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Emaar IPO offers a good deal

|By Matein Khaalid|Emaar Properties will sell 20% of its UAE development portfolio in an initial public offering in November. This is the first IPO in the UAE capital markets in the last three years and follows bellwether offerings such as Emaar Malls and Emaar Misr. Emaar’s Dubai development’s adjusted net value is 24.1 UAE dirhams and I would not be surprised if the post IPO revalues the portfolio to 30 billion AED. The crucial issue for me, as always, is the pricing, valuation and secondary market trading prospects of the IPO. Of course, the rise in Emaar Property’s share price from AED 7 to as high as AED 8.9 after the development IPO was announced in June meant that the optimal strategy was to buy the parent’s shares on the news. However, given that oil prices have doubled since their lows the US dollar index has depreciated 8% in 2017, Emaar’s offplan sales have risen above  10% amid a stressed secondary market and a de facto bank credit crunch, the fabulous margins in Dubai property development and the potential in Expo 2020, Emaar Development will be a profitable deal for investors upon its listing.

While the earnings of Emaar Development will be more volatile than those of its parent, it will also be a pure play vehicle on Dubai property development without exposure to retailing (Emaar Malls) or foreign markets (Egypt, Turkey, Saudi Arabia) risk. Emaar has unquestionably created the most formidable brand in Middle East property development, the reason its off-plan sales did not sag even as transactions, values and rentals declined in UAE real estate since 2014. In fact, Emaar Properties saw its discount to net asset value compress after the June announcement. This segment has exceptional earnings visibility till 2020, given Emaar’s development pipeline is at least 40 billion AED in this period.
In my discussions with investors, I see pervasive bearishness about the after market for UAE IPO’s. National Takaful and Marka (a blind pool to buy shwarma shop chains and cheeky monkeys, hooray!) inflicted ghastly losses on investors, losing 50 – 60% from their IPO offer price. Even Emaar Mall is down 20% from its IPO offer price, a testament to the global Amazonization of retailing and the sharp decline in retail sales. In fact, apart from Amanat, every IPO in the last seven years has lost money for investors.
Emaar Development targets an estimated $1.7 billion in aggregate dividends in the next three years. Emaar’s Dubai development projects also have the highest brand value in the UAE. These range from Downtown, Arabian Ranches, Dubai Marina, Emirates Hills, Dubai Hills, Emaar South, Dubai Creek and Dubai Harbour. Emaar has delivered 85 – 90% launch to sales ratios and developed a global clientele for its villas and apartment offerings. No other property developer in Dubai can remotely match Emaar’s brand, land bank, construction economies of scale, secondary market resale value and offplan sales track record. Emaar presales momentum is robust in 2007 and backed by well marketed product launches. With property development margins above 40% this business is a de facto money machine even when the secondary market for Dubai real estate is stressed.
Emaar Development’s financials suggests net income margins of at least 35% on its own and joint venture projects. Emaar can also borrow from international banks on a scale and spread unthinkable for most UAE private developers. For instance, Emaar recently acquired $1.5 billion five year financing at LIBOR +1.35% for the development business, which accounts for 40% of Group revenues and a third of its profits.
I expect Emaar Properties to be a superb value buy in the AED 7.40 to 7.60 range for a AED 9 target sometime in 2018. Emaar is widely owned by some of the world’s largest fund managers. When risk premia in global emerging markets rise, institutional investors sell their largest, most liquid holdings. In essence, they sell what they can, not what they must. Emaar shares fell from their 11 AED peak to as low as AED 4.5 in early 2016 precisely due to this dynamic, after China’s yuan devaluation triggered global cross-asset contagion and panic selling. I was absolutely convinced that Emaar was the ultimate value buy at 4.5 AED, a strategy idea I published in the KT which proved extremely profitable for investors.
Stock markets are both fickle and volatile. If Emaar Properties trades down to 7.4 AED, my value investing zone, expect another column on this subject!
Market View – The death and rebirth of Britain’s Lloyds Bank
If there was ever a quintessential symbol of Englishness in the High Streets of the sceptered isle, it was the black horse logo of Lloyds Banking Group. Lloyds has a provenance that goes back to Birmingham circa 1765, well before the Industrial Revolution, in the reign of the Hanoverian Mad King George. Yet Britain’s preeminent High Street retail bank faced financial Armageddon with an ill-fated buyout of Halifax Bank of Scotland (HBOS), a merger midwifed by Gordon Brown and Alistair Brown and Alister Darling in the height of the financial crisis. Lloyds was forced to seek a £20.3 billion sterling taxpayer bailout and HM Treasury ended up owning 43% of a humbled international bank that was once a crown jewel of the City.
David Cameron and George Osborne wrote the next chapter in the Lloyds sage when they appointed António Horta-Osório, the Portuguese (this is pre-Brexit Stone Age UK!) chief executive of Banco Santander’s Abbey national as the bank’s CEO. Horta Osório slashed the bank’s dependence on wholesale funding markets, sold £200 billion in toxic HBOS loans, sold the banks’s global network (Lloyds now derives 97% of its revenues in the UK), axed 12000 jobs and closed down 400 branches. This epic restructuring enabled the UK Treasury to sell down its entire stake in Lloyds last May. While the deal and rebirth of Lloyds Bank is also a story of Sophoclean scale, replete with hubris and drama (the current CEO once collapsed due to stress and the shares tanked while he spent two months at The Priory private hospital, it is also a potential money making opportunity for me. Readers of this column know that the big money in global banking stocks is made when things go from Godawful to just plain awful, as we witnessed with the highly profitable trade ideas on Citigroup, Morgan Stanley, Bank of America, UBS, Credit Suisse, ABN Amro and the Argentine Banco Macro. The same virtuous cycle is now happening at Lloyds. Why?
One, Lloyds is highly leveraged to a steeper sterling money market curve which is inevitable as the Bank of England responds to Fed balance sheet unwinding and the post Brexit rise in petrol/food prices (Britain is historically the most pass through inflation prone economy in Europe) with three rate hikes from November and into 2018.
Two, Lloyds expects to generate 2000 – 240 basis points of capital even though it has a Basel Tier One (CET1) capital ratio of 14.9% even now. This makes another hike in the dividend payout and share buybacks inevitable in 2018. By my calculation, Lloyds trades at a forward dividend yield of 7.6% even after its stellar performance last week. Capital return is the sweet spot that ignited a banking Cinderella. Remember Citigroup, which I first recommended in 2012 at 25 after it failed a Fed stress test, Vikram Pandit was ousted in a palace coup and the shrinkage of Citi Holdings began to create excess capital? Citi is 74 now. The real time alchemy of capital return.
Three, Lloyds commands a return of tangible equity of 16% now and the lowest cost to income ratio among its peers in UK banking. Its mortgage margins are set to rise once the Bank of England end its Term Funding Scheme next February 2018 when the first base rate hike would have happened. Ye the sheer scale of capital generation reduces equity dilution risk and facilitates profitable expansion of the loan book. This, ceteris paribus, suggests a valuation rerating, so does the end of the PPI mis-selling litigation cycle.
Four, I am a keen student of the UK property cycle and Lloyds is the UK’s largest mortgage lender. Now that even London home prices have sagged, impairments will rise, as they did in 2018. Yet this is the reason Lloyds is the cheapest major bank in Europe at 9 times forward earnings, 0.95 times book value and a dividend yield of at least 6.4% in 2017.
Five, the acquisition of MBNA’s British credit card portfolio and the life/insurance/pension annuity business of Scottish Widows position Lloyds to outperform RBS and Barclays in the next decade. The move into digital/smartphone banking is also a game changer. Lloyds has a 21% market shares in the UK retail/consumer banking even now. Me thinks my black horse will fly higher. How high? At least 85 pence by next summer. The rebirth of Lloyds Bank will be a time to make money for Queen and country in England’s green and pleasant land!
Currencies – King dollar will soar again in 2018
The US Dollar Index had its best week for the year last week, thanks to a dovish ECB taper timetable. This means the Fed will raise rates at least thrice before Dr. Draghi even moves once.
My strategy call that the financial markets macro smoke signals suggested higher US dollar and higher US Treasury bond yields in October played out last week. There are myriad reasons for US dollar strength. US economic data momentum and corporate fits are on a roll, as Caterpillar and Big Tech just proved. The yield on the ten year US Treasury note has broken out of its six month trading range. Shinzo Abe attained a supermajority in the Japanese general election (Abenomics means a lower yen, 114 as I write). The prospects for tax cuts in Washington has grown brighter now that the US Congress passed the budget bill.
Geopolitical risk in Catalonia, Iraqi Kurdistan and North Korea have reinforced Planet Forex’s safe haven bid for the US dollar. It is essential to track the widening Spanish-German sovereign debt spread to gauge the rift between Madrid and Barcelona. If Taylor, Powell or Warsh replace Dr. Yellen, expect a more hawkish Fed in 2018. I still expect the US Dollar Index to rise to 95 by mid-November. The Fed, not ECB asset purchases, will take the Euro/dollar cross below 1.16.
Geopolitical risk has trumped (bad pun, forgive me!) the inventory glut in the global oil market, the reason Brent crude has risen to $60 a barrel. Once again, supply risk has reemerged in the Middle East with the Kurdish referendum, the Iraqi Army’s recapture of Kirkuk and the US threat to scrap the Iran nuclear deal. It is easy to forget that Brent traded at $46 a barrel last July and was $52 in early September.
While the Canadian dollar benefited from the surge in crude oil since July, the loonie has now depreciated to 1.28 even as Brent continues to grind higher. My call? The financial markets have softened their expectations of Bank of Canada policy this winter while they have heartened their expectations on the Fed taper into 2018. This is the reason international interest rate spreads with Ottawa have moved 40 basis points in the US dollar’s favor. I expect the Canadian dollar to trade at the lower end of the 1.26 – 1.32 range in November. The Federal government’s fiscal position and NAFTA risk could both reinforce the embryonic loonie bearish trend.
The Mexican peso has fallen to a five month low below 19 due to Fed tightening risk, NAFTA risk, higher US Treasury note yield risk and Trump threat risks. The Mexican peso could well fall to 20 in the next four weeks. President Temer’s potential corruption conviction in Congress means a plunge in Brazil real and Bovespa.
While 2017 has witnessed fabulous profits in emerging markets equities (28%), sovereign debt (9%) and local currency debt (8%), currencies have been a laggard at 5.4%, even though this has been the best return since 2010. Yet the J.P. Morgan EM FX index is flawed as it measures only ten emerging market currencies against the US dollar without an inflation adjustment. Since I manage global equity and derivatives trading/strategic books, emerging market currencies are an existential part of my life in the Great Games (this one played out in the green phosphorescent flicker of my Bloomberg terminal, not on the Khyber Pass!). In real effective exchange rate terms, some emerging markets currencies are grossly undervalued. With Brent crude double its early 2016 levels, global trade going gangbusters, China’s debt time bomb defused (for now), the first synchronized recovery since 2009, this makes no strategic sense to me – in plain English, this neglected niche of the global forex village has strong money making potential.
The Philippine peso, the Saudi Arabian riyal, the Pakistan rupee, the Egypt pound, the Turkish lira and the Russian rouble all offer an attractive risk reward calculus, but not necessarily against the US dollar.

Value in major emerging market currencies? Indian rupee, Thai baht, Mexico peso (NAFTA blowup risk overdone), South African rand (Ditto with Zuma/Gupta risk) and the Russian rouble, where central banks have sacrificed stronger currencies in the quest to build reserves. it is surreal to see Bitcoin’s implied volatility surge from only 20% this summer to 100% in October. The little leveraged lambs are being led to the slaughter us they happily climb aboard this lunatic roller coaster. Yalla, habibi!

Emaar Properties will sell 20% of its UAE development portfolio in an initial public offering in November. This is the first IPO in the UAE capital markets in the last three years and follows bellwether offerings such as Emaar Malls and Emaar Misr. Emaar’s Dubai development’s adjusted net value is 24.1 UAE dirhams and I would not be surprised if the post IPO revalues the portfolio to 30 billion AED. The crucial issue for me, as always, is the pricing, valuation and secondary market trading prospects of the IPO. Of course, the rise in Emaar Property’s share price from AED 7 to as high as AED 8.9 after the development IPO was announced in June meant that the optimal strategy was to buy the parent’s shares on the news. However, given that oil prices have doubled since their lows the US dollar index has depreciated 8% in 2017, Emaar’s offplan sales have risen above a 10% amid a stressed secondary market and a de facto bank credit crunch, the fabulous margins in Dubai property development and the potential in Expo 2020, Emaar Development will be a profitable deal for investors upon its listing.
While the earnings of Emaar Development will be more volatile than those of its parent, it will also be a pure play vehicle on Dubai property development without exposure to retailing (Emaar Malls) or foreign markets (Egypt, Turkey, Saudi Arabia) risk. Emaar has unquestionably created the most formidable brand in Middle East property development, the reason its off-plan sales did not sag even as transactions, values and rentals declined in UAE real estate since 2014. In fact, Emaar Properties saw its discount to net asset value compress after the June announcement. This segment has exceptional earnings visibility till 2020, given Emaar’s development pipeline is at least 40 billion AED in this period.
In my discussions with investors, I see pervasive bearishness about the after market for UAE IPO’s. National Takaful and Marka (a blind pool to buy shwarma shop chains and cheeky monkeys, hooray!) inflicted ghastly losses on investors, losing 50 – 60% from their IPO offer price. Even Emaar Mall is down 20% from its IPO offer price, a testament to the global Amazonization of retailing and the sharp decline in retail sales. In fact, apart from Amanat, every IPO in the last seven years has lost money for investors.
Emaar Development targets an estimated $1.7 billion in aggregate dividends in the next three years. Emaar’s Dubai development projects also have the highest brand value in the UAE. These range from Downtown, Arabian Ranches, Dubai Marina, Emirates Hills, Dubai Hills, Emaar South, Dubai Creek and Dubai Harbour. Emaar has delivered 85 – 90% launch to sales ratios and developed a global clientele for its villas and apartment offerings. No other property developer in Dubai can remotely match Emaar’s brand, land bank, construction economies of scale, secondary market resale value and offplan sales track record. Emaar presales momentum is robust in 2007 and backed by well marketed product launches. With property development margins above 40% this business is a de facto money machine even when the secondary market for Dubai real estate is stressed.
Emaar Development’s financials suggests net income margins of at least 35% on its own and joint venture projects. Emaar can also borrow from international banks on a scale and spread unthinkable for most UAE private developers. For instance, Emaar recently acquired $1.5 billion five year financing at LIBOR +1.35% for the development business, which accounts for 40% of Group revenues and a third of its profits.
I expect Emaar Properties to be a superb value buy in the AED 7.40 to 7.60 range for a AED 9 target sometime in 2018. Emaar is widely owned by some of the world’s largest fund managers. When risk premia in global emerging markets rise, institutional investors sell their largest, most liquid holdings. In essence, they sell what they can, not what they must. Emaar shares fell from their 11 AED peak to as low as AED 4.5 in early 2016 precisely due to this dynamic, after China’s yuan devaluation triggered global cross-asset contagion and panic selling. I was absolutely convinced that Emaar was the ultimate value buy at 4.5 AED, a strategy idea I published in the KT which proved extremely profitable for investors.
Stock markets are both fickle and volatile. If Emaar Properties trades down to 7.4 AED, my value investing zone, expect another column on this subject!
Market View – The death and rebirth of Britain’s Lloyds Bank
If there was ever a quintessential symbol of Englishness in the High Streets of the sceptered isle, it was the black horse logo of Lloyds Banking Group. Lloyds has a provenance that goes back to Birmingham circa 1765, well before the Industrial Revolution, in the reign of the Hanoverian Mad King George. Yet Britain’s preeminent High Street retail bank faced financial Armageddon with an ill-fated buyout of Halifax Bank of Scotland (HBOS), a merger midwifed by Gordon Brown and Alistair Brown and Alister Darling in the height of the financial crisis. Lloyds was forced to seek a £20.3 billion sterling taxpayer bailout and HM Treasury ended up owning 43% of a humbled international bank that was once a crown jewel of the City.
David Cameron and George Osborne wrote the next chapter in the Lloyds sage when they appointed António Horta-Osório, the Portuguese (this is pre-Brexit Stone Age UK!) chief executive of Banco Santander’s Abbey national as the bank’s CEO. Horta Osório slashed the bank’s dependence on wholesale funding markets, sold £200 billion in toxic HBOS loans, sold the banks’s global network (Lloyds now derives 97% of its revenues in the UK), axed 12000 jobs and closed down 400 branches. This epic restructuring enabled the UK Treasury to sell down its entire stake in Lloyds last May. While the deal and rebirth of Lloyds Bank is also a story of Sophoclean scale, replete with hubris and drama (the current CEO once collapsed due to stress and the shares tanked while he spent two months at The Priory private hospital, it is also a potential money making opportunity for me. Readers of this column know that the big money in global banking stocks is made when things go from Godawful to just plain awful, as we witnessed with the highly profitable trade ideas on Citigroup, Morgan Stanley, Bank of America, UBS, Credit Suisse, ABN Amro and the Argentine Banco Macro. The same virtuous cycle is now happening at Lloyds. Why?
One, Lloyds is highly leveraged to a steeper sterling money market curve which is inevitable as the Bank of England responds to Fed balance sheet unwinding and the post Brexit rise in petrol/food prices (Britain is historically the most pass through inflation prone economy in Europe) with three rate hikes from November and into 2018.
Two, Lloyds expects to generate 2000 – 240 basis points of capital even though it has a Basel Tier One (CET1) capital ratio of 14.9% even now. This makes another hike in the dividend payout and share buybacks inevitable in 2018. By my calculation, Lloyds trades at a forward dividend yield of 7.6% even after its stellar performance last week. Capital return is the sweet spot that ignited a banking Cinderella. Remember Citigroup, which I first recommended in 2012 at 25 after it failed a Fed stress test, Vikram Pandit was ousted in a palace coup and the shrinkage of Citi Holdings began to create excess capital? Citi is 74 now. The real time alchemy of capital return.
Three, Lloyds commands a return of tangible equity of 16% now and the lowest cost to income ratio among its peers in UK banking. Its mortgage margins are set to rise once the Bank of England end its Term Funding Scheme next February 2018 when the first base rate hike would have happened. Ye the sheer scale of capital generation reduces equity dilution risk and facilitates profitable expansion of the loan book. This, ceteris paribus, suggests a valuation rerating, so does the end of the PPI mis-selling litigation cycle.
Four, I am a keen student of the UK property cycle and Lloyds is the UK’s largest mortgage lender. Now that even London home prices have sagged, impairments will rise, as they did in 2018. Yet this is the reason Lloyds is the cheapest major bank in Europe at 9 times forward earnings, 0.95 times book value and a dividend yield of at least 6.4% in 2017.
Five, the acquisition of MBNA’s British credit card portfolio and the life/insurance/pension annuity business of Scottish Widows position Lloyds to outperform RBS and Barclays in the next decade. The move into digital/smartphone banking is also a game changer. Lloyds has a 21% market shares in the UK retail/consumer banking even now. Me thinks my black horse will fly higher. How high? At least 85 pence by next summer. The rebirth of Lloyds Bank will be a time to make money for Queen and country in England’s green and pleasant land!
Currencies – King dollar will soar again in 2018
The US Dollar Index had its best week for the year last week, thanks to a dovish ECB taper timetable. This means the Fed will raise rates at least thrice before Dr. Draghi even moves once.
My strategy call that the financial markets macro smoke signals suggested higher US dollar and higher US Treasury bond yields in October played out last week. There are myriad reasons for US dollar strength. US economic data momentum and corporate fits are on a roll, as Caterpillar and Big Tech just proved. The yield on the ten year US Treasury note has broken out of its six month trading range. Shinzo Abe attained a supermajority in the Japanese general election (Abenomics means a lower yen, 114 as I write). The prospects for tax cuts in Washington has grown brighter now that the US Congress passed the budget bill.
Geopolitical risk in Catalonia, Iraqi Kurdistan and North Korea have reinforced Planet Forex’s safe haven bid for the US dollar. It is essential to track the widening Spanish-German sovereign debt spread to gauge the rift between Madrid and Barcelona. If Taylor, Powell or Warsh replace Dr. Yellen, expect a more hawkish Fed in 2018. I still expect the US Dollar Index to rise to 95 by mid-November. The Fed, not ECB asset purchases, will take the Euro/dollar cross below 1.16.
Geopolitical risk has trumped (bad pun, forgive me!) the inventory glut in the global oil market, the reason Brent crude has risen to $60 a barrel. Once again, supply risk has reemerged in the Middle East with the Kurdish referendum, the Iraqi Army’s recapture of Kirkuk and the US threat to scrap the Iran nuclear deal. It is easy to forget that Brent traded at $46 a barrel last July and was $52 in early September.
While the Canadian dollar benefited from the surge in crude oil since July, the loonie has now depreciated to 1.28 even as Brent continues to grind higher. My call? The financial markets have softened their expectations of Bank of Canada policy this winter while they have heartened their expectations on the Fed taper into 2018. This is the reason international interest rate spreads with Ottawa have moved 40 basis points in the US dollar’s favor. I expect the Canadian dollar to trade at the lower end of the 1.26 – 1.32 range in November. The Federal government’s fiscal position and NAFTA risk could both reinforce the embryonic loonie bearish trend.
The Mexican peso has fallen to a five month low below 19 due to Fed tightening risk, NAFTA risk, higher US Treasury note yield risk and Trump threat risks. The Mexican peso could well fall to 20 in the next four weeks. President Temer’s potential corruption conviction in Congress means a plunge in Brazil real and Bovespa.
While 2017 has witnessed fabulous profits in emerging markets equities (28%), sovereign debt (9%) and local currency debt (8%), currencies have been a laggard at 5.4%, even though this has been the best return since 2010. Yet the J.P. Morgan EM FX index is flawed as it measures only ten emerging market currencies against the US dollar without an inflation adjustment. Since I manage global equity and derivatives trading/strategic books, emerging market currencies are an existential part of my life in the Great Games (this one played out in the green phosphorescent flicker of my Bloomberg terminal, not on the Khyber Pass!). In real effective exchange rate terms, some emerging markets currencies are grossly undervalued. With Brent crude double its early 2016 levels, global trade going gangbusters, China’s debt time bomb defused (for now), the first synchronized recovery since 2009, this makes no strategic sense to me – in plain English, this neglected niche of the global forex village has strong money making potential.
The Philippine peso, the Saudi Arabian riyal, the Pakistan rupee, the Egypt pound, the Turkish lira and the Russian rouble all offer an attractive risk reward calculus, but not necessarily against the US dollar.
Value in major emerging market currencies? Indian rupee, Thai baht, Mexico peso (NAFTA blowup risk overdone), South African rand (Ditto with Zuma/Gupta risk) and the Russian rouble, where central banks have sacrificed stronger currencies in the quest to build reserves. it is surreal to see Bitcoin’s implied volatility surge from only 20% this summer to 100% in October. The little leveraged lambs are being led to the slaughter us they happily climb aboard this lunatic roller coaster. Yalla, habibi!

Also published on Medium.

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