How would Emaar fare in a recession?

A recent survey has predicted a 28 per cent fall in property prices but the greater danger lies in an adverse impact of a slowdown on sales volume.

But Dubai's real estate sector is based on a solid risk management structure. Even if the price fall is compounded by the deceleration in business volume, corporate giants will be able to tide over the crisis.

In view of the global financial crisis, it would be interesting to evaluate growth (decline), profitability and crises of Emaar Properties PJSC, the largest developer in the Middle East.

Propelled by a 207 per cent CAGR (compound annual growth rate) of its top line and solid operating performance, Emaar has diversified into six business segments in more than 60 markets and has continuously rewarded its shareholders with high value addition.

Revenue of Emaar Properties grew 335-fold from Dh52.4 million in 1999 to Dh17,566 million in 2007 with 254-times gross profit growth over eight years.

Apart from a 1:10 stock split in 2004, the Dubai property giant rewarded its shareholders with a 22 per cent bonus in two tranches in 2005.

Vulnerability

How vulnerable is Emaar in the recessionary phase that caused panic, bringing down its market price from more than Dh15 to Dh2.42 (52-week low, 2.30 P/E)? Based on its third-quarter report, Emaar's sales are down just 4.52 per cent but its profit is up on a quarter-to-quarter basis.

But the realty market has deteriorated in the past two months because of the low level of investible funds.

In case real estate prices in the UAE fall by an estimated 28 per cent, its sales in the current year will be down 12.39 per cent, with an adverse effect of Dh0.20 on its EPS (earnings per share), an anticipated fall from the 2007 level of Dh1.08 to Dh0.88. In a scenario of a prolonged recession through 2009, the projected revenue of Emaar that would be adversely impacted is about Dh4.92 billion at a 28 per cent price cut level with a large negative EPS hit of Dh0.82 per share.

Still the company will have an EPS of Dh0.26, the 2003 level with a forward PE of 9. Emaar can sustain a 25 per cent decline in volume and a 28 per cent fall in prices - that is its maximum tolerance before it will lose. This is a very high margin of safety by any means. Still, Emaar should urgently draw up a strategy to ride over such an adverse outcome.

Moreover, a few points go in favour of Emaar Properties. It has geographic diversification to deal with property market crises in particular regions.

It is lowly leveraged and thus carries a low level of refinancing risk which is critical in times of scarce liquidity and it has enough profitability to survive a sharp price fall. To bolster the realty sector, it is expected that the authorities will adopt further policies on the basis of the presentation of the ministers and bank chiefs to the elected council.

- The writer is Professor of Institute of Management Technology, Dubai