Emaar Development, the UAE built-to-sell (BTS) property development business of Emaar Properties, is currently undergoing initial public offering (IPO) on the DFM market with an intention to raise capital in the range of $1.24 billion and $1.50 billion (Dh4.56 billion to Dh5.51 billion). This IPO will be the 18th public offering in the UAE over the past decade (total capital raised in the past 10 years: $9.8 billion), and will be the third largest offering, just behind $4.2 billion raised by DP World in 2007 and $1.6 billion raised by Emaar Malls in 2014. Based on the IPO offering prospectus, the company would be valued in the range of Dh22.8 billion ($6.2 billion) and Dh27.6 billion ($7.5 billion), compared to Emaar Mall’s IPO valuation of Dh37.7 billion ($10.3 billion).
Although the UAE IPO offerings over the past decade have been generally unappealing from investors’ returns perspective, with only 3 companies trading above their IPO price, we consider IPO of this UAE development jewel will further deepen the UAE listed markets, and infuse some liquidity in the market. At mid-point of the IPO price range, we estimate that the company will have around 5 per cent weight in the DFM index and will be the seventh largest constituent within the DFM index. Also, we expect that Emaar Development could account for 4-6 per cent of the DFM market turnover on a recurring basis, compared to Emaar Malls’ average contribution of 2.4 per cent ($3.5 million) to the market liquidity since November 2014.
Emaar Development has been a UAE development giant with unparalleled scale and deliveries of over 34,500 since 2002.
Since inception in 1997, Emaar Development has operated as a part of Emaar Properties, which is 29.2 per cent owned by Investment Corporation of Dubai (the “ICD”) – the investment arm of the Government of Dubai. Emaar Development, a name behind all the major milestone buildings/areas in Dubai, including Burj Khalifa, the Downtown, the Marina etc, will focus on developing BTS assets in the UAE, while will also manage development of built-to-lease (BTL) and built-to-own (BTO) assets in the UAE on behalf of its parent, Emaar Properties, for a management fee. The company’s pivotal role in making Dubai a global destination is well exemplified by the fact that it is instrumental behind 22 per cent of the total freehold units available in Dubai, and around 7 per cent of the total residential dwellings in Dubai. Between 2013 and 2Q17, the company (including JVs/JDA) sold 20,800 units, worth Dh65.2billion ($17.8 billion). Looking ahead, the company expects to deliver another 22,800 units by 2020, at an annualised rate of 7,000, which if executed timely would equate to around one-half of the total residential units delivery expected by JLL during this time period. As of Q3 2017, the company’s (including JVs/JDA) backlog stood at Dh41 billion compared to the second-largest listed developer, Damac, 2016-end backlog of Dh13.6 billion.
IPO to unlock value for Emaar Properties
Emaar Development is offering 20 per cent of its shares (total shares offered: 800 million), with 90 per cent of the share offering to the qualified investors and 10 per cent offering to the retail investors. The IPO price range of Dh5.7 and Dh6.9 translates into gross IPO proceeds in the range of Dh4.56 billion and Dh5.52 billion, and all the proceeds of the IPO will be received by the selling shareholder, Emaar Properties. We expect significant demand for the IPO, well reflected by market reports of the entire institutional tranche been covered on the first day of the subscription (Nov 2). The IPO subscription period ends on Nov 13 for the retail investors and on Nov 15 for the qualified investors, with pricing expected on November 16 and DFM listing on November 22. We consider that this IPO will translate into significant value unlocking for Emaar Properties due to: 1) better market understanding and valuation benchmark for the underlying UAE development portfolio, 2) special dividends to Emaar Properties through leveraging the entity, 3) clear medium-term dividend policy of Emaar development, and 4) increasing total potential weight of Emaar and its related entities (Emaar Malls, Emaar Development) in the DFM index.
We believe that historically the market used to assign significant discount to Emaar Properties’ UAE development portfolio as a) company had limited disclosures on its development plans, and b) the company used to combine its UAE development portfolio with its international development portfolio. Looking ahead, we see that the company has significantly enhanced the information available pertaining to its under-construction UAE property portfolio, while also have given better insights into its long-term strategy for the UAE development, including details on the land-bank portfolio. This, in our view, will give market better perspective to value the underlying portfolio, and accordingly, will translate into better valuation. This is underscored from the IPO valuation price range of a mere 5 per cent discount to a 15 per cent premium to JLL September 2017 adjusted NAV of Dh24.1 billion — compared to Emaar Properties’ historical trading at well over 20 per cent discount to NAV and Damac’s current trading multiple of over 10 per cent premium to NAV.
Post listing, we expect the market will likely focus on the expected dividend yield in the medium-term to value the company. Emaar development’s dividend policy targets paying at least $1.7 billion (Dh6.2 billion) of dividends up to December 2020, with an inaugural dividend in third quarter of 2018, followed by an annual dividend payment in Q2 of every year. Per the prospectus, Emaar Development is expected to generate a cumulative free cash flow (FCF) from current sales backlog and escrow account of Dh16.8 billion. Given that 80 per cent of 24,000 under-construction units are pre-sold and limited low default rates for Emaar development properties historically, we are comfortable that the anticipated FCF can well cover the planned dividends up to 2020. At mid-point of the IPO valuation (Dh25.2 billion), Emaar Development’s planned dividends would translate into a nominal annual dividend yield of 8.3 per cent up to 2020. Since 2016, Damac has traded in the range of an implied forward dividend yield of 5.6 per cent and 12.4 per cent, with current multiple estimated at 6.5 per cent. Interestingly, Damac’s current market capitalisation at Dh23 billion is some 9 per cent lower than Emaar Development’s mid-point IPO valuation.
Although we consider the market may be focused on dividends in the medium-term to gauge potential value in Emaar development, we do not subscribe to the notion the real estate development portfolio should be valued based primarily on expected dividends in the long-term, and thus, considered to be compared to REITs for the risk-reward profile. The dividends from the real estate development portfolio could be significantly volatile, reflecting underlying real-estate outlook and planned projects by the developer, and thus, valuation should be focused more on the expected cash flows in the longer-term. This aspect is partly reflected by the fact that Emaar development’s revenue more-than-doubled between 2014 and 2016.
Special dividends to Emaar shareholders could be as high as Dh9 billion, similar to payouts post Emaar Malls IPO
We also expect that Emaar Development IPO could translate into special dividends of as high as Dh9 billion, or Dh1.25 per share, to Emaar Properties’ shareholders, translating into over 15 per cent one-time dividend yield. We note that ahead of its IPO, Emaar Development has taken a loan of Dh4 billion and primarily used the proceeds to pay a dividend of Dh3.91 billion to Emaar Properties, which is 10 per cent higher than the dividend of Dh3.55 billion given to Emaar Properties by Emaar Malls pre IPO. Emaar Properties paid a Dh9 billion special dividend to its shareholders post Emaar Malls IPO, and expected IPO proceeds of over Dh5 billion coupled with received dividends from Emaar development can support similar payout to Emaar Properties’ shareholders, in our view. This IPO will also translate into increasing weightage of Emaar (and related entities) in DFM index as DFM index construction reduces the market cap of any company to a maximum of 20 per cent of the total index market cap, and thus, translating into lower weightage for Emaar at current time. We expect Emaar Development to be added to DFM index in late December, after a month of trading, and having a weight of around 5 per cent in the index.
In a nutshell, we see Emaar development IPO to offer global (and regional) investors a great vehicle to take part in Dubai’s continually enhancing real estate appeal. Emaar Malls IPO was over 30x oversubscribed for institutional tranche (retail: 20x) and we see significant appeal for Emaar development IPO as well. However, at the top-end of the IPO range, we consider that Emaar properties offer a better risk-reward proposition to the investors.
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