Falcom downgrades Emaar EC to ‘Underweight,’ revises target price

Falcom Financial Services has revised its target price for Emaar The Economic City’s (Emaar EC) stock down to SAR 8.6 per share, after the company’s weak performance in H1 2018.

“We downgrade Emaar EC with ‘Underweight’ rating from ‘Neutral’ as we do not foresee any significant upside from current levels,” Falcom said in an earnings review.

Emaar EC reported a net loss of 47.6 million in Q2 2018 against a net profit of SAR 36.1 million a year earlier on lower sales of industrial land plots, a decrease in profit share from a joint venture, higher cost of sales, and higher marketing and administrative expenses.

Revenue rose 9.3 percent year-on-year (YoY) to SAR 244.1 million in Q1 on higher residential sales, but it fell 13.1 percent quarter-on-quarter (QoQ) due to lower sales of the residential and industrial segments.

Operating margins of the residential segment dropped to 41.8 percent in Q2 from 79.1 percent in the same quarter last year, while the operating margin of the industrial segment remained flat YoY.

Gross profit declined 23.5 percent YoY in Q2 to SAR 104.8 million on higher costs. Consequently, gross margins contracted to 42.9 percent versus 61.4 percent in Q2 2017.

In March 2018, King Abdullah Economic City (KAEC) announced plans to build a Disneyland-themed entertainment city in Jeddah, while it inked a deal with the National Housing Co. (NHC) to build additional 8,000 residential units in Al-Shurooq under the Sakani program.

Such programs, in addition to a recovery in global oil prices, should boost the real estate sector in general and Emaar EC in particular.

“However, we still remain cautious, as we expect Emaar EC’s capital expenditure to remain high in the medium term, as it is developing infrastructure for city expansion to draw more visitors to KAEC.

We believe this would lead to operating cash flow to remain in the negative territory in the upcoming quarters as well,” Falcom added.