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Sorouh Real Estate
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3Q2009 Results: Negative Margins and Earnings Surprise
• Earnings Below Expectations: 3Q2009 revenue of AED1,351 million (down 10% Y-o-Y but up 38% Q-o-Q), was 19% above our expectation of AED1,131 million. A lower gross margin of 17.2%, versus our 29.2%, meant that gross profit of AED232.4 million was 30% lower than our forecast of AED330.5 million. Operating profit at AED158.1 was also significantly lower than our estimate of AED243.3 million. This lower operating profit, combined with lower interest and minorities and other income, meant that net income of AED187.3 million was 25% below our estimate of AED249.5 million.
• Revenue Mix Includes First Delivery of Units: For the first time since inception, Sorouh recorded unit sales. It handed over 367 of the 395 Golf Garden units, resulting in AED1,267 million in revenue. We had forecast delivery of c315 units in 3Q2009, generating AED1,035 million in revenue. In addition, rental income of AED41.5 million was slightly ahead our estimated AED39.4 million, while other income was c15% ahead our estimate. We expect 4Q2009 to reflect the remaining unit handovers in Golf Gardens, as well as the ongoing pick up in rental and other income.
• Margins Disappoint: Recorded gross margin on Golf Garden units amounted to a disappointing 17-18%, versus our anticipated 24%. In addition, our higher gross margin expectations on rental income need some downward adjustment in light of 3Q2009 figures, which saw an estimated gross margin of 20% versus our expected 60-70%. Given that the expected revenue mix for the fourth quarter is unit revenue light and rental and other income heavy, our 4Q2009 gross margin forecast of c40% now seems too high. However, any potential new land sales in 4Q2009 would help margins.
• Liquidity Remains Strong: Sorouh is the least leveraged of the UAE real estate stocks we cover. Its lliquidity remains strong, with cash of AED3.9 billion, a 9M2009 net debt (cash) to equity ratio of (0.3x), and 3Q2009 gross debt standing at AED2.4 billion. An area of concern remains the slow collection of receivables. The proportion of overdue receivables as a percentage of the total climbed from 4% in 1Q2009 to 8% in 2Q2009, and it has now reached 10% in 3Q2009. Management continues to be confident that it will collect the full amounts owed, given that up to 50-60% has already been paid towards these plot sales, but we maintain potential further delays may result in some write-offs.
• Maintain ST Neutral / LT Buy: We maintain our ST Neutral position, reflecting a sanguine sales and liquidity environment (although marginally improving) in Abu Dhabi, as well as Sorouh’s weaker 3Q2009 earnings. With our estimated LTFV of AED5.68 per share implying a potential upside of 65%, together with our positive view on the fundamentally sound Abu Dhabi real estate sector, we re-iterate our LT Buy.
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All data at market close |
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