Investment View | 10 March 2011 504

Chart 1 : Aldar – current vs non-current debt as of 2010 end

20 60% 54.6% 18 50% 16 45.4% 14 40% 12

10 14.8 17.8 30% 8 20% 6 4 10% 2 0 0% Current Non-Current

Loan amount (Dh bn) % of total

Source: Company data

Chart 2 : Aldar – debt maturity profile as of 3Q10

16 15 . 1

14

12

10

8 5.5 5.5 6 4.1 4 2.2 2 1. 0 0 0.0 0 2 0 10 2 0 11 2 0 12 2 0 13 2 0 14 2 0 15 2 0 16 2 0 17

Lo an amount (Dh bn)

Source: Company data

Table 3 : Funding analysis, 2011-2013F

(Dh m) Cash outflows Capex -7,100 Operating expenses -1,388 Net interest cost -3,647 Debt payment -17,500

Cash inflows Cash from property sale 4,351 Cash from sale of assets to the government 16,500 Cash from convert to be issued 2,800 Cash from recurring income 1,911 Receivables from govt. 2,286

Liquidity on the balance sheet as of 4Q10 Cash + deposits 2,432

Funding surplus 645

Source: Company data, Rasmala forecasts

Aldar Properties | Investment View | 10 March 2011 515

Valuation Using a SOTP approach, we estimate a one-year target price of Dh1.40 per share for Aldar. We value Aldar’s assets to be sold to the government at Dh0.56 per share, 39% of our price target, and the investment and hospitality portfolio at Dh0.35 per share, 26% of our price target, followed by property for sale at 0.19 per share, 14% of our price target. Also we note that floor value provided by the investment and hospitality portfolio is only 0.35 per share, which is equivalent to 26% of the total value, compared with 75% of the total in Emaar’s case. Moreover, only c50% of this value is made up of the operational portfolio, compared to c90% for Emaar.

We value the properties for sale, investment properties and hospitality segments using a discounted cash flow approach. We have not accounted for land bank in our valuation as we believe the land bank is not easily monetisable in the current market conditions. We have also taken into account the cash to be raised from the recently announced convert of Dh2.8bn and Dh11.3bn worth of impairments recently take by Aldar. Aldar’s diluted share count, after taking into account the recently announced Dh2.8bn convert with a strike price of Dh2.3 per share and maturing Dh3.6bn April 2011 Mubadala convert with a strike price of Dh11.7 per share, works out to be 4,099 shares. The conversion will significantly dilute minority shareholders in the near term with the Abu Dhabi government’s indirect shareholding into the company moving up from the current 38% to 61%.

In our DCF analysis we use a WACC of 9.5%, and a terminal growth rate of 3%. Our WACC estimate is based on a cost of debt of 6.0% and a cost of equity of 15.9%. We derive our cost of equity using a risk-free rate of 4.0%, an equity market-risk premium of 7% and beta of 1.7.

Chart 3 : Aldar – valuation breakdown on a per share basis

1.60 0.16 1.40 1.40 0.14

1.20 0.10 0.25 1.00 0.19 0.80 0.56 0.60

0.40

0.20

0.00 Assets to be sold Properties for Investment Hospitality Other properties Other assets Target price to the sale properties government

Source: Rasmala estimates

Aldar Properties | Investment View | 10 March 2011 526

Chart 4 : Aldar – valuation composition by segment

Other assets Assets to be sold to the 11% government 39% Other properties 10%

Hospitality 8%

Investment properties 18% Properties for sale 14%

Source: Rasmala estimates

We estimate most of Aldar’s project value is based on the sale of assets to the government with Ferrari World and other infra assets contributing 30%, and land and residential units at Al Raha beach at 15%, followed by other development and investment properties at Al Raha beach at 15% and the hospitality segment at 9% (see chart below). We calculate several other investment and development properties contributing 5% or less, (eg, Central Market, 3%; Motorworld, 3%).

Chart 5 : Aldar project value contribution to EV (ex-other assets)

Ferrari World and other Others properties infra assets to be sold to 22% the govt. 30%

Hospitality 9%

HQ 1% Al Mamoura Land and residential 2% Motorworld units at Al Raha to be Al Raha DP Al Raha IP Central Market 3% sold to the govt. 13% 2% 3% 15%

Source: Rasmala estimates

Aldar Properties | Investment View | 10 March 2011 537

Aldar Properties PJSC

Aldar, the largest real estate developer by market cap in Abu Dhabi, is strategically important to the government for real estate development. The government also indirectly holds a c38% stake that could rise to 61% after the exercise of conversion option.

Company background

Aldar is the largest real estate Aldar Properties (Aldar) is an Abu Dhabi-based integrated real estate company with diversified developer in Abu Dhabi; it activities across the value chain. The company is engaged in master planning, project reported a market cap of Dh3.8bn construction, investment property management and asset management. In terms of land bank, as of 9 March 2011 projects, and market capitalisation (Dh3.8bn as of 9 March 2011), Aldar is the largest real estate developer in the emirate of Abu Dhabi. The company was listed on the Abu Dhabi Securities Exchange in 2005.

Figure 1 : Group structure

Aldar Properties PJSC

Aldar Real Estate Farah Leisure Parks Al Jimi Mall LLC Yas Hotel LLC Services LLC Management LLC (UAE – 100%) (UAE – 100%) (UAE – 99%) (UAE – 85%)

Aldar Commercial Al Raha Gardens Yas Links LLC Property Developments Property LLC Yas Marina LLC (UAE – 100%) LLC (UAE – 100%) (UAE – 100%) (UAE – 100%)

Abu Dhabi World Aldar Hotels and Trade Centre LLC Yas Yacht Club LLC Aldar Academies LLC Hospitality LLC (UAE – 100%) (UAE – 100%) (UAE – 100%) (UAE – 100%)

Al Raha Infrastructure Aldar Facilities Al Muna Aldar Marinas LLC Company LLC Management LLC Primary School LLC (UAE – 100%) (UAE – 100%) (UAE – 100%) (UAE – 100%)

Source: Company data

Aldar was established by the Abu Dhabi government in 2005 with the objective of developing infrastructure in the emirate and supporting the region’s infrastructure through the creation of high- quality, sustainable communities equipped with residential, commercial, retail, leisure, hospitality, education, and medical facilities.

The government of Abu Dhabi is The Abu Dhabi government has an indirect shareholding of c38% in Aldar through various Aldar’s biggest customer and government institutions and has provided continuous support in terms of loans and land grants. financier, and indirectly holds For instance, in 2005, the Abu Dhabi government granted 9m sq m of land free of charge to Aldar, c38% of Aldar’s shares followed by an additional 25m sq m in 2006, 1m sq m in 2007, and 17m sq m in 2008. The government finances Aldar from time to time with loan grants.

The government also assigns major contracts to Aldar and reimburses it for the common infrastructure used in private projects. In addition, Aldar manages several government projects for fee income, such as the construction of Al Falah, a fully government-funded housing development, which Aldar will construct and, thereafter, manage for a fee. Thus, the Abu Dhabi government is Aldar’s largest shareholder, customer, and financier.

Key business segments Aldar’s main source of income is its Property Development and Sales segment, followed by its other segments: Investment Properties Portfolio and Hotels (see Chart 5). In the first nine months of 2010, the share of property sales to total revenue fell to 49.6% from 84% in 2009, due to a lack of funding to complete projects on time. Delays in projects completions and handovers led total revenue to fall significantly from Dh4,978m in 2008 to Dh933m during 9M10 (see Chart 7).

Aldar Properties | Investment View | 10 March 2011 548

Chart 6 : Revenue breakdown by business segments

10 0 % 3.0% 5.1% 8.4% 10 . 7 % 7.1% 2.9% 7.9 % 90% 10 . 1% 19 . 4 % 80% 16 . 4 % 32.5% 33.6% 70 %

60% 23.8%

50 % 29.5% 84.0% 40% 36.3% 70 .5% 30% 49.6% 20% 29.7% 10 % 19 . 5 %

0% 2 0 0 9 1Q 10 2 Q 10 3 Q 10 9 M 10 Prop ert y develo pment and sales Invest ment prop ert ies Ho t els Ot hers

Source: Company data

Chart 7 : Total annual revenue Chart 8 : Quarterly revenue

6,000 1000

4,978 900 859 5,000 800 700 4,000 634 572 600 497 506 3,000 500

1,979 400 2,000 1,791 277 300 227 1,227 200 200 1,000 100

0 0 2007 2008 2009 2010 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Total revenue (Dh m) Total revenue (Dh m)

Source: Company data Source: Company data

Gross margins have taken a major hit, trending downwards (2008-2010), reflecting tough property market conditions. EBIT margins turned negative on account of lower gross margins, falling revenue and increasing SG&A expenses.

Chart 9 : Gross margin Chart 10 : EBIT margin

50% 35.3% 60%

53.9% 0% 50% 13.5% -42.6% 45.6% -50% -46.4% 40%

-93.4% -100% 30% -103.6% -83.50% 22.4% 24.9% -150% 20% 16.4% 22.9% 16.1%

-200% 10% -211.4% 9.0% 0% -250% 2007 2008 2009 1Q10 2Q10 3Q10 4Q10 2010 2007 2008 2009 1Q10 2Q10 3Q10 4Q10 2010

Source: Company data Source: Company data

Aldar Properties | Investment View | 10 March 2011 559

Construction activity Most of Aldar’s projects are targeted towards high-end markets, both residential and commercial. The company develops housing projects, commercial properties, hotels, waterfront developments (eg, marinas), schools, and other infrastructure facilities. However, to reduce its dependency on the volatile Property Development and Sales segment, the company is moving to recurring sources of revenue, such as renting retail space and operating hotels, schools and a theme park. At present, Aldar owns a land bank of around 52m sq m at prime locations within the emirate of Abu Dhabi (see Table 4). Aldar holds over 50m sq m of land Table 4 : Land bank as of end 2009 in Abu Dhabi

Project Sq mFreehold/leasehold

Al Jimi Mall 177,881 Leasehold (75 years) Central Market 64,264 Leasehold (50 years) Al Raha Gardens 1,060,889 Freehold Abraj Towers (Ethihad Plaza) 47,142 Freehold Al Gurm 1,843,919 Freehold Al Raha Beach 6,410,458 Freehold Nareel/Coconut Island 689,542 Freehold Yas Island 24,848,472 Freehold Al Bateen Park 103,230 Freehold Al Ruwais 504,000 Freehold Airport Site 720,213 Freehold Al Falah 12,803,242 Freehold Motor World 2,938,717 Freehold Baniyas Towers 9,720 Freehold Total 52,221,689

Source: Company data

Currently, Aldar’s focus is on Abu Dhabi; it has, however, indicated plans recently to expand internationally, without disclosing a specific timeline.

During its five years of operations, Aldar has completed projects such as the Yas Marina Circuit, Yas Links Golf Course, Yas Marina, eight hotels (seven of which are on Yas Island with the other located in downtown Abu Dhabi), three schools, a diabetes centre, a shopping mall, and several office complexes and residential projects. However, in February 2010, Aldar sold a large portion of its Yas Island project (including the Yas Marina Circuit) to the Abu Dhabi government for Dh9.1bn in order to help boost liquidity that was dampened by 4Q09 losses.

Projects currently in progress Projects currently in the construction stage include the Al Raha Beach project, a waterfront include the Al Raha Beach development consisting of a residential community, hotels, beaches, marinas, retailing, and project, the Central Market, the commercial complexes, covering over 5.2m sq m. Estimated to house more than 120,000 Cleveland Clinic, the Al Bateen residents, Aldar expects to complete the project (which began in 4Q05) in 2017. Another major School, and the Khalifa University project currently underway is the Central Market, an integrated high-grade mix of commercial, retail, residential, and leisure facilities that Aldar expects to complete in 2013. Other projects include Motorworld (a mixed used project primarily focused on automotive retail shops) and a school (the Al Bateen School, with capacity for 1,500 students).

Figure 2 : Aldar’s future projects timeline

2010 2011 2012 2013 2014 2015 2016 2017

Yas Island development

Al Raha Beach Motor World-I Motor World-II

Motor World-III Mixed used developments Al-Gurm Central Market Other non-core projects Al Bateen School

Source: Company data

Aldar Properties | Investment View | 10 March 2011 1056

Shareholder information The government of Abu Dhabi continues to be the largest shareholder, indirectly holding c38.0% of Aldar’s shares as at August 2010. The company allows foreign ownership of 40% of its shares, the current level being 19.2% as of 25 February 2011.

Table 5 : Shareholding pattern

Holder Name % of outstanding shares Mubadala Development company 19.18 Abu Dhabi Investment company 6.28 National Bank of Abu Dhabi 5.60 National Corporation for Tourism and Hotels 3.00 Other Investors 10.94 Public 55.00

Source: Zawya (a database covering Middle-East markets)

Management profile At end-2009, Aldar reported 2,891 employees; the profiles of its key personnel are listed in Tables 6 and 7.

Table 6 : Snapshot of Aldar’s key directors

Name Position Background Ahmed Ali Al Sayegh Chairman Al Sayegh is also the CEO of Dolphin Energy Limited and the Chairman of Abu Dhabi Future Energy Company Nasser Ahmed Al Suwaidi Vice Chairman Al Suwaidi is the Chairman of the Department of Economic Development (DED). He previously worked at Abu Dhabi Investment Authority (ADIA) and Abu Dhabi National Oil Company (ADNOC). Khaldoon Khalifa Al Vice Chairman Al Mubarak is a member of the Abu Dhabi Executive Council and Mubarak the Chairman of the Executive Affairs Authority of Abu Dhabi.

Source: Company website

Table 7 : Key management

Name Position Background Sami Asad Chief Executive Asad, a mechanical engineer by profession, possesses over 35 Officer years of experience in the oil and gas industry and was previously the COO of Aldar. Shafqat Malik Chief Financial Malik has 10 years of experience in the real estate market and was Officer previously the Finance Director at Mapeley. Mohammed Al Mubarak Chief Commercial Al Mubarak, a graduate in Economics and Political Science, is Officer responsible for the sales and leasing, property and asset management, and facilities management units within the organization.

Source: Company data

Key joint ventures and partnerships In early 2009, Aldar launched the Aldar Partnership Programme, the first of its kind in the United Arab Emirates (UAE). It offers its partners value and investment benefits from one or more of Aldar’s developments across the residential, commercial, and leisure sectors in Abu Dhabi. The first agreement under this programme was signed with PepsiCo. As per the terms of the agreement, PepsiCo would be the exclusive supplier of beverages and snacks for Ferrari World Theme Park Abu Dhabi.

Aldar Properties | Investment View | 10 March 2011 1157

Table 8 : Description of key joint ventures and partnerships

Partner/associate Country Background Description Laing O'Rourke UK A leading Formed in order to deliver Aldar's Al Raha Beach Construction international projects. construction group Besix Belgium Construction groupIn order to support Aldar with delivery of its state-of- the-art development projects, ensuring on-time and on-budget execution of Aldar's shopping and entertainment projects, as well as the Ferrari theme park infrastructure and related hotels. Etihad Airlines UAE UAE's national In order to acquire and manage the Abraj residential airline property near the airport, which is leased to Etihad. Readymix Abu Dhabi LLC UAE A leading Aldar Readymix formed for the manufacture and readymix concrete supply of concrete, concrete derivatives, and related company ancillary services. Aldar has appointed Aldar Readymix as its supplier of concrete based on a pricing strategy that ensures concrete delivery at rates lower than market rates for the same quality, quantity, and specifications. Al Fahim Enterprises LLC UAE One of the largest In order to operate a franchise for Ferrari branded diversified retail stores in the Middle East. business groups in the Gulf Coast National Catering UAE One of the largest Aldar's subsidiary, Al Raha Gardens Property LLC Company catering and and National Catering Company, provide total support services facilities management solutions and services to companies in the Aldar's operative villages at Mussafah and Yas UAE Island. Services include catering, integrated facilities management, reception and security services, commercial laundry services, corporate pantry, and themed cafeteria and restaurants.

Source: Company data

Table 9 : Snapshot of investments in associates

Associate Nature of operations Place of registration Ownership (%) Green Emirates Properties PJSC Property management, development and Abu Dhabi 20.0 advisory services Aseel PJSC Mortgage finance company Abu Dhabi 20.0 Al Maabar International Property development Abu Dhabi 20.0 Investments Iskandar Holdings Co. Ltd. NA Cayman Islands 19.0 DIMARCO Electronic Systems Communication infrastructure and Abu Dhabi 34.0 LLC services Abu Dhabi Finance Company LLC Mortgage finance company Abu Dhabi 16.0

Source: Company data

Aldar Properties | Investment View | 10 March 2011 1258

Income statement

Dhm FY09A FY10A FY11F FY12F FY13F Net rental income 200.5 481.7 402.2 625.8 713.0 Prop development income 1663 818.4 6068 4637 1504 Other revenue 115.6 491.0 432.8 509.9 672.1 Total property income 1979 1791 6903 5773 2889 Other costs -3065 -2773 -4732 -4392 -2146 EBITDA -1086 -981.9 2171 1381 743.2 DDA & Impairment (ex gw) -93.8 -514.1 -191.7 -192.3 -176.3 EBITA -1180 -1496 1979 1189 566.9 Goodwill (amort/impaired) 0.00 0.00 0.00 0.00 0.00 EBIT -1180 -1496 1979 1189 566.9 Associates (pre-tax) -88.4 -27.6 0.00 0.00 0.00 Net interest 193.9 -455.0 -833.5 -529.9 -425.0 Other pre-tax items 1911 -10680 60.0 60.0 60.0 Reported PTP 837.4 -12658 1206 719.2 201.9 Taxation 0.00 0.00 0.00 0.00 0.00 Minority interests 0.00 0.00 0.00 0.00 0.00 Other post-tax items 0.00 0.00 0.00 0.00 0.00 Reported net profit 837.4 -12658 1206 719.2 201.9 Dividends declared -144.4 0.00 0.00 0.00 0.00 Tot normalised items 0.00 0.00 0.00 0.00 0.00 Normalised EBITDA -1086 -981.9 2171 1381 743.2 Normalised PTP 837.4 -12658 1206 719.2 201.9 Normalised net profit 837.4 -12658 1206 719.2 201.9

Source: Company data, Rasmala forecasts year to Dec

Balance sheet

Dhm FY09A FY10A FY11F FY12F FY13F Cash & market secs (1) 2663 648.2 1270 4638 1933 Props under dev 10909 13878 9121 5813 5332 Other current assets 22349 13590 10310 6858 6458 Investment prop 14741 8294 10487 11577 12531 Other non-current assets 15683 10935 8348 7193 7617 Total assets 66345 47344 39535 36079 33871 Short term debt (2) 4696 14811 4473 1473 1223 Long term debt (3) 34001 17761 17934 17934 16684 Other liabilities 10847 10525 11676 10501 9591 Total liabilities 49544 43097 34082 29907 27497 Total equity (incl min) 16801 4247 5453 6172 6374 Total liab & sh equity 66345 47344 39535 36079 33871 Net debt 36034 31924 21136 14768 15973

Source: Company data, Rasmala forecasts year ended Dec

Cash flow statement

Dhm FY09A FY10A FY11F FY12F FY13F EBITDA -1086 -981.9 2171 1381 743.2 Change in working capital -698.5 -2361 9188 5584 -29.3 Net interest (pd) / rec 0.00 0.00 0.00 0.00 0.00 Taxes paid 0.00 0.00 0.00 0.00 0.00 Other oper cash items 727.7 627.8 -1221 1117 -365.0 Cash flow from ops (1) -1056 -2715 10139 8083 348.9 Capex (2) 0.00 0.00 0.00 0.00 0.00 Disposals/(acquisitions) 0.00 0.00 0.00 0.00 0.00 Other investing cash flow -13485 1975 649.4 -1715 -1555 Cash flow from invest (3) -13485 1975 649.4 -1715 -1555 Incr / (decr) in equity 0.00 4795 0.00 0.00 0.00 Incr / (decr) in debt 15653 502.5 -10166 -3000 -1500 Ordinary dividend paid -322.2 0.00 0.00 0.00 0.00 Preferred dividends (4) 0.00 0.00 0.00 0.00 0.00 Other financing cash flow -1352 -6573 0.00 0.00 0.00 Cash flow from fin (5) 13978 -1275 -10166 -3000 -1500 Forex & disc ops (6) 0.00 0.00 0.00 0.00 0.00 Inc/(decr) cash (1+3+5+6) -562.7 -2015 622.3 3368 -2706 Equity FCF (1+2+4) -1056 -2715 10139 8083 348.9

Source: Company data, Rasmala forecasts year to Dec

Aldar Properties | Key Financial Data | 10 March 2011 59

Company description Hold Price relative to country

Aldar Properties is an Abu Dhabi-based integrated real estate company with diversified activities across the value 120 chain; it is engaged in master planning, constructing projects, managing investment properties, and asset 110 100 management. In terms of land bank, projects and market capitalisation, Aldar is the largest real estate developer 90 in the emirate of Abu Dhabi. The company was listed on the Abu Dhabi Securities Exchange in 2005. Aldar was 80 established by the government of Abu Dhabi in 2005 with the objective of developing infrastructure in the emirate, 70 60 and supporting the region's infrastructure through the creation of high-quality, sustainable communities equipped 50 with residential, commercial, retail, leisure, hospitality, education, and medical facilities. The government of Abu 40 Dhabi has an indirect shareholding of c. 38% in Aldar. 30 20 Mar Jun Sep Jan May Aug Nov Mar Jun Oct Mar 08 08 08 09 09 09 09 10 10 10 11

Price relative to country

Strategic analysis Average SWOT company score: 3 Revenue breakdown, FY11F

Strengths 4 Properties for Investment Others sale properties 6% Govt. ownership at 38% implying strong sovereign support. 6% 88% Weaknesses 2 Debt servicing, liquidity challenges and market liquidity hurdles have driven up investor risk aversion, especially in last 12 months.

Opportunities 3 The mid-range of the market remains underserved in Abu Dhabi and may provide for near-to-medium-term cash Source: Rasmala forecasts flows. Threats 2 Market data Facing continued pricing pressures across residential and commercial segments. Headquarters Scoring range is 1-5 (high score is good) Emirates Post Building, Al Najda Street, Abu Dhabi UAE

Website www.aldar.com Shares in issue 2881.6m Freefloat 55% Majority shareholders Mubadala Development Company (19%), Abu Dhabi Investment Company (6%), 0 (0%)

Competitive position Average competitive score: 3- Broker recommendations

Supplier power 2- Low - New residential project activity in the UAE is sharply down as most projects are on hold, delayed or 6 cancelled, thereby putting pressure on contractors. 5 4 Barriers to entry 4+ 3 High - In the domestic market, which is already oversupplied, there remains very little appetite to fund new 2 developments. 1 0 Customer power 3- Buy Hold Sell Medium - transaction activity is low as market sentiment remains soft.

Substitute products 2- Source: Bloomberg Low - Aldar is engaged in government-supported projects and mid-range housings schemes in addition to its core focus of high-end property. Rivalry 2- Low - Aldar is the largest master developer in Abu Dhabi with little competitive risk.

Scoring range 1-5 (high score is good) Plus = getting better Minus = getting worse

Aldar Properties | Strategic and Competitive Overview | 10 March 2011 60

10 March 2011

Arabtec Holding Initiation of coverage

Hold Flattish outlook despite overseas focus

Target price Arabtec's ability to minimise receivables provisions is crucial to its earnings Dh1.45 potential, and to its future success in Saudi Arabia and markets outside of the Price Dh1.36 UAE. We initiate coverage with a Hold rating and a Dh1.45 target price.

Short term (0-60 days) n/a Key forecasts Market view No Weighting FY08A FY09A FY10F FY11F FY12F

Revenue (Dhm) 9,722 7,665 5,646 5,800 5,933 EBITDA (Dhm) 1,333 925.1 726.8 681.2 671.4 Reported net profit (Dhm) 958.0 494.9 319.9 258.0 233.9 Price performance Normalised net profit (Dhm) 958.0 494.9 319.9 258.0 233.9 (1M) (3M) (12M) Normalised EPS (Dh) 0.80 0.41 0.27 0.22 0.20 Price (Dh) 1.72 2.07 2.23 Dividend per share (Dh) 0.00 0.00 0.00 0.00 0.00 Absolute (%) -20.9 -34.3 -39.0 Dividend yield (%) 0.00 0.00 0.00 0.00 0.00 Normalised PE (x) 1.70 3.29 5.09 6.31 6.95 Rel market (%) -10.1 -20.9 -28.8 EV/EBITDA (x) 1.52 1.91 2.01 1.70 1.45 Rel sector (%) -20.9 -34.3 -39.0 EV/invested capital (x) 0.81 0.62 0.50 0.38 0.31 Mar 08 Jan 09 Feb 10 ROIC - WACC (%) 0.00 0.00 0.00 0.00 0.00 10 Accounting standard: IFRS year to Dec, fully diluted Source: Company data, Rasmala forecasts 8

6 Outlook uninspiring, but mix should change; Dubai likely to remain under pressure 4 We expect that, as Arabtec works down its Dubai-focused backlog over the next two to three 2 years, order wins in Saudi Arabia and elsewhere in the Middle East may help offset the sales

0 decline in Dubai, which we believe will remain distressed. Assuming temporary impact from ARTC.DU DFM General Index the Middle East’s current socio-political unrest, we anticipate Arabtec’s revenue mix will

gradually shift more towards international sales, although sector diversification may not be as Market capitalisation significant. We expect Arabtec to remain predominantly a residential contractor despite Dh1.63bn (€318.49m) inroads into the high-margin infrastructure segment. Average (12M) daily turnover Dh48.89m (US$12.56m) Pursuing avenues for enhanced liquidity but market appetite remains low Sector: European-DS Tot Mrkt RIC: ARTC.DU, ARTC UH According to the recent announcement, Arabtec’s management has decided to postpone the Priced Dh1.36 at close 9 Mar 2011. issuance of a US$150m convertible bond owing to unfavourable market conditions. However, Source: Bloomberg given the liquidity crunch that Arabtec is facing in funding working capital for its ongoing

projects, we do not rule out the possibility of it pursuing similar avenues once the market becomes supportive. While issuance of such a convertible bond would provide a near-term cash cushion, overall we think it could be dilutive to the existing shareholders.

Valuation and recommendation We initiate coverage on Arabtec with a Hold rating and a 12-month target price of Dh1.45. Equity | United Arab Emirates Construction & Materials Analysts Our DCF-based target price implies a 2011F EV/backlog of 0.17x. The stock trades at an EV/backlog of 0.17x, below competitors such as DSI at 0.33x. We believe this discount is Saud Masud justified given Arabtec’s high receivables risk and relatively large exposure to Dubai’s civil United Arab Emirates +971 55 725 8596 construction sector. We estimate Arabtec’s exposure as of end-February 2011 to the Civil [email protected] segment in the form of mixed and residential projects to be around 89% of the total backlog. Divya Arora Our proprietary analysis suggests that Arabtec’s pre-crisis valuation assumed a complete United Arab Emirates +971 4 424 2784 write-down of Dh1.7bn of ex-government receivables in Dubai (which we estimate to be [email protected] around 33% of the total receivables). However, the post-crisis derating of the stock from 0.20x to 0.17x signals that market has also started to factor in expected receivables and Dubai International Financial Centre, payment delay risk from the other markets in the region due to fear of contagion. The Gate Village, Building 10, Level 1, P.O. Box 31145, Dubai, United Arab Emirates Important disclosures can be found in the Disclosures Appendix. Distributed outside MENA by The Royal Bank of Scotland N.V. and its affiliates under a strategic www.rasmala.com alliance with Rasmala Investment Bank Ltd.

The basics

Versus consensus Catalysts for share price performance Saudi is a key market for Arabtec, accounting for nearly 31% of the estimated end-February 2011 EPS Ours Cons % diff ex-Russia backlog. Roughly two-thirds of Arabtec’s total backlog is levered to opportunities 2010F 0.27 0.32 -15.6% outside of Dubai and predominantly in the GCC region. Therefore, current political unrest in the 2011F 0.22 0.28 -21.4% 2012F 0.20 0.28 -28.6% region would play as headwind. Any event risk stabilisation may be a catalyst for investors to capitalise on the recent sell-off in Arabtec, ie down roughly 40% year to date. We believe the other Source: Bloomberg, Rasmala forecasts key potential catalyst would be the company’s ability to grow its ex-Dubai backlog in 1H11 and to mitigate further provisioning of Dubai-based receivables. Earnings momentum We model around Dh30m per quarter in receivables provisioning during 2011 and 2012, which suggests erosion of Arabtec’s earnings power. In addtion, Arabtec and peer contractors will likely experience a decline in backlog-to-revenue conversion rates as bank lending remains tight, especially relating to residential and commercial constrcution projects. We, therefore, believe provision and cash flow risk will limit significant earnings growth potential for the foreseeable future. Forced ranking* Valuation and target price Company Rec Upside / We value Arabtec at Dh1.45 per share based on a DCF approach. We assume a 13.7% WACC, a Downside 2% revenue CAGR for the next 10 years, a long-term operating margin of 5% and a terminal DSI Buy 15.8% Emaar Buy 15.7% growth rate of 3%. Our WACC estimate is based on cost of debt of 6.0% and a cost of equity of Arabtec Hold 6.6% 15.9%. We derive our cost of equity using a risk-free rate of 4.0%, an equity market risk premium Sorouh Hold 6.5% of 7% and a beta of 1.7. Aldar Hold 6.1% How we differ from consensus * by difference to target price as at time of publication. Recommendations may lie Overall, we expect revenue to witness a flattish CAGR of 2.4%, from Dh5.6bn in 2010 to Dh6.2bn outside the structure outlined in the disclosure page. in 2014, whereas Bloomberg consensus expects revenue to peak at Dh7.2bn in 2012 from Source: Rasmala forecasts Dh5.8bn in 2010 before sliding to Dh7.1bn in 2013. Overall throughout the forecast period we remain below consensus in both our revenue and EPS estimates. Our EPS estimate for 2011 and 2012 stands at Dh0.22 and Dh0.20, respectively vs consensus at Dh0.28 and Dh0.28 mainly on the back of lower EBIT margins and revenue estimates.

Risks to central scenario There are potential upside risks to our thesis and earnings estimates should Arabtec successfully Key events reduce its Dubai ex-government receivable exposure. In addition, if the company is able to grow its Saudi backlog faster than the decline in its UAE backlog, we believe an upward re-rating for the Date Event stock may be warranted. 10/05/2011 1Q11 result Regional unrest spreading or lingering may pose as a key short-term risk, however alternatively Source: Bloomberg any indications of appeasement or steps towards resolution and social reforms may prove contructive for investor confidence post a meaningful sell-off year to date.

Arabtec has not yet ruled out a stake sale to Aabar Investments, which may pose as a secondary risk entailing potential earnings dilution. Note when Arabtec publicly announced on 9 January 2010 that it was considering selling a 70% stake to Aabar for Dh6.7bn (at Dh2.3 per share), its shares fell nearly 19% over next seven trading sessions on dilution fears.

Arabtec Holding | The Basics | 10 March 2011 622

Key assumptions and sensitivities

Our sensitivity analysis suggests a slightly favourable risk-reward as our bull case scenario results in upside potential of around 20% (fair value of Dh1.74), compared with downside potential of around 15% (fair value of Dh1.23) in the bear case scenario.

Major assumptions We do not include the Russia-based Okhta centre Dh 10bn project in any of our sensitivity scenarios as the project has not broken ground over the last two years and its future still remains uncertain.

Base case: Over our forecast period, our base case assumes: 1) that the backlog (ex-Russia) is converted into revenue at an average annual rate of around 33%, 2) complete exclusion of Dh332m worth of projects in Egypt, and 3) a backlog CAGR of around 2%, which trickles down to a revenue CAGR of around 2%

Bear case: Our bear case assumes: 1) an average annual conversion rate of around 28% (-5pp vs base case), 2) complete exclusion of Dh332m worth of projects in Egypt, and 3) a backlog CAGR of around -4% (-6pp vs base case), leading to a revenue CAGR of around -5% (-7pp vs base case) and a fair value of Dh1.23 (-15% vs base case).

Bull case: Our bull case assumes: 1) an average annual conversion rate of around 39% (+6pp vs base case), 2) complete inclusion of Dh332m worth of projects in Egypt, and 3) a backlog CAGR of around 9% (+7pp vs base case), leading to a revenue CAGR of around 10% (around +8pp vs base case) and a fair value of Dh1.74 (+20% vs base case).

Table 1 : Sensitivity analysis

Value (Dh m) Base case Bear case Bull case PV of free cash flow 1,581 1,392 1,834 PV of terminal value 347 330 365 Other assets 468 445 491 Enterprise value 2,397 2,166 2,690 Net debt -261 -261 -261 Other Liabilities -635 -635 -635 Equity value 1,500 1,270 1,794 Shares outstanding 1,196 1,196 1,196 Value per share (Dh) 1.25 1.06 1.50 One year price target (Dh) 1.45 1.23 1.74 Upside/downside to our base case -15% 20%

Source: Rasmala estimates

Arabtec Holding | The Basics | 10 March 2011 633

Earnings forecast

In 2011, we expect total revenue to rise 2.7% yoy, compared with an expected decline of 26.3% yoy in 2010 due to execution delays and cancellations of projects.

We expect the top line to witness Overall, we expect the top line to witness a flattish CAGR of 2.4% during 2010-14 on account of a flattish CAGR of 2.4% over working capital constraints, execution delays and further expectations of project cancellations due 2010-14, and gross margins to to the current unrest in the region. Over our forecast period, we expect Arabtec to witness gross compress by 300bp on stiffer competition in the Civil segment margin compression from 15% in 2010 to 12% in 2014, driven by stiffer competition in the Civil construction segment and a rise in its ex-Dubai revenue composition. We forecast our EPS to witness a downward trend between 2010 and 2012F as we build in receivables provisions of Dh30m per quarter during 2011 and 2012.

Table 2 : Forecast overview

Dh m 2010F 2011F 2012F 2013F 2014F Contract Revenue 4,639 4,799 4,879 4,955 5,043 % growth -29.4% 3.5% 1.7% 1.6% 1.8% Sales of ready mix concrete/precast 47 56 58 61 63 % growth 26.0% 19.5% 4.1% 4.1% 2.8% Drainage and electromechanical works 762 738 783 831 871 % growth -2.3% -3.2% 6.1% 6.1% 4.8% Marine Construction 96 98 100 102 104 % growth -25.1% 1.5% 2.0% 2.0% 2.0% All other 102 109 113 118 121 % growth -29.8% 6.6% 4.1% 4.1% 2.8% Total Revenue 5,646 5,800 5,933 6,066 6,202 % growth -26.3% 2.7% 2.3% 2.2% 2.2% Gross margin 15.0% 14.0% 13.0% 12.4% 12.0% EBIT Margin 7.9% 6.5% 5.8% 6.4% 6.5% EPS 0.27 0.22 0.20 0.220.23

Source: Rasmala forecasts

Valuation We value Arabtec at Dh1.45 per share based on a DCF approach. Our valuation implies an EV/backlog multiple of 0.17x at the 2011F backlog. The stock currently trades at an EV/backlog multiple of 0.17x, well below competitors such as DSI at 0.33x. We believe this discount is justified, given its high receivables risk, low-margin subcontractor model in Saudi and relatively high exposure to Dubai’s civil construction sector, particularly residential, which faces oversupply risk, lack of financing and soft end-demand. We estimate Arabtec’s exposure as of end-February 2011 to the Civil segment in the form of mixed and residential projects to be around 89% of the total backlog. Also, we estimate Arabtec’s ex-UAE exposure to be around 52% of the total backlog with Saudi at 31%, followed by Qatar at 9% and Egypt at 2%. We have completely excluded Dh332m worth of Egypt-based projects awarded during the last five months.

Our proprietary analysis suggests that Arabtec’s pre-crisis valuation assumed a complete write- down of Dh1.7bn of ex-government receivables in Dubai (which we estimate to be around 33% of the total receivables). However, we believe the post-crisis derating of the stock from 0.20x to 0.17x signals that the market has also started to factor in expected receivables and payment delay risk from the other markets in the region due to fear of contagion. In our view, if Arabtec can mitigate this risk, then the stock could rerate upwards up to the pre-crisis level with an upside potential of up to 20%.

Arabtec Holding | Investment View | 10 March 2011 644

Chart 1 : EV/backlog ex-Russia

0.40

0.36 0.35 0.34

0.30 0.31 0.28 0.26 0.25 0.25 0.24 0.22 0.20 0.2 0.16 0.17 0.15

0.10 0.13

0.05

0.00 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 Current

EV/Backlog ex-Russia

Source: Company data, Zawya

Chart 2 : Arabtec’s estimated backlog* decomposition by geography as of end-February 2011

Others Egypt 10% 2% Saudi Arabia Qatar 31% 9%

Abu Dhabi 21% Dubai 27%

Source: Rasmala estimates *Backlog contributions mentioned in the chart are ex-Russia

Chart 3 : Arabtec’s estimated backlog* decomposition by segment as of end-February 2011

Infrastructure & utilities 11%

Residential 46%

Mixed 43%

Source: Rasmala estimates *Backlog contributions mentioned in the chart are ex-Russia

Arabtec Holding | Investment View | 10 March 2011 655

Arabtec Holding PJSC

Arabtec Holding is one of the largest construction companies by market cap in the UAE. The company derived 81% of its revenue during 9M10 from the contracting business followed by Drainage and Electro-Mechanical Works at 14%.

Company background Arabtec Holding is one of the largest construction companies by market cap (Dh1.6bn on 9 March 2011) in the UAE. Arabtec Holding is the parent company of Arabtec Construction LLC, through which it engages primarily in the construction of high-rise, commercial, and industrial developments, villas and residencies. Arabtec also has investments in the construction sector through its acquisition of contracting and related companies, such as Target Construction and Engineering, and it has formed joint ventures to carry out projects or to venture into international markets. The company, which has emerged as an integrated construction firm in the Gulf Cooperation Council (GCC) region, is now a prominent player in the area, with projects such as the Burj Khalifa and the Infinity Tower in its vast portfolio. Arabtec was also the first construction company in the UAE to be listed on the Dubai Financial Market in 2005.

Figure 1 : Group structure

Arabtec Holding PJSC

Civil construction and related work Infrastructure construction Manufacture of concrete pre-cast Other work

Gulf Steel Arabtec Arabtec Arabtec Target Austrian Arabian Nasser Bin Construction Construction International Engineering Industries Polypod Middle Ready Khaled East L.L.C. L.L.C. (100%) W.L.L. Company Construction FZC Arabtec Mix Concrete Co. Factory Ready Company (GSI – 55%) Engineering L.L.C. Mix (UAE – 60%) Services L.L.C. (NBK– 49%) Arabtec Arabtec (AES – 80%) Emirates Falcon House of Equipment Construction Pakistan Private Arabtec Precast Electromechanical Co. L.L.C. Jordan Limited (ATC L.L.C. Co. EFECO L.L.C. (HOE – 67%) PAK-60%) (UAE – 100%)

Arabtec Construction Palestine

Arabtec Construction Syria (50%)

Arabtec Saudi Arabia L.L.C. (45%)

Arabtec Egypt for Construction

Arabtec Musawa W.L.L. (Bahrain- 75%)

Source: Company data

Arabtec Holding | Investment View | 10 March 2011 666

Arabtec has four main reporting segments that engage in a range of operations across the The Building Construction construction value chain. segment contributed 81.4% of total revenue in 9M10, followed The Building Construction segment is Arabtec’s largest and is engaged in the construction of high- by Drainage and Electro- rise towers, buildings and villas. It contributed Dh3,346m, ie 81% of total revenue, in 9M10 vs Mechanical Works (14.2%) 88% in 9M09.

The Drainage and Electro-Mechanical Works segment is the second largest in terms of revenue and carries out drainage, electrical and mechanical work. It contributed 14% to total revenue in 9M10 vs 8% in 9M09.

The Precast and Concrete Production segment produces ready-mix concrete and precast, mainly for use by its Building Construction segment. In 9M10, this segment’s revenue amounted to Dh33m vs Dh21m in 9M09. The Marine Construction segment reported revenue of Dh72m in 9M10 vs Dh108m in 9M09.

Chart 4 : 9M09 revenue breakdown by segment

Drainage and Electro- mechanical Works 8% All Other 2% Precast and Concrete Marine Construction Production 2% 0%

Building Construction 88%

Source: Company data

Chart 5 : 9M10 revenue breakdown by segment

All Other 2% Drainage and Electro- Marine Construction mechanical Works 2% 14% Precast and Concrete Production 1%

Building Construction 81%

Source: Company data

Arabtec Holding | Investment View | 10 March 2011 677

Arabtec plans to expand into Since 2007, Arabtec has been actively seeking new investments within and outside of the GCC Libya, Algeria and Egypt region. The region, which includes the UAE, the Kingdom of Saudi Arabia (KSA) and Qatar, accounted for 98.4% of Arabtec’s total revenue in 9M10. Arabtec currently operates in Abu Dhabi, Dubai, Jordan, Qatar, Russia, the KSA, Egypt, Syria, Pakistan and other emirates of the UAE.

Table 3 : The GCC remains Arabtec's main source of revenue

Segment (Dhm) 9M09 9M10 Revenue % Revenue % GCC 5,530 99.2% 4,045 98.4% Pakistan 2 0.0% 4 0.1% Levant* 41 0.7% 36 0.9% Russia 0 0.0% 27 0.7% Total 5,573 100.0% 4,111 100.0%

*Levant countries that Arabtec operates in are Syria, Jordan and Palestine. Source: Company data

Backlog During 4Q08-2Q10, Arabtec witnessed a declining trend in its backlog ex-Russia, mainly due to significant project cancellations in Dubai (almost 50% of the peak value). The backlog fell to Dh12.2bn in 2Q10 from Dh28.5bn in 4Q08, before rising to Dh14.9bn in 3Q10. Challenging market conditions in Dubai prompted the company to start considering other meaningful Middle East markets to drive its backlog and revenue growth. Saudi Arabia has emerged as a construction ‘sweet spot’ in the region, with some major public and private projects to be tendered over the next three to four years. Arabtec has formed a consortium with a subsidiary of Saudi Binladen Group (NR) to bid for some of the mass-scale projects to be tendered. The consortium has recently won a project worth Dh4.9bn to construct 5,000 villas. The improved backlog momentum in 3Q10 was a result of project wins in Saudi Arabia and Egypt.

After taking into account further Dh2.3bn worth of projects won during October 2010-Februrary 2011 period, our estimated backlog as of end-February 2011 works out to be Dh14.7bn.

Chart 6 : Total backlog* showing a downward trend due to project cancellations

30.0 28.5

25.0 18.3 18.1 18.9 20.0 13.3 14.9 12.7 12.2 15.0

10.0

5.0

0.0 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Total Backlog ex-Russia (Dhbn)

Source: Company data *Backlog is ex-Russia

Arabtec’s business model is mainly inclined towards Civil construction, which is reflected in its backlog mix, which as of 3Q10 comprised 87.3% mixed and residential projects. Also we estimate Arabtec’s exposure to the Civil segment as of end-February 2011 to be around 89% of the total backlog. Higher exposure to Civil construction and intense competition in Civil construction are the primary reasons for Arabtec’s declining gross and EBIT margins (see Charts 10 and 11).

Arabtec Holding | Investment View | 10 March 2011 688

Chart 7 : Backlog* is mainly driven by mixed and residential projects

100%

90% 24.5% 33.3% 35.9% 32.8% 31.5% 80% 41.0% 45.9% 48.4% 70%

60%

50% 63.5% 40% 56.1% 59.4% 58.2% 61.6% 51.2% 38.9% 30% 50.3% 20%

10% 7.3% 12.4% 12.7% 3.7% 7.8% 5.8% 5.6% 12.0% 0% 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Infrastructure & utilities Mixed Residential

Source: Company data *Backlog contributions mentioned in the chart are ex-Russia

The increasing share of backlog from Saudi Arabia points to Arabtec shifting its excess capacity from the distressed Dubai market. As of 3Q10, Saudi Arabia constituted 36.7% to its total backlog and after taking into account further Dh2.3bn worth of projects won during the October 2010- Februrary 2011 period, we estimate the contribution from Saudi Arabia to be around 31%.

Chart 8 : Backlog segmentation by geography

3.0% 3.0% 2.4% 2.3% 2.0% 3.5% 3.1% 3.4% 100%

90% 13.7% 16.7% 16.1% 10.3% 21.3% 15.9% 19.6% 0.0% 27.9% 80% 8.2% 18.5% 16.6% 70% 26.8% 19.4% 16.8% 5.6% 36.7% 10.6% 60% 12.6% 15.6% 14.9% 19.9% 50% 22.4% 40% 17.6%

30% 56.6% 57.5% 50.8% 46.7% 48.4% 43.6% 20% 38.2% 32.1% 10%

0% 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Dubai Abu Dhabi Saudi Arabia Qatar Others

Source: Company data *Backlog contributions mentioned in the chart are ex-Russia

Arabtec Holding | Investment View | 10 March 2011 699

Chart 9 : Book to bill ratio ex-Russia

3.50 2.95 3.00

2.50 2.25 2.02 2.05 2.00

1. 5 0

1. 0 0

0.50

0.00 4Q09 1Q10 2Q10 3Q10

Book to bill ratio ex - Russia

Source: Company data

Chart 10 : Gross margin Chart 11 : EBIT

18.0% 14.0% 17.3% 12.7% 17.3% 12.0% 17.0% 11.6% 11.0% 16.6% 10.4% 10.0% 16.0% 8.4% 8.0% 15.3% 8.0% 15.0% 15.0% 6.0% 14.2% 14.0% 4.0% 14.0% 2.8% 13.0% 2.0%

12.0% 0.0% 2007 2009 2Q10 9M10 2007 2008 2009 1Q10 2Q10 3Q10 9M10

Source: Company data Source: Company data

Recovering from its exposure to Arabtec faced pressure from a possible debt default in 4Q09 when government-owned Nakheel troubled Nakheel in 4Q09, Properties saw near-bankruptcy. As a result, Arabtec suspended work on Nakheel’s Al Furjan Arabtec expects to recommence project, which was independently valued at Dh3bn. However, in April 2010, Arabtec reported that work on its contracted phase of Al Furjan Villas for Nakheel Nakheel had agreed to pay 40% of its dues to Arabtec within the month and the balance in the form of a publicly tradable bond. In October 2010, Arabtec reported that it planned to recommence construction soon, once the current financial issues had been formalised. The scope of the project has been scaled down to 523 villas from 4,000.

Arabtec secured around Dh10bn in new contracts during the January 2010-February 2011 period. Arabtec has secured over However, the company is facing delays on two of them – Damac Heights (Dh500m) and P17 Dh10bn in contracts in 2010 (Dh710m) – as no revenues have been recognised from them since the awards in May 2010 and January 2010, respectively. A snapshot of Arabtec’s new projects is provided in Table 4.

Arabtec Holding | Investment View | 10 March 2011 1070

Table 4 : Snapshot of Arabtec's new projects awarded during Jan 2010-Feb 2011

Country Project Name Description Reported Duration Client Project Date Value (Dhm) UAE-Abu Gasco Shah Aarabtec's subsidiary Target Engineering Construction Co. was awarded the Feb-11 33 months Saipem S.P.A. 206 Dhabi Gas contract to build 12 substation buildings and instrument/equipment shelters development project Kuwait Sabah Al- Have been awarded the project in joint venture with Kuwait's Combined Group Feb-11 42 months Sabah Al- 900 Salem Company. The full cost of the project is valued at Dh1500m and includes the Salem University construction and external works of four buildings, comprising a basement and six University floors over a total area of 226,000 square metres. Aarabtec's share is Dh900m Egypt Al Marassi The project consists of 74 luxury villas and 30 town homes as part of Al Marassi Jan-11 20 months Emaar MISR 137 project in Sidi Abdul Rahman in North Coast UAE-Abu ADNOC This project consists of a 3 level underground car park, covers an area of Jan-11 24 months ADNOC 219 Dhabi underground approximately 22,741 square meters and provides a built up area of 65,340 ar park square meters with approximately 1575 car parking spaces Bahrain Al Baraka Consists of two office towers that will have 14 floors and total gross development Jan-11 20 months Al Baraka 200 Banking Group area (GDA) of 38,540m² Banking Group Headquarters UAE NA The project involves construction of two residential towers in Abu Dhabi valued at Jan-11 24/16 months NA 623 Dh552m and a staff accommodation building in Fujairah valued at Dh71m Egypt Hanging This project will consist of six residential buildings featuring 726 apartments Sep-10 14 months Amer Group 195 Gardens located at Golf Porto Sokhna, a residential and mixed-use vacation resort covering 2.2m sqm of cliff face on the Red Sea, that is home to Egypt's only mountain top 18-hole championship golf course and a Spa complex. KSA NA Sep Oct-10 48 months Binladen 4,900 Group UAE-Dubai Damac Damac awarded Arabtec the contract to build a residential tower in Dubai May-10 2 years Damac 500 Heights Properties Qatar World Trade Arabtec Construction received a letter of intent awarding it the contract to build the Mar-10 26 months Qatar General 524 Centre World Trade Centre at West Bay, Doha, Qatar. The development includes a 50- Insurance and floor office tower, four basement levels and a 6-storey 'sphere structure'. The Reinsurance contract includes structural, civil, electro-mechanical and external works. Company Syria Yasmeen Yasmeen Rotana is a 5-star hotel valued at over USD120m and a construction Feb-10 To be Yasmeen 245 Rotana value of approx. USD67m. The hotel will feature 338 rooms, a 600-seat banquet completed by Rotana Hotel hall, six meeting rooms, a spa, fitness centre with swimming pool, a sky bar and a 1Q2012 cigar lounge. UAE-Dubai P17 Tower This project, on Sheikh Zayed Road, Dubai, will comprise: Jan-10 38 months Tasameem 710 - a tower with 80 floors Real Estate - three basement levels and a ground floor Co. LLC of - a five store hotel, furnished apartments Abu Dhabi - offices and luxurious apartments - a service building of 10 floors and 5 basements which is connected to the tower at the ninth level by a bridge. Qatar Bridge Towers Arabtec Construction W.L.L, Qatar will build the Bridge Towers (office and hotel Jan-10 30 months NA 696 - Qatar towers) at West Bay, Doha comprising two buildings, with two basement levels, a ground level, three podium levels, a 45 floor office tower and a 45 floor(five star) hotel tower. The work will include structural, civil, electro-mechanical and external works. Palestine Water Loss This project is financed by KFW Bank and is part of the donations program set for Jan-10 20 months Nablus 45 Reduction Nablus Municipality. According to Arabtec this is an important social project for Municipality Phase Two helping the people of Nablus and is part of its geographic expansion in the MENA Nablus - region. Palestine

Source: Company data, Zawya, Ameinfo, Constructionweekonline

Arabtec Holding | Investment View | 10 March 2011 1171

Chart 12 : Geographical breakdown of new projects awarded during Jan 2010-Feb 2011

4,900 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,220 1,210 977 900 1,000 332 500 245 200 116 0 KSA Qatar Dubai Abu Dhabi Kuwait Egypt Syria Bahrain Others

Project Value Dhm

Source: Company data, Ameinfo, Constructionweekonline

The company allows foreign ownership of 49% of its shares; the current level of foreign ownership is around 23.6%. The company’s current ownership is listed in Table 5.

Table 5 : Shareholding composition

Holder's name % of outstanding shares Construction Products Holding Company 5.66% Riad Burhan Taher Kamal 5.43% Other investors 33.91% Public 55.00%

Source: Zawya

Chart 13 : Historical trends in foreign ownership

60%

50%

40%

30%

20%

10%

0% 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Foreign ownership limit Current foreign ownership

Source: Dubai Financial Market Exchange

Arabtec Holding | Investment View | 10 March 2011 1272

Management profile Arabtec employs around 60,000 staff. Table 6 lists the profiles of its key personnel.

Table 6 : Key directors

Name Position Background Riad Burhan Kamal Group The founder and the Chairman of Arabtec Construction also holds the post CEO/Board of CEO in Arabtec Holding, as well as in the subsidiaries which operate in member Dubai, Abu Dhabi, Saudi Arabia, Qatar, Pakistan, Syria and St. Petersburg (Executive) in Russia. He holds a BSc in Civil Engineering and an MSc in Structural Engineering from Imperial College, London University. Sheikh Bhutti Bin Chairman NA Maktoum Bin Juma (Independent) Al Maktoum Sheikh Sultan Bin Member NA Saqer Al Qassimi (Independent) Sheikh Nawaf Bin Member NA Naser Al Thani (Independent) Tom Barry, CEO of Chief Executive Tom Barry was appointed Chief Executive Officer of Arabtec Construction in Arabtec Construction Officer 2009. Barry holds a civil engineering degree from the University College LLC, is also a key Dublin, Dublin, Ireland. He is also a chartered engineer through the member of the group institution of Civil Engineers in the UK.

Source: Company data

Key joint ventures and partnerships Arabtec Holdings has 14 subsidiaries across the construction value chain. The company’s foreign market strategy is mainly partnership-based, as it forms joint ventures with major local players to secure projects. For instance, in October 2010, Arabtec Construction LLC (a subsidiary of Arabtec Holdings) entered into a partnership with Musawa Holding WLL to establish Arabtec-Musawa WLL, a construction company to be located in the Kingdom of Bahrain. However, we believe this strategy could be potentially dilutive on the take-home margins front as, in most of these JVs, Arabtec may end up being a subcontractor.

Arabtec Holding | Investment View | 10 March 2011 1373

Table 7 provides a description of its other key joint ventures and partnerships.

Table 7 : Key joint ventures and partnerships

Partner/ Country Background Share in Description associate Joint Venture (%) Amer Egypt Real Estate 55 This joint venture was announced in October 2010 as a move by Arabtec to expand abroad (as Dubai's property sector is still reeling from the global financial crisis) and cater to the growing construction demand in Egypt. This venture has already secured its first Egyptian project, The Hanging Gardens, worth Dh195m. Arabian UAE Construction 50 This joint venture was awarded the contract to carry out Construction construction works at the Eight Gate Development in Company Damascus, Syria with the total value of the contract amounting to Dh152m. CPC Services Saudi Arabia Construction 45 The joint venture has recently been awarded a contract and Prime worth Dh4.9bn to construct 5,000 villas. International Group Services National Projects Abu Dhabi, A leading 50 This joint venture was awarded the main construction and Construction UAE construction contract for the Nation Towers project in Abu Dhabi, conglomerate in worth Dh1.6bn. the UAE AMN Holdings Pakistan NA 60 This joint venture was awarded the Karachi Financial Towers, a project worth Dh500m, comprising two state- of-the-art 37-floor office towers, which when completed will be the tallest structures in Karachi. Six Construct Belgium Construction 50 This joint venture completed the construction of the Burj Lake Hotel, now called the Address Hotel Samsung South Korea Construction 30 This joint venture was involved in the construction of the world's tallest building, the Burj Khalifa (which stands 828m tall). Max Bogl Germany Largest private 50 This joint venture has received contracts which construction altogether are worth Dh1.35bn, including two contracts company in with Dubai Sports City (DSC) to carry out two stadia Germany with a total value of Dh830m, a contract worth Dh278m to carry out the cargo terminal building works at the Dubai World Central International Airport, Jebel Ali and two contracts to carry out the passenger terminal structural works and air traffic control tower in the same airport. Emirates Dubai Property 50 Two projects that this joint venture worked on were in Sunland Development the Culture Village, an 80-storey residential building called the D1 Tower and the Palazzo Versace Dubai, a luxury hotel with 215 rooms and 169 condominiums (on which construction is currently ongoing). Engineering Jordan Contractor 50 The Heights, The Lofts, Courtyard 1 & 2 Buildings at Enterprises Abdali Development Project in Amman, Jordan is one Company of the projects of this joint venture, valued at Dh277m. Dubai Dubai Construction 50 This joint venture carried out the main package works Contracting for the construction of a major hotel located on Sheikh Company Zayed road in Dubai, for a total value of Dh1,076bn. Marintek Middle NA NA 65 This is a joint venture manufacturing facility where East heavy duty concrete pontoons are manufactured under licence from Marintek, Finland. The facility is about 16,000sq m with a sea front used to transport the pontoons by sea. Asia FZE NA NA WCT Malaysia Malaysia's largest 50 In December 2008, this joint venture, which was Engineering construction and involved in the construction of the Nad Al Sheba property racecourse in Dubai, attempted to terminate the development contract on a number of grounds including failure to company pay certified amounts, the joint venture’s exclusion from the site and Meydan’s (the contract owner) wrongful calls on the Performance Security and Advance Payment Guarantee. Notice of the call of the Performance Security amounting to Dh461.3m (Arabtec's share: Dh230.65m) and the Advance Payment Guarantee amounting to Dh77.3m (Arabtec’s share: Dh38.6m) was received later that same month.

Source: Company data, Ameinfo

Table 8 : Snapshot of investments in associates

Associate Nature of operations Place of registration Ownership (%) Polypod Middle East LLC Assembly of bathroom pods Abu Dhabi, UAE 40.0 and other related pods

Source: Company data

Arabtec Holding | Investment View | 10 March 2011 1474

Income statement

Dhm FY08A FY09A FY10F FY11F FY12F Revenue 9722 7665 5646 5800 5933 Cost of sales -8230 -6338 -4798 -4988 -5162 Operating costs -158.4 -401.5 -122.0 -130.8 -99.9 EBITDA 1333 925.1 726.8 681.2 671.4 DDA & Impairment (ex gw) -260.3 -313.7 -280.6 -304.2 -329.8 EBITA 1073 611.5 446.2 377.0 341.6 Goodwill (amort/impaired) 0.00 0.00 0.00 0.00 0.00 EBIT 1073 611.5 446.2 377.0 341.6 Net interest -24.3 -56.1 -41.2 -51.7 -51.7 Associates (pre-tax) 0.00 0.00 0.00 0.00 0.00 Other pre-tax items 47.1 75.9 37.3 46.4 47.5 Reported PTP 1096 631.2 442.2 371.7 337.4 Taxation -16.4 -39.4 -3.06 -3.18 -3.19 Minority interests -121.5 -96.9 -119.3 -110.6 -100.3 Other post-tax items 0.00 0.00 0.00 0.00 0.00 Reported net profit 958.0 494.9 319.9 258.0 233.9 Tot normalised items 0.00 0.00 0.00 0.00 0.00 Normalised EBITDA 1333 925.1 726.8 681.2 671.4 Normalised PTP 1096 631.2 442.2 371.7 337.4 Normalised net profit 958.0 494.9 319.9 258.0 233.9

Source: Company data, Rasmala forecasts year to Dec

Balance sheet

Dhm FY08A FY09A FY10F FY11F FY12F Cash & market secs (1) 850.4 820.5 1027 1331 1512 Other current assets 6436 6196 5684 4535 4234 Tangible fixed assets 1381 1363 1312 1459 1591 Intang assets (incl gw) 494.6 447.7 397.9 351.9 305.9 Oth non-curr assets 297.5 283.7 542.0 542.0 542.0 Total assets 9460 9110 8962 8219 8185 Short term debt (2) 1102 769.8 744.5 744.5 744.5 Trade & oth current liab 5908 5231 4727 3616 3247 Long term debt (3) 153.6 187.1 116.5 116.5 116.5 Oth non-current liab 178.2 194.7 258.9 258.9 258.9 Total liabilities 7342 6382 5847 4736 4367 Total equity (incl min) 2118 2728 3115 3484 3818 Total liab & sh equity 9460 9110 8962 8219 8185 Net debt 405.1 136.4 -165.9 -470.1 -651.1

Source: Company data, Rasmala forecasts year ended Dec

Cash flow statement

Dhm FY08A FY09A FY10F FY11F FY12F EBITDA 1333 925.1 726.8 681.2 671.4 Change in working capital -1436 -799.2 -180.7 37.4 -67.7 Net interest (pd) / rec -24.3 -56.1 0.00 0.00 0.00 Taxes paid -14.0 -33.5 -3.06 -3.18 -3.19 Other oper cash items 211.4 360.3 -22.7 -5.26 -4.19 Cash flow from ops (1) 70.2 396.6 520.3 710.2 596.3 Capex (2) -867.7 -300.1 -221.7 -406.0 -415.3 Disposals/(acquisitions) 7.92 69.1 26.6 0.00 0.00 Other investing cash flow -43.6 -5.05 9.82 0.00 0.00 Cash flow from invest (3) -903.3 -236.1 -185.2 -406.0 -415.3 Incr / (decr) in equity 0.15 36.3 0.00 0.00 0.00 Incr / (decr) in debt 1025 -298.6 -95.9 0.00 0.00 Ordinary dividend paid -338.9 -21.7 -24.6 0.00 0.00 Preferred dividends (4) 0.00 0.00 0.00 0.00 0.00 Other financing cash flow 0.00 0.06 0.00 0.00 0.00 Cash flow from fin (5) 686.5 -283.9 -120.5 0.00 0.00 Forex & disc ops (6) 0.00 0.00 0.00 0.00 0.00 Inc/(decr) cash (1+3+5+6) -146.6 -123.4 214.6 304.2 181.0 Equity FCF (1+2+4) -797.5 96.5 298.7 304.2 181.0

Source: Company data, Rasmala forecasts year to Dec

Arabtec Holding | Key Financial Data | 10 March 2011 75

Company description Hold Price relative to country

Arabtec Holding PJSC (Arabtec) is one of the largest construction companies by market cap (Dh1.6bn on 9 March 180

2011) in the United Arab Emirates (UAE). It is the parent company of Arabtec Construction LLC, through which it 160 engages primarily in the construction of high-rise, commercial, and industrial developments, villas and residencies. 140

Arabtec also has investments in the construction sector through its acquisition of contracting and related 120 companies, such as Target Construction and Engineering, and it has formed joint ventures to carry out projects or 100 venture into international markets. 80

60

40 Mar Jun Sep Dec Mar Jul Nov Mar Jul Oct Feb 08 08 08 08 09 09 09 10 10 10 11

Price relative to country

Strategic analysis Average SWOT company score: 3 Revenue breakdown, FY10F

Strengths 4 Drainage & Marine Electro- Construction Others One of the largest UAE contractors with strong differentiation in residential and mixed-use development, e.g. Burj mechanical 2% 3% Construction Khalifa. 14% 81% Weaknesses 2 Dubai remains the highest contributor to backlog accounting for near around 27% of its February 2011 end estimated backlog (ex-Russia), thereby keeping intact concerns such as defaults, delays and cancellations.

Opportunities 3 Source: Rasmala forecasts Expanding into growth markets such as Saudi Arabia via local partnerships, moving into high-margin IWP and MEP segments, though dominant in Dubai and Civil segment. Market data Threats 2 Dubai receivables risk may potentially dilute future earnings. The civil construction segment is a crowded Headquarters Street No. 4, Al Quoz, Near Interchange 4, Shk. marketplace, hence margin pressures may intensify going forward. Zayed Rd., Dubai, UAE Website Scoring range is 1-5 (high score is good) http://www.arabtecholding.com/ Shares in issue

1196.0m Freefloat 95% Majority shareholders Construction Products Holding Company (6%), Riad Burhan Taher Kamal (5%)

Competitive position Average competitive score: 3- Broker recommendations

Supplier power 2- Low - Arabtec makes payments in line with its cash inflows from end customers, hence working capital risk is 10 limited. 8 Barriers to entry 4+ 6 High - Need to develop regional relationships and raise funding in a down-market will likely pose strong 4 headwinds for new entrants. 2 0 Customer power 3- Buy Hold Sell Medium - transaction activity is low as market sentiment remains soft. Substitute products 3- Source: Bloomberg Low - Arabtec is looking to diversify more into infrastructure business, where demand is likely to remain relatively robust compared to civil construction. Rivalry 4+ High - Contracting has become a competitive market, with both locals and foreign players bidding for down- scoped opportunities.

Scoring range 1-5 (high score is good) Plus = getting better Minus = getting worse

Arabtec Holding | Strategic and Competitive Overview | 10 March 2011 76

10 March 2011

Drake & Scull Initiation of coverage

Buy Quality growth

Target price DSI has a well-diversified business model with about 69% of backlog being Dh1.10 generated outside the UAE. While the lower-margin Civil business should be a Price Dh0.95 primary growth driver, more attractive revenue streams in MEP and IWP are likely Short term (0-60 days) to ramp up their contribution in the next 18-24 months. n/a Market view Key forecasts No Weighting

FY09A FY10A FY11F FY12F FY13F Revenue (Dhm) 1,917 1,854 2,382 2,601 2,799 Price performance EBITDA (Dhm) 263.9 187.7 272.8 297.8 319.9 Reported net profit (Dhm) 260.7 164.4 215.7 224.9 238.8 (1M) (3M) (12M) Normalised net profit (Dhm) 260.7 164.4 215.7 224.9 238.8 Price (Dh) 1.10 1.03 0.88 Normalised EPS (Dh) 0.12 0.08 0.10 0.10 0.11 Absolute (%) -13.6 -7.8 8.0 Rel market (%) -1.8 11.0 26.0 Dividend per share (Dh) 0.07 0.00 0.00 0.00 0.00 Rel sector (%) -13.6 -7.8 8.0 Dividend yield (%) 7.37 0.00 0.00 0.00 0.00

Normalised PE (x) 7.89 12.40 9.45 9.06 8.53 Mar 09 Nov 09 Jul 10 1.2 EV/EBITDA (x) 7.03 11.80 8.83 8.23 7.44 EV/invested capital (x) 0.81 0.83 0.80 0.76 0.72 1.1 ROIC - WACC (%) 0.00 0.00 0.00 0.00 0.00 1.0 Accounting standard: IFRS year to Dec, fully diluted 0.9 Source: Company data, Rasmala forecasts 0.8 0.7 High growth expectations 0.6 While management expects the company to drive top-line growth by 20-25% pa for the next DSI.DU DFM General Index five years on account of Dh6bn project awards over the last 14 months, both our estimates

and Bloomberg consensus are well below this growth trajectory at 12%. We believe backlog Market capitalisation Dh2.07bn (€405.11m) conversion rates are expected to decelerate further in the current market conditions, and Average (12M) daily turnover hence a more modest assumption is warranted. Should the company deliver consistent Dh9.06m (US$2.50m) results in line with management guidance, we believe the stock could perform well in 2011. Sector: European-DS Tot Mrkt RIC: DSI.DU, DSI UH Recent acquisitions should drive earnings growth momentum Priced Dh0.95 at close 9 Mar 2011. Source: Bloomberg DSI has been able to scale up its backlog by roughly 82% from Dh2.7bn at end-2009 to

Dh4.9bn at end-2010. The company’s aggressive inorganic expansion strategy of acquiring companies in the key markets has been the major driver of this steep growth. We believe DSI’s focus will shift to execution of the order book of the acquired companies, which in turn would make a meaningful contribution to the earnings growth of the consolidated entity.

High-quality sub-sector exposure and diversification support valuation

Equity | United Arab Emirates Construction & Materials DSI is trading at a 2010 P/B of 0.83x and a 2010 EV/backlog of 0.33x, compared with peer Analysts Arabtec at 0.60x and 0.17x, respectively. In our view, DSI has higher exposure to the high-

Saud Masud margin Mechanical, Electrical and Plumbing (MEP) and Infrastructure, Water and Power United Arab Emirates (IWP) segments. We estimate that as of February 2011 end, the combined contribution of +971 55 725 8596 MEP and IWP segments to the total backlog to be around 66%, followed by Civil at 34%. [email protected] Geographically, based on our estimates, the company’s backlog contribution from its three Divya Arora United Arab Emirates largest markets as of end-February 2011 is 49% Saudi Arabia, 19% Abu Dhabi and 12% +971 4 424 2784 Dubai, with its Dubai exposure declining, mainly offset by an increased positioning in Saudi [email protected] Arabia.

Dubai International Financial Centre, The Gate Village, Building 10, Level 1, P.O. Box 31145, Dubai, United Arab Emirates Important disclosures can be found in the Disclosures Appendix. Distributed outside MENA by The Royal Bank of Scotland N.V. and its affiliates under a strategic www.rasmala.com alliance with Rasmala Investment Bank Ltd.

The basics

Versus consensus Catalysts for share price performance Saudi, Egypt and Qatar are primary international markets for DSI, respectively accounting for EPS Ours Cons % diff 49%, 6% and 4% of its estimated backlog as of end-February 2011. The UAE on the other hand is 2011F 0.10 0.10 0.0% the second-largest backlog contributor with a 31% contribution. We believe current sociopolitical 2012F 0.10 0.12 -16.7% 2013F 0.11 0.12 -8.3% unrest in the broader Middle East and North Africa will likely weigh on UAE property names including DSI. However, investors will also differentiate on fundamental impact vs sentiment Source: Bloomberg, Rasmala forecasts impact. In our view, DSI is well established in Saudi without significant reliance on partnerships as in the case of Arabtec. Hence, any stablisation of unrest in the near term may boost DSI’s share performance relative to peers.

Given the 15% year-to-date pullback in the shares, a secondary catalyst may be continued award activity in the Civil segment in 1H11. This may translate into keeping the book-to-bill at or above 4Q10 levels of 2.64. Earnings momentum While the revenue mix will likely tilt towards the lower-margin Civil business in the next 12-18 months as over the last one year the company has won some major civil projects in the region Forced ranking* and is also looking to acquire a Saudi-based Civil contractor, we believe margin compression will Company Rec Upside / be offset by a rise in volumes, which may result in earnings growing slower than the top line for Downside 2011-12F. DSI Buy 15.8% Emaar Buy 15.7% Valuation and target price Arabtec Hold 6.6% We value DSI at Dh1.10 per share using a DCF approach, as we believe this method best Sorouh Hold 6.5% captures the backlog and earning growth potential of the contractors. We assume a 11.4% Aldar Hold 6.1% WACC, a 6% revenue CAGR for the next 10 years, a long-term operating margin of 7.8% and a * By difference to target price as at time of publication. Recommendations may lie terminal growth rate of 3%. Our WACC estimate is based on cost of debt of 5.0% and cost of outside the structure outlined in the equity of 13.1%. We derive our cost of equity using a risk-free rate of 4.0%, an equity market risk disclosure page. Source: Rasmala forecasts premium of 7% and a beta of 1.3. How we differ from consensus Given the ongoing unrest in the region, in the medium term (2011-12), our revenue estimates are below Bloomberg consensus by an average of 8%. Our 2011F and 2012F estimates stand at Dh2.4bn and Dh2.6bn, respectively, vs consensus at Dh2.5bn and Dh2.9bn. However, in the long term (2013-14), we are almost in line with consensus. Our EPS estimates for 2012 and 2013 are below consensus by 16.7% and 8.3%, respectively, on account of our lower revenue and gross Key events margin estimates.

Date Event Risks to central scenario 12/05/2011 1Q11 result Our 2010-14F revenue CAGR is roughly 12%, well below the 20-25% range given by Source: Bloomberg management as we believe the current unrest in the region and weak UAE market fundamentals will lead to meaningful slowdown in the pace of project execution. Should regional unrest be

timely contained and UAE market fundamentals become stronger than our conservative stance, we would expect significant upside to our estimates.

DSI is trading at a 2010 EV/backlog of 0.33x vs Arabtec at 0.17x, due largely to a more diversified model, a higher growth profile and lower provision risk pertaining to backlog and receivables as compared with peers like Arabtec. However, as nearly 69% of the backlog is internationaly driven, given current turmoil in the region, we would not overlook associated risks of project delays and payment pushouts. DSI may also run the risk of managing down outlook expectations should event risk linger or spread considerably in DSI’s key markets such as Saudi Arabia and Qatar.

Drake & Scull | The Basics | 10 March 2011 782

Key assumptions and sensitivities

Our sensitivity assessment suggests favourable risk reward as our bull case scenario implies upside potential of 36% (target price Dh1.49), compared with downside potential of 18% (target price Dh0.90) in the bear case scenario.

Major assumptions Base case: During the forecast period (2011-14F), our base case assumes a backlog-to-revenue average annual conversion rate of 39% and a backlog CAGR of 6%, which trickle down to a revenue CAGR of 7%. We completely exclude the Dh465mn Nile Corniche project in Egypt.

Bear case: An average annual conversion rate of 34% (-5ppt versus base case) and backlog CAGR of 2% (-4ppt versus base case) lead to an estimated revenue CAGR of 3% (-4ppt versus base case) and a target price of Dh0.90 (-18% versus base case). We completely exclude the Dh465mn Nile Corniche project in Egypt.

Bull case: An average annual conversion rate of 44% (+5ppt versus base case) and backlog CAGR of 11% (+5ppt versus base case) lead to a revenue CAGR of 14% (+7ppt versus base case) and a target price of Dh1.49 (+36% versus base case). We completely include the Dh465mn Nile Corniche project in Egypt.

Table 1 : Sensitivity analysis

Value (Dh m) Base case Bear case Bull case PV of free cash flow 860 720 940 PV of terminal value 1,163 920 1,840 Other Assets 411 411 411 Enterprise value 2,434 2,051 3,191 Net debt -242 -242 -242 Other Liabilities -81 -81 -81 Equity value 2,112 1,728 2,868 Shares outstanding 2,178 2,178 2,178 Value per share (Dh) 0.97 0.79 1.32 One year price target (Dh) 1.10 0.90 1.49 Upside/downside to our base case -18% 36%

Source: Company data, Rasmala estimates

Drake & Scull | The Basics | 10 March 2011 793

Earnings forecasts

We forecast DSI's revenue will grow at a CAGR of 12% over 2010-14F. During the forecast period, we expect MEP and Civil divisions to remain the major revenue contributors with MEP accounting for 54% of the total, followed by Civil at 34%.

During the 2011-12F period, we expect the Civil division to be the major revenue growth driver on the back of execution of Dh1.5bn (45% of total) worth of civil projects won over the last 14 months and the acquisition of a Saudi-based Civil contracting firm. Thereafter, during the 2013-2014F period, we assume growth will be driven mainly by the MEP and IWP divisions, as we expect the company to scale up the backlog from these high-margin segments. Our revenue forecast over 2011-14F is based on an average yearly backlog conversion rate of 39% and a backlog CAGR of 6%. Our forecast assumes declining gross and EBIT margin trends as we expect margins to compress gradually on the back of increasing competition in the civil construction segment.

Table 2 : Forecasts overview

2011F 2012F 2013F 2014F MEP (Dh m) 1,307 1,393 1,520 1,613 % growth 6.6% 9.1% 6.1% IWP (Dh m) 269 287 321 332 % growth 6.5% 11.9% 3.5% Civil (Dh m) 806 920 958 997 % growth 14.3% 4.1% 4.1% Total revenue (Dh m) 2,382 2,601 2,799 2,942 % growth 9.2% 7.6% 5.1% Gross margin 17.0% 16.2% 15.6% 15.0% EBIT margin 8.6% 8.3% 8.1% 8.0% EPS 0.10 0.10 0.11 0.12

Source: Rasmala forecasts

Valuation Based on our DCF methodology, we value DSI at Dh1.10 per share, implying 15.8% potential upside to the current price of Dh0.95. Our valuation implies a 2011F EV/backlog multiple of 0.37x. We believe DSI deserves a premium in its valuation, compared with peer Arabtec (trading at a 2010 EV/backlog of 0.17x) due to its higher margins and higher backlog quality in terms of lower exposure to the civil construction segment. We estimate that the combined contribution of high- margin MEP and IWP segments as of end-February 2010 to the total backlog to be around 66%, followed by Civil at 34%. Historically, DSI has traded at an average EV/backlog multiple of 0.45, but the recent sell-off in the stock due to ongoing unrest in the region has led the stock to trade at a meaningfully compressed EV/backlog multiple of 0.31. In our view, the market has overly discounted ex-UAE backlog exposure of DSI, which we estimate as of end-February 2011 to account for 69% of the total backlog, with Saudi at 49%, followed by Egypt at 6% (see Chart 1). Overall, we remain cautious about DSI’s ex-UAE backlog exposure and have assumed a slower average annual backlog conversion rate of 39%, compared with historically achieved rates of around 50-55%. We have completely excluded the recently awarded Dh465m Nile Corniche project in Egypt from our valuation.

Our DCF-based target price is calculated using a WACC of 11.4% and a terminal growth of 3%. We derive our WACC using a cost of equity of 13.1% and cost of debt of 5%. Our long-term revenue CAGR and long-term EBIT margin assumption for DSI are 6% and 7.8%, respectively.

Drake & Scull | Investment View | 10 March 2011 804

Chart 1 : DSI’s estimated backlog* decomposition by geography as of end-February 2011

Others Qatar 10% 4% Egypt 6%

Saudi Arabia 49%

Dubai 12%

Abu Dhabi 19%

Source: Rasmala estimates, *Backlog contributions mentioned in the chart are ex-Durrat Al Bahrain project

Chart 2 : DSI’s estimated backlog* decomposition by segment as of end-February 2011

IWP 12%

MEP Civil 54% 34%

Source: Rasmala estimates, *Backlog contributions mentioned in the chart are ex-Durrat Al Bahrain project

Drake & Scull | Investment View | 10 March 2011 815

Drake & Scull International PJSC

Drake & Scull is a leading UAE construction company engaged primarily in providing services in MEP, IWP and Civil business lines. During 9M10, the company derived 54% of its revenues from the MEP segment.

Company background Drake & Scull International PJSC (DSI) is one of the largest integrated construction companies in the United Arab Emirates (UAE) by market cap (Dh2.1bn as of 9 March 2011). The company was formed through a merger of an electrical company (Drake and Gorham) and a plumbing company (Arthur Scull & Son) in 1964. DSI was established in Abu Dhabi in 1966 and in Dubai, where it is currently headquartered, in 1976. It was listed on the Dubai Financial Market (DFM) in March 2009. At end-2009, DSI reported about 12,000 employees.

The company is primarily engaged in Mechanical, Electrical and Plumbing (MEP) services, Civil Contracting services, and Infrastructure, Water and Power (IWP) services.

Figure 1 : Snapshot of DSI operating segments

Source: Company data

DSI is the leading MEP contractor in the region and its expertise in MEP spans the entire value chain of operations including design, construction, engineering, procurement, consultation,

maintenance and operation of a wide range of projects, extending to district cooling plants. DSI Evolving from being a specialised business to has also been able to diversify its specialised MEP skills to cover other areas of revenue such as becoming a highly integrated IWP and Civil Contracting. The company covers the entire value chain in the IWP business by service provider providing the design, integration, installation, start-up, testing, operation and maintenance of district cooling plants, water and wastewater treatment plants, and power generation and distribution plants.

Drake & Scull | Investment View | 10 March 2011 826

Figure 2 : DSI group structure

Drake and Scull International PJSC

Mechanical, Electrical, Plumbing Water and Pow er (WP) Civ il (MEP)

DSI Construction DSI A UH DSI A s ia Passavant DSWP (100%) KSA (65%) (100%) (100%) (100%) Roediger Engineering (100%) DSC KSA CA MPCO Thailand GTCC DXB GTCC A UH (100%) (60%) (100%) (80%) (80%) Passavant Roediger (82%)

Dubai (100%) Oman (51%) Qatar (100%) Kuw ait (75%) Jordan (100%) Syria Egy pt ( 100% ) Libya (65%) (100%)

Source: Company data

DSI’s MEP segment has historically been the main contributor of revenue, and it contributed 54.3% of total revenue during 9M10. However, the company continued to make inroads into the IWP segment with its share moving up from 19.3% in 2009 to 27.8% in 9M10.

Chart 3 : Segmental decomposition of revenues

10 0 % 17 .2 % 12.5% 13.4% 90% 21.6% 18 . 1% 17 .8 % 24.6% 26.9% 80% 39.4% 12 .5 % 23.5% 19 .0 % 28.9% 70 % 17 . 1% 27.8% 19 .3 % 60% 31.0% 50 % 28.0% 40% 70.3% 30% 61.3% 62.9% 58.7% 63.1% 56.2% 54.3% 20% 42.1% 32.6% 10 %

0% 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10 9M10

MEP IWP Civil work

Source: Company data

DSI’s total backlog ex-Durrat Al Bahrain stood at Dh4.9bn as at end-2010, a jump of 81.5% over the end-2009 backlog of Dh2.7bn, suggesting the company continued to get new orders despite the tough market conditions. However, the 2010 year-end backlog also includes Dh815m worth of projects consolidated from the recently completed acquisition of a Saudi-based MEP contractor. Also, after taking into account further Dh2.6bn worth of projects won during first two months of 2011, our estimated backlog as of end-February 2011 works out to be Dh7.3bn.

Drake & Scull | Investment View | 10 March 2011 837

Chart 4 : Backlog* grew 81.5% from end-2009 to end-2010

5.0 4.5 4.0 3.5 3.0

2.5 4.9 4.9 2.0 3.5 3.6 1.5 2.7 2.7 2.5 2.4 2.4 1.0 0.5 0.0 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Total Backlog (AED bn)

Source: Company data, *Backlogs mentioned in the chart are ex-Durrat Al Bahrain project

During 2010, the company won Dh3.4bn worth of projects, of which 45% came from the Civil segment. As a result, the Civil division’s contribution to total backlog shot up from 11.3% at end- 2009 to 25.9% at 3Q10 end. Around 36% of the total projects won in 2010 came from Saudi Arabia, highlighting that country’s importance as a major long-term market for DSI. The company further won around Dh2.6bn worth of projects during first two months of 2011 with around Dh2bn coming from a civil contract in Saudi Arabia. We estimate the contribution of the Civil segment as of end-February 2011 to the total backlog to be around 34%. We believe the Civil division will play an increasingly important role in driving revenues over the next couple of years. This could be viewed as negative from a margin perspective, but it will be positive from a volume and overall net income standpoint.

Chart 5 : Backlog* contribution from Civil segment on the rise due to major wins in Saudi

100% 15.3% 11.3% 90% 20.7% 27.5% 24.6% 27.8% 25.4% 25.9% 80% 13.7% 27.8% 70% 16.7% 18.5% 17.7% 15.3% 19.4% 60% 21.3% 50% 40% 71.1% 62.6% 30% 56.9% 60.9% 56.9% 58.7% 53.1% 50.9% 20% 10% 0% 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

MEP IWP Civil work

Source: Company data, *Backlogs contributions mentioned in the chart are ex-Durrat Al Bahrain project

Overall, the company’s backlog is well diversified with respect to its geographic segmentation. Based on 3Q10 backlog of Dh4.9bn, Saudi Arabia has overtaken Dubai as the highest contributor to the total backlog, with its contribution shooting up from 5.3% in 2009 to 32.4% and Dubai’s declining from 36.8% to 22.8%. Also, based on recently announced projects wins during first two months of 2011, we estimate that the backlog from Saudi will have reached 49% of the total as of end-February 2011.

Drake & Scull | Investment View | 10 March 2011 848

Chart 6 : Saudi Arabia overtaking Dubai as a major contributor to the backlog*

100% 7.9% 7.4% 9.1% 11.6% 14.0% 90% 27.6% 21.7% 17.8% 14.5% 7.4% 11.4% 15.8% 80% 5.0% 10.3% 70% 5.3% 4.3% 4.1% 32.4% 21.1% 21.0% 17.6% 32.7% 60% 30.9% 50% 30.3% 33.6% 6.6% 40% 24.2% 30% 56.5% 56.1% 59.2% 50.8% 20% 36.8% 38.1% 34.2% 10% 22.8% 0% 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Dubai Abu Dhabi Qatar Saudi Arabia Others

Source: Company data, *Backlogs contributions mentioned in the chart are ex-Durrat Al Bahrain project

Chart 7 : Increasing book to bill ratio provides higher revenue visibility

3.00

2.50

2.00

1.50 2.79 2.64 2.08 1.00 1.91 1.43 0.50

0.00 4Q09 1Q10 2Q10 3Q10 4Q10

Book to bill ratio ex durrat al bahrain

Source: Company data

Operating margins have been on a downward trajectory as the company’s SG&A expenses are on the rise as a result of new acquisitions and the company’s move into different geographies.

Chart 8 : Gross margin Chart 9 : EBIT margin

24% 14 %

22.6% 12 . 2 % 22% 12 %

20.2% 10 % 20% 9.4% 18 . 9 % 19 . 4 % 8.6% 8% 9.2% 19 . 2 % 18 % 18 . 8 % 7.1% 6.6% 6% 16 . 6 % 6.2% 16 % 4%

14 % 2%

12 % 0% 2007 2008 2009 1Q10 2Q10 3Q10 9M10 2007 2008 2009 1Q10 2Q10 3Q10 9M10

Gross margin EBIT margin

Source: Company data Source: Company data

Drake & Scull | Investment View | 10 March 2011 859

Table 3 : Projects awarded during January 2010-February 2011 period

Contract cost Business Announced Project Country Project name Client Description (AEDm) stream date completion

The Centro Hotel, Capital Center is a hotel by Rotana, the hotel Centro Hotel - Capital UAE - Abu Dhabi 64 MEP Jan-10 22 months Rotana Hotels management company in the MENA - located in the ADNEC Centre complex in Abu Dhabi.

Drake & Scull Water & Power LLC (DSWP) was awarded the utilities development works contract at the Residential Compound in Khalifa Khalifa A City District UAE - Abu Dhabi 118 WP Jan-10 NA NA A City, Abu Dhabi. The contract is to develop a 20,000 tonne chiller Cooling plant and two thermal storage tanks with a capacity of 12,500TRH each was awarded.

College of Health Sciences DSI for Electrical Contracting Kuwait (DSK) was awarded two 65 contracts within the education sector in Kuwait City by the Kuwaitfor Girls MEP Jan-10 4 years Government government of Kuwait as part of its 2010 USD104bn four-year Nursing Institute of the 26 economic stimulus plan Shuwaikh campus

Arabian The five-star hotel is being developed on Abu Dhabi’s Sowwah UAE - Abu Dhabi Rosewood Hotel 187 MEP Feb-10 NA Construction Island and DSI plans to supply MEP works to the Rosewood Hotel. Company The five-star hotel is set to open in the first quarter of 2012.

Lakeside Project 371 Gulf Technical Construction Company (GTCC), a subsidiary of DSI, will work on Damac Properties’ Lakeside, a residential project UAE - Dubai Civil Mar-10 NA Damac Properties comprised of four towers located in International Media Production The Corner 113 Zone and The Corner, a 15 storey commercial building in Business Bay.

The compound is a mixed-use community development occupying Residential, Leisure and 232,735 sqm west of the Khalifa A City. The project involves UAE - Abu Dhabi Commercial Compound 100 WP Mar-10 NA NA working on infrastructure such as sewer lines, irrigation, and all Infrastructure related civic works. It is set to be completed in 2011.

Sohar Court Complex 19 14 months Drake and Scull International Oman (DSO) has won two contracts Oman Oman MEP May-10 worth USD12m (OMR4.6m) to supply MEP works to government- Government Oman National Museum 25 17 months owned projects.

Saadiyat Beach Tourism 130 DSI won the contract for the complete MEP works for the two Apartments Development and UAE - Abu Dhabi MEP Jun-10 18 months projects, which include the supply, installation, testing and Investment commissioning of the entire electro-mechanical works. Abu Dhabi Court Complex 110 Company (TDIC)

Damac Properties awarded an AED450m contract for its Al Kingdom of Saudi Al Jawahara Tower 450 Civil Jun-10 28 months Damac Properties Jawharah project in Jeddah to DSI’s Civil contracting arm in Saudi Arabia Arabia (DSC KSA)

DSI was awarded the MEP works which include the supply and Information Technology Rayadah Kingdom of Saudi installation of air conditioning, plumbing and drainage, cabling, small and Communications 460 Civil Jul-10 2012 Investment Arabia power & lighting systems, etc. This overall project will span over an Center (ITCC) Company area of 776,000 sqm.

Phase I: 2012 DSI was awarded a design and build contract for two district cooling Qatar Heart of Doha 182 WP Jul-10 Dohaland 2016 plants in Heart of Doha.

Kuwait Arabella Complex 9 MEP Jul-10 NA NA Arabella is a food court in Kuwait.

CAMPCO The project is a labour accomodation building with an area of 49,425 UAE - Abu Dhabi CAMPCO 130 Civil Sep-10 Nov-11 Properties LLC sqm and will accommodate 5,000 workers when completed.

Gardenia Real DSI was awarded the MEP works contract for the five-star hotel with Syria Gardenia Hotel 85 MEP Sep-10 Jun-12 Estate Investment a total built-up area of 84,000 sqm.

Engineering, Procurement, Construction and Operation The project involves design and construction of district colling plant Kingdom of Saudi (EPCO) contract for a 290 WP Nov-10 18 months NA with a capacity of 35,000 tonnes. DSI will also be responsible for Arabia District Cooling plant in operation and maintenance of the project. Riyadh

Supply, installation, testing and commissioning of mechanical, electrical & plumbing, or MEP, works for two projects in Oman and UAE/Oman NA 100 MEP/Civil Dec-10 NA NA the complete civil construction and MEP works for another project in Dubai

Abu Dhabi Presidential Abu Dhabi The project involves managing the complete MEP works of the Abu Dhabi 340 MEP Dec-10 Early 2013 Palace government presidential palace

The project includes complete MEP works, including the design Oman Government project 160 MEP Jan-11 NA Oman government supply, installation, testing and commissioning of the project

Qatari Diar Real A mixed used development including the construction of hotel and Egypt Nile Corniche project 465 MEP Jan-11 2014 end Estate Investment service apartments. DSI will be managing the MEP works. Company

King Abdullah Petroleum Kingdom of Saudi Studies and Research 2,000 Civil/MEP Feb-11 Aug-12 Saudi Aramco Involves constrcution of studies and research centre. Arabia Center project

Total worth of contracts won 5999

Source: Company data

Drake & Scull | Investment View | 10 March 2011 1086

Shareholder information The public owns 55% of DSI shares, while the founders own the remaining 45% (CEO at 43% and others at 2%). The company allows foreign ownership of 49% of its shares, with the current level of foreign ownership being 17.6%. Table 4 provides the company’s current ownership status.

Table 4 : Shareholder composition

Holder % of outstanding shares KRT2 Limited 9.18 KRT3 Limited 8.63 Khaldoun Rashid Tabari 8.25 Al Mal Capital 5.79 SHUAA Partners Fund l, LP 3.60 Other investors 9.55 Public 55.00

Source: Zawya

Chart 10 : Historical trend in foreign ownership

60%

50%

40%

30%

20%

10%

0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Foreign ownership limit* Current foreign ownership

Source: Dubai Financial Market Exchange

Management profiles The profiles of DSI’s key personnel are listed in Tables 5 and 6.

Table 5 : Snapshot of DSI board of directors

Name Position Background Majed Saif Al Ghurair Chairman Also CEO of Al Ghurair Private Company and managing director of Gulf Extrusions Co and Arabian Can Industry. Holds a Bachelor in Accounting degree from Al Ain University and was voted the Business Leader Personality of the Year within the UAE in 2004. Khaldoun Rashid Tabari Vice Chairman With DSI for more than 12 years, Tabari also serves as a board member for EMCOR Facilities Services Group (ME), Waltech, Cedar Mills and Jordan Fleet Leasing Company.

Source: Company data

Drake & Scull | Investment View | 10 March 2011 1187

Table 6 : Key management personnel

Name Position Background Osama Hamdan Chief Financial Has 15 years’ experience working for Fortune 500 companies in Officer the US. Prior to joining DSI, Hamdan was CFO for Gulf Cryo Holding and Tamdeen Shopping Centre Development, both in Kuwait. Possesses an M.B.A. in Finance, Marketing and Quantitative Analysis from California Polytechnic University, USA and a BSc in Finance, Accounting and Management from American University of Beirut, Lebanon. Michael Salmon Chief Commercial Has more than 40 years of experience in the engineering and Officer construction industry. Has held senior management positions with Gammon Construction and was the commercial director for EMCOR Infrastructure and Rail Services. Zeina Tabari Chief Corporate Manages all communication between DSI, the financial Affairs Officer community and other stakeholders Tawfiq Abu Soud Executive Director - An executive board member, with more than 25 years of Water and Power experience in the oil, gas and MEP contracting field. The longest serving executive at DSI at 13 years. Has a Masters of Business Administration from the University of Hull, UK and a BSc in mechanical engineering from Southern Illinois University, USA. Saleh Muradweij Executive Director - An executive board member, with more than 20 years of Civil professional experience in the GCC. Holds a Master of Science and Bachelor of Science degree in Civil Engineering from Bradley University, USA.

Source: Company data

Key joint ventures and partnerships In 2008, Drake and Scull International PJSC, through Gulf Technical Construction Co LLC, held a 50% interest in Ranya Test Joint Venture, with Ranya General Contracting Company LLC. In 2009, DSI formed a strategic alliance with Assyce Group to develop alternate energy products for the telecoms sector in the Middle East and Africa.

Table 7 : Snapshot of key joint ventures/partners/alliances

Partner/associate Country Background Share in joint Description venture (%) Ranya General UAE Ranya is involved 50 The Group, through Gulf Technical Contracting (RGC) in civil engineering, Construction Co LLC has formed Ranya Company power generation Test Joint Venture, a joint venture with and distribution, Ranya General Contracting Company electromechanical (LLC) under a joint venture agreement works and dated 12 August 2005. plumbing services Bilfinger Berger Germany A global developer 82 In November 2009, DSI acquired 82% of of wastewater, Passavant-Roediger, which is in water and sludge partnership with Bilfinger Berger, a treatment publically listed German company technologies internationally active in construction services. Assyce Group Spain Provider of Partnership DSI formed a strategic alliance with Assyce specialist solutions Group to develop alternate energy products in the field of for the telecom sector in the Middle East renewable and and Africa. The alliance sustainable energy has been agreed based on the two companies’ recent activities in the development of a grid-free telecom solution and will focus on expanding the portfolio of products through custom-made value engineered solutions. Zamil Group Holding Saudi Zamil Group JV The venture has been done to create a Company Arabia Holding Company synergy between Zamil Group’s strong is a Saudi family- presence in the region and DSI’s expertise owned global and reputation in the MEP, WP and cicil investment space. company with diverse industrial, petrochemical, commercial and consumer interests worldwide

Source: Company data, Bi-me.com

Drake & Scull | Investment View | 10 March 2011 1288

Income statement

Dhm FY09A FY10A FY11F FY12F FY13F Revenue 1917 1854 2382 2601 2799 Cost of sales -1529 -1516 -1977 -2178 -2362 Operating costs -123.8 -150.0 -132.1 -124.6 -117.3 EBITDA 263.9 187.7 272.8 297.8 319.9 DDA & Impairment (ex gw) -83.0 -62.9 -68.7 -82.6 -92.9 EBITA 180.9 124.8 204.1 215.2 227.0 Goodwill (amort/impaired) 0.00 0.00 0.00 0.00 0.00 EBIT 180.9 124.8 204.1 215.2 227.0 Net interest 28.7 11.5 -6.71 -10.6 -10.0 Associates (pre-tax) 0.00 0.00 0.00 0.00 0.00 Other pre-tax items 57.6 24.1 23.8 26.0 28.0 Reported PTP 267.2 160.5 221.2 230.7 244.9 Taxation -0.86 4.67 0.00 0.00 0.00 Minority interests -5.60 -0.72 -5.53 -5.77 -6.12 Other post-tax items 0.00 0.00 0.00 0.00 0.00 Reported net profit 260.7 164.4 215.7 224.9 238.8 Tot normalised items 0.00 0.00 0.00 0.00 0.00 Normalised EBITDA 263.9 187.7 272.8 297.8 319.9 Normalised PTP 267.2 160.5 221.2 230.7 244.9 Normalised net profit 260.7 164.4 215.7 224.9 238.8

Source: Company data, Rasmala forecasts year to Dec

Balance sheet

Dhm FY09A FY10A FY11F FY12F FY13F Cash & market secs (1) 878.4 523.0 568.5 525.3 595.2 Other current assets 2240 2670 3344 3623 3847 Tangible fixed assets 211.5 214.4 281.6 388.6 441.2 Intang assets (incl gw) 821.8 902.2 868.6 835.1 801.5 Oth non-curr assets 249.0 122.2 122.2 122.2 122.2 Total assets 4401 4431 5185 5494 5807 Short term debt (2) 503.5 520.2 520.2 520.2 520.2 Trade & oth current liab 1157 1196 1560 1719 1864 Long term debt (3) 159.9 147.3 387.3 387.3 387.3 Oth non-current liab 64.3 41.4 41.4 41.4 41.4 Total liabilities 1885 1905 2509 2668 2813 Total equity (incl min) 2515 2526 2676 2827 2995 Total liab & sh equity 4401 4431 5185 5494 5807 Net debt -215.0 144.6 339.0 382.2 312.3

Source: Company data, Rasmala forecasts year ended Dec

Cash flow statement

Dhm FY09A FY10A FY11F FY12F FY13F EBITDA 263.9 187.7 272.8 297.8 319.9 Change in working capital -325.0 -337.4 -293.0 -109.7 -173.0 Net interest (pd) / rec -58.8 1.28 2.91 2.39 1.85 Taxes paid -1.39 0.00 0.00 0.00 0.00 Other oper cash items -52.4 16.7 3.30 12.8 120.2 Cash flow from ops (1) -173.7 -131.7 -13.9 203.3 269.0 Capex (2) -16.2 -29.6 -102.4 -156.0 -112.0 Disposals/(acquisitions) 1.75 0.13 0.00 0.00 0.00 Other investing cash flow -418.9 -124.3 31.2 34.8 35.3 Cash flow from invest (3) -433.4 -153.8 -71.2 -121.2 -76.6 Incr / (decr) in equity 0.00 0.00 0.00 0.00 0.00 Incr / (decr) in debt 263.5 24.8 240.0 0.00 0.00 Ordinary dividend paid 0.00 -151.4 -71.4 -79.9 -77.1 Preferred dividends (4) 0.00 0.00 0.00 0.00 0.00 Other financing cash flow -240.3 -107.2 -37.9 -45.4 -45.4 Cash flow from fin (5) 23.2 -233.8 130.7 -125.2 -122.5 Forex & disc ops (6) -2.95 -19.7 0.00 0.00 0.00 Inc/(decr) cash (1+3+5+6) -586.8 -539.1 45.6 -43.2 69.9 Equity FCF (1+2+4) -189.9 -161.3 -116.3 47.2 157.0

Source: Company data, Rasmala forecasts year to Dec

Drake & Scull | Key Financial Data | 10 March 2011 89

Company description Buy Price relative to country

Drake & Scull International PJSC (DSI) is one of the largest integrated construction companies in the United Arab 150

Emirates (UAE) by market cap (Dh2.1bn as at 9 March 2011). The company was formed through the merger of 140 electrical company (Drake and Gorham) and plumbing company (Arthur Scull & Son) in 1964. DSI was 130 established in Abu Dhabi in 1966 and in Dubai, where it is currently headquartered, in 1976. It was listed on the 120 Dubai Financial Market (DFM) in March 2009. At end 2009, DSI reported around 12,000 employees. DSI is a 110 vertically integrated company specialising in engineering solutions in the following business segments: 100 Mechanical, Electrical and Plumbing (MEP) services; Civil contracting services; and Infrastructure, Water and 90 Power (IWP) services. 80 Mar May Jul Oct Dec Mar May Jul Sep Dec Feb 09 09 09 09 09 10 10 10 10 10 11

Price relative to country

Strategic analysis Average SWOT company score: 3 Revenue breakdown, FY11F

Strengths 4 IWP MEP DSI has a vertically integrated model with solid geographic diversification, including declining Dubai exposure. Its 11% 55% Civil direct presence in Saudi Arabian market strengthens its business model in the long run. 34% Weaknesses 2 DSI's dependence on the UAE remains high as the country still accounts for around 31% of its February 2011 end estimated backlog (ex-Durrat Al Bahrain).

Opportunities 3 Source: Rasmala forecasts These include expanding into growth markets such as Saudi Arabia and Egypt. Abu Dhabi infrastructure may be a growth catalyst, although we remain cautious of opportunity timing given the high degree of competition. Market data Threats 2 Project delays cannot be ruled out in the UAE, and in particular could have a direct impact on backlog and growth Headquarters Drake and Scull Building, Dubai Investment expectations. Park, UAE Website Scoring range is 1-5 (high score is good) www.drakescull.com Shares in issue 2177.8m Freefloat 55% Majority shareholders KRT2 Limited (9%), KRT3 Limited (9%), Khaldoun Rashid Tabari (8%)

Competitive position Average competitive score: 3+ Broker recommendations

Supplier power 2- Low - DSI makes payments in line with its cash inflows from end customer, hence working capital risk is limited. 12 Barriers to entry 3+ 10 8 High - DSI's need to develop regional relationships and raise funding in a down-market will likely pose strong 6 headwinds for new entrants. 4 Customer power 2- 2 0 Medium - Transaction activity is low as market sentiment remains soft. Buy Hold Sell Substitute products 4+

Low - DSI's integrated portfolio of MEP, IWP and Civil positions it well across various contracting businesses. Source: Bloomberg Rivalry 3+

High - Contracting has become a competitive market with both local and foreign players bidding for down-scoped opportunities.

Scoring range 1-5 (high score is good) Plus = getting better Minus = getting worse

Drake & Scull | Strategic and Competitive Overview | 10 March 2011 90

10 March 2011

Emaar Properties Initiation of coverage

Buy Unique value among peers

Target price Emaar is a tier-1 master developer with a strong rental portfolio and increasing Dh3.10 international exposure. International execution and financing challenges should Price Dh2.68 not be ignored, but we believe Emaar will continue to benefit from its unique Short term (0-60 days) business model's maturity relative to its peers. n/a Market view Key forecasts No Weighting

FY09A FY10A FY11F FY12F FY13F Total property income (Dhm) 8,413 12,150 8,278 7,207 5,449 Price performance Net rental income (Dhm) 1,510 1,960 1,771 1,665 1,665 Normalised PTP (Dhm) 2,028 3,006 2,305 2,218 1,998 (1M) (3M) (12M) Normalised EPS (Dh) 0.05 0.40 0.38 0.36 0.33 Price (Dh) 3.29 3.74 3.40 Normalised PE (x) 49.90 6.69 7.09 7.37 8.18 Absolute (%) -18.5 -28.3 -21.2 Dividend per share (Dh) 0.00 0.00 0.00 0.00 0.00 Rel market (%) -7.4 -13.7 -8.0 Dividend yield (%) 0.00 0.00 0.00 0.00 0.00 Rel sector (%) -12.5 -22.9 -19.8 Adj NAV per share (Dh) 4.70 5.10 5.47 5.84 6.17

Mar 08 Jan 09 Feb 10 NNNAV per share (Dh) 4.70 5.10 5.47 5.84 6.17 14 Disc/(prm) to adj NAV (%) 43.00 47.40 51.00 54.10 56.50 12 Net debt to tot ass (%) 9.09 10.60 6.09 0.71 -4.38 10 Accounting standard: IFRS year to Dec, fully diluted 8 Source: Company data, Rasmala forecasts

6 4 Rental and hospitality portfolio a crown jewel with upside 2 We estimate Emaar’s unique and tier-1 rental and hospitality portfolio accounts for 75% of 0 total company value with potential upside. While spin offs may unlock value, in the near term EMAR.DU DFM General Index Emaar might seek to drive up average rents and more favourable lease structures. However,

Market capitalisation we do not include this in our model as our fundamental view is that rents remain under Dh16.34bn (€3.20bn) pressure until 2012. If Emaar does increase rents in 2011 and beyond, we would likely see Average (12M) daily turnover upside to our thesis. Dh96.94m (US$24.29m) Valuation appears cheap even after discounting risk from ongoing regional unrest Sector: ADX Bank & Fin Index RIC: EMAR.DU, EMAAR UH Priced Dh2.68 at close 9 Mar 2011. Using a SOTP approach we value Emaar at Dh3.10 per share. We value Emaar’s rental and Source: Bloomberg hospitality portfolio at Dh2.32 per share and, in our view, this tier-1 portfolio, which comprises

almost 90% operational properties, would act as a floor for the share price. With the stock currently at Dh2.68, we believe the potential downside could be limited compared to Aldar and Sorouh, whose rental and hospitality portfolios account for only 26% and 37% of our target prices, respectively. We estimate Emaar’s properties for sale portfolio at Dh0.73 per share and, in our view, at the current stock level around 50% of the property for sale portfolio is available as a free option to investors. Also we completely exclude ongoing projects in Egypt valued at Dh0.30 per share on account of ongoing socio-political uncertainty. Analysts Near-term financing visibility relatively improved Saud Masud United Arab Emirates In our view, recent issues of US$500m straight debt (maturing in 2016) and US$500m +971 55 725 8596 [email protected] convertible (maturing in 2015), and expected net cash flow from operations over the next year will provide Emaar with enough liquidity to repay its short-term debt. Also the long-term Divya Arora United Arab Emirates nature of recently issued debt has helped Emaar to increase the duration of its liability +971 4 424 2784 portfolio and reduced short- to medium-term repayment risk. We factor in no dilution from the

Equity | United Arab Emirates Real Estate Investment & Services [email protected] convertible as the conversion price of Dh4.75 per share appears quite distant from the Dubai International Financial Centre, current price of Dh2.68 per share.

The Gate Village, Building 10, Level 1, P.O. Box 31145, Dubai, United Arab Emirates Important disclosures can be found in the Disclosures Appendix. Distributed outside MENA by The Royal Bank of Scotland N.V. and its affiliates under a strategic www.rasmala.com alliance with Rasmala Investment Bank Ltd.

The basics

Versus consensus Catalysts for share price performance Given the significant exposure of Emaar to Egypt and Saudi Arabia, we beileve sociopolitical EPS Ours Cons % diff uncertainty in Egypt, and the potential spread of unrest into Saudi Arabia, may affect Emaar’s 2011F 0.38 0.41 -7.3% operational traction in these countries and could be an overhang for the stock. Alternatively should 2012F 0.36 0.44 -18.2% 2013F 0.33 0.26 26.9% we find regional unrest being mitigated via unilateral or bilateral efforts to implement socioeconomic refoms, we believe investor confidence may be restored; a positive catalyst for Source: Bloomberg, Rasmala forecasts equities. In six to 12 months, should Emaar see strength in average rents, especially at the Dubai Mall, we would expect further upside to its share price performance. Earnings momentum We expect Emaar’s EPS to peak in 2012 as Dubai-based project handovers near completion. We then expect its earnings to decline in 2013 on account of a drop in delivery volumes. However, we believe the decline in earnings would be less than that in revenue as a mixshift towards the higher-margin rental and hospitality portfolio should somewhat offset the fall in earnings from lower volumes. Valuation and target price Forced ranking* We base our target price for Emaar on a SOTP valuation. Our target price implies 15.7% upside Company Rec Upside / potential from the current level. We estimate 75% of Emaar’s fair value is accounted for by its Downside rental and hospitality portfolios combined, with development properties accounting for 24%. DSI Buy 15.8% Emaar Buy 15.7% How we differ from consensus Arabtec Hold 6.6% Sorouh Hold 6.5% Our forecast for 2011 revenue is Dh8,278m versus the Bloomberg consensus estimate of Aldar Hold 6.1% Dh9,942m as we expect handovers to occur later than the company is guiding. Overall, our 2011-

* By difference to target price as at time of 14 cumulative revenue estimate of Dh25.5bn is 6% below the consensus estimate of Dh27bn. publication. Recommendations may lie outside the structure outlined in the Risks to central scenario disclosure page. Source: Rasmala forecasts Our thesis is based on a high likelihood of depopulation risk, largely centered around Dubai. However, if actual population dynamics prove contrary to our view, we believe there could be meaningful upside to our estimates for the property sector and Emaar. If our view proves to be conservative, we would likely see more resilience in house prices, rental values and overall domestic demand and consumption.

Emaar is one of the most liquid MENA stocks and may be negatively affected should the current regional political unrest linger or spread. Key events

Date Event 21/04/2011 1Q11 results

Source: Bloomberg

Emaar Properties | The Basics | 10 March 2011 922

Key assumptions and sensitivities

Based on our sensitivity check, our bull case results in a valuation of Dh4.22, about 36% above the base case. Our bear case results in a valuation of Dh2.53, about 18% below the base case. We see this as indicating a favourable risk-reward balance.

Major assumptions Base case: In our base case we totally exclude the NPV of ongoing projects in Egypt from our valuation. We assume average occupancy of 88% for investment properties and 78% for hospitality properties. We also factor in a 12% fall in rent prices in 2011-12.

Bear case: In our base case we totally exclude the NPV of ongoing projects in Egypt from our valuation. We assume average occupancy of 83% for investment properties and 73% for hospitality properties, and a fall in rentals of around 12% in 2011-12, with handovers 10% below the base case.

Bull case: Our bull case factors in 50% of the NPV of ongoing projects in Egypt; average occupancy of 94% in investment properties and 86% in hospitality properties. We assume flat rentals.

Table 1 : Sensitivity analysis

Base case Bear Case Bull case Value Value per Value Value per Value Value per (Dh m) share (Dh) (Dh m) share (Dh) (Dh m) share (Dh) Properties for sale 6,104 1.00 4,313 0.71 7,440 1.28 Investment properties 16,649 2.73 13,745 2.26 18,073 3.00 Hospitality 2,732 0.45 2,432 0.40 3,226 0.54 Total value of the properties 25,484 4.18 20,490 3.36 28,738 4.81 Other assets 338 0.06 197 0.03 2,572 0.42 Total value of the assets except cash 25,870 4.24 20,687 3.39 31,310 5.23 Net debt -6,364 -1.04 -6,358 -1.04 -6,364 -1.04 Other liabilities -2,879 -0.47 -723 -0.12 -2,998 -0.48 Total equity value 16,626 2.73 13,606 2.23 21,947 3.71 One year price target 3.10 2.53 4.22 Upside/downside to our base case -18.2% 36.2%

Source: Company data, Rasmala estimates

Emaar Properties | The Basics | 10 March 2011 933

Earnings model

We forecast total revenues will trend downwards, from Dh8,278m in 2011 to Dh4,560m in 2014, mainly due to falling revenues from property sales as Emaar hands over most of its units under construction in major Dubai-based projects in 2010-12.

We expect Emaar to deliver around 4,850 units between 2011 and 2012, with deliveries in Dubai comprising around 32% of the total. However, in terms of top line, Dubai will remain a major contributor, as most deliveries internationally will be tied to the emerging markets, where prices are still much lower than in Dubai. Thereafter, we expect Emaar’s business model to become more levered to the delivery of projects in international markets.

We estimate investment property and hospitality segments will contribute about 39% of total revenue in 2011-14, providing a stable source of cash flow to Emaar to cover its operating costs and a portion of its capex. However, overall we forecast revenues from investment properties and hospitality properties will slide downward over 2011-12 as rentals fall a further 10-15% over the period.

Table 2 : Forecasts overview

(Dh m) 2011F 2012F 2013F 2014F Revenue from property sales 5,718 4,770 2,990 2,092 Revenue hospitality 789 772 794 766 Revenue from investment 1,771 1,665 1,665 1,703 properties Total revenue 8,278 7,207 5,449 4,560 Gross margin 40.3% 41.1% 44.3% 47.3% EBIT margin 24.2% 23.9% 24.9% 26.8% EPS (Dh) 0.38 0.36 0.33 0.33

Source: Rasmala forecasts

Funding profile Examining Emaar’s debt maturities and funding needs we note that, as of 3Q10, 48% of its total debt is current, with 80% due by 2012. We believe Emaar will be able to repay or refinance its debt obligations, both domestic and foreign, including Turkey. In our view, recent issues of US$500m straight debt (maturing in 2016) and US$500m convertible (maturing in 2015), and expected net cash flow from operations over the next one year will provide Emaar with enough liquidity to repay its short-term debt. Also, the long-term nature of recently issued debt has helped Emaar to increase the duration of its liability portfolio and has reduced short- to medium-term repayment risk. Our funding gap assessment of Emaar’s consolidated balance sheet below highlights a surplus of Dh3.2bn by the end of 2012.

Chart 1 : Loan maturity schedule as of 3Q10 (Dh m)

4500 4,028 4000

3500

3000

2500 2,338

2000 1,591 1500 1,102 1000 777

500 98 0 2010 2011 2012 2013 2014 2015 2016 2017

Source: Company data

Emaar Properties | Investment View | 10 March 2011 944

Chart 2 : Debt breakup – current vs non- Chart 3 : Debt breakup – secured vs current as of 3Q10 (Dh m) unsecured as of 3Q10 (Dh m)

5,200 5,157 100% 7,000 100% 90% 6,295 5,100 90% 80% 6,000 80% 5,000 70% 5,000 70% 60% 63% 4,900 60% 52% 4,000 3,637 50% 48% 50% 4,800 4,776 40% 3,000 40% 37% 4,700 30% 2,000 30% 20% 20% 4,600 10% 1,000 10%

4,500 0% - 0% Current Non-current Secured Unsecured Loan value % of total Loan value % of total

Source: Company data Source: Company data

Table 3 : Funding analysis, 2011-12F

(Dh m) Cash outflows Capex -3,748 Operating expenses -3,511 Net interest cost -455 Debt payment -7,355

Cash inflows Cash from property sale 5,766 Cash from recurring income/others 5,238 Cash from convert and straight debt 3,670

Liquidity on the balance sheet as of 4Q10 Cash + deposits 2,783 AFS financial assets 776

Funding surplus 3,163

Source: Company data, Rasmala forecasts

Valuation We value Emaar at Dh3.10 per share on a sum-of-the-parts DCF approach. Based on our estimates, Emaar’s major capex investments in building a top-tier investment and hospitality portfolio provides its share price a floor value of Dh2.32 per share, ie, 75% of its total value. With the stock currently at Dh2.68, we believe the potential downside could be limited compared to that for Aldar and Sorouh, whose rental and hospitality portfolios account for only 26% and 37% of our target prices, respectively. Also, in Emaar’s case, around 90% of this rental and hospitality portfolio is already operational compared to Aldar and Sorouh, at 50% and 55%, respectively. We estimate Emaar’s properties for sale portfolio at Dh0.73 per share, or 24% of our target price, driven mostly by deliveries of residential and commercial units in Dubai-based projects and, in our view, at the current stock level around 50% of this portfolio is available as a free option to investors. We completely exclude ongoing projects in Egypt valued at Dh0.30 per share on account of ongoing socio-political uncertainty. We factor in no dilution from the recently issued US$500m convertible as the conversion price of Dh4.75 per share appears quite distant from the current price of Dh2.68 per share.

We value properties for sale, investment properties and hospitality segments using a discounted cash flow approach as we believe this rightly captures the value potential at the project level. We have excluded land bank from our valuation as we believe the land bank is not easily monetisable in the current market conditions. In our DCF analysis we use a WACC of 12.2% and a terminal growth rate of 3%. Our WACC estimate is based on a cost of debt of 5% and a cost of equity of 14.5%. We derive our cost of equity using a risk-free rate of 4.0%, an equity market-risk premium of 7% and a beta of 1.5.

Emaar Properties | Investment View | 10 March 2011 955

Chart 4 : Current target price decomposition by segment

3.50 0.05 3.10 0.33 3.00 1.99

2.50

2.00

1.50

1.00 0.73

0.50

0.00 Properties for sale Investment properties Hospitality Other assets Target price

Source: Rasmala estimates

Chart 5 : Current target price percentage decomposition by segment

Other assets Hospitality 1% Properties for sale 11% 24%

Investment properties 64%

Source: Rasmala estimates

We estimate UAE accounts for nearly 74% of Emaar’s enterprise value, followed by Saudi at 10% and others at 16%. In our EV we exclude Egypt on account of ongoing socio-political uncertainty. In Dubai, we believe most of Emaar’s value, ie, 85-90%, is driven by its rental and hospitality assets, including Dubai Mall. We believe the remaining 10-15% is accounted for by development properties from downtown Burj Dubai and other projects.

Chart 6 : Current enterprise value (ex-other assets) geographical decomposition

Others 16% UAE 74%

Saudi Arabia 10%

Source: Rasmala estimates

Emaar Properties | Investment View | 10 March 2011 966

Emaar Properties PJSC

Emaar Properties is the largest tier-1 developer by market cap in the MENA region, with a high-quality recurring income portfolio of investment and hospitality properties that contributed 26% to the top line in 9M10.

Company background

Emaar is the largest real estate Emaar Properties (Emaar), based in the UAE, is the largest listed real estate developer in the developer in the MENA region by Middle East and North Africa (MENA) region by market cap (Dh16.3bn as of 9 March 2011). The market cap company listed on the Dubai Financial Market in 2000.

Alongside the government-owned Nakheel and Dubai Holdings, Emaar is one of the main master- developers in Dubai. It is engaged in property investment and development; provides property management services; engages in retail, hospitality, education, and healthcare businesses; and invests in providers of financial services in the UAE and in over 17 international markets. It reported holding a land bank of c260m sqm and having delivered 31,370 residential units by the end of 1H10.

The Government of Dubai Emaar was established in June 1997 with a paid-up capital of Dh1.0bn. It commenced operations indirectly holds 31.2% of Emaar’s in July of that year, and in 1998 the shareholders decided on a two-step capital increase which shares included a 1:1 rights issue and an extra preferential issue of 65m shares to be allocated to the Government of Dubai. Emaar has historically benefitted from its close ties with the Government of Dubai, which indirectly holds 31.2% of its shares (Table 6).

It has emerged as a developer of Beginning with the government’s land grant in 1998, Emaar has grown rapidly in the UAE and the master-planned communities from MENA region. Initially, Emaar catered to Dubai’s growing need for housing by developing mass- being a mass-market residence market residences. Subsequently, however, it changed its strategy to emerge as an integrated developer real estate developer with a focus on master-planned communities.

In 1998, Emaar conceived the cDh73bn Downtown Dubai project, which comprised the Dubai Mall, several residencies and the Burj Khalifa. In the UAE, significant Emaar projects also include the Dubai Marina development, Arabian Ranches, and Emirates Living. Since 2005, Emaar has significantly increased its international operations. Its strategy is to take its model of master- planned communities, which has proved successful in the UAE, across borders to emerging markets such as India and Egypt.

Emaar Properties | Investment View | 10 March 2011 977

Emaar Properties |InvestmentView |10March 2011

Figure 1 : Emaar group structure

EmaarGroupPJSC

Emaar Dubai EmaarInternational EmaarInvestments Malls Hotel & Hospitality Healthcare Property Development 100% Resorts 100% 100% Projects– 100% 100%

MGF- India KSA – EEC Turner Int’l ME Dubai Mall Giorgio Armani Nuran LLC Emrill Services 45.5% 30.50% 50% 100% 100% 33.33%

District Cooling APIC-India Turkey Dubai Bank Emaar Retail The Adress 100% 74% 100% 30% 100% Hotels 100%

Capital Partner Syria EmaarPakistan Emaar Financial Int’l Malls 100% 60% 67% Services 38% 100% Emaar Hotel Management

National Emaar Onapar Misr– Egypt Reel Cinema Amlak Investments JV (Morocco) 100% 100% 100% 48.08% Emaar Leisure Group

Canada Emaar Utilities Morocco T,S&O 100% Industries & 100% 100% Investments 40% Emaar Int'l Hospitality Lebanon 100% MENAHamptons KSA – EME 60% 100% 61%

EJL Homes JV with Bawadi Int’l Jordon 100% 50% 100%

Dead Sea Co. of Tourism

Source: Company data

8 98

Major ramp up of the hospitality Property sales remain Emaar’s main source of revenue, accounting for 74.1% of its total revenue and investment portfolio has for 9M10. Emaar has gradually built in a portfolio of recurring income (investment properties), with increased its share in the total a leasable area of 0.65m sq m, contributing 17.9% to the total revenue as of 9M10 compared to revenue to 25.9% during 9M10 from 10.1% in 2008 4.7% in 2008 (Chart 7). The recurring property portfolio acts as a stable source of cash inflows for Emaar to fund its operating costs and a portion of its capex on development and investment properties.

Chart 7 : Segmental revenue break up

100% 1.6% 4.7% 5.4% 90% 1.7% 17.9% 16.2% 16.5% 15.7% 17.9% 7.1% 80% 7.9% 8.2% 8.9% 7.9% 70%

60%

50% 96.7% 90.0% 40% 74.1% 75.6% 74.6% 77.3% 74.1% 30%

20%

10%

0% 2007 2008 2009 1Q10 2Q10 3Q10 9M10

Property development and sales Hospitality Investment properties

Source: Company data

Chart 8 : International operations revenue

International 4.69%

Revenue from international operations looks miniscule, however, it is expected to increase significantly over the next three to four years

UAE 95.31%

UAE International

Source: Company data

Emaar Properties | Investment View | 10 March 2011 999

Chart 9 : Annual revenues (Dh m) Chart 10 : Quarterly revenues (Dh m)

20 17.9 4.5

18 4.0 3.8 16 14.0 3.5 14 3.0 2.9 3.0 2.8 12.2 2.7 12 10.7 2.5 10 8.4 1.9 1.9 2.0 8 1.5 1.5 6 1.0 4 0.5 2

0 0.0 2006 2007 2008 2009 2010 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Source: Company data Source: Company data

Despite overall revenues sliding Despite the steep fall in the property prices, Emaar has been able to maintain its gross margin at down, delivery volumes still 35-40%. remain meaningful Chart 11 : Gross margin Chart 12 : EBIT margin

60% 35% 48.8% 32.6%

30% 28.8% 50% 48.7% 27.6% 29.2% 25.2% 42.4% 25% 22.9% 40% 39.5% 37.4% 41.6% 18.9% 20% 30% 21.4% 37.1% 31.1% 15% 20% 10%

10% 5%

0% 0% 2007 2008 2009 1Q10 2Q10 3Q10 4Q10 2010 2007 2008 2009 1Q10 2Q10 3Q10 4Q10 2010

Source: Company data Source: Company data

Ongoing construction activity and operational investment properties

Table 4 : Snapshots of ongoing domestic projects for sale

Delivery schedule Project name 2011 2012 2013 Downtown Dubai –residential (units) 320 947 749 Downtown Dubai – commercial (sq ft 000) 1,205 - - Dubai Marina – commercial (sq ft 000) 758 - - Arabian Ranches – residential (units) 71 18 - Umm Al Quwain Marina – residential (units) 277 - - Total residential (units) 668 965 749 Total commercial (sq ft 000) 1,963 - -

Source: Company data

Emaar Properties | Investment View | 10 March 2011 10010

Table 5 : Snapshots of ongoing international projects for sale

Delivery schedule (units) Country Entity 2011 2012 2013 Egypt Emaar Misr 655 1,069 1,106 KSA Emaar Middle East 211 284 484 Pakistan Emaar DHA Islamabad 102 145 99 Pakistan Emaar GIGA Karachi - 294 300 Syria Emaar IGO 31 43 36 Morocco Emaar Tinja - 73 63 Canada Emaar Properties (Canada) Ltd. 69 - 52 Turkey Emaar Turkey 26 79 466 Lebanon Metn Renaissance 87 154 147 Others Associates 2,533 3,869 4,246 Total 3,714 6,010 6,999

Source: Company data

Emaar has a tier-1 rental and hospitality operational portfolio with properties such as Dubai Mall, the biggest mall in the world with GLA of 0.34m sq m, and a chain of The Address brand hotels in Dubai. Overall, in Dubai, Emaar has nine hotels and resorts, with 1,457 keys and 462 service apartments. Its retail portfolio has a total GLA of 0.65m sq m.

Shareholder information The Government of Dubai continues to be the largest shareholder, holding 31.2% of Emaar’s shares at October 2010. The company allows foreign ownership of 49% of its shares; however, the current level of foreign ownership has been at a significantly lower level of 8.6%, indicating a lack of foreign investor participation due to the prevailing market and economic uncertainties.

Table 6 : Shareholder composition

Holder's name % of outstanding shares Investment Corporation of Dubai 31.22% Public 68.78%

Source: Zawya

Chart 13 : Historical trends in foreign ownership

60%

50%

40%

30%

20%

10%

0% 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Foreign ownership limit Current foreign ownership

Source: Dubai Financial Market Exchange

Emaar Properties | Investment View | 10 March 2011 10111

Management profile Emaar has about 5,000 employees.

Table 7 : Board of directors

Name Position Background Mohamed Ali Alabbar Chairman Founder of Emaar Properties. He is also the Chairman of the Bahrain- based Al Salam Bank-an Islamic bank, a Board Member of Noor Investment Group-an affiliate of Dubai Group, the leading diversified financial company of Dubai Holding. Alabbar holds an Honorary Doctorate in Humanities and is a graduate in Finance and Business Administration, both from Seattle University in the United States. Hussein Al Qemzi Vice Chairman Al Qemzi is a Non-Executive Director and was appointed to the Board as Vice Chairman of Emaar on 8 March 2006. He is also a member of the Nominating and Remuneration Committee. Majid Saif Al Ghurair Director Non-Executive Director and Chairman of the Audit and Internal Control Committee. He was appointed to the Board of Emaar on 8 March 2006. Ahmed Jamal Jawa Director Non-Executive Director and Chairman of the Nominating and Remuneration Committee. Was appointed to the Board on 8 March 2006. Khalifa Hassan Director Appointed to the Board on 29 April 2009. He is a member of the Audit Aldaboos and Internal Control Committee of the Company since March 2010. Saeed Ahmad Al Tayer Director Appointed to the Board on 29 April 2009. He is a member of the Nomination and Remuneration Committee of the Company since March 2010. Ahmad Thani Al Director Executive Director. Appointed to the Board on 8 March 2006. Matrooshi Dr Lowai Belhoul Director Belhoul is a Non-Executive Director and [Member of the Audit and Internal Control Committee.

Source: Company data

Table 8 : Key management

Name Position Background Ahmed Thani Al Managing Director Joined Emaar in 2005. Matrooshi Low Ping Executive Director - Finance & Risk Joined Emaar in 2002. Ayman Hamdy Executive Director - Legal & Company Joined in 2006 and was assigned the additional Secretary responsibilities of Company Secretary in 2007. Amit Jain Group Chief Financial Officer Joined Emaar in 2006. Kenneth Foong Chief Information Officer Joined Emaar in 2007. Mohamed El Dahan Executive Director - Internal Audit Joined Emaar in 2005 as Executive Director. Issam Galadari Chief Executive Officer - Emaar Dubai Joined Emaar in 2000. LLC Naaman Atallah Chief Operating Officer Joined Emaar in 2004.

Source: Company data

Key joint ventures and partnerships In the international markets it caters to, Emaar operates through its wholly owned subsidiaries such as Emaar Misr for Development SAE and Emaar Properties Gayrimenkul Gelistirme AS, Turkey, or through joint ventures with local players. It also holds capital shares in associated companies throughout the region.

Emaar Properties | Investment View | 10 March 2011 10212

Emaar Properties |InvestmentView |10March 2011

Table 9 : Description of key joint ventures and partnerships

Partner/associate Country Background Description Project Development Construction Number of units/land size type* to commence - anticipated completion date* The joint-venture agreement with Bawadi LLC is to jointly develop Member of Tatweer, a Dubai Holdings (ownership land in Bawadi development in Dubai. According to the terms of UAE subsidiary of Dubai Bawadi Mixed-use 2008-2017 19,000 units/6.5m sqm of land 50%) the agreement, the group is committed to contribute Dh3.8bn Holding over the expected construction period of seven to 10 years In 2005, the Saudi Arabian General Investment Authority Residential 250,000 apartments and 25,000 (SAGIA) teamed up with Emaar Properties to build the development- Residential 2006-2025 villas DhD97.6bn King Abdullah Economic City, a residential and Phase 1 SAGIA Saudi Government authority commercial complex north of Jeddah. Emaar, the Economic City Arabia Industrial zone Commercial NA 63.5m sqm (EEC) has about 168m sqm of land for the entire project. Emaar's current business plan anticipates no equity investment from Sea Port Commercial NA 13.8m sqm Emaar in EEC for the next five years Emaar Morocco joined with Onapar, part of the ONA Group, to Residential and Amelkis II 2005-2009 Morocco's largest develop the Dh1.3bn Amelkis II and III, and the Dh4.2bn Bahia leisure conglomerate, with NA ONA Group Morocco Bay Residential and influential Amelkis III 2006-2011 hospitality shareholders Bahia Bay Mixed-use 2007-2015 The joint-venture agreement between Emaar Properties and IGO 450,000 sqft Strategic JV with a is to undertake the Dh4.4bn Eighth Gate project Distinct zones – Commercial Invest Group Overseas Syria group of Syrian Eighth Gate Mixed-use 2007-2012 Centre, Waterfront and Tourist business leaders Zone Emaar Properties has signed an MoU with the Zowara-Abou Zowara-Abou Kemash Libya's leading Libya Kemash Development Zone to develop the Zowara-Abou Master planning stage Development Zone development zone Kemash area on the Mediterranean coast near Tripoli, Libya

Source: Company data

13 103

Table 10 : Snapshot of investments in associates

Business Country of Ownership (%) Associate incorporation Emaar The Economic City Property development KSA 30.50 (Saudi Joint Stock Company) Amlak Finance PJSC Financing company UAE 48.08 Turner International Middle East Ltd Program, project and UAE 50.00 construction management Dubai Banking Group PJSC Shari'a compliant financial UAE 30.00 investment company Emaar Industries and Investments (Pvt) JSC Investment company UAE 40.00 Emaar Financial Services LLC Brokering services UAE 38.00 Emrill Services LLC Integrated facilities UAE 33.33 management Prestige Resorts SA Property development and Morocco 50.00 hospitality Amelkis Resorts SA Property development and Morocco 50.00 hospitality Orientis Invest Property development and Morocco 50.00 hospitality Golden Ace Pte Ltd Investment holding company Singapore 30.00 Dead Sea Company for Tourist and Real Tourism and real estate Jordan 37.20 Estate Investment development

Source: Company data

Emaar Properties | Investment View | 10 March 2011 10414

Income statement

Dhm FY09A FY10A FY11F FY12F FY13F Net rental income 1510 1960 1771 1665 1665 Prop development income 6236 9240 5718 4770 2990 Other revenue 667.2 950.0 789.3 772.0 793.7 Total property income 8413 12150 8278 7207 5449 Other costs -5358 -8662 -5616 -4847 -3482 EBITDA 3056 3488 2663 2360 1967 DDA & Impairment (ex gw) -635.7 -702.0 -662.0 -637.9 -612.0 EBITA 2420 2786 2001 1722 1355 Goodwill (amort/impaired) 0.00 0.00 0.00 0.00 0.00 EBIT 2420 2786 2001 1722 1355 Associates (pre-tax) -534.5 -199.0 0.00 0.00 0.00 Net interest 139.0 -146.6 -311.2 -144.0 -22.5 Other pre-tax items 3.35 565.7 615.2 640.1 666.1 Reported PTP 2028 3006 2305 2218 1998 Taxation 23.5 -1.00 0.00 0.00 0.00 Minority interests 37.9 -29.0 0.00 0.00 0.00 Other post-tax items -1762 -533.0 0.00 0.00 0.00 Reported net profit 327.3 2443 2305 2218 1998 Dividends declared 0.00 0.00 0.00 0.00 0.00 Tot normalised items 0.00 0.00 0.00 0.00 0.00 Normalised EBITDA 3056 3488 2663 2360 1967 Normalised PTP 2028 3006 2305 2218 1998 Normalised net profit 327.3 2443 2305 2218 1998

Source: Company data, Rasmala forecasts year to Dec

Balance sheet

Dhm FY09A FY10A FY11F FY12F FY13F Cash & market secs (1) 2797 4009 5086 4437 6234 Props under dev 31076 28198 26261 24703 23906 Other current assets 1388 2395 2325 2245 2165 Investment prop 8546 8045 7728 7423 7131 Other non-current assets 20338 20861 20416 19983 19463 Total assets 64145 63508 61815 58790 58899 Short term debt (2) 4500 4776 4776 2776 2176 Long term debt (3) 4125 5992 4077 2077 1477 Other liabilities 26641 21437 19355 18112 17423 Total liabilities 35266 32205 28208 22964 21076 Total equity (incl min) 28879 31303 33607 35825 37824 Total liab & sh equity 64145 63508 61815 58790 58899 Net debt 5828 6759 3767 416.0 -2582

Source: Company data, Rasmala forecasts year ended Dec

Cash flow statement

Dhm FY09A FY10A FY11F FY12F FY13F EBITDA 3056 3488 2663 2360 1967 Change in working capital -5012 -2587 124.8 595.0 387.7 Net interest (pd) / rec 0.00 146.6 311.2 144.0 22.5 Taxes paid -3.00 0.98 0.00 0.00 0.00 Other oper cash items 327.4 -430.2 303.9 496.1 643.6 Cash flow from ops (1) -1632 617.5 3403 3595 3020 Capex (2) -1866 -766.7 -100.0 -100.0 0.00 Disposals/(acquisitions) 6.42 580.0 0.00 0.00 0.00 Other investing cash flow -930.7 -788.6 210.3 212.4 232.6 Cash flow from invest (3) -2790 -975.3 110.3 112.4 232.6 Incr / (decr) in equity 0.00 0.00 0.00 0.00 0.00 Incr / (decr) in debt 1196 2174 -1915 -4000 -1200 Ordinary dividend paid -3.57 -0.87 0.00 0.00 0.00 Preferred dividends (4) 0.00 0.00 0.00 0.00 0.00 Other financing cash flow 17.2 -435.7 -521.5 -356.3 -255.2 Cash flow from fin (5) 1210 1737 -2437 -4356 -1455 Forex & disc ops (6) -102.2 -7.10 0.00 0.00 0.00 Inc/(decr) cash (1+3+5+6) -3315 1372 1077 -649.0 1798 Equity FCF (1+2+4) -3498 -149.2 3303 3495 3020

Source: Company data, Rasmala forecasts year to Dec

Emaar Properties | Key Financial Data | 10 March 2011 105

Company description Buy Price relative to country

Emaar Properties (Emaar), based in the UAE, is the largest listed real estate developer in the Middle East and 120

North Africa (MENA) region by market cap. It was listed on the Dubai Financial Market in 2000 and is one of the 110 main master-developers in Dubai. It is engaged in property investment and development; provides property 100 management services; engages in retail, hospitality, education, and healthcare businesses; and invests in 90 providers of financial services in the UAE and in over 17 international markets. It reported holding a land bank of c. 80 260m sqm and having delivered 31,370 residential units by the end of 1H10. Emaar was established in June 1997 70 with a paid-up capital of DH1.0bn. Emaar has historically benefitted from its close ties with the government of 60 Dubai, which indirectly holds 31.22% of its shares. 50 Mar Jun Sep Dec Mar Jul Nov Mar Jul Oct Feb 08 08 08 08 09 09 09 10 10 10 11

Price relative to country

Strategic analysis Average SWOT company score: 3 Revenue breakdown, FY11F

Strengths 4 Properties for Hospitality sale 22% Robust recurring revenue portfolio accounting for approx. 75% of value, largely self-reliant funding strategy, 69% internationally diversified and the most liquid stock among peers. Investment properties Weaknesses 2 9% Bulk of revenues still driven out of Dubai and the residential sector under stress.

Opportunities 3 International expansion and ability to add debt to a relatively well capitalised balance sheet. Source: Rasmala forecasts Threats 3 Should local and international funding become more challenging, the stock could face valuation pressure. Market data

Scoring range is 1-5 (high score is good) Headquarters Building 3, Sheikh Zayed Road, Emar Business Park Website www.emaar.com Shares in issue 6096.2m Freefloat 69% Majority shareholders Investment corporation of Dubai (31%), 0 (0%), 0 (0%)

Competitive position Average competitive score: 3- Broker recommendations

Supplier power 2- Low - Lack of residential activity in the UAE (with projects being on hold/delayed/cancelled) is putting pressure on 12 the contractors' ability to negotiate higher rates with developers. 10 8 Barriers to entry 5+ 6 High - In the domestic market, which is already oversupplied, there remains very little appetite to fund new 4 developments. 2 0 Customer power 3+ Buy Hold Sell Medium - while off-plan activity is virtually non-existent, Emaar appears to be facing far fewer customer defaults and project delays than peers. Source: Bloomberg Substitute products 2- Low - Emaar is primarily engaged in high-end property, although it is looking at mid-range market expansion as a dual strategy in Dubai. Rivalry 2- Low - Nakheel, Dubai Properties Group and others are Emaar's peers in Dubai. However Emaar enjoys a unique position as a high-quality and luxury brand.

Scoring range 1-5 (high score is good) Plus = getting better Minus = getting worse

Emaar Properties | Strategic and Competitive Overview | 10 March 2011 106

10 March 2011

Sorouh Real Estate Initiation of coverage

Hold Solid balance sheet but low visibility

Target price While near- to medium-term financing needs seem adequately addressed, Dh1.15 sustained market pressures on house prices and rents may impact the handover Price Dh1.08 schedule in 2011-12.

Short term (0-60 days) n/a Key forecasts Market view No Weighting FY09A FY10A FY11F FY12F FY13F

Total property income (Dhm) 3,185 1,156 2,862 2,874 3,081 Net rental income (Dhm) 139.4 200.9 198.1 357.8 389.3 Price performance Normalised PTP (Dhm) 686.1 383.4 385.7 476.4 520.1 Normalised EPS (Dh) 0.27 0.14 0.14 0.18 0.19 (1M) (3M) (12M) Normalised PE (x) 4.01 7.57 7.58 6.13 5.62 Price (Dh) 1.38 1.77 2.22 Dividend per share (Dh) 0.00 0.00 0.00 0.00 0.00 Absolute (%) -21.7 -39.0 -51.4 Dividend yield (%) 0.00 0.00 0.00 0.00 0.00 Rel market (%) -17.8 -34.7 -47.5 Rel sector (%) -15.9 -34.4 -50.5 Adj NAV per share (Dh) 2.41 2.31 2.45 2.63 2.82 Mar 08 Mar 09 Feb 10 NNNAV per share (Dh) 2.41 2.31 2.45 2.63 2.82 12 Disc/(prm) to adj NAV (%) 55.20 53.20 55.90 58.90 61.70 10 Net debt to tot ass (%) 3.26 2.44 3.12 0.08 -8.77 8 Accounting standard: IFRS year to Dec, fully diluted 6 Source: Company data, Rasmala forecasts

4

2 Medium term funding needs look adequately addressed 0 We believe Sorouh’s recent proactive move to secure a loan of Dh2.35bn from a consortium SOR.AD ADX Gen Index of lenders and payment of the sukuk before time has given the company enough headroom

in 2011 and 2012 to focus on its ongoing development and investment property pipeline. Market capitalisation Dh2.84bn (€555.12m) Based on our estimates, Sorouh has enough liquidity to fund its capex, operating expenses, Average (12M) daily turnover interest cost and debt repayment over the next two years. Dh14.04m (US$3.72m) Visibility remains soft, although balance sheet is relatively healthy Sector: ADX Bank & Fin Index RIC: SOR.AD, SOROUH UH Sorouh is a smaller scale Abu Dhabi developer than Aldar with an under-levered balance Priced Dh1.08 at close 9 Mar 2011. Source: Bloomberg sheet, although demand dynamics for both companies are similar, ie, they have low volume

on commercial and residential projects with limited visibility on land transactions. Given continued market uncertainty and a reasonable probability of project delays, we see a likelihood of the company disappointing Bloomberg consensus estimates in the near term. Government projects should give a cash flow cushion, however earnings accretion on these projects is limited given lower margins.

Valuation and recommendation We initiate coverage on Sorouh Real Estate with a Hold recommendation and a 12-month Analysts target price of Dh1.15. Based on an SOTP approach, we estimate 43% of fair value is driven

Saud Masud by properties for sale, followed by the rental and hospitality portfolio combined at 37%, and United Arab Emirates other assets at 20%. +971 55 725 8596 [email protected] Divya Arora United Arab Emirates

+971 4 424 2784

Equity | United Arab Emirates Real Estate Investment & Services [email protected]

Dubai International Financial Centre, The Gate Village, Building 10, Level 1, P.O. Box 31145, Dubai, United Arab Emirates Important disclosures can be found in the Disclosures Appendix. Distributed outside MENA by The Royal Bank of Scotland N.V. and its affiliates under a strategic www.rasmala.com alliance with Rasmala Investment Bank Ltd.

The basics

Versus consensus Catalysts for share price performance In the near term, we believe high sociopolitical uncertainity and the broader regional market Revenue Ours Cons % diff (Dh bn) sentiment may be an overriding factor for UAE’s property sector. Another important near-term 2011F 2.9 3.1 -6.5% catalyst would be deliveries of proposed units at Sun, Sky and Tala Towers, scheduled for 1H11. 2012F 2.9 2.9 0.0% Earnings momentum 2013F 3.1 3.2 -3.1%

Source: Bloomberg, Rasmala forecasts Property handovers at Sun, Sky and Tala Towers are scheduled to start in 1Q11 and should begin to provide earnings momentum. However, we remain cautious about the timing of handovers and we model in a slower handover schedule than suggested in company guidance. Valuation and target price An SOTP approach is our primary valuation methodology for Sorouh’s target price, as it is a bottom-up method and examines value potential by project and segment, aggregatng a collective value for the company’s portfolio against its outstanding liabilities. We estimate 43% of fair value is driven by properties for sale, followed by the rental and hospitality portfolio combined at 37%, and other assets at 20%. Forced ranking* How we differ from consensus Company Rec Upside / Our revenue estimate for 2011 at Dh2,862m is below the Bloomberg consensus estimate of Downside Dh3,149m, as we believe there could be potential handover delays. Overall, we expect Sorough’s DSI Buy 15.8% revenues to peak in 2013 at Dh3,081m vs the consensus estimate of Dh3,156m, before falling to Emaar Buy 15.7% Arabtec Hold 6.6% Dh832m in 2014F vs consenus at Dh1,075m, due mainly to no major handovers in 2014F after Sorouh Hold 6.5% scheduled deliveries of gate tower units in 2012-13F. Throughout the forecast period we are Aldar Hold 6.1% below consensus on our revenue estimates as we expect handovers to be slower than forecast by

* By difference to target price as at time of the street. publication. Recommendations may lie outside the structure outlined in the Risks to central scenario disclosure page. Source: Rasmala forecasts Should population trends surpass our forecasts in both Dubai and Abu Dhabi, we would likely witness better-than-expected market fundamentals and, in turn, stronger liquidity in the property market. Like Aldar, its Abu Dhabi peer, Sorouh would likely see upside from liquidity returning to the sector, which we believe is the main risk for developers in the foreseeable future.

Regional unrest spreading or lingering may pose a key short-term risk. Alternatively, any indications of appeasement or steps towards resolution and social reforms may prove constructive for investor confidence post a meaningful sell-off year-to-date. Key events

Date Event 28/04/2011 1Q11 result

Source: Bloomberg

Sorouh Real Estate | The Basics | 10 March 2011 1082

Key assumptions and sensitivities

Our valuation sensitivity analysis suggests neutral risk-reward as our bull-case scenario results in potential upside of around 25% (target price Dh1.44) compared to possible downside of 27% (target price Dh0.84) in our bear-case scenario.

Major assumptions Base case: Fall in rentals of around 13% in 2011-12; average occupancy of 60% for the upcoming investment properties.

Bear case: Fall in rentals of around 13% in 2010-12; average occupancy of 45% for the upcoming investment properties, ie, down 15% points versus base case; handovers 10% below the base case.

Bull case: Flat rentals; average occupancy of 70% in the upcoming investment properties; handovers 15% above the base case.

Table 1 : Sensitivity analysis

Base case Bear case Bull case Value Value per Value Value per Value Value per (Dh m) share (Dh) (Dh m) share (Dh) (Dh m) share (Dh) Properties for sale 1,657 0.63 1,491 0.57 1,889 0.72 Investment properties 1,323 0.50 1,191 0.45 1,508 0.57 Hospitality 134 0.05 121 0.05 1530.06 Total value of the properties 3,114 1.19 2,803 1.07 3,550 1.35 Other assets 781 0.30 380 0.14 1,014 0.39 Total value of the assets except cash 3,896 1.48 3,183 1.21 4,564 1.74 Net debt -336 -0.13 -336 -0.13 -336 -0.13 Other liabilities -944 -0.36 -940 -0.36 -953 -0.36 Total equity value 2,616 1.00 1,907 0.73 3,275 1.25 One year price target 1.15 0.84 1.44 Upside/downside to our base case -27.1% 25.2%

Source: Company data, Rasmala estimates

Sorouh Real Estate | The Basics | 10 March 2011 1093

Earnings model

After reporting subdued revenues in 2009-2010 due to lack of handovers, we forecast Sorouh will report average revenues of Dh2,939m during 2011-13 driven mainly by the handover of units and commercial/retail space at Sun, Sky, Tala and Gate Towers.

We expect Sorouh to deliver around 3,592 residential units and 74,300 sq m of commercial space in 2011-13F, with Sun and Sky Towers contributing around 1,150 units to the residential segment and comprising the entire amount of deliveries in commercial/retail segment in 2011F. Thereafter, in 2012-13F, we model delivery of 2,070 units at Gate Tower to contribute the majority of the revenues. Finally, we expect 2014 to remain soft as we assume no further deliveries.

The company is incurring a significant amount of capex on building a recurring income portfolio, which in turn based on our estimates is expected to take its GLA from around 260,000 sq m in 2010 to around 604,000 sq m in 2014, driven mainly by the completion of Al Rayanna and Al Ain Mall developments with GLAs of 215,200 sq m and 47,422 sq m respectively. As with revenue, we expect EPS to peak in 2013 to Dh.19 from Dh0.14 in 2011, implying a CAGR of 16.5%.

Table 2 : Forecast overview

Dh m 2011F 2012F 2013F 2014F Revenue from property sales 2,297 2,134 2,303 0 Revenue from investment properties 198 358 389 442 Revenue from other segments 368 382 389 390 Total revenue 2,862 2,874 3,081 832 Gross margin 20.9% 22.5% 22.6% 31.7% EBIT margin 12.1% 13.8% 14.0% 17.7% EPS (Dh) 0.14 0.18 0.19 0.09

Source: Rasmala forecasts

Funding gap analysis We believe Sorouh’s recent proactive move to secure a loan of Dh2.35bn from a consortium of lenders and payment of the Sukuk before time have given the company enough headroom in 2011 and 2012 to focus on its ongoing development and investment property pipeline. Based on our estimates (see Table 3), Sorouh has enough liquidity tied to its existing cash balance and the cash it is going to generate from operations to fund its capex, operating expenses, interest cost and debt repayment over the next two years. However, operational inefficiencies, a further deterioration in market conditions, a rise in customer defaults, etc, may have a negative impact on this equation, causing potential liquidity stress.

Table 3 : Funding analysis, 2011-2012F

Dh m Cash outflows Capex -1,963 Operating expenses -378 Net interest cost -129 Debt payment -840

Cash inflows Cash from property sale 2,419 Cash from recurring income/others 623

Liquidity on the balance sheet as of 4Q10 Cash + deposits 1,307 AFS financial assets 134

Funding surplus 1,173

Source: Company data, Rasmala forecasts

Sorouh Real Estate | Investment View | 10 March 2011 1104

Valuation Our target price for Sorouh of Dh1.15 per share is based on an SOTP approach, with properties for sale comprising around 43% of the value at Dh0.49 per share, driven mainly by deliveries of the Sun, Sky, Tala and Gate Towers at Shams Abu Dhabi. We value the investment properties and hospitality at Dh0.43 per share, contributing 37% to our target price and thereby acting as a potential floor to Sorouh’s stock price. However, its contribution to the total value is much lower when compared to Emaar at 75% of the total. Moreover, only about 55% of the investment properties and hospitality value is coming from the operational portfolio, compared to about 90% in case of Emaar.

We value the properties for sale, investment properties and hospitality segments using a discounted cash flow approach, as we believe this rightly captures the value potential at the project level. We have not accounted for land bank in our valuation, as we believe the land bank is not easily monetisable in current market conditions. In our DCF analysis we use a WACC of 13.2% and a terminal growth rate of 3%. Our WACC estimate is based on a cost of debt of 5.5% and a cost of equity of 15.2%. We derive our cost of equity using a risk-free rate of 4.0%, an equity market risk premium of 7% and a beta of 1.6.

Chart 1 : Target price decomposition by segment

1.40 1.15 0.23 1.20

0.04 1.00 0.39

0.80

0.60 0.49

0.40

0.20

0.00 Properties for sale Investment properties Hospitality Other assets Target price

Source: Rasmala estimates

Chart 2 : Target price decomposition by segment

Other assets 20%

Hospitality Properties for sale 3% 43%

Investment properties 34%

Source: Rasmala estimates

Sorouh Real Estate | Investment View | 10 March 2011 1115

We consider Sorouh’s flagship project Shams Abu Dhabi, the major driver of value and estimate it to contribute 58% of the total, with Sun, Sky and Tala Towers (to be delivered during 2011) accounting for 67% of this, followed by Gate Towers (to be delivered during 2012-13) at 33%. We estimate the existing investment properties, Sas Al Nakhl, Khalidya Village and Al Oyoun, to account for 24% of the total and other major under development projects, such as Al Rayana, to account for 8% of the total value.

Chart 3 : Sorouh projects value contribution to EV (ex-other assets)

Al Ain mall Other IP Hospitality 2% 4% 4% Khalidya & Al Oyoun 8% Sun, sky & Tala towers 39% Al Rayana 8%

Sas Al Nakhl 16%

Gate tower 19%

Source: Rasmala estimates

Sorouh Real Estate | Investment View | 10 March 2011 1126

Sorouh Real Estate PJSC

Sorouh Real Estate PJSC (Sorouh) is the second-largest public real estate developer in Abu Dhabi by market cap and is primarily involved in property development, sales and property management. The Abu Dhabi government indirectly owns a 7% stake.

Company background

Sorouh is the second-largest real Sorouh Real Estate PJSC (Sorouh) is the second-largest public real estate developer in Abu estate developer in Abu Dhabi by Dhabi by market cap (Dh2.8bn as of 9 March 2011). The company was listed on the Abu Dhabi market value (Dh2.9bn on 9 March 2011) Securities Exchange through its IPO in 2005. Sorouh is engaged in property investment, development and property management, and in providing retail and hospitality services in Abu Dhabi. While Sorouh currently operates predominantly in the emirate of Abu Dhabi in the United Arab Emirates (UAE), it is making efforts to diversify geographically by taking up international projects like Agora Madinat & Resort in Morocco and a project in Egypt, which are currently in the pre-development stage.

The Abu Dhabi government Sorouh enjoys a close relationship with the Abu Dhabi government, which indirectly owns 7% of indirectly owns 7% of its shares its shares. Government backing comes in the form of close to zero-cost land grants, development approvals, award of low margin government projects and financial backing.

Figure 1 : Group structure

Sorouh Real Estate PJSC

Sorouh International Limited (UAE - 100%) Tilal Liwa Real Estate Investment LLC (UAE - 100%)

Gate Towers- Shams Abu Dhabi LLC (UAE - 100%) Al Seih Real Estate Management LLC (UAE - 91.4%)

Sorouh Abu Dhabi Real Estate LLC (UAE - 100%) Seih Sdeirah Real Estate LLC (UAE - 91.4%)

Sorouh Egypt for Investment and Tourism Development Sorouh International Development Limited (UAE - 100%) JSC (Egypt - 80%)

Sorouh International Morocco Limited (UAE - 100%) Khidmah LLC (UAE - 60%)

Pivot Engineering & General Contracting Co (WLL) (UAE Lulu Island for Project Development LLC (UAE - 100% 60%)

Source: Company data

Key business segments Sorouh’s Land Sales segment was the major revenue driver over the past three years while Sorouh was in the process of developing its projects. The company also used land sales to finance the development of its major projects. However, over the past three years, its contribution fell to 35.4% in 9M10 from 94.9% in 2008 mainly attributable to the lack of land demand by the sub developers and, to some extent, attributable to increasing revenues from other business segments (Chart 4).

Sorouh Real Estate | Investment View | 10 March 2011 1137

Chart 4 : Segmental revenue break up

10 0 % 3.4% 6.5% 15 . 1% 90% 22.1% 23.3%

80% 44.5% 70 % 51.1% 60% 50.3 % 36.2% 35.4% 1. 5 % 50 % 94.9% 1. 1% 4.5% 26.7% 1. 1% 40% 0.9% 13 . 6 % 15 . 3 % 30% 11. 8 % 20% 37.9% 27.3% 27.0% 10 % 21.9% 24.8% 1. 7 % 0% 2008 2009 1Q10 2Q10 3Q10 9M10

Pro pert y Develo pment and Sales Invest ment Prop ert ies Hospitality Land sales Co nst ruct io n

Source: Company data

Projects currently under Sorouh’s Property Development segment began reporting revenue in 2009, and its revenue that development include LuluIsland, year (Dh1.2bn) represented 38% of total revenue. In 9M10 it contributed Dh246m (25% of total Alghadeer, and Shams Abu Dhabi revenue).

Land Sales and Property Development combined provide Sorouh the most significant revenue contribution (89% in 2009) but due to the economic downturn, the company has started to shift some of its developments into Sorouh’s property investment portfolio in order to increase its portion of recurring revenue. This is reflected in a significant increase in contribution of rental income to total revenue from 1.7% in 2008 to 15.3% in 2010 (check Chart 4).

Sorouh also acts as a contractor by taking on low margin projects for the Abu Dhabi government like Watani and Al Shamka, and in 9M10, the Construction segment recorded revenue growth of 76% yoy, building on the 58% yoy growth it saw in 2009; this resulted in this segment accounting for 23% of total revenue in 9M10 vs 5% in 9M09.

In 2009, Sorouh opened the first The Hospitality segment handles the hotel businesses in Sorouh’s portfolio. It has only one project hotel under its Hospitality under this category, the 111-room Tilal Liwa Hotel in the western region of Al Gharbia. segment – the 111-room Tilal Liwa Lower handovers and land sales in stressed market condition led revenue to decline significantly in 2010.

Chart 5 : Total annual revenue (Dh m) Chart 6 : Quarterly revenue (Dh m)

4,000 3,723 1,600

3,500 1,400 1,351 3,103 3,000 1,200

978 2,500 2,321 1,000

2,000 800

1,500 600 1,205 438 431 371 1,000 400 336 630 190 214 500 200

0 0 2006 2007 2008 2009 2010 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Source: Company data Source: Company data

Gross margins declined due to fall in land sales, however, this is positive from business model standpoint as the company is moving away from the high-margin choppy land sales business to relatively stable and lower-margin property development, sales and rental business.

Sorouh Real Estate | Investment View | 10 March 2011 1148

Chart 7 : Gross margin Chart 8 : EBIT margin

70% 50% 46.5% 45.0% 61.7% 60% 49.4% 40% 45.4% 56.9% 51.4% 29.7% 50% 44.1% 30% 29.4% 45.4% 40% 27.0% 20% 17.4% 30% 29.7% 10% 20% 19.0% 0% 10% -4.2%

-10% 0% 2007 2008 2009 1Q10 2Q10 3Q10 4Q10 2010 2007 2008 2009 1Q10 2Q10 3Q10 4Q10 2010

Source: Company data Source: Company data

Ongoing construction activity and operational investment properties Significant projects currently under development include Shams Abu Dhabi on Reem Island (which is a master development containing plots for sale, residences, and other projects like the Shams Gate and the Sun and Sky Towers), and Alghadeer on the border of Abu Dhabi and Dubai. Tables 4,5 and 6 provide more information with regard to its current and operational key developments.

Table 4 : Snapshot of properties for sale under construction

Project name Completion year Units/sq m Shams Abu Dhabi – Sun, Sky and Tala Towers – residential (units) 2011 1,522 Sky Tower – commercial (sq m) 2011 74,302 Shams Abu Dhabi - The Gate – residential (units) 2012 3,533 Al Ghadeer – residential (units) 2012 2,132

Source: Company data,

Table 5 : Snapshot of investment properties under construction

Project name Completion year Units/sq m Al Ain Mall – commercial (sq m) 2011 47,422 Al Rayyana – residential (sq m) 2011 213,000 Podium – retail (sq m) 2011 13,501 Podium – others (sq m) 2011 12,412 Danat Abu Dhabi – residential (sq m) 2011 30,801 The Gate – others (sq m) 2013 13,675

Source: Company data

Table 6 : Snapshot of operational investment properties

Project name Units Khalidya Village – residential (units) 150 Al Oyoun Village – residential (units) 148 Sas Al Nakhl – residential (units) 588

Source: Company data

Sorouh Real Estate | Investment View | 10 March 2011 1159

Shareholder information The company allows foreign ownership of 15% of its shares; the current level of foreign ownership, as of 1 November 2010, was 11.4%. The company’s current shareholding pattern is listed in Table 7.

Table 7 : Shareholder composition

Holder's name % of outstanding shares Al Joud Investment 11.63 Abu Dhabi Investment Company 6.97 Public 81.11

Source: Zawya

Management profile At the end of 2009, Sorouh had 261 employees. The profiles of Sorouh’s key personnel are listed in Tables 8 and 9.

Table 8 : Key directors

Name Position Background Saeed Eid Al Ghafli Chairman Chairman since 2005. He has held senior positions at a number of leading companies in the GCC, including Chairman of the Boards of Al Rayaan Investment and Emirates Building Company. Ghafli is a qualified lawyer, with a Bachelors degree in Law from UAE University. Mohamed Khalaf Al Vice Chairman The Vice President since 2005, Mazrouei is also the Director General of Mazrouei the Abu Dhabi Authority for Culture & Heritage, as well as Chairman of the Abu Dhabi Media Company. He has a Bachelors degree in Public Administration from the UAE University and a Masters in Public Administration from the University of Portland US.

Source: Company data

Table 9 : Key management

Name Position Background Abubaker Seddiq Al Managing Director Al Khouri worked as the Assistant Director of the Abu Dhabi Investment Khouri Authority (ADIA) prior to joining Sorouh. Possesses a Bachelors degree in Finance from Linfield College in McMinnville, US and is a Chartered Financial Analyst (CFA). Gurjit Singh Chief Operating Prior to joining Sorouh, Singh worked with numerous publicly listed, Officer diversified multinationals including the Sime Darby Group, Malaysia and Sentosa Leisure Group, Singapore. He is a graduate from the University of Cambridge, UK. Richard Amos Chief Financial Prior to joining Sorouh, Amos headed up the finance function at Tourist Officer Development and Investment Company (TDIC). Amos holds a Masters degree in Modern Languages and Linguistics from Cambridge.

Source: Company data

Sorouh Real Estate | Investment View | 10 March 2011 11610

Key joint ventures and partnerships Sorouh has partnered with several businesses to support its construction and development industries. Table 10 provides a snapshot of its key joint ventures and partnerships.

Table 10 : Description of key joint ventures and partnerships

Partner/associate Country Background Share in Joint Description Venture (%) S&T Cool District Cooling Abu Dhabi, UAE District cooling 50 Sorouh and Tabreed created the JV, Co LLC, S&T Cool District Co LLC, to provide district cooling to sectors of Sorouh's Shams Abu Dhabi development. Abu Dhabi Business Co Abu Dhabi, UAE NA 51 NA LLC

Source: Company data

Table 11 : Description of other business investments

Business partner Country Background Description Egypt International Egypt Real estate Sorouh joined hands with its subsidiary, Egypt developer International, to create Sorouh Egypt for Investment and Touristic Development JSC; which is currently in the pre-development phase of Sorouh City, a major 500-hectare mixed-use development in New Cairo. Orascom Construction Egypt Cement and The joint venture, named the Arabian Sea Industries (OCI) construction Foundation Company LLC, was formed to capitalize contractor on the growing construction industry. Hydra Commercial Abu Dhabi, UAE NA Investments Capital Investment Abu Dhabi, UAE Private institutional investment house Pivot Engineering & Abu Dhabi, UAE Construction In May 2008, Sorouh acquired a 60% stake in the General Contracting Abu Dhabi construction firm to reinforce its Company LLC construction arm. Capital Investment Abu Dhabi, UAE Private institutional In 2008 the JV Khidmah, a property management investment house company, was created to provide essential services to Sorouh Real Estate PJSC and other real estate companies in Abu Dhabi and the GCC.

Source: Company data

Table 12 : Snapshot of investments in associates

Associate Nature of operations Place of Ownership registration (%) Al Maabar International Investment LLC International property development and Abu Dhabi 20 investment Aseel Finance PJSC Mortgage finance company Abu Dhabi 20 Green Emirates Properties PJSC Real estate Abu Dhabi 20 Bunya LLC Acts as the municipality of Al Reem Island Abu Dhabi 33 Abu Dhabi Finance PJSC Mortgage finance company Abu Dhabi 20 LLJ Properties LLC Real estate agency Abu Dhabi 40 Al Sdeirah Real Estate Investment LLC Real estate management Abu Dhabi 30 Galaxy Building Materials LLC Provides building materials Abu Dhabi 45 Al Fayafi Al Khadra Landscaping LLC Landscaping and landscape maintenance Abu Dhabi 40 services World-Class Initiatives and Standards in n/a Abu Dhabi 20 Education (W.I.S.E.) LLC

Source: Company data

Sorouh Real Estate | Investment View | 10 March 2011 11711

Income statement

Dhm FY09A FY10A FY11F FY12F FY13F Net rental income 139.4 200.9 198.1 357.8 389.3 Prop development income 1177 321.0 2297 2134 2303 Other revenue 1869 633.9 367.6 381.9 388.5 Total property income 3185 1156 2862 2874 3081 Other costs -2443 -838.0 -2474 -2435 -2607 EBITDA 742.5 317.8 388.5 438.7 474.5 DDA & Impairment (ex gw) -278.4 -196.5 -41.5 -43.0 -44.2 EBITA 464.1 121.3 347.0 395.8 430.4 Goodwill (amort/impaired) -29.8 -162.9 0.00 0.00 0.00 EBIT 434.3 -41.5 347.0 395.8 430.4 Associates (pre-tax) -50.5 48.7 12.0 12.0 12.0 Net interest -42.1 -43.6 -65.3 -63.3 -54.2 Other pre-tax items 153.3 52.7 92.0 132.0 132.0 Reported PTP 495.0 16.2 385.7 476.4 520.1 Taxation 0.00 0.00 0.00 0.00 0.00 Minority interests -12.2 -8.74 -11.6 -14.3 -15.6 Other post-tax items 0.00 0.00 0.00 0.00 0.00 Reported net profit 482.8 7.44 374.2 462.1 504.5 Dividends declared 0.00 0.00 0.00 0.00 0.00 Tot normalised items -191.1 -367.2 0.00 0.00 0.00 Normalised EBITDA 659.7 367.1 388.5 438.7 474.5 Normalised PTP 686.1 383.4 385.7 476.4 520.1 Normalised net profit 673.9 374.6 374.2 462.1 504.5

Source: Company data, Rasmala forecasts year to Dec

Balance sheet

Dhm FY09A FY10A FY11F FY12F FY13F Cash & market secs (1) 1626 1309 1241 1633 2651 Props under dev 3778 5273 4124 3079 1486 Other current assets 4669 3768 3648 3528 3408 Investment prop 1240 1675 2264 2288 2306 Other non-current assets 2383 1609 1623 1636 1648 Total assets 13698 13634 12901 12164 11500 Short term debt (2) 989.9 12.5 12.5 12.5 12.5 Long term debt (3) 1083 1630 1630 1630 1630 Other liabilities 5500 5813 4694 3481 2297 Total liabilities 7573 7456 6337 5124 3940 Total equity (incl min) 6125 6178 6564 7040 7560 Total liab & sh equity 13698 13634 12901 12164 11500 Net debt 446.7 333.3 402.0 9.45 -1009

Source: Company data, Rasmala forecasts year ended Dec

Cash flow statement

Dhm FY09A FY10A FY11F FY12F FY13F EBITDA 742.5 317.8 388.5 438.7 474.5 Change in working capital -3215 -805.6 150.0 -47.3 528.2 Net interest (pd) / rec 42.1 43.6 65.3 63.3 54.2 Taxes paid 0.00 0.00 0.00 0.00 0.00 Other oper cash items 844.1 48.9 26.7 68.7 77.8 Cash flow from ops (1) -1586 -395.3 630.5 523.4 1135 Capex (2) -397.6 -443.1 -633.8 -67.6 -62.3 Disposals/(acquisitions) 0.33 0.39 0.00 0.00 0.00 Other investing cash flow 380.3 1218 20.1 22.1 31.2 Cash flow from invest (3) -17.0 775.5 -613.7 -45.5 -31.2 Incr / (decr) in equity 0.00 0.00 0.00 0.00 0.00 Incr / (decr) in debt -91.7 1584 0.00 0.00 0.00 Ordinary dividend paid -330.1 -5.71 0.00 0.00 0.00 Preferred dividends (4) 0.00 0.00 0.00 0.00 0.00 Other financing cash flow -1887 -2257 -85.4 -85.4 -85.4 Cash flow from fin (5) -2309 -679.1 -85.4 -85.4 -85.4 Forex & disc ops (6) 0.00 0.00 0.00 0.00 0.00 Inc/(decr) cash (1+3+5+6) -3912 -298.8 -68.6 392.5 1018 Equity FCF (1+2+4) -1984 -838.3 -3.35 455.8 1072

Source: Company data, Rasmala forecasts year to Dec

Sorouh Real Estate | Key Financial Data | 10 March 2011 118

Company description Hold Price relative to country

Sorouh Real Estate PJSC (Sorouh) is the second-largest public real estate developer in Abu Dhabi by market cap. 120 The company was listed on the Abu Dhabi Securities Exchange through its IPO in 2005. Sorouh is engaged in 100 property investment and development and property management, and in providing retail and hospitality services in 80 Abu Dhabi. While Sorouh currently operates predominantly in the state of Abu Dhabi in the United Arab Emirates (UAE), it has diversified geographically with its Agora Madinat & Resort project in Morocco and a project in Egypt 60

(still in the pre-development phase). Sorouh enjoys a close relationship with the Abu Dhabi government, which 40 indirectly owns 7% of its shares. Government backing comes in the form of close to zero-cost land grants, 20 development approvals, and financial backing. 0 Mar Jun Sep Jan May Aug Nov Mar Jun Oct Mar 08 08 08 09 09 09 09 10 10 10 11

Price relative to country

Strategic analysis Average SWOT company score: 3 Revenue breakdown, FY11F

Strengths 4 Properties for Others sale Investment 13% 80% Refinancing risk mitigated via early payment of sukuk, cash inflows and outflows right-aligned at least in the near properties term, engaged on key government projects that may cushion revenue volatility. 7% Weaknesses 3 Similar to Aldar and other developers in Abu Dhabi funding needs could escalate beyond a 12-month horizon or shortfalls may be pulled in earlier if economic conditions continue to deteriorate.

Opportunities 3 Source: Rasmala forecasts Diversifying into the commercial sector away from residential and land sales may strengthen business model and enhance valuation. Market data Threats 2 Uncertainty on handovers, rolling receivables and other provisions risks may impact headline results. Headquarters Abu Dhabi Mall, East Tower, 5th floor, Tourist Area, Abu Dhabi - UAE Scoring range is 1-5 (high score is good) Website www.sorouh.com

Shares in issue 2625.0m Freefloat 93% Majority shareholders Al Joud Investment (12%), Abu Dhabi Investment Company (7%), 0 (0%)

Competitive position Average competitive score: 3- Broker recommendations

Supplier power 2- Low - New residential project activity in the UAE is sharply down as most projects are on hold, delayed or 6 cancelled, thereby putting pressure on contractors. 5 4 Barriers to entry 4+ 3 High - In the domestic market, which is already oversupplied, there remains very little appetite to fund new 2 developments. 1 0 Customer power 3- Buy Hold Sell Medium - transaction activity is low as market sentiment remains soft. Substitute products 2- Source: Bloomberg Low - Sorouh is engaged in government-supported projects and mid-range housing schemes in addition to its core focus of high-end property. Rivalry 2- Low - We believe Sorouh is a smaller niche player compared to the larger developer Aldar, with relatively little competitive risk.

Scoring range 1-5 (high score is good) Plus = getting better Minus = getting worse

Sorouh Real Estate | Strategic and Competitive Overview | 10 March 2011 119

Recommendation structure Absolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price and only reflects capital appreciation. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months. Market or sector view: This view is the responsibility of the strategy team and a relative call on the performance of the market/sector relative to the region. Overweight/Underweight implies upside/downside of 10% or more and Neutral implies less than 10% upside/downside. Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value.

Valuation and risks to target price

Aldar Properties (RIC: ALDR.AD, Rec: Hold, CP: Dh1.32, TP: Dh1.40): We value Aldar Properties using a sum-of-the-parts method implying a fair value of Dh1.40 a share. Main risks include refinancing risk and ability to fund near-term projects. Should population surpass our conservative estimates we would likely witness better fundamentals, liquidity and property demand leading to upside risk to our estimates Arabtec Holding (RIC: ARTC.DU, Rec: Hold, CP: Dh1.36, TP: Dh1.45): We value Arabtec using a DCF approach implying a fair value of Dh1.45 a share. Upside risks to our target price include Arabtec successfully reducing its Dubai ex-government receivable exposure and the company growing its Saudi backlog faster than the decline in its UAE backlog. The main risks include rising provisions on Dubai receivables and weaker-than-expected traction in high-growth foreign markets including Saudi Arabia, Libya, etc. Drake & Scull (RIC: DSI.DU, Rec: Buy, CP: Dh0.95, TP: Dh1.10): We value DSI using a DCF methodology. Key risks to our target price include project delays in the UAE that may lower robust growth expectations from 2011 onwards. Also, the company may need to revise down management expectations of a 20-25% revenue CAGR over the next five years. Emaar Properties (RIC: EMAR.DU, Rec: Buy, CP: Dh2.68, TP: Dh3.10): We value Emaar Properties using a sum-of-the-parts method implying a fair value of Dh3.10 a share. Main risks include potential delays in raising domestic and international capital as core market stresses still prevail and we expect a continued decline in house prices in the foreseeable future. Sorouh Real Estate (RIC: SOR.AD, Rec: Hold, CP: Dh1.08, TP: Dh1.15): We value Sorouh Real Estate using a sum-of-the-parts method implying a fair value of Dh1.15 a share. Main risks include further project delays that could create headline risk and prompt consensus downgrades.

Disclaimer This report is prepared by Rasmala Investment Bank Limited ("RIB"). RIB is regulated by the Dubai Financial Services Authority ("DFSA"). RIB products or services are only made available to customers who RIB is satisfied meet the regulatory criteria to be a " Professional Client", as defined under the Rules and Regulations of the Dubai International Financial Centre ("DIFC"). Our investment recommendations take into account both risk and expected return. We base our long-term fair value estimates on a fundamental analysis of a company's future prospects, after having taken perceived risks into consideration. We have conducted reasonable research to arrive at our investment recommendations and fair value estimates for the company or companies mentioned in this report. Although the information in this report has been obtained from sources that RIB believes to be reliable, we have not independently verified such information thus it may not be accurate or complete. RIB does not represent or warrant, either expressly or impliedly, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by RIB or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connection therewith. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This research report is prepared for general circulation and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any securities referred to in the report. It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs. RIB is not registered with the U.S. Securities and Exchange Commission, or any U.S. state authority, as a broker-dealer or investment advisor. This report has not been approved, disapproved or recommended by the U.S. Securities and Exchange Commission, any state securities commission in the United States, the securities commission of any non-U.S. jurisdiction or any other U.S. or non-U.S. regulatory authority. None of these authorities has passed on or endorsed the merits or the accuracy or adequacy of this report. RIB and its group entities (together and separately, "Rasmala") does and may seek to do business with companies covered in its reports. As a result, users should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Rasmala and its respective employees, directors and officers shall not be responsible or liable for any liabilities, damages, losses, claims, causes of action, or proceedings (including without limitation indirect, consequential, special, incidental, or punitive damages) arising out of or in connection with the use of this report or any errors or omissions in its content. The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

Real Estate | Disclosures Appendix | 10 March 2011