dar al arkan real estate development company · we initiate coverage on dar al-arkan real estate...

of 34 March 2010

DAR AL-ARKAN Real Estate Development Company

ALJAZIRA CAPITAL

Dar Al-Arkan CompanyInside Look and Vision

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Research DepartmentCompany Reports March 2010

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Asset Management Department

Brokerage and Investment Centers DivisionResearch Division

Head of Funds DistributionKhaled Al-Sorayea+966 1 [email protected]

Assistant General Manager for Brokerage and Investment CentersAla’a Al-Yousef+966 1 [email protected]

Division ManagerAbdullah Alawi+966 2 [email protected]

Regional ManagerCentral RegionSultan Al-Mutawa+966 1 [email protected]

Area ManagerSaleh Al-Zu’bi+966 2 [email protected]

Regional ManagerWest and South RegionsAbdullah Al-Misbahi+966 2 [email protected]

Assistant ManagerSaleh Al-Quati+966 2 [email protected]

Area Manager - QassimAbdullah Al-Rahit+966 6 [email protected]

ExecutiveWael Sindi+966 2 [email protected]

Area Manager - Eastern ProvinceMaher Al-Ajaji+966 3 [email protected]

International, GCC, and Corporate Stock Department ManagerAmjad Subeih+966 2 [email protected]

Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No. 07076-37

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Executive Summary 1

Investment Risks 3

Valuation Summary 4Net a Asset Value Method 4Discounted Cash Flow Method 5Weighted Average Cost of Capital 7Valuation under Different Scenarios 8Comparative Valuation 9Blended Valuation 9

1. DAAR, Leading Player in an Attractive Market 10Growth Largely Focused on Land Sales, Residential Properties to Take Lead 11

2. KSA Real Estate Sector Growth Prospects Endearing 12Large, Young Population Base Growing Rapidly 12Urbanization, Declining Household Size and Workforce Expansion to Boost Demand 13Leading to Widening Demand-Supply Gap… 13Real Estate Prices Significantly Lower Than Other GCC Markets 14Mortgage law to induce demand 14

3. Affordable housing, an attractive segment 15Affordability is an important factor in Saudi Arabia 15Demand for affordable accommodation is compelling 15DAAR favorably geared on affordable housing 15

4. DAAR’s Mega Residential Projects to Spur Growth 16

Revenues from Residential properties to surge in 2012 16Ongoing projects 16Upcoming projects 18

5. “Mixed Use” Strategy to Help Boost Land Value 19Driving majority topline growth so far 19Average prices are however on a decline 19“Mixed use” strategy to help restrict fall in land value 19Land projects to continue rolling… 20

6. Rental Portfolio to Provide Recurring Revenues 21

7. New “Sukuk” to Provide Relief on Funding Concerns 21Hefty Debt Burden and Maturity Profile 21 Stock Takes a Beating Over Funding Concern, Dubai World Debt Default 22DAAR comfortably Placed to Replay its Liabilities 22

8. DAAR’s Robust Financial Performance 23Income Statement 23Balance Sheet 23

9. Company Overview 24History & Product Offerings 24Business Model 24DAAR’s affiliates 25Non-affiliated partners 25

10. Financial Projections 26Income Statement 26Balance Sheet 27Cash Flow Statement 28

Table of Contents

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Initiation | KSA | Real Estate 15 March 2010

Key informationReuters code: 4300.SE Bloomberg code: ALARKAN ABCountry: Saudi ArabiaSector: Real EstatePrimary Listing: TASIM-Cap: SAR 14.8 bn52 Weeks H/L: SAR 21.75 / 11.45

Dar Al-Arkan Real Estate Development Company (DAAR)

Established in 1994 by six prominent business families, Dar Al-Arkan is a leading real estate company in The Kingdom of Saudi Arabia.

DAAR primarily focuses on three core businesses: land development (purchasing and developing infrastructure on raw land parcels), master-planned lifestyle communities (development of residential and commercial space), and property management (leasing and rental of residential, commercial and retail space).

The company has its head office in Riyadh and substantial presence throughout the Kingdom through its branch offices in Mecca, Jeddah and Madinah.

The Residential Projects Connoisseur

We initiate coverage on Dar Al-Arkan Real Estate Development Company (DAAR)

with a fair value price of SAR 19.1.

This implies an upside potential of 39.4% from current levels. We believe the

current slowdown in the real estate market and the consequent lower sales and

margins have already been factored in the stock price. At current levels, DAAR is

trading at a P/BV multiple of 1.1, the lower side of its two-year historic average of

1.1-1.6. DAAR offers attractive investment opportunities given its mega master-

planned lifestyle communities targeted at the middle income segment and

substantial bank of developed land. The company’s recent venture into property

management is likely to provide a stable source of earnings.

DAAR, a Leading Player in an Attractive Market

DAAR is a leading property developer in Saudi Arabia, with operations in all key and attractive regions of the Kingdom’s Eastern, Central and Western provinces. Sensing massive opportunities in residential markets segment, the company successfully transformed itself from a primary developer of basic infrastructure on raw land plots during 1990s to a diversified property developer offering large-scale, master-planned lifestyle residential communities. During 2004-2009, DAAR sold

6.893 residential units and 29.9 mn sq. mt. of developed lands

KSA Real Estate Sector’s Growth Prospects Encouraging

The residential real estate sector in Saudi Arabia offers substantial growth opportunities, mainly due to the Kingdom’s fast growing population (~2.5% per annum), increasing urbanization and widening demand-supply gap. Housing demand in KSA is real and less speculative compared to its neighbors in GCC such as Dubai. This is largely because Saudi nationals account for over 70% of the Kingdom’s population, and purchase houses principally to stay in rather than for investment purposes. Housing demand is also likely to be induced by enactment of the much-awaited mortgage law (expected by the first quarter of 2010). The new law would provide greater financing choices to potential property buyers, thereby increasing purchases.

Fair Value: SAR 19.1Current Price: SAR 13.70Upside: 39.4%

0

50

100

Dec-07 Jul-08 Jan-09 Jun-09 Mar-10

DAAR TASI

Table 1: Key Financial and Valuation Numbers

Price Chart

All fig. in SAR mnunless specified

2008 2009 2010 E 2011 E 2012 E 2013 E 2014 E

Revenues 5,610.8 5,464.1 5,566.3 5,969.4 8,965.0 10,349.1 4,397.4

EBITDA 2,694.3 2,361.5 2,399.8 2,634.1 3,701.7 4,112.3 2,201.3

Net Income 2,356.2 2,122.7 2,115.0 2,331.9 3,532.7 3,961.7 2,129.7

EPS (SAR) 2.2 2.0 2.0 2.2 3.3 3.7 2.0

P/E 6.3 7.0 7.0 6.3 4.2 3.7 6.9

ROE 21% 17% 15% 16% 22% 23% 12%

ROA 12% 10% 9% 10% 16% 19% 10%

AlJazira Capital

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Affordable Housing, the Key Segment

Demand for affordable housing offers the most attractive prospect for growth in the Kingdom. We attribute this to three key factors: A) KSA’s low per capita income compared to other GCC regions; B) high proportion of Saudi nationals in low to mid-income group; and C) limited availability of financing options. DAAR’s strategic focus on affordable housing is geared favorably to this segment and, therefore, the company is likely to benefit immensely. The Al Qasr project, which entails the construction of 3,051 residential units (Completion of residential and commercial units expected in early 2010), targets the lower bracket of the middle-income segment, whereas Shams Ar-Riyadh and Shams Al-Arous (around 4,700 units combined) cater to the higher and middle bracket of middle-income segment.

Mega Residential Projects to Spur Growth

Land sales continue to be a majority revenue driver for DAAR, contributing as much as 90.5% to its top-line in 2009. Nonetheless, on account of strong residential project pipeline, notably Shams Ar-Riyadh and Shams Al-Arous, residential properties revenues are likely to jump in 2012 and contribute around 44% to the top-line. Overall, we estimate DAAR’s residential revenues at SAR 11.6 bn on sales of approximately 5,200 units during 2010-2013.

Mixed-Use Strategy to Boost Land Project Earnings

Average selling price of developed land realized by DAAR fell a significant 27% YoY in 2008 and 4.3% in 2009. This was largely because it sold lands in suburban areas where land prices are relatively modest. Though suburban areas provide large development opportunities, prices are likely to remain modest. Thus, to augment the value of per sq. mt. of developed land, DAAR is implementing “mixed-use” strategy. The company aims to acquire a large parcel of land, develop residential units on a part of it and sell the rest (after establishing basic infrastructure) to other real estate developers. The sale of the remaining developed land is thus likely to offer higher value. We estimate land revenues at SAR 22.3 bn during 2010-2014.

Property Management, a New Revenue Stream

To further diversify revenue sources, DAAR ventured into developing and maintaining ‘leasing income generating asset portfolio’. This investment portfolio is likely to include residential, commercial as well as retail properties—all developed by the company. DAAR plans to retain around 1,300 residential apartment units of the Al-Qasr project for leasing income. Additionally, construction of the Al-Qasr shopping mall, commercial and retail spaces is on track and likely to be completed by the end of 2010. We expect rental income to start accruing 2010 onwards and become a stable and large source of revenues in the long term.

Liquidity Intact to Cover Liabilities

A large portion (almost 89%) of DAAR’s debt is due for maturity over the next two years. Unlike its GCC counterparts, the near absence of off-plan sales in the Kingdom makes it difficult for the company to fund projects internally, leading to increased dependence on external financing. Facing tight liquidity situation, the company issued its fourth Sukuk, worth SAR 1.7 bn (USD 450 mn) on 11 February 2010. The funds will be utilized to finance its expansion projects. We believe the company is comfortably placed to repay its financial obligations (next falling due in 2012) considering the significant earnings boost expected in 2012 as the Shams Ar-Riyadh delivery begins.

Demand for affordable housing offers the most attractive prospect for growth in the Kingdom.

We estimate DAAR’s residential revenues at SAR 11.6 bn on sales of approximately 5,200 units during 2010-2013.

To augment the value of per sq. mt. of developed land, DAAR is implementing “mixed-use” strategy.

We expect rental income to start accruing 2010 onwards and become a stable and large source of revenues in the long term.

A large portion (almost 89%) of DAAR’s debt is due for maturity over the next two years. We believe the company is comfortably placed to repay its financial obligations (next falling due in 2012) considering the significant earnings boost expected in 2012 as the Shams Ar-Riyadh delivery begins.

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Delay in Economic Recovery

We have assumed a recovery in the macroeconomic environment in Saudi Arabia in tandem with the resurgence in world trade activity and an improvement in oil prices (expected to trade above USD 65-75 in 2010). However, any correction in oil prices due to continued slowdown would likely affect business activities and sentiment in the Kingdom. This will also affect the real estate market both on account of reduced demand and lower prices. Such a scenario could negatively impact our valuations.

Absence of Off-Plan Sales Model Implies Higher Working Capital Requirement

The selling of residential properties under the off-plan model has been banned in the Kingdom since March 2009. The absence of off-plan sales model in Saudi Arabia means developers require substantially higher working capital to commence development. This is because cash inflows start accruing only three months before project completion. By then, most development costs have already been committed. This makes Saudi developers more dependent on equity or debt financing to execute projects.

Liquidity Positions to Tighten in the Near Term

DAAR’s net debt-to-equity ratio was 44.2% in 2009, down from 58.9% in 2008. In the near term, the company’s cash outflows are likely to increase significantly as development work on the big-ticket project, Shams Ar-Riyadh is set to begin in full throttle. The new Sukuk issue is also likely to push the net debt-to-equity ratio to 51.3% in 2010. Failure to secure financing, or delay in the development work due to non-availability of finances, could undermine DAAR’s ability to meet its debt obligations.

Land Sales, a Large Value Driver

Land sales have been a majority revenue driver for DAAR in the past. The company does not disclose information related to the locality of the land, size, costs, market value, etc. We have assumed that DAAR will continue to focus on suburban areas where development opportunities are immense. However, this is likely to keep average selling prices lower relative to pre-2008 historical averages. We have assumed selling prices to average SAR 626 per sq. mt. during 2010-14, around 3.0% higher than the 2008 level but almost 25% lower than the 2007 level. If average selling prices drop below our estimate, it could dent earnings from land projects and consequently our valuations.

Investment Risks

Any correction in oil prices due to continued slowdown would likely affect business activities and sentiment in the Kingdom.

The selling of residential properties under the off-plan model has been banned in the Kingdom since March 2009.

Failure to secure financing, or delay in the development work due to non-availability of finances, could undermine DAAR’s ability to meet its debt obligations.

This is likely to keep average selling prices lower relative to pre-2008 historical averages.

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We initiate coverage on Dar Al-Arkan Real Estate Development Company with a fair value estimate of SAR 19.1per share. This implies an upside potential of 39.4% from the current price level. Our fair value estimate is derived from a weighted average of Net Asset Value (NAV), Discounted Cash Flow (DCF) and peer comparison-based methods. We have assigned equal weightage to all the three valuation methodologies to arrive at

the fair value estimate for DAAR.

Net Asset Value Method

Our NAV valuation approach generated a fair value of SAR 20.0 per share. This is based on two key components:

a) DAAR’s latest Book NAV; andb) Additional value generated by the company’s ongoing development land/ residential

projects and investment portfolio.

Valuation Summary

Book NAV

Book NAV considers the company’s net asset value at cost, which is total assets minus liabilities, as on the balance sheet. It includes all costs incurred by the company for purchase of land and all development expenses that have been capitalized (i.e., expenses pertaining to establishment of basic infrastructure on the land, construction costs and other related expenses). Based on 2009 financials, DAAR’s book NAV on a per share basis is SAR 13.1.

Additions to Book NAV

DAAR has several ongoing development projects in the residential real estate and developed plot sales segments. It also has an investment properties portfolio. Though we have captured the book value of these investments, which are at cost on the company’s balance sheet, the additional value created upon completion of these development projects are yet to be accounted for. Hence, to estimate additions to the book value, we have determined the value of DAAR’s ongoing residential projects, land under development and investment portfolio based on a few key parameters such as price, costs, margins, time to completion and discount rate equivalent to cost of equity.

Development Projects

This includes Al-Tilal, Al-Qasr, Shams Ar-Riyadh and phase-I of Shams Al-Arous. These projects have different timelines, ranging from 0.25 years to nearly 3 years. The Al-Qasr and Al-Tilal projects have already begun delivering units; therefore, we only considered residential units sitting unsold at the end 2009. For the other two projects, Shams Ar-Riyadh and phase-I of Shams Al-Arous, we considered all planned units. Combinedly, these development projects yielded a value of SAR 2.8 bn, or SAR 2.6 per share.

Net Asset Value SAR mn SAR per share

Book NAV (2009) 14,123.9 13.1

Residential Development Projects 2,800.8 2.6

Development of Land Bank 3,500.5 3.2

Rental Properties 1,178.5 1.1

Overall NAV 21,603.8 20

Table 2: NAV Valuation

Source : AlJazira Capital

We estimate the fair value of SAR 19.1per share. This implies an upside potential of 39.4% from the current price level.

NAV valuation approach generated a fair value of SAR 20.0 per share.

Based on 2009 financials, DAAR’s book NAV on a per share basis is SAR 13.1.

Combinedly, these development projects yielded a value of SAR 2.8 bn, or SAR 2.6 per share.

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Land Bank

The management does not disclose details regarding its land bank, but has indicated that they are located in Riyadh, Jeddah, Makkah, Medina, Dammam, Dhahran and Al Khobar. We have assumed that the company will likely take 2.5-4.5 years to develop these lands and sell them upon development. Being conservative, we have assumed these developed lands to generate a gross profit margin of around 40%, which is less than the five-year average of ~51%. This is largely because DAAR’s land development work is shifting more to the competitive sub-urban areas, where the margins are relatively moderate. Therefore, we expect the company’s current land bank to generate SAR 3.5 bn, or SAR 3.2 per share.

Investment Properties Portfolio

DAAR is gradually building up its portfolio of lease income generating investment properties. The Al-Qasr project involves around 1,300 residential apartment units, 78,000 sq. mt. of mall space, and approximately 100,000 sq. mt that will be put up on lease. To value this rental income generating portfolio, we assumed an average rental yield of 8%. This yields a total value of SAR 1.2 bn, or SAR 1.1 per share.

Discounted Cash Flow Method

Our DCF model generated an enterprise value of SAR 25.3 bn. This implies an equity value of SAR 20.3 bn (SAR 18.8/share) after adjusting for net debt and value of DAAR’s investment in associates. The DCF-generated fair value is based on a five-year explicit forecast period (FY10-14E), involving plot and residential properties sales and rental income. It also includes the terminal value of the rental income generated by the company’s investment portfolio beyond 2014.We considered those residential projects that are either in progress or have been launched with all specific details such as cost of investment, number of units, average sizes, time to completion, and delivery rates. Hence, only Al-Qasr, Shams Ar-Riyadh, Al-Tilal and Shams Al-Arous (Phase I) residential projects have been considered at this point in time. We have also assumed that DAAR would sell plots measuring nearly 7.1 mn sq. mt. (on average) each year until 2014. We have not assumed sale of plots and residential properties beyond 2014. The value created by residential and land projects account for nearly 90% of our DCF-generated enterprise value.The terminal value of the investment properties portfolio has been calculated on an average rental yield of 8%, accounting for nearly 11% of DAAR’s DCF generated enterprise value.

We expect the company’s current land bank to generate SAR 3.5 bn, or SAR 3.2 per share.

We assumed an average rental yield of 8%.

Our DCF model generated an enterprise value of SAR 25.3 bn.

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Table 3: DCF Valuation, Key Financial Metrics


All figures in SAR mn, unless specified 2008 2009 2010 E 2011 E 2012 E 2013 E 2014 E

Revenues 5,611 5,464 5,566 5,969 8,965 10,349 4,397

EBITDA 2,694 2,361 2,400 2,634 3,702 4,112 2,201

Margins (%) 48.0% 43.2% 43.1% 44.1% 41.3% 39.7% 50.1%

EBIT 2,644 2,321 2,360 2,587 3,658 4,071 2,161

Margins (%) 47.1% 42.5% 42.4% 43.3% 40.8% 39.3% 49.2%

Net income 2,356 2,123 2,115 2,332 3,533 3,962 2,130

Margins (%) 42.0% 38.8% 38.0% 39.1% 39.4% 38.3% 48.4%

Cash from operations 2,766 4,459 (4,363) 1,461 3,975 6,993 6,110

Total assets 20,164 23,597 23,774 24,083 20,613 21,338 20,667

Shareholder’s equity 11,736 13,859 14,599 15,416 16,652 18,039 18,784

Total liabilities & equity 20,164 23,597 23,774 24,083 20,613 21,338 20,667

Free Cash Flow Analysis (FCF)

NOPLAT 2,578 2,267 2,306 2,527 3,574 3,977 2,112

Depreciation and amortization 50 41 40 47 44 41 40

Change in working capital 296 (732) (306) 2,262 3,872 5,454 3,917

Capex (3) (2) (42) (30) (31) (36) (29)

FCF 2,921 1,574 1,997 4,807 7,458 9,436 6,040

FCF consideration 100% 100% 100% 100% 100%

Discount factor 0.93 0.85 0.78 0.72 0.66

PV of FCF 1,862 4,104 6,831 6,756 3,960

Sum of PV of FCF 22,513

Terminal value 4,220

PV of Terminal value 2,767

Enterprise value 25,280

Add: Net debt & others (4,969)

Total equity value 20,311

Shares 1,080.0

Fair Value (SAR Per share) 18.8

WACC (%) 9.2%

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Core Assumptions:

Financial Estimates

Revenues:

We expect revenues to increase 1.9% in FY10E largely due to an increase in revenues from residential properties. Project revenues are expected to increase in FY10E due to higher earnings from residential properties. Moreover, DAAR is expected to deliver approximately 4,700 residential units, generating revenues of SAR 11.2 bn during FY11-14E. We expect land development projects to provide stable revenues—annual revenues are expected to average around SAR 4.2 bn during FY11-14E. The investment portfolio is expected to offer a robust source of recurring revenues from FY10E to reach SAR 428.7 mn by FY14E.

Margins:

We have forecasted gross margins for residential projects in accordance with the regional dynamics where the residential units and plots are expected to be sold. We expect operating margins to improve post 2010 largely on account of better margins on land sales. Thereafter, operating margins are likely to average 41.2% during 2011-13. Operating margins are likely to expand to 49.1% in 2014 due to the significantly lower contribution (~5%) from residential properties to the top-line and the consequent increase in contribution from high-margin rental properties..

Weighted Average Cost of Capital (WACC)

A WACC of 9.2% is based on the following assumptions:

Cost of Equity

Cost of Equity of 12.9% assumes a risk-free rate of 3.6% (equivalent to the 10-year US treasury yield of 3.6% at present), risk premium of 7.1%, a beta of 0.84, and 3.4% towards additional risk associated with the country and the real estate sector.

Cost of Debt:

Cost of Debt: We arrived at cost of debt by considering the interest rate on both short- and long-term borrowings. We arrived at post tax cost of debt of 2.6%.Terminal Value represents the present value of perpetuity rental income based on an average rental yield of 8%.

Terminal Value

Represents the present value of perpetuity rental income based on an average rental yield of 8%.

We expect revenues to increase 1.9% in FY10E largely due to an increase in revenues from residential properties.

We expect operating margins to improve post 2010 largely on account of better margins on land sales.

Cost of Equity of 12.9%.

We arrived at post tax cost of debt of 2.6%.

WACC of 9.2%.

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We have further tested our core fundamental assumptions under two possible scenarios: Bull Case and Bear Case. These scenarios illustrate how sensitive our DCF-based fair value is to changes in key input variables. We chose sales price, cost of operations and WACC as three important variables.

Bull Case:

In the Bull Case scenario, we have assumed:

Sales price to rise 10% across project revenues and land revenues;Cost of operations to decrease by 10%; andWACC to decrease by 1%.

This generated a fair value of SAR 21.7, representing an upside of 58.4% to the current market price.

Bear Case:

In this scenario, we have assumed:

Sales price to decline by 10%;Cost of operations to increase by 10%; andWACC to increase by 1%.

This generated a fair value of SAR 16.0, representing an upside of 16.8% to the current market value.

Valuation Under Different Scenarios

Table 4: : Scenario Analysis


16.0

0.6 0.4 1.7

18.8

1.7 0.4

0.8

21.7

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5

10

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20

25

DCF

Bear

case

WAC

C in

crea

se b

y 1%

Cost

s inc

reas

e by

10%

Price

s dro

p by

10%

DCF

Base

Cas

e

Price

s inc

reas

e by

10%

Cost

s dec

reas

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10%

WAC

C de

crea

se b

y 1%

DCF

Bull

case

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Comparative Valuation

We also used the comparative valuation method based on Price-to-Book Value (P/BV) metrics to value DAAR relative to its peers in the region. The peer set includes real estate companies operating out of different countries in the GCC region.

CompanyP/BV

2008 2009 Current

Emaar the Economic City (UAE) 0.6 0.6 0.8

Aldar Properties PJSC (UAE) 0.7 0.6 0.6

Sorouh Real Estate PJSC (UAE) 1.0 0.9 1.0

Deyaar Development PJSC (UAE) 0.4 0.4 0.4

Barwa Real Estate Company QSC (Qatar) 1.8 1.6 1.6

United Development Company P.S.C. (Qatar) 1.3 1.3 1.3

Talaat Moustafa Group Holding (Egypt) 0.7 0.7 0.7

Peer average 0.9 0.9 0.9

Max 1.8 1.6 1.6

Min 0.4 0.4 0.4

Dar Al Arkan Real Estate Development Co. (KSA) 1.2 1.1 1.1

l

The current P/BV multiple for DAAR stands at 1.1x in a peer group range 0.4x-1.6x, comprising GCC real estate companies. Since 1QFY08, the company’s P/BV multiple has stayed in the 1.1x-1.6x range on quarterly basis. This indicates that current multiple is at the lower end of its short historical average (the stock was listed on Tadawul in December 2007). We believe the slowdown in project revenues and higher input costs have already been factored in the current stock price. DAAR is expected to deliver around 5,400 units over the period 2010-14 and sell (on average) 7.2 mn sq. mt. of land each year over the same period. This is likely to boost DAAR’s top-line to SAR 8,965.0 mn in 2012, or 1.6x of 2008 revenues. In anticipation of DAAR’s improved financial performance, we value DAAR at a P/BV multiple of 1.4x of its FY10E book value. This yields a fair value of SAR 18.5 per share.

We used a blended approach to derive the fair value price for DAAR. We assigned equal weightage to all the three methodologies discussed above. Based on this, the fair value is estimated at SAR 19.1 per share, implying a potential upside of 39.4% to the current market price.

Methodology Weights Fair Value (SAR)

Weighted Average

(SAR)

NAV 33% 20.0 6.7

DCF 33% 18.8 6.3

Comparable - P/BV 33% 18.5 6.2

Weighted Average Fair Value (SAR) 19.1

Current Stock Price (SAR) 13.7

Upside/ (Downside) potential 39.4%

Table 5: Comparative Valuation – P/BV

Source :Reuters, AlJazira Capital


Table 6: Weighted Average Valuation Summary

Blended Valuation

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DAAR is a leading property developer in Saudi Arabia. The company, which focuses primarily on Riyadh, is increasingly expanding its footprint into the attractive and populous Eastern and Western Provinces. Makkah, Riyadh and the Eastern Province, home to over 60% of the Kingdom’s population, are regarded as the most prospective real estate markets in Saudi Arabia. In the wake of substantial growth opportunities in the residential real estate market, DAAR gradually transformed itself from a primary developer of raw land plots during 1990s into a well diversified property developer offering large-scale, master-planned lifestyle communities. Thus, during the period 2004-09, the company sold 29.9 mn sq. mt. of developed land and 6,893 residential units, thereby becoming one of the largest real estate developers in Saudi Arabia. Expanding operations helped the company to report an impressive financial performance, with revenues and net profit surging over twofold to SAR 5.5 bn and SAR 2.1 bn, respectively, during 2004-2009.

1. DAAR, Leading Player in an Attractive Market

Chart 1: Land and Residential Units Sales

Chart 2: Revenue and Net Income: 2004-2009

Source : Company Documents


200

400

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2004 2005 2006 2007 2008 2009

Res u

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Area of land sold (mn sq. mt.) Residential units sold

0.0 1.0 2.0 3.0 4.0 5.0 6.0

2004 2005 2006 2007 2008 2009

SA

R b

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Revenues (SAR mn) Net income (SAR mn)

2.5

4.2 4.4 4.9

5.6

1.1 1.8 1.8 2.0 2.4

5.5

2.1

DAAR gradually transformed itself from a primary developer of raw land plots during 1990s into a well diversified property developer.

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Growth largely focused on land sales, residential properties to take lead

Land sale is the largest revenue driver for DAAR, contributing 80% to its top-line. However, in the recent past, DAAR has built an astute mix of project pipeline, and is now seen as more geared to residential projects. As per the current residential properties pipeline, the company is expected to build and deliver 5,431 residential units during 2010 to 2014. Additionally, DAAR aims to gradually build up an investment portfolio of residential and commercial leased income properties.

Chart 3: Land and residential projects contribution to revenues, 2004-09

1,759

3,191 3,202 3,605

4,620 4,945

724

1,006 1,151 1,321

990 519

0

1,000

2,000

3,000

4,000

5,000

6,000

2004 2005 2006 2007 2008 2009Project Revenues (SAR mn) Land Revenues (SAR mn)


The company is expected to build and deliver 5,431 residential units during 2010 to 2014.

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Large, Young Population Base Growing Rapidly

Saudi Arabia boasts of the best demographics amongst GCC countries. This is one of the key underlying factors driving demand for real estate in the country. The Kingdom accounts for 65% of the GCC’s total population and is growing at an average rate of ~2.5%. The two other key characteristics that make the Kingdom’s demographics really attractive are its relatively young population (approximately 60% of population is under the age of 30), and the fact that its population mix is not as dependent on expatriates as its GCC peers. Nationals account for nearly 76% of KSA’s population compared to 42% in UAE, 52% in Kuwait and 68% in Bahrain. Further despite the decline in fertility, the population of Saudi Arabia is expected to grow at a rapid long-term rate of around 2.5%, well above the world average of around 1.2%. World Bank forecasts the population of Saudi Arabia to reach 37.5 mn by 2025 and approximately 50 mn by 2050, double of current 25 mn. We believe most of this population growth would be driven by nationals as the government’s labor policies are likely to keep the expatriate population under check.

2. KSA Real Estate Sector Growth Prospects Endearing

Chart 4: Saudi Arabia Population (mn), 2006-2050e

Chart 5: Proportion of Expatriates in GCC Countries

42% 52%

68% 76% 83%

58% 48%

32% 24% 17%

UAE Kuwait Bahrain KSA Oman % of Expats % of Nationals

Source : CIA Fact Book

Source : World BAnk

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CAGR 2.4%

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The Kingdom accounts for 65% of the GCC’s total population and is growing at an average rate of ~2.5% (approximately 60% of population is under the age of 30).

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Urbanization, Declining Household Size and Workforce Expansion to Boost Demand…

Economic progress, high employment opportunities and higher standard of living is driving rapid urbanization in Saudi Arabia. Consequently, the percentage of urban population (people living in and around major cities) in the Kingdom has jumped significantly from around 20% to 88%. The urbanization level is expected to reach 91% by 2015. Cities such as Riyadh and Jeddah are likely to continue witnessing a meaningful increase in population density. Therefore, we expect housing demand in these regions to remain relatively strong.

The average household size (inhabitants per house) in Saudi Arabia is on the decline, falling from 6.1 in 1992 to 5.7 in 2004. The household size is likely to continue shrinking considering the increasing fascination for the Western concept of smaller, nuclear families. The Kingdom’s large young population will marry in the coming years and build their own houses; this is likely to accelerate the trend. The Ministry of Economy and Planning expects the average household size in the Kingdom to decline to 5.1 by 2020.

The increase in working population is also likely to act as a catalyst to housing demand. According to the Ministry of Economy and Planning, the country’s workforce comprises only 9.3 mn people (or 38% of the total population of 24.4 mn,). This is much below than the average of regional countries such as UAE (~64%) and Qatar (~59%). Saudi nationals account for nearly 51% of the total workforce (4.8 mn). This implies that only 26% of the local population is currently working. This is largely because the Kingdom has a large youth population, which is yet to start working, and less participation by female. The government’s efforts and policies supporting Saudization are likely to increase the local workforce to 6.8 mn by 2014E. The country’s total workforce is thus expected to grow to 11 mn.

…Leading to Widening Demand-Supply Gap

The anticipated population growth coupled with favorable demographics is expected to further widen the current demand-supply gap for housing units. According to data from the Ministry of Economy and Planning’s 8th Development Plan, housing demand was forecasted to average 0.2 mn housing units each year during 2005-09. However, delivery rates have been significantly lower so far (at less than 50% of the forecasted demand), suggesting that supply side constraints are widening the gap.

The Ministry of Economy and Planning expects supply to fall short of the expected growth in demand for housing in the foreseeable future. As per the Ministry’s estimates, the demand-supply gap is likely to reach 13% of expected demand, or 1.0 mn housing units by 2024.

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2,000

4,000

6,000

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10,000

2005-2009 2010-2014 2015-2019 2020-2024

Units Supplied Demand-Supply Gap

Chart 6: Widening demand-supply gap in housing industry (‘000 units)

Source : Ministry of Economy and Planning, KSA

The anticipated population growth coupled with favorable demographics is expected to further widen the current demand-supply gap for housing units.

Economic progress, high employment opportunities and higher standard of living is driving rapid urbanization in Saudi Arabia.

of 28 March 2010


Real Estate Prices Significantly Lower than other GCC Markets

Despite the sharp correction in real estate prices across the GCC, Saudi real estate continues to remain relatively attractive. We attribute this to the Kingdom’s under-inflated realty assets relative to its neighboring GCC countries. Demand for housing in Saudi Arabia is driven more fundamentally and is real compared to the largely speculative or investment nature of purchases in other GCC regions such as Dubai. According to Colliers’s MENA Real Estate Review Q3 2009, residential property prices in Riyadh averaged around USD 850 per sq. mt., approximately 1/5th of those in Abu Dhabi and 1/4th of Dubai.

Chart 7: Average real estate prices (USD/sq. mt.) – KSA v/s other major GCC markets (3QFY09)

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Abu Dhabi Doha Dubai Khartoum Riyadh Jeddah Eastern Province Source : Colliers Q3 2009, MENA Real Estate Overview

Mortgage Law to Induce Demand

The Kingdom’s much-awaited mortgage law is expected to be announced by the first quarter of 2010. The law is in the final stages of formulation and details are being worked out by the Experts Commission of the Cabinet. The dearth of established mortgage laws in an extensive market is the key reason behind limited availability of housing finance in the Kingdom. The Real Estate Development Fund (REDF), a specialized government credit institute, is the key financier. It provides almost 80% of housing finance in the country. Residential mortgage finance thus accounts for a mere 1% of the GDP compared to 5% in the UAE, 6% in Kuwait and 8% in Qatar. However, with the mortgage law expected to be implemented soon, we expect it to provide purchasers ample financing options and increase demand for housing units. The Ministry of Economy and Planning expects the Saudi mortgage market to reach USD 23 bn, or 4.4% of the GDP, by 2012-end.

Residential property prices in Riyadh averaged around USD 850 per sq. mt., approximately 1/5th of those in Abu Dhabi and 1/4th of Dubai.

With the mortgage law expected to be implemented soon, we expect it to provide purchasers ample financing options and increase demand for housing units.

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Affordability is an Important Factor in Saudi Arabia

The real estate market in Saudi Arabia is characterized by strong domestic demand, which is not influenced by the inflow of expatriates as much as its peers due to the higher proportion of nationals in its total population. Further at USD 18,855 in 2008, Saudi Arabia’s per capita income is far behind UAE (USD 55,028), Kuwait (USD 45,920) and Qatar (USD 93,204). The relatively low average income level and limited availability of housing finance thus makes a solid case for affordable housing in Saudi Arabia. Most residential projects in the Kingdom have historically targeted affluent and cash-rich Saudis. This effectively meant an under supply of good quality dwellings at affordable prices for many years.

3. Affordable Housing, an Attractive Segment

Demand for Affordable Accommodation is Compelling

The Saudi government’s 2009 housing demand forecast suggests that the demand for apartments and single floors in a villa is expected to be almost double of that of whole villas. The government estimates that demand for apartments/single floor within a villa in Riyadh is estimated at 16,170 units compared to 8,396 family villas, while demand for 4,812 apartments is estimated in the Eastern Province compared to 2,907 villas. This further highlights the issue of affordability in KSA. Further as per the recent Mena House View 2009 report published by Jones Lang La Salle, a real estate service company, the Kingdom is expected to witness a shortfall of one million housing units by 2012, most of which would be created due to limited supply of housing units at affordable prices. Therefore, we expect most of the housing demand in the Kingdom to come from the low to middle income group.

DAAR Favorably Geared on Affordable Housing

DAAR’s residential properties profile is highly geared towards the affordable housing market segment. While all of the company’s ongoing residential projects are targeted at middle income segment, three of them specifically target the lower and middle bracket of the middle income segment. Al Qasr is DAAR’s first large-scale community project targeted at the middle income segment. The company completed 97% of its Al-Qasr project excluding the shopping mall by the end of 2009. In 2009, the company launched ‘Shams Al-Arous’ project, which involves 10,000 residential units, including multi-storey apartments and villas of varied sizes. Phase 1 of Shams Al-Arous is expected to begin construction in the second half of 2010. Given the size of investment and residential units (SAR 1.5 bn investment for 2,000 residential units), we have assumed this to be a middle income project.

Name of the Project

Total No. of Residential Units Target Segment

Al-Tilal 500 Middle Segment of Middle Income Group

Al-Qasr 3,051 Lower & Middle Segment of Middle Income Group

Shams Ar-Riyadh 2,694 Higher & Middle Segment of Middle Income Group

Shams Al-Arous 2,000 Higher & Middle Segment of Middle Income Group

Table 7: DAAR’s Target Customer Segment


0

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Qatar UAE Kuwait Bahrain Oman KSA

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'000

Chart 8: GCC Countries – GDP Per Capita (USD)

Source : www.imf.org

The Saudi government’s 2009 housing demand forecast suggests that the demand for apartments and single floors in a villa is expected to be almost double of that of whole villas.

DAAR’s residential properties profile is highly geared towards the affordable housing market segment.

of 28 March 2010


Revenues from Residential Properties to Surge in 2012

According to the current project portfolio, DAAR is developing three large-scale residential projects at a combined project investment of SAR 9 bn. These projects will mostly comprise master-planned communities. Of these three projects, two are located in Riyadh; the third one is in Medina. The projects are at various stages of development. Considering that off-plan sales are banned in KSA, the delivery of these units in the year of their completion is likely to result into an uneven revenues pattern. We have assumed the longer sales cycle in various project completions due to unfavorable investment climate. This is expected to result in a jump in the company’s revenues during 2012 and 2013. In 2012, DAAR is expected to deliver a total of 1,478 residential units, comprising mostly from Shams Ar-Riyadh project. This is likely to push residential properties revenues to SAR 4.3 bn in that year. Overall, we expect residential properties to generate total revenues of almost SAR 12.5 bn during 2010-13.

Our residential properties revenue estimate includes contribution from the first phase of the recently announced Shams Al-Arous project in Jeddah City. (For project details, refer the Upcoming Projects section below.)

Name of the Project

Total Cost (SAR mn)

Total Units % Completed Start

DateUnits sold 2009

Timeline to exit

Al-Tilal 375 500 Completed 2003 150 2010

Al-Qasr 1,800 1,733 97% 2005 1,346 2009

Al-Qasr Mall 950 - 65% 2005 - End 2010

Shams Ar-Riyadh 5,800 2,694 25% 2008 - End 2012

4. DAAR’s Mega Residential Projects to Spur Growth

Table 8: Ongoing Projects


Chart 9: Residential Properties Revenues (SAR bn), 2008-2013E

Location of upcoming projects in KSA

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0

2008 2009 2010 E 2011 E 2012 E 2013 E Housing Project Revenues (SAR bn)



Tabuk

RIYADHShams Ar-Riyadh

Al-QasrAl-Tilal

Shams Al-Arous

Qasr Khzam

Ha’il

BuraydahAd Dammam

Al Hufuf

Abha

Medina

Jeddah

DAAR is developing three large-scale residential projects at a combined project investment of SAR 9 bn.

of 28 March 2010


Al-Tilal

Located in Southern Medina, this residential project (Phase 1) entails the construction of 500 residential villas of ten different sizes based on the Arabian and Neo-Classic styles. During 2009, the company completed the erection of Al-Tilal project at a total cost of SAR 375 mn - 150 villas have been sold. We expect the company to sell around 350 villas in 2010, more than half the total villas. Al-Tilal is also likely to be the largest revenue con-tributor to DAAR’s revenues from residential properties in 2010. Upon successful comple-tion of the current phase 1, the company is expected to announce two more phases, offering residential as well as commercial units. Given the lack of information, we have not factored these probable phases into our forecast. However, considering the project’s strategic locational advantage (proximity to the Holy Prophet Mosque), the launch of ad-ditional phases will surely attract Saudi nationals, in our view.

Al-Qasr

Al-Qasr, the first master-planned lifestyle residential community with a total built-up area of 1.2 mn sq. mt., was launched by DAAR in the Al-Swaidi suburb of Riyadh. The project entails an estimated investment of SAR 1.8 bn. It comprises 250 residential villas, 2,800 residential apartments, shopping mall and commercial spaces. The project also marks the company’s formal entry into investment properties—1,318 residential apartments, Al-Qasr shopping mall (net leasable area of 78,584 sq. mt.) and commercial spaces with a net leasing area of 83,135 sq. mt. The residential project is nearly 97% complete, with 1,346 units sold at the end of 2009. We expect DAAR to deliver remaining units in 2010. We have recognized leasing income generated on residential apartments (likely to accrue beginning 2010), shopping mall and commercial spaces as a new revenue item called rental revenues. (See investment properties portfolio section below for details.)

Shams Ar-Riyadh

This is one of the largest residential projects launched by DAAR. The project, involving a land area of 5 mn sq. mt., is being built at an estimated investment of SAR 5.8 bn. The project, located in Riyadh’s Al-Dariyia district, offers 2,694 villas. It also includes commercial and retail spaces with a total built-up area of 3.0 mn sq. mt. At the end of 2009, the construction on building the model villas had started. It is expected to be fully complete by the end of 2012. Since the company plans to deliver units in phases, we expect DAAR to sell around 269 units (equivalent to 20% of total units) in 2011, 1,078 units (~50%) in 2012, and the remaining 1,347 units in 2013. Based on this delivery rate, we believe Shams Ar-Riyadh will account for a majority (~82%) of DAAR’s revenues from residential properties during 2011-13.

Al-Tilal is also likely to be the largest revenue contributor to DAAR’s revenues from residential properties in 2010.

The project entails an estimated investment of SAR 1.8 bn.

This is one of the largest residential projects launched by DAAR. The project, involving a land area of 5 mn sq. mt., is being built at an estimated investment of SAR 5.8 bn.

of 28 March 2010


Shams Al-Arous

DAAR recently announced its new residential development project, Shams Al-Arous. The development project will be based in the Western Province of the Kingdom (Jeddah City) and will cover an area of 3 mn sq. mt. The project, expected to start by Q4 2010 and end by 2016, entails a total investment of SAR 7.5 bn. DAAR plans to develop it as a modern integrated master planned community, which will include a mix of residential and commercial establishments. It will have around 10,000 residential units, including a mix of villas and multi-storey apartments of varied sizes with all required community facilities such as parks, shopping centers, restaurants, schools, mosques, etc. It will also include commercial developments such as malls, office spaces and retail shops.Phase-I of Al-Arous will start in Q4 2010 and is expected to end in 18 months (by H2 2012). It will include 2,000 residential units built on an investment of SAR 1.5 bn. We have included the Phase I of Shams Al-Arous in our forecast. As the units are expected to be completed by H2 2012, we expect DAAR to sell around 400 units (equivalent to 20% of total units) in 2012, 1,400 units (~70%) in 2013, and the remaining 200 units in 2014. Based on these delivery schedules, Shams Al-Arous Phase-I is expected to account for 25% of total project revenues in FY13E.

Qasr Khozam

DAAR ventured into a massive land development project, Qasr Khozam. The project intends to transform the Jeddah City centre into one of the most attractive cities in the Arab world. Qasr Khozam project is one of the most ambitious projects in the Kingdom’s history. The project is a joint venture between DAAR (51%) and Jeddah Development and Urban Regeneration Company (49%), a company owned by the municipality of Jeddah. DAAR is working on the land development phase of the Qasr Khozam project and intends to sell the land parcels once infrastructure development is completed. The project is spread over an area of 1.13 sq. mt. and will have a built-up area of 25 mn sq. mt. It is currently in the master-planning and infrastructure design stage and is expected to start by Q4 2010. The project entails an investment of SAR 10 bn and is expected to be completed by 2015.The project is expected to start by Q4 2010. However, since specific project details have not been released by the company, we did not consider Qasr Khozam in our forecasts for DAAR.

Table 9: Upcoming Projects

Name of the Project Total Cost (SAR mn) Total Units Start Date Timeline to Exit

Qasr Khozam 10,000 - Q4 2010 2015

Shams Al-Arous 7,500 10,000 Q4 2010 2016


Based in the Western Province of the Kingdom (Jeddah City) and will cover an area of 3 mn sq. mt. The project, expected to start by Q4 2010 and end by 2016.

The project intends to transform the Jeddah City centre into one of the most attractive cities in the Arab world. The project is a joint venture between DAAR (51%) and Jeddah Development and Urban Regeneration Company (49%), a company owned by the municipality of Jeddah.

Phase-I will include 2,000 residential units built on an investment of SAR 1.5 bn.

of 28 March 2010


Driving Majority Topline Growth So Far

DAAR recorded sustained healthy growth in its land projects segment supported by buoyant activities in the Saudi real estate sector. The company’s land revenues grew at a CAGR of 23% during 2004-09 to reach SAR 4.9 bn, accounting for over 90% of the top-line in 2009. The company purchases sizeable areas of undeveloped land mostly in the periphery of major cities and develops infrastructure, including water and sewage systems, electricity and roads before selling it to large developers/individual buyers at attractive margins. The gross margins for land sales averaged 49.6% during 2004-2009. DAAR generally sells the developed land when the potential value appreciation has been achieved.

Average Prices are However on a Decline

DAAR posted a significant decline of nearly 28% YoY in average realized price of developed land to SAR 608 per sq. mt. in 2008 and 4.3% reduction to SAR 582 per sq.mt. in 2009. This was largely because it sold a larger proportion of lands in suburban areas where land prices are relatively modest. Going forward, we continue to expect DAAR’s land development projects to be concentrated in the suburban areas of Riyadh, Mecca, Medina, Jeddah and the Eastern Province. Though these suburban areas are likely to provide attractive development opportunities, the average prices are likely to remain

modest.

“Mixed Use” Strategy to Help Boost Land Value

To boost value of per sq. mt. of developed land sold, DAAR has emphasized on implementing a “mixed-use” strategy. Under the new strategy, the company aims to acquire a large parcel of land, develop mega-residential lifestyle communities on a part of it and sell the rest of the developed land parcel to other real estate developers. Sale of such developed lands is likely to fetch a greater value per sq. mt. of plots sold by the

company.

5. “Mixed Use” Strategy to Help Boost Land Value

Chart 10: Area Of Land Sold V/S Average Price Realization (2004-09)

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Area of land sold (mn sq. mt.) Realized price per sq. mt. (SAR) Source : Company Documents

The company’s land revenues grew at a CAGR of 23% during 2004-09 to reach SAR 4.9 bn, accounting for over 90% of the top-line in 2009.

The average prices are likely to remain modest.

of 28 March 2010


Land Projects to Continue Rolling…

We expect DAAR to benefit from rising demand for developed land in the suburbs given the large volume of real estate development projects scheduled in the Kingdom. The company’s “mixed-use” strategy on the other hand is likely to keep per sq. mt. of developed land value high. We expect DAAR to sell an average of 7.0 mn sq. mt developed land annually during the period FY10-14E, translating into aggregate revenues of SAR 20.5 bn. Based on this, we expect land projects to contribute on an average 67.2% to the total revenues during FY10-14E.

Chart 11: Land Development Revenues, FY09-14E


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

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Land Revenues (SAR mn) Contribution to total gross revenues (%)

We expect DAAR to sell an average of 7.0 mn sq. mt developed land annually during the period FY10-14E, translating into aggregate revenues of SAR 20.5 bn.

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6. Rental Portfolio to Provide Recurring Revenues

In order to change the product mix and ensure sustained revenue growth, DAAR retains certain portions of its developed properties. The company hopes to derive recurring rental income from these properties. In line with its strategy to enhance the income generating asset portfolio, the company intends to retain some residential apartments (1318 Leasable Residential Units) and office building (100,000 sq mt Gross Leasable Area) in the Al Qasr project as well as retail properties for rental purposes in order to increase its income generating assets portfolio. The Al Qasr Shopping Centre would provide an additional 78,000 sq mt of Gross Leasable Area and is expected to start generating income by 2011. Additionally, the retail portion of Sham ArRiyadh shall start contributing to rental income 2012 onwards. Going forward, these are expected to generate recurring revenues for DAAR. The company may consider diverting a higher proportion of developed property to its income generating asset portfolio considering issues pertaining to affordability in the Kingdom.

Chart 12: Growth in Rental Revenues (FY10-14E)


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2010 E 2011 E 2012 E 2013 E 2014 E Rental Revenues (SAR mn)

7. New Sukuk to Provide Relief on Funding Concerns

Hefty Debt Burden and Maturity Profile

A large portion (almost 89%) of DAAR’s debt is maturing over the next two years—a maturity of USD 600 mn is due in March 2010. This point to a possible tightening of liquidity in 2010, especially considering the significant investment required in the company’s planned development projects. Moreover, the off-plan sales model is less accepted in the Kingdom. This effectively means real estate developers in Saudi Arabia have to commit higher capital investments before the properties are actually sold. Consequently, DAAR has increased its reliance on debt financing to fund its projects. In May 2009, the company raised its third Sukuk (worth USD 750 mn) with maturity in April 2014. Moreover, in February 2010 the company issued new Sukuk worth SAR 1.7 bn (USD 450 mn) to fund development projects. The Sukuk has maturity in February 2015 and an annual profit margin of 10.75%. The Sukuk has been assigned ‘Ba2 CFR’ rating by Moody’s and a ‘BB-’ rating by S&P.

It is expected to start generating income by 2011.

This effectively means real estate developers in Saudi Arabia have to commit higher capital investments before the properties are actually sold.

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Stock Takes a Beating Over Funding Concern, Dubai World Debt Default

The significant investment required for development projects coupled with DAAR’s lumpy debt-maturity profile gave rise to some concern about the company’s liquidity position. Debt default by Dubai World also renewed fears that the real estate sector may take longer to recover. The consequent lower price realizations and decelerated sales cycle dampened investor sentiment, which dented the DAAR stock during last few months. The DAAR stock has declined 14.7% to date since November 2009. However, the recently announced new

Sukuk issue ended all uncertainty regarding the company’s financing strategy.

Sukuk Issue Size (SAR mn) Margin Subscription

Date Maturity

DAAR Sukuk II 2,250 3 months LIBOR + 225 bps July-2007 March-2010

DAAR International Sukuk 3,750 3 months LIBOR + 200 bps March-2007 July-2012

DAAR Sukuk III 750 SIBOR + 400 bps May-2009 April-2014

DAAR Sukuk IV 1,700 1075 bps Feb-2010 Feb-2015

Table 10: Sukuk Profile

Source :Zawya

DAAR Comfortably Placed to Replay its Liabilities

DAAR’s debt-equity ratio stood at 60.3% at the end of 2009 compared to 65.1% in 2008. Its total borrowings aggregated SAR 8.4 bn in 2009. With the repayment of its SAR 2.25 bn Sukuk in 2010 and the issuance of SAR 1.7 bn new Sukuk in February 2010, DAAR’s total borrowings are expected to total SAR 7.8 bn by the end of the year assuming no further debt issuance during the year. Hence, we expect the company’s debt-equity ratio to decline to 53.2% by the end of 2010.

Moreover, the comparison with peers also indicates than DAAR has reasonable leverage compared to its other GCC counterparts. DAAR’s debt-equity ratio of 62% in 3Q09 was lower compared to the peer group average of 109.5%. We believe DAAR’s high leverage is justified as the company’s project bank is quite large. Developed land (long term) on the company’s balance sheet was valued at SAR 4.2 bn at the end of 2009—this is recorded at cost with no revaluation gains. The company has also taken a prudent decision to not to pay any cash dividend during 2009 to restore its cash balance to meet the company’s expansion needs. As a result, DAAR’s cash balance stood at SAR 2.2 bn at the end of 2009. Hence, we believe DAAR is in a better position to repay its liabilities. Additionally, DAAR’s next debt maturity scheduled in 2012 is more than covered by the inflows from Shams ArRiyadh development expected in the same year.

Chart 13: Debt-Equity Ratio Comparison With Peers (2009)

Source :Zawya

214%

42% 14%

318%

107%

8% 30%

62%

0%

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100%

150%

200%

250%

300%

350%

Aldar Sorouh Deyaar Barwa United Dev Talaat Moustafa

Emaar Dar Al Arkan

The DAAR stock has declined 14.7% to date since November 2009.

We expect the company’s debt-equity ratio to decline to 53.2% by the end of 2010.

of 28 March 2010


8. DAAR’s Robust Financial Performance

Income Statement

Gross RevenuesDAAR’s gross revenues grew robustly from SAR 2.5 bn in 2004 to SAR 5.5 bn in 2009, implying a CAGR of 17.1% over the period. Revenues grew primarily due to growth in revenues from the development and sale of land parcels to real estate developers. Revenue from land sales increased at a CAGR of 23% during 2004-2009 due to increased real estate development in the Kingdom. Surging oil prices coupled with accelerated economic development supported the growing demand in real estate sector. Land revenue accounted for 90.5% of DAAR’s total revenues and reached SAR 4.9 bn during 2009 compared to SAR 4.6 bn during 2008.

Project revenues grew at a CAGR of 8.1% during 2004-2008 primarily due to the increasing number of residential projects undertaken by DAAR and improving per sq. mt. revenues. However, project revenues declined a significant 47.6% YoY in 2009 due to change in the mix of residential units sold in 2009 compared to 2008. The company focused on selling apartments at the Al Qasr project, which command lower unit prices than villas. This resulted in lower revenues. The volatility in project revenues can be ascribed to the varied timeline of projects and near absence of off-plan sales in the Kingdom. Consequently, gross revenues declined 2.6% YoY to SAR 5.5 bn in 2009.

Costs of OperationsDAAR has been able to manage costs effectively. Cost of operations for land sales averaged 49.6% of land revenues during 2004-2009. In terms of profitability, land sales have been leading the project development segment. The cost of operations for project revenues averaged 59.5% during 2004-2009. During 2009, cost of operations for land revenues stood at 51.7% compared to 76.7% for project revenues.

MarginsDAAR’s profit margins have been constantly improving during 2004-2008. The company’s gross margins expanded from 48.8% in 2004 to 50.7% in 2008 primarily due to dominance of high-margin land revenues in the total gross revenue. Land sales offer higher margins as they entail the development of raw land and sale. Since raw patches of land are available at discounted rates, this segment offers high margins. However, gross margins for land sales declined in 2009 due to lower gross margin from sale of residential units. Operating margins improved from 45% in 2004 to 47.1% in 2008. During 2009, the company reported an operating profit of SAR 2.3 bn with an operating margin of 42.5%. The net profit margins of DAAR have moved marginally in the range of 43.8% to 42% during 2004-2008. In 2009, the company recorded a net margin of 38.8%.

EarningsThe normalized earnings of the company grew at a CAGR of 21.3% during 2004-2008. However, during 2009, earnings declined 9.9% YoY and reached SAR 2.1 bn primarily due to reduced project revenues and increased input cost pressures.

Balance Sheet

Fairly leveredDAAR had an outstanding debt of SAR 8.4 bn as of 2009 and a corresponding net debt to equity ratio of 0.44x. Considering that DAAR operates in the real estate sector and the company hardly gets to record any off-plan sales, we consider the company to be fairly leveraged given the current debt position. Also, DAAR had a cash balance of SAR 2.2 bn (by the end of 2009) that puts the company in a comfortable position to fund its ongoing development projects. As projects reach completion in 2010 and 2011, we expect the company to have sufficient cash to fund projects and repay its debt liabilities.

Projects in progress Projects in progress have been increasing since 2004 and several mega projects are underway. This reflects the revenue potential DAAR will realize going forward. As projects in progress near completion, they will generate revenues for the company. Projects in progress are expected to decline beyond 2011 as major projects, including Shams ArRiyadh, will be completed.

DAAR’s gross revenues grew robustly from SAR 2.5 bn in 2004 to SAR 5.5 bn in 2009.

The cost of operations for project revenues averaged 59.5% during 2004-2009.

Grew at a CAGR of 21.3% during 2004-2008.

The net profit margins of DAAR have moved marginally in the range of 43.8% to 42% during 2004-2008. In 2009, the company recorded a net margin of 38.8%.

DAAR had an outstanding debt of SAR 8.4 bn as of 2009.

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9. Company Overview

History & Product Offerings

Dar Al-Arkan Real Estate Development Company (DAAR) is a publicly-listed, Saudi Arabia-based real estate development company primarily involved in residential real estate development. DAAR, headquartered in Riyadh, was established in 1994 by six prominent business families in the Kingdom. It has secured significant experience in developing residential master-planned lifestyle residential communities since inception. The company has made its presence felt by developing projects across all major cities and regions of the Kingdom such as Riyadh, Jeddah, Madinah and the Eastern Province. The company’s product offerings include:

Land Development

Acquiring raw land parcels and developing infrastructure on the land for sale to other real estate developers.

Master-Planned Lifestyle Communities

This entails the development of residential units, including villas and apartments. Also includes development of commercial units (retail and office space).

Property Management

Owning, leasing and maintenance of residential, commercial and retail units.

Business Model

DAAR’s business model has six phases from land acquisition to site development and finally construction of superstructures. The company acquires land from high net worth individuals or the government and develops parcels of land that can be sold to other real estate developers. DAAR also undertakes project development, including residential and commercial units, on these lands depending on the pre-feasibility study.

Phase ILand

Acquisition

Phase IIProject

Planning

Phase IIISite

Development

Phase IVLand

Development

Phase VIFinishing /Decoration

Phase VSuperstructure

Land Selection,Procurement

Process, Legaland FinancialDue-Diligence,

InvestmentProposal

ProjectOrganizing &Implementing,

Strategy,ResourceAllocation

RegulatoryApprovals, Site

Clearance,Design, Layout,Land Planning

Materials andTechnology,

Landscaping,Utility

Installation,Sub-Contracting

DesignConstruction

Plan, MaterialsTechnoloy,

Testing

Cladding,Ceramic andWood Work,Plastering,

Painting


Chart 14: DAAR – Various phases in the business model

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DAAR’s Affiliates

DAAR has affiliations with several entities that have assisted the company in carrying out its operations smoothly and achieving robust growth. The company’s affiliated partners provide easy financing options for DAAR projects, thus enhancing their affordability.

Kingdom Installment Company – Forced by limited availability of mortgage financing, the founders of DAAR established Kingdom Installment Company (KIC) in 2001. KIC was formed to provide mortgage financing to DAAR’s customers. Later, in 2004, KIC became a shareholder in DAAR. It currently holds 5.7% of DAAR’s outstanding shares.

Saudi Home Loans – DAAR entered into an agreement with Arab National Bank, KIC and the International Finance Corporation (IFC, a private arm of the World Bank) to set up Saudi Home Loans (SHL). SHL offers Shariah-compliant products for mortgage finance and targets low- to middle-income group of customers looking to buy houses. SHL is expected to be the preferred partner for housing finance for all projects developed by DAAR.

Non-affiliated partners

Turner Construction – DAAR entered into a ‘knowledge transfer’ agreement with Turner Construction in 2005. Turner Construction, an international construction management consulting firm, was established more than 100 years ago. As per the agreement between Turner and DAAR, the former will provide project management, financial planning and people management assistance to DAAR during project execution.

Cluttons – In 2005, DAAR entered into an agreement with Cluttons to restructure DAAR’s marketing and sales functions. Cluttons, a private company established in 1765, is a leading surveyor and property consultant. Cluttons helped DAAR to formulate its marketing strategy, restructure its sales and marketing department, train employees and a complete working model based on research and market analysis.DAAR is also affiliated to group of companies under common ownership of some of DAAR’s directors.

Al-Arkan Building Company Limited – Al-Arkan Building Company, established in August 2000, focuses on general contracting and procurement of raw land for DAAR. In 2003, it became a shareholder in DAAR and currently holds 8.4% stake in the company.

Manazel for Establishment & Construction Company – Manazel was founded by DAAR’s founders in 2001. It focuses on general contracting of buildings, road-works, dam and sewage works. More recently, Manazel’s share in DAAR’s projects has been declining as the size of projects is increasing. Manazel holds 7.9% stake in DAAR.

Eamar Al-Byader for Development and Trade Company – Eamar was established in March 2003 to focus on the purchase of land, general contracting, and construction of roads, airports and dams. Eamar holds 5.6% stake in DAAR.

Khalid AbdullahAl Shalash; 9.1%

Al-Arkan Building Co. Limited; 8.4%

Manazil for Construction Co;7.9% Yousuf Abdullah

Al Shalash; 7.7%

Hathlol Al Saleh Hathlol; 6.9%

Kingdom Installments & Trading Co.; 5.7%

Eamar Al Byader Dev. &Trading Co.; 5.6%

Majed Abdul Rahman Al Qasim; 5.3%

Others; 43.4% DAAR ShareholdingSource : Company Documents

Chart 15: Shareholding pattern of DAAR

Holds 5.7% of DAAR’s outstanding shares.

Holds 7.9% stake in DAAR.

DAAR holds 8.4% stake in the company.

Holds 5.6% stake in DAAR.

Offers Shariah-compliant products for mortgage finance.

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10. Financial Projections

Income Statement

Revenues

We expect DAAR’s gross revenues to reach SAR 10.3 bn by FY13E, backed by significant expansion of project revenues during FY09-13E and stable revenue inflows from land projects. The residential project revenues are expected to grow robustly as ongoing projects (Shams Ar-Riyadh, Al-Qasr and Al-Tilal) reach completion. Project revenues are expected to decline significantly in 2014 as we have only forecasted revenues from ongoing projects. Other projects that may come online during the forecast period have been excluded. Land projects are expected to provide aggregate revenues of SAR 22.2 bn during FY10-14E.

Rental revenues are expected to grow strongly during FY10-13E, rising from 0.5% of total revenues in FY10E to 3.1% in FY12E. Once the projects that are to contribute to rental properties (Shams Ar-Riyadh and Al-Qasr) get completed, rental revenues are expected to increase substantially from SAR 29.6 mn in FY10E to SAR 428.7 mn in FY14E and contribute 9.7% to the total revenues.

Costs/Margins

We expect DAAR’s gross and operating margins to improve FY10E onwards. We expect operating margins to move from 42.4% in FY10E to 49.2% in FY14E, benefiting from improved land earnings, increasing proportion of high-margin rental revenues and decline in residential properties revenues as DAAR delivers all its residential units in that year. Net margin is likely to increase from 38.0% to 48.4% during the period FY10-14E.


Table 11: DAAR Income Statement (FY08-12E)

All figures in SAR Mn, unless specified 2008 2009 2010E 2011E 2012E

Gross Revenues 5,610.8 5,464.1 5,566.3 5,969.4 8,965.0

Cost of Revenues (2,765.6) (2,956.9) (3,009.3) (3,171.7) (5,152.5)

Gross Profit 2,845.2 2,507.1 2,557.0 2,797.6 3,812.6

SG&A Expenses (149.6) (145.7) (157.2) (163.6) (110.9)

Other Operating Expenses (51.1) (40.6) (39.9) (47.2) (43.7)

Operating Income 2,644.4 2,320.8 2,359.9 2,586.9 3,657.9

Interest Expense (244.6) (146.2) (228.1) (234.8) (78.5)

Other income 16.9 2.7 33.0 34.7 36.4

Profit before zakat, tax, minority int. 2,416.7 2,177.3 2,164.8 2,386.8 3,615.9

Zakat/Tax provision (60.4) (50.0) (49.8) (54.9) (83.2)

Net Income 2,356.2 2,127.3 2,115.0 2,331.9 3,532.7

Earnings per share (SAR) 3.3 2.0 2.0 2.2 3.3

Normalized earnings per share (SAR) 2.2 2.0 2.0 2.2 3.3

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Balance Sheet

Capital Expenditure

The Company is expected to incur capex related to investment properties that will provide rental income during FY10E-FY12E in the Shams Ar-Riyadh and Al-Qasr projects. We expect DAAR to keep replenishing its land bank to maintain it at current levels. However, we have not assumed any land addition beyond FY12E.

Debt Outstanding

We expect DAAR to raise debt in FY10E to fund its ongoing residential and land projects and meet its debt repayment obligations. However, once these projects are complete, the company is expected to become cash rich—even if it maintains dividend payout at current

levels. We expect DAAR to repay approximately all outstanding debt by FY14E.

Projects in Progress

Projects in progress are expected to become nominal by FY14E, as we have only considered ongoing projects—these will be completed by then.


Table 12: DAAR Balance Sheet (FY08-12E)

All figures in SAR Mn, unless specified 2008 2009 2010E 2011E 2012ECurrent AssetsCash & cash equivalents 716.5 2,223.5 316.5 2,883.8 3,257.9

Projects in progress 1,148.2 677.4 3,436.4 4,310.8 4,193.8

Developed Land 120.6 286.6 3,746.6 3,735.2 3,015.0

Total Current Assets 4,727.6 4,269.0 8,866.6 12,384.8 12,484.1

Non-current assetsProjects in progress 6,772.8 8,591.0 7,184.6 4,933.8 1,340.1

Developed Lands 2,978.2 4,171.7 425.0 107.4 183.6

Investment in land under development 3,727.5 3,683.4 2,574.9 1,908.3 1,868.8

Total non-current assets 15,436.4 19,327.8 14,907.0 11,698.1 8,128.7

Total Assets 20,164.0 23,596.8 23,773.6 24,082.9 20,612.7

Current LiabilitiesIslamic Sukuk - - - 3,750.0 -

Islamic Murabaha 1,635.0 2,700.0 540.0 1,080.0 756.0

Total Current Liabilities 2,419.6 3,806.1 1,632.6 5,955.8 2,005.2

Non-current liabilitiesIslamic Sukuk 6,000.0 5,654.7 5,104.7 1,354.7 1,354.7

Islamic Murabaha - - 2,160.0 1,080.0 324.0

Total non-current liabilities 6,007.9 5,666.8 7,276.8 2,446.8 1,690.8

Shareholder's equityPaid-up Capital 7,200.0 10,800.0 10,800.0 10,800.0 10,800.0

Legal/Statutory Reserve 3,600.0 462.3 673.8 907.0 1,260.2

Retained Earnings/ Accumulated losses 936.5 2,596.9 3,125.7 3,708.6 4,591.8

Total shareholder equity 11,736.5 13,859.2 14,599.4 15,415.6 16,652.0

Total liabilities, provisions & equity 20,164.0 23,596.8 23,773.6 24,082.9 20,612.7

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Cash Flow Statement

Cash Flow from Operating Activities

We expect DAAR’s cash flow from operations to grow robustly and reach SAR 3.9 bn by FY12E backed by incremental earnings and efficient working capital management. As per our forecasts, the company’s future earnings would be sufficient to fund its working capital requirements

Cash Flow from Investing Activities

DAAR is expected to invest in investment properties to build its income generating portfolio. The projects in progress and land banks are expected to generate cash as they reach completion.

Cash Flow from Financing Activities

DAAR is expected to maintain a dividend pay-out of 65% during the forecast period. We have assumed additions in the Islamic Murabaha during FY10E to fund investment requirements. However, we expect DAAR to have sufficient cash balance FY11E onwards to repay its outstanding Islamic Sukuk and Murabaha balance.


Table 13: DAAR Cash Flow Statement (FY08-12E)

All figures in SAR Mn, unless specified 2008 2009 2010E 2011E 2012E

Cash flow from operating activities

Net Income before Zakat 2,416.7 2,172.7 2,164.8 2,386.8 3,615.9

Depreciation & Amortization 49.9 40.6 39.9 47.2 43.7

Change in working capital 296.0 2,236.1 (6,567.9) (972.6) 315.0

Total cash from operating activities 2,766.2 4,459.2 (4,363.2) 1,461.3 3,974.6

Cash flow from investing activities

Developed Land (743.8) (1,193.4) 3,746.6 317.7 (76.2)

Projects in progress (425.1) (1,818.3) 1,406.4 2,250.8 3,593.8

Land under development - 44.1 1,108.5 666.7 39.5

Total cash from investing activities (4,970.6) (3,942.2) 4,421.5 3,205.3 3,525.7

Cash flow from financing activities

Islamic Sukuk - 750.0 (550.0) - (3,750.0)

Islamic Murabaha 1,235.0 (30.3) - (540.0) (1,080.0)

Dividend paid during the year (1,620.0) - (1,374.8) (1,515.7) (2,296.2)

Total cash from financing activities (426.0) 990.0 (1,965.4) (2,099.3) (7,126.2)

Net cash change during the year (2,630.4) 1,507.0 (1,907.0) 2,567.3 374.1

Cash at the beginning of the year 3,346.9 716.5 2,223.5 316.5 2,883.8

Cash at the end of the year 716.5 2,223.5 316.5 2,883.8 3,257.9

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COMPANY PROFILE

AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business.

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