• What is in our numbers? We inch up our fair value by 2.6% to AED3.16/share, implying 5.3% upside; hence, we downgrade our rating to Neutral. We highlight that since our last update the stock was up 25% (versus 19% for DFM). Our new fair value assumes a slowdown in tenant sales in 2016 (-7% Y-o-Y) and that this would increase by 13% in 2017, following the opening of the fashion avenue expansion in the early months of the year. Upon calculating the terminal value, we maintain the cap rate unchanged at 7%; this compares to 5% assumed by the independent valuer’s report when calculating the fair value of the company’s assets.
• Bear case scenario: drop in sales turnover in 2016-17, lower rates for the expansion and higher cap rate In this scenario, we highlight an operating environment, where a global economic slowdown and economic challenges in the region prevail. Such conditions would entail lower retail spending and eventually reflect negatively on tenant sales, which we forecast would drop 10% in 2016 and 1% in 2017 despite the new space opening its doors during the year. We also incorporate lower lease rates reflecting an environment where tenants’ negotiating power would increase; thus, putting pressure on overall rent rates. We expect the new space would start operating in 2H2016 and assume lower rent rates for new tenants. As for our terminal value calculation, we assume a cap rate of 9% (+200bps versus our base case).
• Bull case scenario: Assume strong retail spending, a surge in lease rates and a cap rate of 5% Our bull case scenario assumes healthy growth in retail spending, leveraging on improved economic conditions in the region and various Asian counties (China and India, on the top list). This would, in turn, reflect positively on total tenant sales, +4% in 2016 and +19% in 2017. As for rent rates, we assume the company would be able to lease out the added space at high rent rates, similar to the signed pre-lease agreement, in the range of AED1,000-1,750/sqft. (versus AED750/sqft. in our base case). We assume a cap rate of 5% upon calculating our terminal value.

Mai Attia