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Emaar can expect Q2 'earnings momentum'

With Emaar not booking any provisions or impairments during the recent quarter, analysts maintain that the company might be done with provisions, and forecast an even better Q2 for the real estate major.

"We believe that most bad assets have already been written off on Emaar 's [balance sheet], which should help maintain positive earnings momentum," Majed Azzam, Analyst - Real Estate, HC Securities, told Emirates Business.

Emaar had provisioned a collective Dh203 million in impairment costs in Q4 2009 - Dh49m for loss from discontinued operations (primarily in the US) and Dh154m as share of impairment in group's financial associate (Islamic mortgage provider Amlak Finance ).

"Recurring income from the malls and hotels provide earnings and cash flow visibility and also put a floor underneath the valuation," added Azzam.

"The results show that the business is improving," concurred Ahmed Badr, Real Estate Analyst at Credit Suisse, from his office in Dubai.

Moreover, analysts expect losses from associates to turn into profits from the current quarter onwards. "We expect losses from associated companies to turn positive in Q2 this year while continuing losses still expected from Emaar Economic City in Saudi Arabia and Amlak in the UAE," said Azzam.

The UAE's largest real estate firm booked 34 per cent lower losses from associated companies - Dh57m in Q1 2010 compared with Dh87m in Q4 2009.

" Emaar 's India operations should start contributing positively to the associate line from Q2 onwards, with the delivery of the Commonwealth Village," Azzam added.

"Internationally, we see Egypt as one of the main contributors to the bottom line going forward," added Credit Suisse's Badr.

"We foresee a quarter-on-quarter growth in Q2, primarily on the back of deliveries in Burj Khalifa ; and rental income from malls and hotels," he added.

Both Credit Suisse and HC Securities remain bullish on the company's share price.

"We maintain our 'outperform' rating on Emaar with a target price of Dh5.25," said Badr.

"We expect Q2 results to be on the same lines as Q1, and have a 'buy' rating on the share, with a target price of Dh6.6," added Azzam.

In a note authored by Badr, Credit Suisse said one of the reasons behind the better-than-expected numbers was "higher than expected revenue from malls and hotels businesses on the back of higher occupancy rates and increased footfall in Dubai Mall by 30 per cent in last February".

The bank also reckoned that Emaar derived "the bulk of revenue" from delivery of sold properties. "We think that Burj Khalifa might have considerably contributed to overall revenues in Q1," the note said.

In addition, lower marketing and administration expenses, as well as declining losses from associates, boosted Emaar Properties' net profits by Dh124m during Q1 2010 compared with the last quarter of 2009, data shows.

Emaar incurred Dh450m as selling, marketing, general and administration expenses (collectively referred to as SGA on the income statement) in the most recent quarter, 17 per cent lower than the Dh544m it incurred in the preceding three months.

"SGA is down quarter-on-quarter but it is more or less in line with Q1 of 2009 - there is an amount of cyclicality in these expenses and we shouldn't read too much into these numbers," said Azzam. "However, overall the trend [on expenditure] has been downward," he added.

Emaar reported Dh760m in net profits for Q1 2010, which is up 5.6 per cent q-o-q and more than triple Q1 2009 numbers. Unlike Q4 2010, the company did not book any provisions or impairments during the recent quarter.

By Vicky Kapur

© Emirates Business 24/7 2010