Emaar Development PJSC (EMAARDEV:DFM) – market cap as of 24/11/2017: $6.26bn (AED 23bn)
Introduction
On November 22, 2017, Emaar Properties sold on the DFM (i.e. Dubai Financial Market) 20% of the shares of its domestic development arm in an Initial Public Offering, at $1.64 per share. Emaar capitalisation at listing was c. $6.56bn with 800m shares included in the offering. Since the beginning of trading on Wednesday, the company share price fell by 4.3%, marking the worst debut trading day since 2014 among the 10 biggest initial public offerings in the Middle East and Africa over that time span.
About Emaar Properties PJSC
Emaar Properties PJSC is one of the world’s leading real estate developers and it is headquartered in Dubai. Emaar has presence in more than 36 markets all over the world, in Middle East, North Africa, Pan-Asia, Europe and North America. The company provides property development and management services and its most renowned buildings include Burj Khalifa, The Dubai Mall and The Dubai Fountain. Since 2012, the company has delivered over 34,500 residential units in Dubai and other global markets.
Its operations are divided in six main segments: Emaar Properties, UAE Development (object of the IPO), International Development, Emaar Malls, Emaar Hospitality, Entertainment and Leasing. In spite of the fall in oil prices, which have negatively impacted the UAE economy and as a result Emaar, the company is continuously growing.
Indeed, its financials are impressive, recording revenues of $3.92bn in 2016, a growth of 41% from 2015, when the company recorded $2.79bn in sales. Revenues for H1 2017 are of $2.14bn, revealing an 8% increase over the same period in 2016. Specifically, sales for the segment of International Development grew by 64% to $462m, representing 22% of total revenues. Net profit grew by 15% to $772m during H1 2017, compared to $674m of the same period last year.
Industry Overview
A total of 14,600 residential units entered the Dubai residential market in 2016, the highest level since 2012 and more than twice this number of units is scheduled for completion in 2017. Abu Dhabi, instead, saw fewer completions than its neighboring emirate, with only 3,100 residential units completed during 2016.
Sale prices for both apartments and villas in Dubai show signs of stabilizing, with no change recorded during Q4 2016, even though transaction volumes remain down. On a YoY basis, apartment prices recorded a mere 1% decline, while villa prices improved marginally by 2%.
Meanwhile, rental indices continue to fall for both apartments and villas, with minimal quarter on quarter change (-1% for apartments and -3% for villas), and a larger annual decline of 6% for apartment rents, and 8% for villa rents.
On the other side of the market, retailers reported a decline in sales during 2016 in the primary malls of Dubai and Abu Dhabi, and vacancies increased slightly in Dubai, from 8% in Q4 2015 to 9% in Q4 2016, while remaining stable in the majority of malls in Abu Dhabi, at 2%.
In December 2016, the government reinstated the Abu Dhabi 5% rental cap (residential rent increases are capped at 5% a year) three years after its suspension, and the other real estate laws which were introduced in 2015. However, it is also to notice that rents are falling at the moment, and as a result the law is likely to have no implications in the near future.
Finally, in 2016 Abu Dhabi reported an annual inflation of c. 2%. As part of the government’s diversification plan, energy subsidies were removed, and a new fee (3% of rent) added as a fixed cost to a household’s utility bill. Further increases are likely in 2017 with VAT being introduced in January 2018.
IPO Structure
Emaar Properties PJSC’s $1.5bn IPO of its United Arab Emirates development business, offered 800m shares at a price range of between Dh5.7 ($1.55) and Dh6.9 ($1.88) per share. The offering opened on Thursday, with an offer price of Dh6.03 ($1.64) and with about 6% of the shares available to retail investors and 94% to institutional ones. The sale, which implies a market cap for Emaar Development of Dh24.1bn, or $6.56bn, is the largest since Emaar Malls’ $1.6bn offering in 2014.
The maximum cap of the offer price represents a premium of as much as 15% to the company’s NAV (net asset value) and the minimum cap a 5% discount. Emaar is selling 20% of the unit, which is expected to pay at least $1.7bn in dividends over the next three years in about equal installments. That would imply a dividend yield of at least 7.5% of the top end of the price range.
Emaar Properties said Q3 net income increased 32% to Dh1.51bn ($0.41bn). The company said it has more than 24,000 developments under construction, and that it is in a position to generate strong cash flows in coming years, which will support the generous dividend policy.
IPO Rationale
Mohamed Alabbar, the Chairman of Emaar Properties, announced that the IPO of the group’s real estate development business would “allow potential investors an opportunity to participate in a pure play UAE developer offering strong and stable cash flows and an attractive dividend yield”. As mentioned above, indeed, Emaar Development plans to pay out $1.7bn in dividends over the next three years and the company’s strong cash flow generation power supports the claim.
The capital injection will also allow Emaar Properties to realize more large-scale projects in the region and beyond it, and allow its shareholders, to which the UAE’s government belongs, to thereby unlock the true value of the real estate development business. Given the arm’s direct involvement in high-profile projects such as Downtown Dubai, Dubai Marina, The Dubai Mall and Burj Khalifa, a separate listing of Emaar Development was expected to drive shareholder value by more clearly recognizing the growth in this business line.
Market Reaction
Source: Bloomberg
The share price of Emaar Development dropped 4.3% on the first day of trading. Specifically, the property development company’s shares fell as low as Dh5.60 ($1.53) in the morning trade before recovering to close the day at Dh5.77 ($1.57). Its counter recorded 1,502 deals with 48.47m shares changing worth Dh279m ($75.98m) on the day. This represents the worst debut trading day since 2014 among the 10 largest IPOs in the Middle East and Africa over that time frame. Analysts blame a lack of retail participation given the current geopolitical risks surrounding political purges in Saudi Arabia and tensions with Iran as the reason for the weak performance.
Advisors
Bank of America Merrill Lynch, EFG Hermes, Emirates NBD, First Abu Dhabi Bank and Goldman Sachs are the Joint Global Coordinators for the Offering. Emirates NBD and First Abu Dhabi Bank are the Lead Receiving Banks. Rothschild is acting as Financial Advisor on the Offering.
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