14-Aug-2017
Damac Properties - 2Q17 results: No positive surprises; results broadly in line with estimates
Rating: Sell
Target Price: AED2.63
Closing Price: AED3.84
Contracted sales, net income meet estimates
Contracted sales rose 12% Y-o-Y to AED1.8bn, bringing 1H17 total to AED4.0bn (+11%). Revenue came in at AED1.6bn in 2Q17 (-11% Y-o-Y, -19% Q-o-Q, EFGe: -8%), with a record low contribution from development property (AED926mn, -36% Y-o-Y, -14% Q-o-Q). This brought 1H17 revenue to AED3.5bn (+4.2% Y-o-Y). Gross profit margin was stable, supported by a high contribution from land sales (from increased villa sales in Akoya Oxygen). Net income roughly met our estimate (-2.8%), coming in at AED705mn in 2Q17 (-21% Y-o-Y, -20% Q-o-Q), and AED1.6bn in 1H17 (-18.2% Y-o-Y). Earnings were further helped by the booking of AED129mn in income from cancellations in 2Q17 and AED215mn in 1H17 (vs. AED99mn in 2Q16, AED411.5mn in 1H16).
Leverage rose sequentially on newly-issued USD500mn sukuk
Total debt rose by 25% Q-o-Q to reach AED5.4bn; with a USD500mn (AED1.84bn) sukuk issuance in April 2017, partially offset by the repurchase of AED727mn from an earlier sukuk issuance, which matures in Apr-19. Damac’s net cash position is AED3.24bn; we note, however, that c78% of its cash balance is held in an escrow account, to be released upon units’ delivery. Management had indicated that the construction of the 2,000-unit Damac Tower (Paramount Hotels) is close to completion, while 1,071 units were delivered in 1H17 (521 in 2Q17) at DAMAC Hills, bringing the total deliveries to date in the project to c3,100 units. Construction of c5,000 units are underway at Akoya Oxygen, with a further 1,300 villas scheduled to begin construction in Sep-17.
Reiterate Sell rating as recent outperformance is unjustifiable
Damac’s recent outperformance (3M: +33%, DFMGI: +6%) is unjustifiable, in our view. The stock trades at a 46% premium to its 2017e NAV compared to an average trading discount of 14% since listing in Jan-15, with no major improvement in the underlying operations backing such outperformance/premium. We expect contracted sales in 2017-18 to be roughly unchanged Y-o-Y, following a 26% Y-o-Y drop in 2016. That said, we expect it to continue to offer attractive dividend yields in the short term, with payout supported by the cash releases from the escrow account, as more deliveries are planned over the coming 18 months. We estimate a dividend of AED0.25/share in 2017 and 2018; offering a dividend yield of 6.4%. We note, however, that we have concerns over the longer-term outlook for dividend payments, given its relatively weak new sales booked since 2015.
Mai Attia
Sara Boutros
Target Price: AED2.63
Closing Price: AED3.84
Contracted sales, net income meet estimates
Contracted sales rose 12% Y-o-Y to AED1.8bn, bringing 1H17 total to AED4.0bn (+11%). Revenue came in at AED1.6bn in 2Q17 (-11% Y-o-Y, -19% Q-o-Q, EFGe: -8%), with a record low contribution from development property (AED926mn, -36% Y-o-Y, -14% Q-o-Q). This brought 1H17 revenue to AED3.5bn (+4.2% Y-o-Y). Gross profit margin was stable, supported by a high contribution from land sales (from increased villa sales in Akoya Oxygen). Net income roughly met our estimate (-2.8%), coming in at AED705mn in 2Q17 (-21% Y-o-Y, -20% Q-o-Q), and AED1.6bn in 1H17 (-18.2% Y-o-Y). Earnings were further helped by the booking of AED129mn in income from cancellations in 2Q17 and AED215mn in 1H17 (vs. AED99mn in 2Q16, AED411.5mn in 1H16).
Leverage rose sequentially on newly-issued USD500mn sukuk
Total debt rose by 25% Q-o-Q to reach AED5.4bn; with a USD500mn (AED1.84bn) sukuk issuance in April 2017, partially offset by the repurchase of AED727mn from an earlier sukuk issuance, which matures in Apr-19. Damac’s net cash position is AED3.24bn; we note, however, that c78% of its cash balance is held in an escrow account, to be released upon units’ delivery. Management had indicated that the construction of the 2,000-unit Damac Tower (Paramount Hotels) is close to completion, while 1,071 units were delivered in 1H17 (521 in 2Q17) at DAMAC Hills, bringing the total deliveries to date in the project to c3,100 units. Construction of c5,000 units are underway at Akoya Oxygen, with a further 1,300 villas scheduled to begin construction in Sep-17.
Reiterate Sell rating as recent outperformance is unjustifiable
Damac’s recent outperformance (3M: +33%, DFMGI: +6%) is unjustifiable, in our view. The stock trades at a 46% premium to its 2017e NAV compared to an average trading discount of 14% since listing in Jan-15, with no major improvement in the underlying operations backing such outperformance/premium. We expect contracted sales in 2017-18 to be roughly unchanged Y-o-Y, following a 26% Y-o-Y drop in 2016. That said, we expect it to continue to offer attractive dividend yields in the short term, with payout supported by the cash releases from the escrow account, as more deliveries are planned over the coming 18 months. We estimate a dividend of AED0.25/share in 2017 and 2018; offering a dividend yield of 6.4%. We note, however, that we have concerns over the longer-term outlook for dividend payments, given its relatively weak new sales booked since 2015.
Mai Attia
Sara Boutros