• Weak tenant sales to continue, pressured further by seasonality… We expect tenant sales to have continued to be relatively weak in 2Q16, pressured further by seasonality (three weeks of Ramadan along the summer months, which does not bode well for tourism and retail activity). Without announcing an exact percentage, management has indicated that tenant sales fell by a single-digit Y-o-Y in 1Q16, which we expect has continued through 2Q16. Our numbers incorporate a 7% drop in tenant sales in 2016e, which is, so far, roughly consistent with the YTD trends.
• … but EMG’s operating results are largely shielded, in our view We expect the slowdown in tenant sales to be absorbed largely by EMG, as was seen in 1Q16, which saw revenue growing 13% Y-o-Y and net come 22%. We expect revenue of AED800mn (+10% Y-o-Y) in 2Q16, EBITDA margin of 78% (unchanged Y-o-Y) and net income of AED488mn (+19% Y-o-Y). Revenue growth will be driven by further growth in the base rent, with the rent renewals for expired contracts (20% of GLA in 2015, 5% in 1Q16) showing full effect. We note that for leases expiring in 1Q16, base rent increases saw a 35% rise over the previous lease term. We expect 2Q16 results to further prove the company’s high resilience to weakening tenant sales, which we expect to be well-received by the market. That said, the fact that valuations are full limits the extent of the stock’s positive reaction.
• Expect no major milestones for planned expansions We do not expect further progress to have been accomplished in the pre-leasing of TDM 600,000 sqft expansion, with the latest announcement from the company indicating that still only c30% of the expected GLA had signed heads of terms. We expect significant progress to be achieved in 4Q16, with management targeting to pre-lease c90% of the planned expansion before year-end. As for the capex, we expect the same slow spending trend to have continued with a major progress in expenditure spent expected in 2H16, towards the opening of the new space. We note that management attributed the delay of the completion of the TDM expansion to 1H17 to general sector-wide delays in construction.

Mai Attia
Sara Boutros