This report is the Financial Analysis of ALDAR properties PJSC. During the course of this study, we have analyzed the financial statements of the company for the last 3 years (2006, 2007 & 2008) and based on our financial analysis we have drawn some conclusion as to whether it would be wise to invest in the company at this stage.
2. Company Introduction
ALDAR Properties PJSC is the leading real estate developer in Abu Dhabi, with more than USD 75 billion worth of developments planned for the next ten years and a land bank with over 50 M sqm. Its major master developments include: Al Raha Gardens, Al Raha Beach and Yas Island. Aldar develops properties for sale and for its investment property portfolio in all key real estate market segments. The major operating line of the company can be summarized as follows
Property Sales.
Investment Properties.
Land Sales.
2.1 Vision & Mission
"Vision"
"Rewarding investment - To create for our shareholders a stable and lucrative investment platform providing realistic returns and long term benefits. "
"Mission"
"Deliver maximum return for stakeholders through sustainable and world class property developments"
Aldar currently owns stakes in seven joint ventures (JV) involved in district cooling, construction and home financing.
Aldar's Shareholding Structure
The government of Abu Dhabi holds 25.4% of Aldar's shares through a number of its investment arms. With its 14.1% share, Mubadala Development Company (Mubadala) is the government institution with the largest stake in Aldar. The free float is estimated to be around 74.6%. Earlier this year, the government of Abu Dhabi passed a law allowing foreign ownership of Aldar's shares. However, foreign ownership is not permitted to exceed 40%.
3. Real estate market overview
The Abu Dhabi real estate market can be regarded as one of the dominating & fast growing in the region. This is accounted by its strong economic growth, being one of the highest GDP per capita figures worldwide, population growth rate of 7%, shortage in property supply in all major market segments, pent-up demand accumulating for the last few years and the newly introduced property legislations allowing expatriates, estimated 80% of the population to purchase leasehold property with 99 year renewable contract.
ALDAR accounts for 45% of property supply in the capital over the next 10 years.
4. Business Strategy Analysis
ALDAR's main business strategies can be summarized as follows
Consolidate itself's position in Abu Dhabi.
Further expansion into mature & emerging markets.
Emphasizing on development of an investment property portofolio.
Considering to Exit of investment properties on the long run
Sell developed serviced land plots
Expand Asset Management Services
Continue mortgage & district cooling markets.
5. SWOT analysis
Strengths
It has largest land bank in the capital
Its partnership policies with key real estate players and financial institutions in the capital to provide mortgage finance.
Very strong relationship with the government of Abu Dhabi.
Management's s real estate development experience internationally.
Joint Venture with the region's largest district cooling service provider, Tabreed, capturing demand for this type of service in Aldar's developments.
A major Aldar's developments hosted Abu Dhabi F1 Grand Prix in 2009, with a seven years renewable contract.
Weakness
Short operating history with barely any track record
Income has to date been dominated by fair value gain on investment properties, which is not unusual for a real estate developer on the take-over, but nevertheless a weakness
Opportunities
Strong economic growth in the gulf region as a whole, and more specifically in Abu Dhabi.
Annual population growth of around 7% in Abu Dhabi, fuelled by growing number of expatriates.
Shortage of property supply in all real estate market segments in Abu Dhabi
Government's new property law allowing expatriates to purchase properties in Abu Dhabi on a renewable 99-year leasehold contract basis. 80% of Abu Dhabi residents are non-nationals.
2004's law gave nationals the right to buy and sell freehold property.
F1 Grand Prix, an opportunity to attract visitors to Yas Island's other leisure destinations and hotels.
Threats
New players entering the market.
Construction material's cost increase.
Mortgage interest rates increase.
Existing Global Financial Crisis.
6. Accounting Analysis
Adoption of new and revised standards
Al Dar Properties have adopted new standards in line with the International Financial Reporting Interpretations Committee standards that is
IFRIC 11 IFRS 2: Group and Treasury Share transactions
IFRIC 12 Service Concession Arrangements
IFRIC 14 IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirement and their interaction
The consolidated financial statements have been prepared in line with the International Financial Reporting Standards (IFRS)
Basis of Preparation
The preparation of the financial statements are mainly on historical cost basis but have not considered the revaluation of investment properties and other derivatives.
Basis of Consolidation
In the income statement we have seen a higher Net profit in comparison to its Gross profit and the method of accounting is included in the Profit from other operation. The method of accounting has been controlled by the company and has the power to govern over it accounting policies. The companies have been previously mentioned. The company has not accounting for double accounting where in inter bank balances, revenue and expenses are accounted for twice. Minority interest has been taken into consideration as a separate item in order to account the activities of the groups separately and not included in the owner's equity.
Revenue Recognition
The revenue and costs of the group has been measured reliably and has been accounted for separately under items such as Sale of properties, Rental income and Interest income.
Sales of properties - When a buyer has been remunerated from the surplus amount acquired from a sale and ensured that all the economic risks, degree over the control of the property and cost for transfer has been considered.
Rental income - The group policy for the revenue recognition is as per operating leases
Interest income - The company income is based purely upon the tenor of the commitment to the principal outstanding and rate of return
LEASING
Group as a lessor
Rental income from operating leases is recognized on a straight line method over the period of the rent. Cost that been incurred initially are accounted in line with the operating lease are added to the amount of leased asset and recognized on the straight line basis.
Group as lessee
Assets purchased at the start are recognized as the group assets at their fair value or if lower, at the present value of the minimum lease payments. The liability of this lease would be recovered in the finance obligation of the company. Lease payments are apportioned between finance charges and return on the lease in order to balance the remaining liability. Finance charges are accounted directly to the profit or loss unless they featured to the qualifying assets.
Operating lease payments are accounted for on a straight line method unless there have an economic benefit by accounting through a reducing balance method or varied time period. Contingent rental from operating lease are recognized as an expense from mentioned time period.
BORROWING COSTS
Borrowing costs are directly elemental to the acquisition, construction or production of the asset which are used for the intent to sell or generate income for the business over a given period of time. In case of any borrowing availed for certain investment opportunities pending their expenditure on qualifying assets are deducted from the borrowing costs eligible for capitalization.
PROPERTY, PLANT AND EQUIPMENT
Property, Plant and equipment are all measured at historical cost less depreciation value. The historical cost directly attributed to the acquisition of the asset. Deprecation is accounted on a straight line bases to allocate their real value over an estimated period. The residual value is measured and adjusted if required over a period of time. If an assets estimated carrying value is higher than it recoverable value then its value is written down immediately. Gain and losses from the assets are determined by comparing to it carrying amounts.
Each assets life is accounted as follows -
Buildings - 20 years
Labour camps - 10 years
Leasehold improvements - 4 years
Office equipments - 4 years
Office equipment - 5 years
Computer - 3 years
Furniture and fixtures - 5 years
Motor vehicles - 4 years
CAPITAL WORK IN PROGRESS
Capital work in progress is account at Cost principal. Once the work is completed the value to transferred to the asset and then accounted for as per their depreciating accounting method.
INVESTMENT PROPERTY
Investment property, which is ready to buy, is account on an appreciation basis, initially measured at cost which incurs all expenses used to build the property at its fair value. Gains or losses subsequently included in the profit or loss for each period.
7. FINANCIAL ANALYSIS
7.1 Horizontal Analysis
7.1.1 Balance Sheet
7.1.2 Income Statement
Comments
The total assets of ALDAR shows a growth of 119.94% but it also shows total liabilities increase of 125%. There has been a tremendous growth in gross profit & net income in the Income Statement from 2007 to 2008. The horizontal analysis indicates changes in financials on a year to year basis. This helps analyze the growth perspective of the business and gives investors a better understanding of the company's forecasts. A better feasibility study of the company can be assessed to invest in the company.
7.2 Vertical Analysis
7.2.1 Balance Sheet
7.2.2 Income Statement
Comments
The vertical analysis depicts a detailed breakup reflecting in the income statement & balance sheet variance in each item .The Cost of goods Sold ratio has decreased, which means that the company decreased the cost per each sale and therefore raised gross profit. Although the interest rates have increased, the company as seen in the ratios achieved more profit by increasing their sales.
7.3 Trend Analysis
Comments
We are unable to assess the long term results of the Al Dar properties as we have very little data to check the company's growth. But from the little date that is available we are looking at the company growing at an increasing pace, this could be for strategic reasons such as Location and culture. The company is heading in the right direction for growth and a better assessment will be done when Net profit is considered. The figures above are complete and audited.
8. Ratio Analysis
8.1 Profitability Ratios
Gross Profit Ratio
The Gross profit of Al Dar has increased from 45.64% to 53.9% in 2008 as compared to Emaar properties where the gross net profit increased from 39.48% in 2007 to 42.53% in 2008. This would indicate that the cost of funding would be higher in the case of Emaar, i.e. cost of material, labor, and project.
Net Profit Ratio
The Net profit of Al Dar properties was 158.24% in 2007 and it is 69.23% in 2008. The Net profit ratio is more than the G.P ratio because of other income reflected in the P&L of Al Dar properties [Fair value gain on investments 1,532,584]. Al Dar has subsidiaries that have been accounted in the Financials making transparent the group financials.
The Net profit ratio of Emaar properties has declined from 36.74% in 2007 to 19.24% in 2008. This drop in net profits in 2008 is because of impairment of goodwill in 2008 2,522,577
On the profitability front, Al Dar properties seems to be a much better company
Net Return on Equity
The Return on equity of Al Dar was 25.25% which has dropped to 21.5% in 2008, as compared to this the ROE of Emaar properties has dropped from 19.55% to 8.66%.
The drop in the ROE of Emaar is more than 50% as compared to Al Dar properties where the drop in ROE is only 14.85%.
Al Dar is generating a much better Return on Equity than Emaar properties; it shows how much shareholders are able to gain from their investments.
Net Return on Asset
The Net return on Asset of Al Dar properties has decreased marginally from 8.58% to 6.9%. [Drop of 19.58%]
The Net return on Asset of Emaar properties has decreased from 12.67% to 5.11% a drop of 59.66%
Al Dar again has been able to generate revenue from the usage of their assets.
8.2 Solvency and Liquid Ratio
Current Ratio
The current ratio of Al Dar is healthy the standard current ratio of 2:1 has been maintained which shows that the company is in a healthy position and can meet its short term liabilities.
The current ratio of Emaar is much lower than the standard ratio of 2:1 and moreover it has deteriorated from 0.77 to 0.59 in 2008. The company seems to have a big liquidity crunch and may not be able to meet its short term obligations
Quick Ratio
The quick ratio of both the company also reflect similar picture as reflected by the current ratio.
Emaar properties have a much lower quick ratio as compared to ALDAR Properties.
Inventory Turnover Ratio
ALDAR and Emaar have a very low inventory turnover and cannot be assessed since the industry does not define a comprehensive list of inventory to be accounted. ALDAR is able to manage their inventory efficiently since the ratio is higher.
The industry does have a specified time frame which would indicate a clear receivable days since it would always be on the higher side. The real value of property is recovered once it is ready-to-stay and thereby ALDAR has a higher number of days of Collection since most of their properties are on the verge of completion.
8.3 Financing Ratios
Gearing Ratio
Interest Coverage Ratio
The interest coverage ratio of Al Dar is better than Emaar.
Al Dar is in a better position to repay its interest than Emaar, 43.57% as compared to 36.34% of Emaar.
8. RECOMMENDATIONS &CONCLUSION
ALDAR has mainly been focusing their business on land and free hold property. ALDAR is looking to enhance their projects in the commercial region and gain from the appreciation value of the developed region. ALDAR r is focusing on developing varied industry to act as a hub in the region in order to built capital share in the World. ALDAR is in an expanding phase and is looking at lucrative projects in the Capital and is ensuring that the pace is steady. ALDAR is also ensuring that revenue generated in this business is constant since slow down on projects would hamper the industry as a whole. ALDAR is politically connected in the region since it belongs to one of the wealthiest ruling families in the UAE. We recommend a 'BUY' option for our investors keeping in mind all the above aspects of the business.
10. REFERENCES
www.aldar.com
www.emaar.com
www.sca.ae
http://www.arabianbusiness.com/arabic/581541
Hilton, R., 8th edition (International), Managerial Accounting, McGraw Hill/Irwin
