This report is basically a financial analysis report of the Emaar Properties PJSC and its subsidiaries which aim to discuss the key area related to the accounting judgments to bring down the impacts that these judgments have on the financial performance and position of the company. This report would further discuss the background of the company along with its key operating areas in the light of the various internal and external factors which impacts or are likely to impact the performance of the company. The overall analysis of the ratios and the comments on the various areas of the financial performance are also included in the report. Overall, this report would be establishing a critical relationship between the operational and financial data of the company to assess the combined impacts they have on the financial position and profitability of the company.
As the financial statement report of a company is a well structured report describing the financial health of the company, this report will be describing the various aspects related to the financial analysis based on the annual financial report of past few years. (Investor Words, 2011) The financial report analysis plays a vital role for making a number of major decisions related to the investments, finance and other managerial activities of the company. The complete analysis of the Emaar Properties PJSC is done based on the consolidated financial statement of the company submitted to the UAE stock market on 31 December 2010 for the past fiscal year. The analysis of the financial statement of the company is done mainly focusing the following three aspects:
Analysis of the Business Strategy
Analysis of the Accounting Policies and Judgments
Analysis of the Financial Ratios
The analysis of the business strategy of the company would include the analysis of the direction and scope of the company over the long term. This further include the strategies adopted by the company to configure its resources available under the challenging environment of its competitors, expectations of the stockholders, etc in order to meet the overall demands of the company, achievement of the fundamental goals and the objectives of the company along with the all around satisfaction of the customers, suppliers, etc by increasing the revenue and reducing the cost. (Tutor2U, 2011)
The analysis of the accounting policies and the judgments made by the management of the company is done to evaluate the different procedures and the policies adopted by the Emaar Properties PJSC including the various methods and measurement systems presented in the financial statements for presenting the disclosures. This can be very useful for the investors while reviewing the financial reports in order to make the decisions about their investments in the company. (Investopedia ULC, 2011)
The analysis of the different financial ratios is done in order to quantify the several of the financial aspects of the company to identify the overall financial condition of the company which are very useful for the managers, current and the potential stakeholders, and by the company's creditors. The report will further present the critical findings and the analysis that came out of the ratio analysis. (Loth, 2011)
BUSINESS STRATEGY ANALYSIS
Company's Foundation and Establishment
The Emaar Properties Public Joint Stock Company was established in the year 1997 as a public joint stock company by the Ministerial Decree number 66. The company started its operations on 29 July 1997 after its establishment on 23 June 1997. The Emaar Properties PJSC along with its subsidiaries constitutes the Emaar Group whose registered office is at P.O. Box, Dubai, United Arab Emirates. The company trades its shares on the Dubai Financial Market. The Emaar has been involved in several of its activities aiming to shape the lives and the landscapes in the Emirate since the very inception of it in 1997. The activities of the company include building homes; development of new master planned and value added communities that meet all around needs of the lifestyle of the homebuyers. With its innovative concepts and the business strategies, the company can be recognized as the prime mover of the real estate and the construction sector of the Emirate. (Emaar Properties PJSC and its Subsidiaries, 2010)
Mission, Vision, and Values
The Emaar Properties has a one fold mission of transforming the company into a one stop and a global solution provider for the good lifestyle including the homes, leisure, health, education, work, play, industry, etc. (Emaar Properties PJSC, 2010)
The vision of the Emaar group is the transformation of the company from just the real estate development to become one of the most valuable lifestyle developers in the world. (Emaar Properties PJSC, 2010)
The company carry on some of the most important values while conducting its business which include the trust, integrity, fairness, complete focus on the customers, open communication with all who are involved with the company's business, providing the positive work environment for the employees for their continuous development, keeping the social responsibility as one of the top priorities and keeping the innovation, speed and execution while as most of the operations. (Emaar Properties PJSC, 2010)
Key Operating Areas
The key operating areas of the Emaar Properties PJSC includes the constructions of the homes, offices, industrial buildings, apartments, malls, shops and other infrastructure. The Emaar is also extending its expertise in the creation of the master planned communities, international markets, etc. The company has been establishing the new competencies in the leisure and hospitality, educational institutions, malls, healthcare and other financial services. The services offered by the company have evolved from the integrated approach of the property development and the customer service. The company also invests in the associated companies, joint ventures, properties, etc. The company is involved in the different big construction projects with the government as well as the private sector which includes the real estate required for the tourism, education and comfort living.
Corporate Strategies
The main goal of the company is to become one of the most valuable companies of the world. The two pronged strategy of business adopted by the Emaar Properties PJSC include the business segmentation and geographical expansion. Both of these two strategies are discussed one by one as below:
Business Segmentation
For the smooth functioning of business of the company, the whole business is segmented into three major segments of real estate, leasing and related activities and hospitality. Following are the different operations which are performed in each of the segment of the company:
Real Estate: Development and selling of the villas, condominiums, commercial units, plots of land, etc.
Leasing and Related activities: Development, leasing and management of the real estate like malls, retails, residential and the commercial spaces.
Hospitality: This segment includes the development, management and ownership of the hotels, apartment services and other leisure activities.
There are few other business segments of the company as well like property management services and investments in the providers of the financial services but they do not meet the criteria of the reported segment as per the rules of IFRS 8.
Geographic Expansion
The Emaar group is currently focusing a lot on the geographical expansion of its business and for this it is developing the new international business opportunities outside the United Arab Emirates as well. The business has been divided into a domestic segment and the international segment which include the business activity and operations in the UAE and outside the UAE respectively. The Emaar is currently having its collective presence in the several expanding markets of the Middle East, North Africa, Europe, North America, and Pan-Asia. The company has already established its business operations in the countries of United Arab Emirates, Syria, Saudi Arabia, Jordan, Lebanon, Morocco, Egypt, Pakistan, India, China, Turkey, USA, United Kingdom and Canada.
Factors Affecting the Company's Performance
There are the following internal factors which impact the performance of the company:
The commitment of the management towards the expansion and well functioning of the business.
The inconclusive interpretation of the standard requirements.
The training policies adopted by the company to train its employees for the different aspects.
The external factors which impact the performance of the company are listed as follows:
The quality of work shown by the subsidiary companies.
Quality of work by the associated companies.
The quality of the raw material and services received from the suppliers.
The other external factors like the policies of the different governments, international and domestic laws and the regulations.
ACCOUNTING POLICIES AND JUDGEMENTS' ANALYSIS
The analysis of the accounting policies and the judgments are done to understand the different aspects of the accounting policies adopted by the company and discussing the key areas of the accounting judgment and further studying the impact of both on the financial performance and position of the company. (Emaar Properties PJSC and its Subsidiaries, 2010)
Basis of Preparation
The consolidated financial statement of the Emaar Properties PJSC is prepared in accordance to the International Financial Reporting Standards (IFRS) which is issued by the International Accounting Standards Board (IASB) along with the requirements as applicable to the laws of the United Arab Emirates. The financial statements are prepared in the United Arab Emirates Dirham (AED) which is the functional and the presentation currency of the company with all the values being rounded off to the nearest thousands. Most of the elements in the consolidated financial statements are prepared on the basis of historical cost except for the cases of financial assets and the financial instruments where the other comprehensive incomes are used.
Property, Plant and Equipment
The aspects of property, plant and the equipments are basically reviewed for the purpose impairment whenever there is an indication that the carrying amount of the property, plant and the equipments may not be recoverable. The impairment loss is identified in the income statement whenever the carrying amount of these elements exceeds the recoverable amount. Following are the listed entities whose depreciations are calculated on a straight line basis:
Entities
Depreciation
Leasehold Improvements
2-5 years
Sales Centers
1-5 years
Other Buildings
10-45 years
Computers and office equipments
2-5 years
Plant, machinery and heavy equipment
3-20 years
Motor Vehicles
3-5 years
Furniture and fixtures
2-10 years
Leisure, entertainment and other assets
2-15 years
The review of the useful lives and the depreciation are made periodically for ensuring that the method and the period of depreciation are consistent as per the expected economic benefits from these listed entities.
Financial Assets
The recognition of the financial assets is recognized or derecognized when the purchasing or the selling of the financial assets are made within the timeframe which is established by the market concerned. The measurement of the financial assets is done at either the amortized cost or at the fair value. The fair value of the financial instruments which are actively traded in the organized financial markets is calculated by having the reference of the quoted bid prices of the market for the assets and the offer prices for the liabilities.
The financial assets are classified into the "equity instruments" and the "debt instruments" on the basis if they are non-derivative and meets the definition as per the rules specified in IAS 32 Financial Instruments. The assets which have their fair value in the foreign currency is determined and translated at the very spot at the end of the reporting period. The derecognition of the financial assets is made when the rights to receive the cash flows from the assets are expired or the group has transferred the rights to receive the cash flows from that asset. Also, the assets can be deemed to be impaired if the clear evidence of the impairment as the result of some "loss event" is encountered. The business combination and the goodwill of the company is another aspect of the measurement of the assets with the company. The total assets of the company measured at the end of the year 2010 were worth 62,504,328,000 AED of which the assets worth 40,035,095,000 AED belonged to the domestic segment of the company and the assets worth 22,469,233,000 AED belonged to international segment which include the assets like bank balances and cash, trade receivables, other receivables, deposits and prepayments, property, plant, equipments and the goodwill.
Revenue Recognition
The revenue of the company in the financial statement which was recognized by the sale of the property when the risks and the ownership of the property has been transferred to the buyer of the property, the lease to buy scheme when the property is put to the lease and the rental income during the period is added to the revenue, the lease of the investment property for which again the rental income is counted, interest revenue from the various sources and finally the revenue generated from the services. The total revenue of the company calculated for the year 2010 had been 11,177,556,000 AED from the domestic segment and 972,718,000 AED from the international segment making the total to be 12,150,274,000 AED.
Cash and Cash Equivalents
The cash and the cash equivalents available with the company consisted of the cash in hand, bank balances, the short term deposits at the different places and the net of outstanding bank overdrafts.
Trade receivables
The trade receivables are that amount of the receivable incomes which are estimated for the doubtful debts when the collection of the full amount is not probable. When there is no possibility of the recovery those income goes to the bad debts which is written off.
Development Properties
The development properties of the business includes the cost involved with acquiring of the properties, construction and the other costs involved with the development of the property. The costs include the cost involved in acquiring the freehold and leasehold for the land, the payments made to the contractors, borrowing costs, costs of the site preparation, design and the planning costs, fees involved with the legal services, taxes involved with the property transfers, construction overheads, etc.
Investment in Associates
The Emaar Group has the considerable investments in its associates which are added into the accounting of the financial statements. The goodwill of the associated company is also added to the carrying amount of the company. The share in the gains and the losses of the associated company is also added to the financial statement of the company. The equity method is applied and the investments are regularly checked if it is impaired.
Interest in Joint Ventures
The Emaar group also do have substantial amount of the interests in the joint ventures which is the contractual arrangement of the economic activities by two or more properties. The Group recognizes the interests by using the equity method and the interest is added in the consolidated statement of the financial activities of the company by measuring the cost of the share, acquisition charges and subtracting the impairment.
End of Service Benefits
The Emaar group has the policy of providing the benefits of the end of service to its employees. These benefits are shared by the employees on the basis of the final salaries of the employees after the completion of the specified period of time. The Group also makes the contribution to the pension fund for the employees which are calculated as the percentage of the employees' salary.
Key Areas of the Accounting Judgment and their Impacts
The Emaar group has taken a number of judgments in many areas which had a significant amount of impact on the amounts recognized in the consolidated financial statements. The key areas of the accounting judgments made by the management of the Emaar group include the investment properties, classification of the investment properties and the operating lease commitments.
The Group decided to adopt the cost model for the investments in the property and thus the investment properties are calculated with the cost and deducting any impaired loss or accumulated depreciation. This resulted in the more realistic calculation of the investments and the value of it for the company.
Another judgment made for the classification of the property as the part of the investment property or not. For this, the Group decided to consider whether the property is generating the cash flow independently of the other assets held by the company or not. As an impact, the hotels and the service apartment buildings being operated by the Emaar Group came under the classification of as the property and not as the part of the investment property of the Group.
The Group also entered into a number of the commercial and retail property leases for which the Group decided to retain all the significant and the considerable risks and the rewards of the ownership of such properties which resulted to the change of figure at the face of financial statements.
4. Ratio Analysis
4.1. Profitability Ratio Analysis:
Title of Ratio
2009
2010
Return on (Shareholder's) Investment(ROI)
7.91%
7.10%
Return on Capital Employed (ROCE)
5.41%
5.84%
Operating Margin (Operating Profit/Sales)
24.10%
20.40%
Gross Margin (Gross Profit/Sales)
48.73%
37.42%
Overhead/Sales
29.67%
23.11%
Sales Growth
-0.24%
30.76%
4.1.1. Return on (Shareholders') Investment (ROI):
Sample calculations:
ROI (2009) = (2477011 /31300031)*100% = 7.91%
Return on Investment is a major analysis tool used to evaluate whether an investment option is profitable or not. It acts as a precautionary instrument wherein a particular project can be evaluated based on the cost of project and the gain expected from such an investment. In the case of Emaar, it has to be noted that the Return on Investment has declined from 7.91% in 2009 to 7.1% in 2010, which means that the cost of investment has increased which has lead to decrease in Return in Investment on a year on year basis. This is not a healthy indication as a company would expect it's ROI to increase in order to show increase in profitability of its investments. But the cost of investment can increase due to various external factors such as input costs and cost of material. Thus such factors are tough to control for the company.
4.1.2. Return on Capital Employed (ROCE):
Sample calculation:
ROCE (2010) = [(2478450) / (31300031 + 11168543)] * 100% = 5.84%
Return on Capital Employed is an indicator of efficiency and profitability of the investments already made by the company. Whereas in the case of ROI, investment decision can be altered according to a project's viability, in ROCE an existing capital investment can be analyzed whether it has given desirable yield or not. According to data, the ROCE has increased from 5.41% in 2009 to 5.84% in 2010. This is a healthy sign as the company has been successful in lowering its long term debt and also increases its operating profit before interest and tax. This ratio helps us to understand that the company has been successful in increasing efficiency and thereby increasing profitability.
4.1.3. Operating Margin or profit:
Sample calculation:
OM (2010) = (2478450 / 12150274)*100% = 20.40%
The major function of operating margin is to determine how competent the company has been in its pricing strategy and its operations. As per calculations, the operating margin has declined from 24.1% in 2009 to 20.4% in 2010. This shows that although sales have increased the operating profit before interest and tax has declined in comparison to it. This means that the company will have difficulty in meeting its fixed costs such as interest on debt.
4.1.4. Gross Margin or Profit:
Sample Calculation:
GM (2010) = (4546744 / 12150274) * 100% = 37.42%
Gross margin means the percentage of total sales revenue the company retains after providing for various costs associated with producing the goods. In the case of Emaar, the revenue is generated by sale of assets and thus the costs associated with the sale of assets are advertising, input costs and material costs. Since the input costs have increased from 2009 to 2010, the gross margin is bound to decline. Thus the gross margin has declined drastically from 48.73% in 2009 to 37.42% in 2010.
4.1.5. Overheads/Sales:
Sample Calculation:
O/S (2010) = (2808451 / 12150274) * 100% = 23.11%
Overhead refers to those expenses that are not related to direct labour, materials or administration costs. Thus the declining trend suggests that the company has been successful in lowering its overhead costs and thus reducing its overheads/sales ratio. It's a positive indication for the company.
4.1.6. Sales Growth:
Sample calculations
SG (2010) = [(12150274 - 8413262) / (12150274)]*100% = 30.76%
Sales Growth is an indication of the growth of sales made by the company on YoY basis. The Sales growth has increased drastically from -0.24% to 30.76% in 2010. This has been majorly due to the economy slowdown in the real estate sector in the year 2008-2009. Thus the sales figure had taken some beating. The Sales growth thus shoots up magnificently for the year 2010.
4.2 Liquidity Ratios:
Title of Ratio
2009
2010
Working Capital (%)
25.40%
46.73%
Acid Test/Quick Ratio (%)
25.40%
46.73%
4.2.1 Working Capital:
Sample Calculations:
WC (2010) = (8798410 / 18828350) * 100% = 46.73%
The working capital is an indication of liquidity of a company. As per the ratios, the working capital has increased from 25.4% in 2009 to 46.73% in 2010. This is a very positive indication for the company as in order to operate and be in business, a company requires liquidity for payment of various costs and expenditures.
Acid Test/Quick Ratio:
Sample Calculations:
AT (2010) = [(8798410 - 0 / 18828350) * 100% = 46.73%
It is an indicator of the company's short term liquidity. Similar to the working capital ratio, the quick ratio is an instrument used to determine whether the company has enough liquidity to meet its short term expenses. Thus with an increase from 25.4% in 2009 to 46.73% in 2010, the company has ensured it has enough short term liquidity to meet short term expenses. It is a very positive indication for the company.
4.3 Gearing Ratio:
Title of Ratio
2009
2010
Gearing Ratio (%)
23.00%
26.30%
4.3.1 Gearing ratio:
Sample Calculations:
GR (2009) = [(11168543) / (31300031 + 11168543)] * 100% = 26.30%
Gearing ratio is the ratio between the owner's funds to the creditor's funds used for operating a company. Thus, it shows the amount of leverage used in operating a company. Lower the leverage, less risky it is to operate the company. Thus the gearing ratio should always be low on YoY basis. As per calculations, the gearing ratio is 23% in 2009 as compared to 26.3% in 2010. This is not a healthy sign as the company has increased its debt by increasing leverage, making it more risky to operate the company.
4.4 Activity / Efficiency
4.4.1 Asset turnover
Asset Turnover = sales / total assets
Sample calculation:
Asset Turnover (2010) = (12150274 / 62504328) * 100% = 19.44%
year
Ratio
2009
2010
Asset Turnover
13.12%
19.44%
Asset Turnover is an important ratio in measuring how efficiently a company has used its assets in generating revenue. Emaar has been successful in increasing the ratio from 13.12% in 2009 to 19.44% in 2010, which indicates that it has been successful in utilization of its assets to generate revenue.
4.4.2 Managing Receivable
Days Sales Outstanding (DSO) = trade receivable / Avg. daily sales
Avg. daily sales = sales / 365
Sample calculation:
Avg. daily sales (2010) = 12150274 / 365 = 33288.42
Days sales outstanding (2010) = 8938956 / 33288.42 = 268.53 days
year
Managing receivable
2008
2009
2010
Days sales outstanding
414.12 days
268.53 days
Days Sales Outstanding is an indicator of how quickly a company recovers the revenue from the sale it has made. In 2009 the company has a DSO of 414.12 days whereas in 2010 the DSO drops to 268.53 days. This data indicates that the company has become more efficient in collecting dues made from sales which in turn improve the revenue cycle of the company.
4.5 Shareholders Returns
4.4.1 Dividend Per Share
Dividend Per Share = dividends paid / number of outstanding shares
This ratio measures the money or profit that each share will gain.
2009
2010
Dividend Per Share
0
0
Since dividend has not been declared by the company for both years, that is, 2009 and 2010, it is not possible to calculate dividend per share. This shows that the company is not ready to divulge liquid capital to its shareholders. It wishes to spend this capital on its projects.
4.5.2 Dividends Payout Ratio
Dividends Payout Ratio = Dividends Paid / Profit after tax
2009
2010
Dividends Payout Ratio
0
0
Dividend Payout ratio shows the percentage of the company's earnings it pays out in terms of dividend. Since Emaar has not declared dividend to its shareholders for both years, 2009 and 2010, the Dividend payout ratio is zero for both years. This is not a good practice as the shareholders expect the company to distribute a certain percentage of earnings to its shareholders. This move will make the shareholders feel uncomfortable holding stock of such a company.
4.5.3 Dividends Yield
Dividends Yield = Dividends per share / market value per share
This ratio measures the percentage of dividend earned by each share over the market value per share.
Sample calculation:
Dividends Yield (2009) =
2009
2010
Dividends Yield
0
0
Since the company is not giving any dividend for the years 2009 and 2010, the dividend yield ratio is zero. This means the shareholders are not getting any material return on their investment. This may have a negative impact on shareholders.
4.5.4 Earnings Per Share
Earnings Per Share = Profit after tax / number of shares
Sample calculation:
Earnings Per Share (2010) = 2477011 / 6091239 = AED 0.41
2009
2010
Earnings Per Share
0.34
0.41
Earning per Share is a major indicator of whether a person should invest in a particular company or not. It enables a shareholder to know whether the company will give desired return on investment or not. In the case of Emaar, the EPS has increased marginally from 0.34 in 2009 to 0.41 in 2010. This is a positive indication as it will attract shareholders to invest in the company.
4.5.5 Price / Earnings (P/E)
Price / Earnings (P/E) = market value per share / Earning per share
Sample calculation:
Price / Earnings (2010) = 3.19 / 0.41 = 7.84 times
2009
2010
Price / Earnings
9.56 times
7.84 times
Price/Earnings Ratio is a valuation tool to know what the investor is expecting from his investment. The ratio is driven by market prices and thus cannot be judged as a major tool for an investor in deciding whether to invest in the company or not. The investor can compare such ratio with companies in the same industry to determine which is doing the best in the lot. At Emaar, the P/E Ratio has declined from 9.56 times in 2009 to 7.84 times in 2010. This means the market price of the share has declined from year 2009 to year 2010, which is not a good sign for the company.
Short Analysis and Recommendation to shareholders
After detailed analysis of the various ratios and comparison to its previous year's performance, a shareholder should reduce his investment in the company. The figures are not very encouraging, The Company is not paying any dividend to its shareholders for the past 2-3 years and the share price in the stock market has also taken a beating. The company is facing many issues in terms of under utilization of its funds as can be seen with huge working capital. Although the EPS has increased, the numbers are not encouraging. Thus, an investor should avoid investing in the real estate sector on a whole considering that all other companies are facing similar problems in the current scenario. The companies in the real estate sector are facing major liquidity problem and hence are unable to rotate capital for investment in other projects. With the rising cost of material, the property rates are increasing leading to lower sales. Thus, until this scenario of liquidity shortage is cleared, an investor should avoid entering the real estate sector on a whole.
Conclusion
Emaar, as a company has been able to sustain itself from the storm which had entered the real estate market due to the subprime crisis in United States. Being a large entity, it was able to swallow the losses incurred in 2008-2009 and as the numbers reflect, it has been able to recuperate from that loss. But the worst isn't over. Although the company has recovered, it still has a long way to make its business profitable after that hiccup. Thus, until the scenario improves, an investor should keep away from Emaar and later enter it when situations are favorable.
