• Contracted sales disappoint again; reported numbers slightly beat Damac Properties (Damac) reported its 2Q16 financial results. Contracted sales was the main disappointment in the quarter (AED1.6bn, -29.2% Y-o-Y, -18.6% Q-o-Q; H1: AED3.6bn, -29% Y-o-Y). Revenue (AED1.8bn, -24.4% Y-o-Y, +8.3% Y-o-Y) beat slightly (3.2%), with revenue from constructed units up 6.3% Y-o-Y, reflecting positively on the construction pace. Gross profit margin was maintained at decent levels, above the 55% mark (2Q16: 56.5%, 1H16: 58.6%). Net income came in at AED887mn (-37.4% Y-o-Y, -15.6% Q-o-Q), beating our estimate by +15%, on the back of lower-than-expected S,G&A.  
• Trim contracted sales numbers to account for weak Q2 number We cut our contracted sales 2016 forecast to AED6.5bn, c7% below management guidance of AED7.0bn. Our estimate implies a 29% Y-o-Y drop. On the reporting level, we cut our revenue estimate by 12% in 2016e to AED7.2bn (-15% Y-o-Y) and the same for net income to AED3.6bn (-21% Y-o-Y). Management guides for flat growth rates for revenue and net income for the year. Our assumptions incorporate AED539mn in income from cancellations in 2016e, in line with management guidance of a combined AED1bn in 2016-17; AED441mn was booked in 1H16.
• Cut FV by 3%; remain Neutral despite attractive multiples We lower our FV by 3% to AED2.27 from AED2.35 and maintain our Neutral rating (4.6% downside potential). The stock is trading at attractive earnings multiples of 4.0x in 2016e and 3.8x in 2017e, offers an average dividend yield of 10.5% over the coming two years along with 20%+ ROEs. However, we reiterate our concerns over the negative impact of any potential market softness on its operations; especially as it has lately underperformed its peer Emaar Properties in terms of contracted sales growth. Additionally, we note its ability to pay a dividend is reliant on the outlook for future sales as c90% of the company’s cash balance is in escrow account and is thus restricted.

Mai Attia
Sara Boutros