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Emaar seen as best play on Dubai property recovery

EmaarFor a bellwether, Emaar Properties — builder of the world’s tallest tower — has done quite well for itself in the past year: reflecting Dubai’s meteoric real estate sector recovery with a 104% gain in 2013 that underpinned the stock market’s stellar performance.

On Tuesday, Emaar’s stock rallied another 6.3% to 8.24 dirhams ($2.25) – its highest closing level since early September 2008, when Dubai’s much celebrated property story went from boom to bust in the wake of the global financial crisis.

But unlike several other real estate companies that struggled to come to terms with huge debt taken on during the good years to finance in some cases outlandish projects, Emaar chose to diversify its revenue model by focussing on geographic expansion and recurring income through investments in businesses such as malls and hotels.

Not surprisingly it seems to be in the best position now to benefit from a sharp revival in Dubai’s economic fortunes, some analysts say.

Investment bank EFG Hermes this week upgraded Emaar to buy, from a neutral rating previously, while raising its fair value sharply to AED10.1 from AED6.

Retail and developers multiples have expanded in the region, EFG said in a note to clients, indicating that investors are willing to pay more for growth. Emaar-specific fundamentals also continue to improve in a bull market with leasing and hospitality revenues in the first nine months of 2013 surpassing previous expectations, it said.

Moreover a strong hike in deliveries in markets outside the U.A.E. will drive revenue expansion in 2014, while a positive contribution from associates, following years of losses, will help grow the bottom line, NBAD Securities said in a recent report.

“We expect Emaar to grow revenues by +15.6% YOY to AED11.3 billion in 2014 and net profit by +40.6% from an easy comparison base in 2013,” said Sanyalaksna Manibhandu, a senior analyst at NBADS, which has a buy rating on the stock with an AED9.65 target price.

There are of course risks to Emaar’s valuations. “We still have concerns over the financial, operational and legal standing of some of its international operations, paired with very limited, yet slowly improving, disclosure,” the EFG analyst highlighted. “For instance, there is no breakdown of the assets held under the development business in the UAE, which constitutes 30% of Emaar’s value.”

But buoyed by expectations of more gains on the back of index compiler MSCI’s promotion of the U.A.E. to emerging market status in May and the perceived longer-term benefits from Dubai hosting the World Expo in 2020, most analysts and investors for now are happy to buy the Emaar story.

“We would strongly recommend to continue holding Emaar, which remains in our view a core holding of any regional portfolio,” Loic Pelichet, an analyst at NBK Capital, said.-WSJ