Emaar plans to sell 20% of its property business via IPO

Bloomberg

The company that helped build entire neighbourhoods in Dubai plans to sell part of its business in the UAE in an initial public offering.
Emaar Properties PJSC, which spearheaded a building boom in the emirate over the past 15 years and built the world’s tallest skyscraper in Dubai, will sell 20 percent of its real-estate development business, according to emailed statement on Sunday. Emaar Development is targeting the distribution of aggregate dividends of no less than $1.7 billion, to be paid over the next three financial years ending December 2020.
The retail offering subscription period will be open for 11 days starting November 2. Emaar Properties’s shares advanced more than 25 percent since the plan was first announced in June.
Emaar’s development business “has continued to do well despite an economic slowdown with offplan sales growing at double-digit rates, which shows what a strong brand it is,” said Ayub Ansari, an analyst at Securities & Investment Co. in Bahrain. “There is a delivery backlog of AED40 billion that’s going to be recognized over the next four years, so clearly there’s earning” potential, he said.
The real estate business’s share sale will be the fourth of Emaar’s units to break away from the mother company — including one in Egypt and another in Saudi Arabia — but the second in UAE. The first, Emaar Malls PJSC, is one of eight companies to have sold shares in an IPO since the start of 2010, almost all of which are trading below their offer price.
The UAE real-estate arm contributed 40 percent of Emaar’s revenue and 31 percent of its gross profit in the first half, while the malls business provided 20 percent of income and 34 percent of profit, according to its results presentation.
The hotels business contributed 10 percent of revenue.
Emaar, the parent company, has traded at a persistent discount to consensus fair net asset value. But spinning off its subsidiaries has helped reduce that discount, said Mohammad Kamal, an analyst at Dubai-based Arqaam Capital Ltd. The plan to sell the domestic development arm has already helped unlock value, he said.
Carving out a business that’s fully focused on property development means it will no longer have access to recurring income Emaar’s other units, said Kamal at Arqaam. If demand for real estate in the U.A.E. wanes and sales slow, the company may need to increase borrowings to complete projects.
“The earnings of a carved out entity are more volatile than the holding company that has access to diverse and recurring income streams,” Kamal said.
But also, investors would be able to gain exposure to one segment without taking on others such as Emaar Malls and Emaar Misr, says Issam Kassabieh, an equities analyst at Menacorp Financial Services in Dubai.
“If I were to look at one critical factor, I would look at off plan sales, which has been growing for Emaar, and that’s very reassuring,” said Ansari at SICO Bahrain.
Wouldn’t the hotels business be better for an IPO?
Hotel room rates in Dubai have been falling for the last three years amid increased supply, said Ansari at SICO Bahrain.
“Hospitality may be a compelling story in a couple of years, in the run up to the Expo2020,” Ansari said.
So is Emaar Development a good buy?
Emaar’s UAE development’s adjusted net asset value is 24.1 billion dirhams as of September, the company said in an emailed statement on Sunday. The business looks “fairly valued,” according to SICO’s Ansari, but a decision on how attractive the IPO would depend on its offer price.
Considering the Expo 2020 factor and the segment’s exceptional results, the stock is a good call,” Menacorp’s Kassabieh said. “It’s the first IPO in a while and it will restore appetite.”