• Initiate with a Neutral rating; our FV is set on 0.8x 2016e NAV We set our FV for Damac Properties (Damac) at AED2.40, implying 3% downside potential; hence, our Neutral rating. We set our FV on 0.8x 2016e NAV, to match the avg. historical trading discount-to-forward looking NAV. We question the sustainability of its strong sales numbers contracted in 2014-15 and hold a relatively bearish view on booked sales for 2016-17 (c12% lower, on average, for both years, versus 2015, in line with mgmt guidance). This is consistent with our relatively cautious outlook on residential property prices in Dubai. That said, trading multiples are undemanding (2016e PE: 3.9x, 2017e: 3.4x), albeit with limited earnings visibility. Moreover, the board-committed cash dividend of AED0.25 implies an attractive yield of 10.1%.
• High-risk profile: undiversified revenue, high geographic and segmental concentration, limited cash shield We believe Damac is not an attractive investment opportunity, in a backdrop of expected continued market softness in 2016-17, given: i) its relatively undiversified revenue mix compared to peers such as Emaar Properties, with full reliance on property sales; ii) low visibility on future cash inflow, in the absence of recurring income generating assets (putting dividend commitment at risk); iii) its geographical and segmental concentration in the Dubai residential segment; iv) limited cash shield, with c90% of the company’s cash balance held in escrow account, which is restricted to the building of launched and sold projects; and v) its concentrated buyers’ base, with high representation of GCC/Saudi investors, who we argue may show relatively lower appetite for real estate investment in the short term.
• Bull case scenario offers 34% upside; bear 43% downside In light of current increasing concerns over the outlook of Dubai’s property market, we conducted a bull-bear scenario analysis to highlight various operating market conditions. Our bull case value of AED3.32/share is based on 1.0x 2016e NAV, assuming more stability in market conditions in the short term, allowing for better-than-expected sales volumes and stronger pricing. To derive our bear case valuation, we set our value of AED1.41/share on 0.6x 2016e NAV; this assumes tougher market conditions, with 2016-17e booked sales figures cut to a half (versus 2015).

Mai Attia
Sara Boutros