CASE STUDY: Emaar Properties PJSC: Investment Risk Emaar Properties is a real estate development company located in
Question:
CASE STUDY: Emaar Properties PJSC: Investment Risk
Emaar Properties is a real estate development company located in the United Arab Emirates (UAE). It was founded and incorporated in 1997 by chairman Mohamed Alabbar. It is a public joint-stock company, listed on the Dubai Financial Market in 2000, and has a valuation of US$9.7 billion as of June 2018. The company operates internationally providing property development and management services. With six business segments and 60 active companies, Emaar has collective presence in 36 markets across the Middle East, North Africa, Pan-Asia, Europe and North America. Emaar Properties Dubai is one of the largest real estate developers in the UAE and is known for various large-scale projects such as developing Burj Khalifa, the tallest building in the world. In-line with growing risk in the world economy, Emaar has diversified interests in real estate including both commercial and residential property development, as well as malls and hospitality. Examples of Emmar diversified local and international projects are: Emaar Properties, Emaar International, Emaar Hospitality, Emaar Malls, Emaar Hotels & Resorts, Emaar Retail, Burj Khalifa, Emaar Community Management, Emaar Technologies, Emaar Industries and Investments, Amlak Finance, Emaar Investment Holdings, Hamptons International
Assume that you recently graduated with MBA in finance, and you just landed a job as a financial analyst with Emaar-Dubai.Your first assignment is to invest AED 10,000,000 based on your own investment selection.Because the funds are to be invested in a business at the end of one year, you have been instructed to plan for a one-year holding period.Further, your boss Ahmed Azizy has restricted you to the following investment alternatives, shown with their probabilities and associated outcomes.
Table 1: Returns on Alternative Investments: Estimated Rates of Returns
State of the
Probability
Dubai-Bonds
Emaar
Amlak
Hamptons
Market Portfolio
2-stock Portfolio
DFM Index
Recession
0.1
4.0%
-25.0%
28.0%
10.0%*
-13.0%
3%
-10.0%
Below average
0.2
4.0
-4.0
14.7
-10.0
1.0
-6.0%
Average
0.4
4.0
20.0
0.0
7.0
15.0
10.0
12.0%
Above average
0.2
4.0
30.0
-10.0
45.0
29.0
15.0%
Boom
0.1
4.0
40.0
-20.0
30.0
43.0
15.0
20.0%
Beta (?)
0.0
1.0
*Note that the estimated returns of Hamptons International do not always move in the same direction as the overall economy.For example, when the economy is below average, consumers purchase fewer mattresses than they would if the economy was stronger.However, if the economy is in a flat-out recession, a large number of consumers who were planning to purchase a more expensive inner spring mattress may purchase, instead, a cheaper foam mattress.Under these circumstances, we would expect Hampton's stock price to be higher if there is a recession than if the economy was just below average.
Mr. Najeeb's economic forecasting staff has developed probability estimates for the state of the economy, and its security analysts have developed a sophisticated computer program, which was used to estimate the rate of return on each alternative under each state of the economy.Emmar is a real estate developer; Amlak is a finance company that provides finance when banks are not accessible; and Hamptons International is a premier international real estate company in Dubai offering an extensive portfolio of properties in the UAE and internationally.Mr. Najeeb also maintains an "index fund" which owns a market-weighted fraction of all publicly traded stocks in Dubai Financial Market (DFM); you can invest in that fund, and thus obtain average stock market results.The average expected return of DFM is 10% and the standard deviation (?) is 9% with a 1.0 beta (?).
The project manager, Mr. Naser Al Meri noticed that profits are growing over the last 5 years. Therefore, he had embarked upon an expansion project, which had the potential of increasing sales by about 10% per year over the next 3 years in the worst case, 20% in the normal, and 30% in the best case scenario. The additional capital needed to finance the project had been estimated at AED 350m. He asked you about whether financing the project by fixed rate debt or issue common stocks to raise the needed fund. The board of directors held a meeting to discuss the issue of finance but they were equally divided in their opinion of which financing route should be chosen. As a graduate with MBA from Ajman University, you have to prove your worth to Emaar by suggesting a solution to this dilemma. Your suggestions may be around either: Homemade leverage or creating different scenarios around look before leverage. It is a good opportunity to make use of the financial information provided in Table 2 (Income Statement), Table 3 (Balance Sheet), and Table 4 (Key Ratios).
Emaar Case: Part One Questions:
1.Why is the Dubai Bond's return independent of the state of the economy? Do Dubai Bonds promise a completely risk-free return?
2.Why are Emaar's returns expected to move with the economy whereas Amlak's are expected to move counter to the economy?
3.Calculate the expected rate of return on each alternative and fill in the blanks on the row for (?) in the table above.
4.You should recognize that basing a decision solely on expected returns is only appropriate for risk neutral individuals.Since your client, like virtually everyone, is risk averse, the riskiness of each alternative is an important aspect of the decision.One possible measure of risk is the standard deviation of returns. Calculate the expected return and estimate the risk value for each alternative.
5.Suppose you suddenly remembered that the coefficient of variation (CV) is generally regarded as being a better measure of stand-alone risk than the standard deviation when the alternatives being considered have widely differing expected returns.Calculate the missing CVs.Does the CV produce the same risk rankings as the standard deviation?
6.Suppose you created a 2-stock portfolio by investing AED 10,000,000 in Emaar and AED 8,000,000 in Amlak. Calculate the expected return (?p), the standard deviation (?p), and the coefficient of variation (CVp) for this portfolio.
7.Suppose an investor starts with a portfolio consisting of one randomly selected stock.What would happen (1) to the riskiness and (2) to the expected return of the portfolio as more and more randomly selected stocks were added to the portfolio?What is the implication for investors?
8.Should portfolio effects influence the way investors think about the riskiness of individual stocks?
9.If you decided to hold a 1-stock portfolio, and consequently were exposed to more risk than diversified investors, could you expect to be compensated for all of your risk; that is, could you earn a risk premium on that part of your risk that you could have eliminated by diversifying?
10.How is market risk measured for individual securities? How are beta coefficients calculated?
Part Two Questions:
1.Provide comprehensive analysis on the capital structure of Emaar over the last 5 years and explain its impact on performance of the company.
2.Explain the reasons behind the decline in the free cash flow.
3.Based on the 5-years balance sheets and cash flow statements, comment on the dividend policy of Emaar.
4.If Emaar plans to keep the same rate of growth, what the optimal mechanism of raising fund for its new investments?
5.How do you compare Emaar with other competitors on the bases of:
EPS,
Capital structure and risk of debt,
Ability to raise internal finance, and
Dividend policy.
Appendix
Table 2: Emaar Properties PJSC | Ratios - Key Metrics |
Ratios - Key Metrics
Column1
Industry Median
2018
2017
2016
2015
2014
Earnings Quality Score
50
57
41
40
66
69
Profitability
Gross Margin
42.6%
54%
55%
58%
60%
60%
EBITDA Margin
27.5%
39%
39%
40%
40%
47%
Operating Margin
26.4%
32%
33%
34%
31%
35%
Pretax Margin
29.8%
35%
35%
39%
33%
37%
Effective Tax Rate
23.7%
0%
1%
1%
-1%
0%
Net Margin
22.6%
35%
35%
39%
34%
37%
DuPont/Earning Power
Asset Turnover
0.19
0.23
0.18
0.18
0.18
0.14
x Pretax Margin
29.8%
35%
35%
39%
33%
37%
Pretax ROA
5.5%
8%
6%
7%
6%
5%
x Leverage (Assets/Equity)
2.92
2.32
2.37
2.44
2.09
2.25
Pretax ROE
18.5%
19%
15%
16%
13%
11%
x Tax Complement
0.73
68%
84%
89%
90%
89%
ROE
13.8%
13%
13%
14%
12%
10%
x Earnings Retention
0.67
82%
100%
80%
74%
67%
Reinvestment Rate
10.2%
11%
13%
11%
9%
7%
Liquidity
Quick Ratio
0.60
-
-
-
-
-
Current Ratio
1.31
-
-
-
-
-
Times Interest Earned
6.5
-
-
-
-
-
Cash Cycle (Days)
658.1
141.6
104.4
86.2
18.3
50.1
Leverage
Assets/Equity
2.92
2.32
2.37
2.44
2.09
2.25
Debt/Equity
0.72
0.44
0.45
0.44
0.35
0.37
% LT Debt to Total Capital
21.3%
0.241
0.252
0.275
0.235
0.242
(Total Debt - Cash) / EBITDA
4.14
0.6
0.04
-
-
-
Operating
A/R Turnover
2.6
2.2
3.5
4.2
4
7.3
Avg. A/R Days
141.8
167.3
104.4
86.2
92.1
50.1
Inv Turnover
0.5
53.5
-
-
-
-
Avg. Inventory Days
811.1
6.8
-
-
-
-
Avg. A/P Days
135.0
32.5
-
-
73.9
-
Fixed Asset Turnover
12.87
2.35
1.82
1.67
1.56
1.22
WC / Sales Growth
1.1%
-
-
-
-
-
Bad Debt Allowance (% of A/R)
1.4%
0.01
0.019
-
0.027
0.05
ROIC
-
0.127
0.098
0.107
0.096
0.083
Table 3: Emaar Properties PJSC | Income Statement |
Income Statement
Annual Standardized in Millions of U.A.E. Dirhams
Column1
Column2
Column3
Column4
Column5
2018
2017
2016
2015
2014
Earnings Quality Score
57
41
40
66
69
Period End Date
31-Dec-2018
31-Dec-2017
31-Dec-2016
31-Dec-2015
31-Dec-2014
Revenue
25,694
18,752
15,540
13,661
9,930
Net Sales
25,694
18,752
15,540
13,661
9,930
Other Revenue, Total
--
--
--
--
--
Total Revenue
25,694
18,752
15,540
13,661
9,930
Cost of Revenue, Total
11,867
8,478
6,577
5,405
3,989
Cost of Revenue
11,867
8,478
6,577
5,405
3,989
Gross Profit
13,827
10,274
8,963
8,256
5,941
Selling/General/Admin. Expenses, Total
4,021
3,131
2,066
1,695
594
Selling/General/Administrative Expense
3,135
2,422
1,417
1,075
61
Labor & Related Expense
886
709
648
621
533
Research & Development
--
--
--
--
--
Depreciation/Amortization
689
642
601
599
580
Depreciation
689
642
601
599
580
Interest Expense, Net - Operating
--
--
--
--
--
Interest/Investment Income - Operating
512
411
353
302
276
Investment Income - Operating
512
411
353
302
276
Interest Expense(Income) - Net Operating
--
--
--
--
--
Interest Exp.(Inc.),Net-Operating, Total
512
411
353
302
276
Unusual Expense (Income)
396
0
--
301
29
Impairment-Assets Held for Use
--
--
--
301
0
Impairment-Assets Held for Sale
396
0
--
0
29
Other Operating Expenses, Total
(128)
(117)
640
1,115
1,005
Other Operating Expense
305
278
965
1,435
1,308
Other, Net
(433)
(395)
(325)
(321)
(303)
Total Operating Expense
17,357
12,545
10,238
9,417
6,473
Operating Income
8,337
6,207
5,302
4,243
3,457
Interest Expense, Net Non-Operating
--
--
--
--
--
Interest/Invest Income - Non-Operating
(364)
(338)
(27)
144
(118)
Interest Income - Non-Operating
290
261
272
432
478
Investment Income - Non-Operating
(654)
(599)
(299)
(289)
(596)
Interest Income(Exp), Net Non-Operating
--
--
--
--
--
Interest Inc.(Exp.),Net-Non-Op., Total
(364)
(338)
(27)
144
(118)
Gain (Loss) on Sale of Assets
--
--
--
--
--
Other, Net
1,035
746
806
149
356
Other Non-Operating Income (Expense)
1,035
746
806
149
356
Net Income Before Taxes
9,009
6,616
6,081
4,535
3,694
Provision for Income Taxes
(11)
68
79
(54)
8
Net Income After Taxes
9,020
6,548
6,002
4,589
3,686
Minority Interest
(2,912)
(975)
(583)
(507)
(393)
Net Income
6,108
5,572
5,419
4,082
3,293
Basic Weighted Average Shares
7,160
7,160
7,160
7,160
6,923
Basic EPS Excluding Extraordinary Items
0.85
0.78
0.76
0.57
0.48
DPS - Common Stock Primary Issue
0.15
--
0.15
0.15
0.15
Table 4: Balance Sheet
Annual Standardised in Millions of U.A.E. Dirhams
Column1
Column2
Column3
Column4
Column5
Column6
Earnings Quality Score
57
41
40
66
69
Period End Date
31-Dec-2018
31-Dec-2017
31-Dec-2016
31-Dec-2015
31-Dec-2014
Assets (AED Millions)
Cash and Short Term Investments
9,494
21,103
17,289
17,919
16,018
Cash
7,895
8,457
--
7,889
7,127
Cash & Equivalents
1,599
12,646
17,289
10,030
8,891
Accounts Receivable - Trade, Net
7,474
2,922
2,615
2,684
1,152
Accounts Receivable - Trade, Gross
7,605
3,025
--
2,746
1,236
Provision for Doubtful Accounts
(157)
(152)
--
(129)
(109)
Total Receivables, Net
15,402
8,083
2,615
4,705
2,172
Receivables - Other
7,928
5,161
--
2,021
1,020
Total Inventory
201
242
--
77
--
Inventories - Other
201
242
--
77
--
Prepaid Expenses
4,662
4,409
8,048
2,543
2,308
Other Current Assets, Total
--
--
--
--
--
Property/Plant/Equipment, Total - Gross
--
15,678
--
12,705
11,183
Buildings - Gross
--
386
--
390
432
Land/Improvements - Gross
--
7,628
--
6,729
6,511
Machinery/Equipment - Gross
--
2,132
--
1,846
1,756
Construction in Progress - Gross
--
3,407
--
1,901
613
Other Property/Plant/Equipment - Gross
--
2,125
--
1,838
1,873
Property/Plant/Equipment, Total - Net
10,648
11,237
9,331
9,333
8,214
Accumulated Depreciation, Total
--
(4,440)
--
(3,372)
(2,970)
Goodwill, Net
--
411
--
46
46
Intangibles, Net
616
216
46
--
--
Intangibles - Gross
--
220
--
--
--
Accumulated Intangible Amortization
--
(4)
--
--
--
Long Term Investments
65,090
60,028
53,740
41,805
42,463
LT Investment - Affiliate Companies
4,701
4,724
4,610
6,697
5,591
LT Investments - Other
60,388
55,304
49,130
35,108
36,872
Note Receivable - Long Term
987
727
154
3,022
2,920
Other Long Term Assets, Total
4,195
7,020
6,033
70
39
Deferred Charges
873
916
--
--
--
Defered Income Tax - Long Term Asset
178
138
--
70
39
Discontinued Operations - LT Asset
3,144
5,967
6,033
--
--
Other Assets, Total
123
161
--
37
--
Other Assets
123
161
--
37
--
Total Assets
111,419
113,637
97,256
79,557
74,179
Liabilities (AED Millions)
Accounts Payable
1,337
773
--
1,023
1,159
Payable/Accrued
5,141
3,478
11,046
2,403
1,881
Accrued Expenses
5,623
4,687
--
4,099
3,627
Notes Payable/Short Term Debt
0
0
0
0
0
Current Port. of LT Debt/Capital Leases
2,191
2,146
--
325
730
Other Current liabilities, Total
18,843
22,073
19,615
16,697
19,364
Dividends Payable
291
295
--
300
1,605
Customer Advances
13,588
17,884
18,723
14,072
15,482
Income Taxes Payable
119
92
--
54
17
Other Payables
4,845
3,802
892
2,270
2,261
Total Long Term Debt
18,719
19,422
17,350
12,949
11,622
Long Term Debt
18,719
19,422
17,350
12,949
11,622
Total Debt
20,910
21,568
17,350
13,274
12,351
Deferred Income Tax
1,874
2,080
--
5
32
Deferred Income Tax - LT Liability
1,874
2,080
--
5
32
Minority Interest
8,749
7,737
5,954
3,807
2,620
Other Liabilities, Total
903
3,350
3,462
136
134
Reserves
163
163
149
136
134
Discontinued Operations - Liabilities
723
3,169
3,313
--
--
Other Liabilities
17
19
--
--
--
Total Liabilities
63,380
65,747
57,427
41,442
41,169
Shareholders Equity (AED Millions)
Redeemable Preferred Stock, Total
--
--
--
--
--
Preferred Stock - Non Redeemable, Net
--
--
--
--
--
Common Stock, Total
7,160
7,160
7,160
7,160
7,160
Common Stock
7,160
7,160
7,160
7,160
7,160
Additional Paid-In Capital
578
578
578
578
--
Retained Earnings (Accumulated Deficit)
45,183
44,411
36,552
33,595
28,380
Treasury Stock - Common
--
--
--
--
--
ESOP Debt Guarantee
--
--
--
--
--
Unrealized Gain (Loss)
(1,358)
(1,151)
(1,127)
(1,163)
(935)
Other Equity, Total
(3,523)
(3,107)
(3,334)
(2,056)
(1,595)
Translation Adjustment
(3,523)
(3,117)
(3,319)
(2,033)
(1,592)
Other Equity
--
--
--
--
0
Other Comprehensive Income
0
10
(15)
(23)
(3)
Total Equity
48,040
47,890
39,829
38,114
33,011
Total Liabilities & Shareholders' Equity
111,419
113,637
97,256
79,557
74,179
Total Common Shares Outstanding
7,160
7,160
7,160
7,160
7,160
Table 5: Emaar Properties PJSC | Cash Flow |
Cash Flow
Annual Standardised in Millions of U.A.E. Dirhams
2018
2017
2016
2015
2014
Earnings Quality Score
57
41
40
66
69
Period End Date
31-Dec-2018
31-Dec-2017
31-Dec-2016
31-Dec-2015
31-Dec-2014
Cash Flow-Operating Activities (AED Millions)
Net Income/Starting Line
9,008.7
6,615.9
6,080.5
4,535.3
3,694.2
Depreciation/Depletion
689.0
641.5
601.5
901.0
855.3
Depreciation
689.0
641.5
601.5
901.0
855.3
Amortization
11.6
4.4
0.0
--
--
Amortization of Intangibles
11.6
4.4
0.0
--
--
Deferred Taxes
--
--
--
--
--
Non-Cash Items
707.4
463.3
49.6
204.6
229.7
Unusual Items
8.9
5.7
12.2
298.9
1.4
Equity in Net Earnings (Loss)
(49.7)
(134.8)
(299.6)
(188.8)
87.5
Other Non-Cash Items
748.2
592.4
337.0
94.5
140.8
Changes in Working Capital
(9,978.5)
(5,158.4)
(4,246.9)
(28.0)
3,051.1
Accounts Receivable
(4,592.4)
(247.3)
97.9
(870.1)
(579.2)
Other Assets
(5,485.8)
(6,804.9)
(2,552.1)
(1,075.4)
(2,378.7)
Accounts Payable
3,428.5
2,813.4
(1,256.4)
430.8
289.4
Taxes Payable
(27.3)
(11.6)
25.3
1.8
1.1
Other Liabilities
(4,296.8)
(845.1)
(561.6)
1,484.9
5,718.6
Other Assets & Liabilities, Net
995.3
(62.9)
0.0
--
--
Cash from Operating Activities
438.3
2,566.8
2,484.7
5,613.0
7,830.3
Cash Flow-Investing Activities (AED Millions)
Capital Expenditures
(2,642.0)
(1,947.2)
(1,206.7)
(1,272.3)
(754.7)
Purchase of Fixed Assets
(2,641.0)
(1,947.2)
(1,206.7)
(1,272.3)
(754.7)
Purchase/Acquisition of Intangibles
(1.0)
0.0
--
--
--
Other Investing Cash Flow Items, Total
1,136.1
4,771.4
(1,556.5)
(2,084.3)
3,274.0
Acquisition of Business
0.0
(555.4)
0.0
--
--
Sale of Business
0.0
132.2
13.5
--
5,800.0
Sale of Fixed Assets
48.6
77.4
29.9
7.7
4.9
Sale/Maturity of Investment
2,218.3
1,839.6
438.8
21.3
1,845.4
Investment, Net
867.3
5,370.6
(1,196.1)
(1,535.9)
(4,441.6)
Purchase of Investments
(3,001.2)
(2,863.5)
(1,490.3)
(936.6)
(394.3)
Other Investing Cash Flow
1,003.1
770.6
647.8
359.2
459.6
Cash from Investing Activities
(1,505.9)
2,824.2
(2,763.2)
(3,356.6)
2,519.3
Cash Flow-Financing Activities (AED Millions)
Financing Cash Flow Items
(957.9)
(868.3)
(790.7)
471.8
(604.7)
Other Financing Cash Flow
(957.9)
(868.3)
(790.7)
471.8
(604.7)
Total Cash Dividends Paid
(4,545.0)
(1,494.0)
(1,397.9)
(2,378.3)
(8,497.4)
Cash Dividends Paid - Common
(4,545.0)
(1,494.0)
(1,397.9)
(2,378.3)
(8,497.4)
Issuance (Retirement) of Stock, Net
--
--
--
--
--
Issuance (Retirement) of Debt, Net
(678.6)
4,251.3
3,104.8
908.1
2,397.3
Long Term Debt Issued
5,238.5
6,435.6
5,872.0
1,588.4
7,934.2
Long Term Debt Reduction
(5,917.0)
(2,184.3)
(2,767.2)
(680.3)
(5,529.5)
Long Term Debt, Net
(678.6)
4,251.3
3,104.8
908.1
2,397.3
Cash from Financing Activities
(6,181.4)
1,889.1
916.2
(998.4)
(6,704.8)
Foreign Exchange Effects
(29.2)
(0.3)
(558.5)
(46.8)
(12.9)
Net Change in Cash
(7,278.2)
7,279.8
79.3
1,211.1
3,631.9
Net Cash - Beginning Balance
16,240.9
8,961.1
8,881.8
7,670.8
4,038.9
Net Cash - Ending Balance
8,962.7
16,240.9
8,961.1
8,881.8
7,670.8
Cash Interest Paid
945.9
834.9
759.1
438.1
604.7
Free Cash Flow
(2,203.7)
619.6
1,278.0
4,340.7
7,075.5
Table 6: Competitors Data
Name
Last Price
PE
Est. PE
EPS
Ccy
DPS
Ccy
Div. Yld (%)
ROE (%)
P/Book
P/Sales
Mcap
Emaar Properties PJSC
4.74 c
5.56
5.18
0.85
AED
0.15
AED
3.14
12.73
0.71
1.32
33,937,162,301
Sector average (Mean)
--
50.07
9.89
0.20
AED
0.06
AED
1.69
9.48
0.76
6.54
6,562,685,798
Sector median
--
8.98
5.69
0.08
AED
0.00
AED
0.00
3.89
0.45
3.01
1,355,494,682
Emaar Properties PJSC
4.74 c
5.56
5.18
0.85
AED
0.15
AED
3.14
12.73
0.71
1.32
33,937,162,301
Aldar Properties PJSC
2.12 c
8.98
7.82
0.24
AED
0.14
AED
6.51
7.88
0.69
2.65
16,904,653,646
Emaar Development PJSC
4.15 c
4.26
4.52
0.98
AED
0.26
AED
6.33
59.89
2.09
1.08
16,600,000,000
Wahat Al Zaweya Investment & Real Estate Development LLC
2.43 c
13.90
--
0.17
AED
0.02
AED
0.93
21.40
2.25
4.89
5,619,931,553
Damac Properties Dubai Co PJSC
0.896 c
4.71
16.82
0.19
AED
0.00
AED
0.00
8.24
0.38
0.88
5,420,800,000
Deyaar Development PJSC
0.335 c
13.81
33.80
0.02
AED
0.00
AED
0.00
2.96
0.43
3.01
1,935,630,000
Union Properties PJSC
0.316 c
21.75
10.53
0.01
AED
0.00
AED
0.00
2.16
0.44
2.71
1,355,494,682
Manazel Real Estate PJSC
0.403 c
4.54
4.60
0.09
AED
--
--
--
7.92
0.36
1.29
1,076,400,000
Eshraq Investments PJSC
0.403 c
310.00
--
0.00
AED
0.00
AED
0.00
0.21
0.65
36.04
953,250,000
RAK Properties PJSC
0.448 c
5.95
5.69
0.08
AED
0.00
AED
0.00
3.89
0.23
8.84
910,000,000
Al Ramz Corporation Investment and Development PJSC
0.958 c
157.31
--
0.01
AED
--
--
--
0.69
1.11
5.46
526,819,392
Sharjah Group Company PSC
0.89 c
--
--
-0.10
AED
0.00
AED
0.00
-4.75
0.45
5.35
70,221,967
Dana Group International Investments Ltd
0.3 c
--
0.05
0.00
AED
--
--
--
-0.01
0.02
11.47
4,551,830
Expert Answer:
