Emaar Properties PJSC - Coursework Example

? Table of Contents Executive Summary 2 Introduction 4 Calculation of Ratios 7 Profitability Ratios 7 Liquidity And Solvency Ratios 7 Working-CapitalRatios 7 Investor Performance Ratios 7 Ratio analysis 9 Profitability Ratios 9 Liquidity and Solvency 10 Working Capital ratios 10 Investor performance 11 Conclusion 21 Bibliography 22 Executive Summary This report is a financial analysis of Emaar Properties PJSC which is one of the world’s largest and fastest growing real estate developers. Their performance is indicative of the huge rise in demand of living solutions for people around the globe. Emaar properties' has held a growing position in the industry as compared over the period of two years. The reports highlights on what financial effect the global financial crisis had on Emaar Properties’ performance. The continuous growth and expansion in various developments by Emaar Properties has played a vital role in its success. It has been competing well in its sector and industry within the geographical boundaries of Middle-East and has spread to international horizons as well. The leap to other countries has made Emaar Properties a global enterprise in the world of real-estate developers leading with innovations and state of the art facilities The report is clearly spread out in different sections according to financial results obtained while comparing Emaar from the year 2009 to 2010 and Emaar as compared to the industry average and its main competitors. This report is divided into parts and properly analyzed into different parts. The ratios have been calculated and analyzed as per the past record of Emaar properties. Other than that Emaar Properties figures have been compared to the Industry average too as well as other competitors. Emaar has been a leading real-estate developer and due to much expansion in its projects it has been retaining profits since 2007. It has been giving out zero dividends and all the money is invested back in the company. (Rasmala, 2010) Introduction Company Overview Emaar is one of the largest property investment organizations listed on the Dubai Financial Market (DFM) in the year 2000. It was started in 1997 and is currently known as Emaar Properties Public Joint Stock Limited Company (PJSC). Emaar offers high quality apartments to homebuyers with its full range to cater to their particular requirements. Emaar is innovating at a quick pace to provide premium lifestyle to its consumers globally. It is responsible for developing value-added, master planned communities along with homes. It has changed the concept of living lifestyle with its innovative designs and development. Along with developing and expanding in the Dubai Market, it has reached out globally in various countries for future projects and has been active for quite some years now. It is expanding globally by spreading its vision of innovative lifestyle development and a new concept of ‘home’. Additionally Emaar is listed on two additional markets of Jones Arabia Titans Index and S&P IFCG Extended Frontier 150 Index. Emaar was also awarded the 462nd position in the world by 11th Financial Times Global 500 in 2007. (Emaar Properties, 2008) Financial Overview In June 2004, Emaar took the initiative of reducing the value of their shares from AED 10 to AED 1. It was done primarily to protect the interests of the shareholders and make their shares affordable for potential investors. Emaar further went on to do a 1:1 rights issue to double its capital in July 2005. (Emaar Properties, 2008) Ownership and Management Emaar is currently run by Mohamed Ali Alabbar who is the Director General of Dubai Department of Economics Development and also the Chairman of Emaar Properties. Emaar was privately held when it was established in 2007. After expanding into 60 different areas of development by its companies, it was listed in the Dubai Financial Markets. By 2007, the government of Dubai bought a 32% stake by giving the private investors AED28 billion worth of stock. The company also owns the Gold and Diamond Park in Dubai and its operations are handled by Emaar as well. At present the ownership is divided equally between the government of Dubai (33%), its founding investors (33%) and traded on stock exchange (33%). (Emaar, 2010) The Management of Emaar Properties is as follows: H.E. Mohamed Ali Alabbar Chairman Mr. Hussain Al Qemzi Vice Chairman H.E. Dr. Lowai Mohamed Belhoul Director Mr. Majid Said Al Ghurair Director Mr. Ahmed Jamal Jawa Director Mr. Khalifa Aldaboos Director Mr. Saeed Ahmed Al Tayer Director Mr. Ahmed Thani Al Matrooshi Director Calculation of Ratios 2009 2010 Profitability Ratios Net Profit Margin (Net Profit/Sales) 3.44% (289376 / 8413262) 20.39% (2477011 / 12150274) Return On Assets (Net Profit/Total Assets) 0.45% (289376 / 64144798) 3.96% (2477011 / 62504328) Return On Equity (Net Profit/Common Equity) 4.75% (289376 / 6091239) 40.67% (2477011 / 6091239) Liquidity And Solvency Ratios Current Ratio (Current Asset/Current Liabilities) 0.25 (6459486 / 25433446) 0.47 (8798410 / 18828350) Working Capital (AED) (18,973,960) (6459486 - 25433446) (100,299,400) (8798410 – 18828350) Working-Capital Ratios Debtor Days (Average Accounts Receivable/Sales) x 365 42.57 days (981354 / 8413262 * 365) 27.10 days (902022 / 12150274 * 365) Creditor Days (Average Accounts Payable/Cost Of Sales) x 365 807.65 days (9545382/4313806*365) 429.11 days (8938956/7603530*365) Investor Performance Ratios Earnings Per Share (Net Income/Number Of Common Shares) 0.4 AED 0.05 AED Fixed-Asset Turnover (Sales/Net Fixed Assets) 14.70% (8413262 / 57245921) 22.64% (12150274 / 53659852) Total Asset Turnover (Sales/Total Assets) 13.12% (8413262 / 64144798) 19.44% (12150274 / 62504328) Debt Ratio (Total Liabilities/Total Assets) 0.55 (35265790 / 64144798) 0.5 (31204297 / 62504328) Debt-Equity Ratio (Total Liabilities/Shareholder Equity) 5.79 (35265790 / 6091239) 5.12 (31204297 / 6091239) Times Interest Earned (EBIT/Interest) 9.36 (2027254 / 216687) 6.98 (2478450 / 355006) Other Ratios Degree of Operating Leverage (Change in income/ Change in Sales) (165819/-2303849) -0.072 (2187635/3737012) 0.59 Degree of Financial Leverage (EBIT/ EBIT - Interest) 1.107 (2244432 / 224432 – 216687) 1.14 (2833456/ 2478450) Degree of Combined Leverage (DOL x DFL) -0.0797 0.6726 Earnings per share of common stock 0.05 0.4 Price/earnings ratio (3.86/0.05) 77.2 (8.875/0.4) 8.875 Price of a common share 3.86 AED 3.55 AED Market value of a corporation (6091239x3.86) 23512182450 AED (6091239x3.55) 21623898450 AED Total market value of a portfolio 23511410.54 AED 21668667.5 AED Dividends Paid 3567000 AED 1208000 AED Dividend yield 0.0152% 0.0056% Dividend payout 1.17% 0.0496% Ratio analysis Profitability Ratios Net Profit Margin The results of the ratios that were found clearly show how profitable Emaar has been in the year 2010, with a net profit margin of 20% as compared to 3% in the previous year 2009. This increase of 17% can be seen as a result of the huge increase in sales from around AED 8400 million to around AED 12150 million. The increase in net profit can also be considered a reason for this increase in the profit margin as we can see that there hasn’t been much of an increase in the expenses of the company as shown in the income statement. Return on Assets & Equity We also see that there has been an increase in the return on total assets which rose from 0.45% in 2009 to 3.96% in 2010. There has also been a huge increase in the return on equity from 4.75% in 2009 to 40.67% in 2010. As seen there has been no change in the equity of the company which implies that the increase in the ROE has been due to the increase in the net profit of the company which rose from AED 289 million to AED 2477 million in 2010. This increase in ROE shows that the return on shareholders’ investments has increased and there is a greater incentive for them to invest in Emaar. However, we also see that the company has not given any dividends in the year 2009 as well as in 2010 which only shows that the investors are loyal to the company and have faith in the firm. Liquidity and Solvency Current Ratio Liquidity of a firm shows its ability to convert its assets into cash. In the case of Emaar, the liquidity of the firm can only be seen by the current ratio compared between the two years. This ratio has risen from 0.25 in 2009 to 0.47 in 2010. This is a good indication for the liquidity of the firm showing that Emaar is more secure now and for every dollar of liability it has more money to finance it through its current assets. Working Capital ratios The working capital of a firm shows the efficiency of the company as well as its short term health. If we see the firm’s working capital we will see that it has been negative for both the years, AED -18973960 in 2009 and AED -10029940 in 2010. This implies that Emaar is currently facing issues meeting its short-term liabilities with its current assets. This is not a very favorable position to be in for any firm as it could mean running out of assets to pay back its creditors as well as a long run negative working capital could also lead to bankruptcy. The working capital ratios that we found included the debtor days which show the number of days which the debtors usually take to pay back the firm. We can see that the credit period given to Emaar’s debtors has decreased from 42 to 27 days after sales are made. This shows that the firm is now willing to give less credit so that more cash can be retained in the firm. This is a good indication as the company is now trying to increase its liquidity by bringing in cash sooner. The creditor days period, however, has also declined from around 807 days in 2009 to 429 days in 2010. This shows us that Emaar’s creditors are now less willing to extend the credit period for Emaar to pay them back. This means that Emaar is in urgent need of building up its financial situation and better its liquidity if it has to keep up with paying back its creditors on time. Failing to do so could lead to bad reputation in the market and Emaar being a very huge firm which has been in the market for quite some time will not want to risk any such situation. Investor performance If we see the investors ratios the first thing that we notice is that the earnings per share (EPS) has risen. It rose from AED 0.05 in 2009 to AED 0.4 in 2010. Since we can see that the net income has risen in 2010 which meant that the EPS has also risen. Even though the company has not paid any dividends the rising EPS will still encourage the investors to invest in Emaar. Since the company hasn’t paid any dividends we cannot find much investors performance ratios and the returns they are getting as dividend yields. The fixed asset turnover ratio has also increased from 14% in 2009 to 22% in 2010. This is shown by the increase in the fixed assets but a greater increase in sales in 2010 as compared to 2009. And as seen the total assets turnover has also increased from 13% in 2009 to 19% in 2010. It could imply that Emaar is now generating a better volume of business given its investments in total assets. The debt ratio which shows the firms the part of financing supplied by its creditors, has also fallen from 55% in 2009 to 50% in 2010. This is not very favorable even though it has fallen because a 50% financing done by the creditors is risky and if Emaar wants to reduce it more it might have to issue more stocks. The debt-equity ratios, which shows the amount of capital tied up in liabilities, has fallen from 5.8 in 2009 to 5.1 in 2010. This fall is a good indicator for Emaar, however, a debt-equity ratio of more than 1 is not favorable and in this case it is much more than 5 indicating that a lot of capital is tied up in liabilities and Emaar should take corrective measures to reduce this ratio by reducing its liabilities or increasing its shareholder equity. The ratio of times-interest-earned (TIE) has also fallen from 9.4 in 2009 to 7.0 in 2010. It measures the number of times operating income can be used before the firm is unable to meet its annual interest costs. A fall in this implies that Emaar is covering its interest expenses by a lower margin of safety now and the firm could face difficulties issuing finance. If we analyze the financial statements of Emaar, we find that the firm has made a much larger increase in profit as compared to 2009. This is mainly because the previous year had a big loss from discontinued operations which were not present in the year 2010, hence the increase in the net profit for the year 2010. Emaar Properties saw a degree of operating leverage at 0.59 during 2010 which indicated that a change in sales didn’t have much of an influence on net income for that year. The price earnings ratio showed a dramatic decrease from 2009 to 2010 which was due to the low EPS in 2009. The fall was significant while the market price also decreased due to the economic recession. Emaar paid lesser dividends in 2010 partly due to its expansion activities. The cash dividend saw a decrease of overall 2359,000 AED. This led to reduction in the dividend pay-out ratio as compared to last year of 2009. Market value of Emaar Properties remained pretty much the same as it had a stable market price in the market which saw a negligible decline in 2 years. This the Net Worth of the shares remained the same as Emaar Properties has not issued out any Preference shares in the Dubai Stock exchange and other financial markets. Industry comparison Emaar is one of the biggest company and market leaders in the properties industry of UAE and it is also not wrong to say that the company is doing relatively better than the last year i.e. 2009. We found from a report that Emaar has two major competitors namely Aldar and Sorouh. However even then the investors think that Emaar is a better option due to its performance since the past years and the sustainability that it provides to its customers. Company Share equity Cap (AED million) EPS 2010 ROE 2010 Emaar 6,091 0.4 0.41 Aldar 2,577 (4.39) (4.91) Sorouh 2,625 0.003 0.01 The above data has been found from the financial statements of the three companies. According to a report it was stated that Emaar is considered to be a very favorable option of investment as compared to its debtors. The reputation of Emaar has clearly given its benefits and created a loyal image in the investors who expect sustainable increase in its revenues which have been growing since the past two years as shown in the ratios and through the increase of the net profit margin in 2010. (Global, 2011). The table above gives us an idea about the competition that Emaar is facing. It shows that comparatively Emaar has the highest share capital of AED 6,091 million as compared to Aldar and Sorouh which have much lesser revenues if compared with Emaar. According to this report the hospitality sector in UAE is also doing very well which has resulted in Emaar being able to benefit greatly because of its high reputation and hence increase its revenues further. The earnings per share for each of the company show the attractiveness of the firm to its investors. In 2010 we can see from the above data that Emaar had the highest EPS of AED 0.4 as compared to AED 0.003 for Sorouh and a loss per share for Aldar. This negative EPS is due to the high losses that Aldar faced in the year 2010 which led to it giving a negative EPS. Hence. The EPS gives the indication that the investors will be more likely to invest in Emaar due to the high EPS they will get as compared to the other two competitors. The return on equity is also the highest for Emaar with an ROE of 0.41. This is compared to the Aldar’s ROE of (4.91) and Sorouh with an EPS of 0.01. This shows the return that the shareholders of the firms are getting. In the year 2010 we can see that the shareholders of Emaar were at the greatest advantage since they were getting the highest returns on their investments. Even though they were not paid any dividends but the profits that were made were very good and it gave the shareholders more faith in Emaar as compared to Aldar which had a negative ROE. Analysis of Financial Statements If we move to the balance sheet of Emaar we see that the bank balance and cash has around doubled from 2009 to 2010. This implies that Emaar has a very favorable liquidity position in the year 2010 and is unlikely to face any issues. However, at this point it is also important to see the working capital of the firm which we found out above was negative for both the years. But we also saw that this negative working capital has decreased from 2009 to 2010 showing that Emaar is working towards trying to better its working capital position so that it can prevent and avoid any sort of risks involved with the liquidity position. Goodwill was reduced for Emaar which can be considered another important part of their Assets section. We see that the goodwill for Emaar has fallen from AED 439 million to AED 46 million. This is not a very small reduction and the firm should be concerned with this large fall in its goodwill, given the fact that it is a relatively old company and has had a good reputation in the market. We also see that the company has issued convertible notes worth AED 1758 million in 2010 which has increased the total liabilities of the firm. The share capital of the firm has remained the same as it was in 2009. However, Emaar has made more retention of profit in the year 2010 as compared to 2009 which is shown by the increase in retained earnings from AED 7877 million in 2009 to AED 10017 million in 2010. Awards and Achievements – Financial Performance Over the period of years, Emaar has won several awards for its pole position as a provider of integrated lifestyles to its consumers. It has been quite strong in developing investments opportunities for its consumer base and providing development to the economy. Emaar has also made significant movements for its corporate social responsibility initiatives and its financial performance has also sky rocketed with highest ratings by supporting business and consumers. Dubai Quality Award: For Emaar’s commitment to quality and service excellence for creation of business culture based on quality. ISO14001:2004 Certification: For its environmental management processes. It won ISO accreditations for supreme work and environmental standards. Commercial Real Estate Digital Innovation Awards: For transformation of real estate companies into digital models for their innovation. Best Use of Automation - Facilities Management in all developments Most Digital Real Estate – Extreme Multifamily Residential Burj Khalifa Arabian Business Property Company of the Year Standard & Poor’s and Moody’s Investor Services Rating: For the company’s significant role and leading position in the fast-growing Dubai property development market. (Emaar, 2010) PE1 Rating for Emaar Pakistan (Islamabad): For effective work enforcement and ability to handover property to customers according to the best possible standards. S&P’s IFCG Extended Frontier 150 Index: Emaar has the highest weighting at 5.59 per cent and reflects the company’s strong regional presence and growing international recognition. (Emaar, 2010) SWOT Analysis Strengths Well backed financially by Government of Dubai and the Emaar group itself which is one of the largest real estate developers globally and the most experienced and reputable regionally Ownership of huge amounts of land in size under Emaar properties. Much more than combined land of Aldar Properties, Sorouh Real Estate’s, Dar Al Arkan’s and Jabal Omar’s in the GCC. Strong business relations with Saudi Arabian General Investment Authority (SAGIA) by signing Memorandum of Understanding (MoU) for Sanofi-Aventis Joint venture Weaknesses Their expertise is limited to development of various projects but not creating something for the benefit of the people or economy in terms of sustenance. Lot of time is involved in their business which increases uncertainty and operational risks. Global financial crisis creates quite a negative impact. Business failures in foreign countries, affect them locally. Opportunities Demand for investment and development in growing rapidly in Saudi Arabia. Changes in mortgage law in Saudi Arabia would increase the demand and their capacity to acquire property. King Abdullah Economic City in Saudi Arabia is located in such a region which expects huge demand for real estate in future. Government of Saudi Arabia granted a license to construct a sea port of handling capacity of 20 million TEU’s. Threats Failure to incentivize a critical base of companies to set up base and trigger a self-sustaining cycle of human migration. Serious competition from other industrial companies and groups, especially cities, like King Abdullah Economics City. Current Operations Emaar with its successful accomplishments in Dubai now hopes to spread in international horizons. It has diversified its development by building educational centers, shopping malls, apartments, office buildings, hospitals and financial institutes in Dubai. They are now targeting more towards master-planned communities with a more holistic approach for customer service and property development. It is on its course on being one of the leading real estate developers in the world. They collaborated with the Dubai government in the policies of the ‘Green Initiative’ to help construct energy efficient projects. Jordan Canada Lebanon Morocco Egypt Syria India Turkey Saudi Arabia Pakistan US United Arab Emirates Emaar particularly targets on building value for their customers. For them to achieve such goals they actively participate in expansions in terms of innovation, high quality development and diversifying into related businesses. The Government of Dubai holds a significant stake in Emaar Properties. (Emaar Properties, 2008) Overall Analysis All in all we can conclude by saying that Emaar is doing favorably in terms of profits and performance. However, what might be of consideration is the liquidity position of the firm, mainly its working capital which has been negative in both the years 2009 and 2010 which could be considered as dangerous. The overall performance of the company can be considered to be better as compared to the previous year 2009. Conclusion All in all we found in another report that the UAE industry is not doing very well due to the economic recession world-wide. However, it is also true that the world is growing out of this recession but the figures and data of 2010 doesn’t not show any significant improvements, however trails of improving situation in the industry can be seen. Emaar has been doing very well by far despite the diminishing economy. The reputation that it has made over the years has helped in Emaar in retaining its shareholders even though it did not give them any dividends in 2010 or in 2009 which could act as a way to attract more shareholders. However, it is also not wrong to say that the goodwill of Emaar has also deteriorated from 2009 to 2010. It is also true that the economy is in such a situation that only the larger organizations can survive in the market which gives Emaar a competitive edge. Even the other two competitors, Aldar and Sorouh, do not give Emaar as much competition mainly due to the fact that different regions prefer different companies but even then Emaar is able to capture most of the market share. And as the report says that the different companies that are currently operating in the industry “…will have to continually work with an emergent change management process in order to be in equilibrium with the national, industrial and economic environment.” (Oryx Middle East). Bibliography Properties, Emaar. (2008). Emaar Economic City. Shuaa Capital. Retrieved from: http://www.gulfbase.com/ScheduleReports/EMAAR_TASI150408.pdf http://www.emaar.com/index.aspx?page=investorrelations Global. (2011). UAE Real Estate Sector. Retrieved from: http://www.globalinv.net/research/UAE-RealEstate-062011.pdf Oryx. (2010). Construction Industry in the UAE. Retrieved from: http://www.oryxme.com/documents/3_year_industry%20forecas.pdf Dawawala, A. (2009). Economic Analysis for Emaar Properties. Project Report. Germany: GRIN. Deulgaonkar, P. (2011). No Emaar dividend… for third year running. Retrieved from: http://www.emirates247.com/property/real-estate/no-emaar-dividend-for-third-year-running-2011-03-21-1.371081 Emaar. (2010). Awards. Retrieved from: http://www.emaar.com/index.aspx?page=about-awards Rasmala. (2011). Emaar Properties. Retrieved from: http://www.rasmala.com/equity_report/emaar_properties_29Mar2011.pdf Read More