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Dubai: Real estate major Emaar's stock has more than 100 per cent upward potential and it is probably one of the most misunderstood and undervalued large market-cap companies, HSBC said in a research report on Wednesday.
Walid Khalfallah and Majid Azzam, analysts with HSBC Middle East, said, "In our view, Emaar is probably one of the most misunderstood and undervalued $20 billion market-cap companies that we cover globally.
"The stock is stuck at its post-2006 market crash level, mostly because of selling by retail investors. However, with the share-for-land swap issue becoming a distant memory, we think institutional involvement and improving corporate communication should lead to a strong recovery."
Emaar shares gained 6.61 per cent in Dubai yesterday to close at Dh12.10.
The current price, say analysts, seems to ignore potential margin recovery and foreign subsidiaries.
"We value Emaar at Dh23, implying a potential total return of 102 per cent. Our 2008 net asset value (NAV) of Dh17.7 per share is at a 23 per cent discount to our discounted cash flow (DCF) value," the analysts said.
DCF is the future value of all projects discounted back. Even if Emaar cancelled all future projects and halted construction on unsold developments, analysts believe theoretically only Dh8.5 would be taken off their target price and Dh6.4 off their estimated 2008 NAV.
"We believe the stock currently trades at our estimated floor NAV of Dh11.3. We expect margins will bottom out in 2008 and should progressively improve."
Gross margins came under pressure in 2006 and 2007 as plot sales declined and the US business suffered losses. This was the main reason behind the significant negative earnings revision last year.
HSBC analysts used DCF to value all projects where development plans have been completed based on built-up areas.
While a typical developer margin 15 per cent (margin on top of NAV), analysts have assumed 30 per cent margin higher than NAV to arrive at a DCF value (Dh23).
"We believe the difference is justified, because our model implicitly includes price and rental appreciation, while the static NAV calculation does not. Furthermore, investment properties are understated in our NAV calculation," they said.
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