Nomura offers up an opinion about the UAE property sector. Recommendations, target prices, and Nomura brief comments are:
Aldar Properties (ALDAR) - from Neutral to Reduce, Target Price AED 4.15 ("Yas Island Phase 1, Nov 09, large land bank, aggressive accounting (rel)")
Deyaar Development (DEYAAR) - from Reduce to Neutral, TP AED 0.92 ("Handing over developments, aggressively curbing defaults, launching DPO")
Emaar Properties (EMAAR) - from Buy to Neutral, TP AED 4.18 ("Merger distractions, Emaar MGF IPO, Burj Dubai Tower opening Dec 09")
RAK Properties (RAKPROP) - stays at Reduce, TP AED 0.73 ("Development concentration, illiquid P/E holdings, cash positive currently")
Sorouh Real Estate (SOROUH) - from Neutral to Buy, TP AED 4.62 ("Cash positive, Lulu Island upside, over collateralised securitisation")
Union Properties (UPP) - stays at Reduce, TP AED 0.98 ("Significant gearing, possible funding gap needs addressing")
What do you think? Agree? Disagree? Report summary follows, full report is a comprehensive 48 pages of comment, charts, and figures.
Nomura 14 October 2009:
A False Dawn
By Chet Riley
We believe UAE real estate’s share price has rallied ahead of fundamentals with the sector having outperformed the MSCI UAE by 37% over the past three months, while average underlying prices have fallen a further 12% over the same period. Optimism is being fuelled by a global real estate resurgence, the emergence of distressed asset funds, foreign capital inflows and a ‘federal fill up’ in terms of the second US$10bn tranche of the Dubai bond, which has eased temporarily liquidity concerns. There are now indications that the Nakheel bond will be restructured or repaid. The sector is working hard to digest the developer distress, but liquidity is still a very scarce commodity. Developers most at risk are those that sold at the peak and are now delivering into the trough. The financial sector is unlikely to bear additional banking risk, so sub-tier developers may get squeezed further with no ‘roll-over relief’ available. Future growth will likely be curbed by oversupply and the willingness of banks to grow mortgage loan books, so management of the industry is still required. We now think we are mid-cycle (previously early cycle) and have adjusted our target prices accordingly.
- We have rolled over our NAV-based valuations to 2010E (from 2009E) and made various adjustments to strike our share price targets, which increase on average 43%. We amend our average cyclical discounts from 40% to 25%, which is our mid-cycle rating, and make a number of corporate adjustments, considering cost controls, strategy, gearing, corporate disclosure and development risk to strike our fair value target prices.
- Our preferred Abu Dhabi stock and now top pick is Sorouh (rated Buy, from Neutral) over Aldar (rated Reduce, from Neutral). At face value, Sorouh is trading at 1.7x book versus Aldar’s 1x book, but removing accounting adjustments show both trading at parity (page 11), with Sorouh proving a better recycler of equity and more embedded value than Aldar, hence our preference.
- We drop our historical preference for Emaar rating to Neutral (from Buy) owing to its recent share price performance. We still rate the stock as a premier master developer, and it is our preferred Dubai-based developer. There are a number of near-term distractions that need to be addressed.
- We upgrade Deyaar to Neutral (from Reduce), profiling the distressed asset fund, and maintain our Reduce ratings for RAK Properties and Union Properties.
For complete details of the research together with the associated important disclosures please see the link attached.
Nomura's almost equal valuations for Aldar (4.15) and Sorouh (4.18) look counter intituitive to me or at least contrast to the valuations I have come across from other analysts. I also know the numbers and sizes of projects for Aldar which are much higher than those for Sorouh.
The share prices in the market (Aldar more than 50% higher than Sorouh) may make Aldar less attractive than Sorouh. But I didn't expect Aldar to have a lower or even equal valuation than Sorouh.
To just compare share prices as a valuation indicator is misleading. For a start, Aldar has substantially more shares than Sorouh. Indicators like PE, PBV, ROE, and so on are better for comparison purposes as to the cheapness or expensiveness (?) of share prices (although they all have potential flaws also). _________________ UAE IPO list | posting guidelines
I was comparing (or trying to compare) Nomura's valuations for Aldar and Sorouh (and hence recommendations) to their respective valuations from other analysts who have valued Aldar higher than Sorouh.
Where I got it wrong or misleading was when compared their market prices. I intended to say that Aldar's price might have exceeded its fair value and hence become less attractive (sell). On the other hand, Sorouh may still be less than its fair value and thus still attractive (buy). But I was surprised at the higher valuation by Nomura for Sorouh than Aldar. In fact, I have not seen any report (other than Nomura's) that has higher valuation for Sorouh than Aldar or recommended buy for Sorouh and sell for Aldar.
Even then I bought (back) Sorouh today! I think I was excited by Nomura's report!
While going through the report, I found that Nomura itself has acknowledged its valuations/recommendations for Aldar and Sorouh being at odd with other analysts.
Figure/chart 6 on page 8 of the report shows that Nomura's valuation (Dh4.62) for Sorouh is higher than other analysts' consensus target price (around Dh4) and is (4.15) lower for Aldar than others (over Dh6).
Similarly, Figure 7 on the same page shows Nomura's BUY and SELL recommendations for Sorouh and Aldar in contrast to other analysts' SELL and BUY recommendations (majority ratings), respectively.
Thanks, Cash King. When I will be cash king like you, I will be reading more attractive articles. Right now I am cash poor digging into research reports to find any clue where to find some treasure!
Cash King, thanks for reminding me of the cash principles. The problem arises when I buy too much in an unexpected fall - whether because of my absence from the net or my judgement (which often goes wrong!) of the extent of fall. This doesn't leave me with much cash to enjoy the next opportunity. I also have some preference for certain stocks / quantities to be kept on a longer term basis. Having said this, I agree with the rules you listed and often try to follow them.
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