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INVESTMENT RESEARCH

EMAAR MALLS GROUP – IPO

Fair Value: AED 2.28

Likely Listing Premium: 15%

IPO NOTE

September 2014

ANALYSTS

Nandakumar Chenicheri

Asst. Vice President - Research

Email: [email protected]

Tel: (+968) 24822300 Ext. 353

Gaurav Ramaiya



Tel: (+968) 24822300 Ext. 348

Mable C. Pereira



Tel: (+968) 24822300 Ext. 342

EMAAR MALLS GROUP PJSC (EMG) under formation

INVESTMENT CASE

Valuation: Our estimated net asset value for Emaar Malls is AED 2.28 against

the valuation of AED 2.55 arrived at by Jones Lang LaSalle, an independent real

estate valuer. Due to the Group’s holding of premium retail assets in a strong

environment, a robust development pipeline and positive sentiment

surrounding the IPO, the stock could see an upside of 15% from our estimated

NAV, resulting in a price of AED 2.62.

Valuation Methodology

Carried out by Method Net Asset Value

Jones Lang LaSalle

Individual Property Valuation

Valued using of DCF, Income Capitalisation and Residual Land Value Methods depending on individual property

Net Asset Value = Market Value of Assets - Net Debt

AED 2.55 per Share (June 30 2014)

Fincorp

Income Capitalisation Approach on an overall portfolio basis

Gross Net Asset Value = Net Pro Forma NOI/Economic Cap Rate

Net Asset Value = Gross Net Asset Value - Net Debt

AED 2.28 per Share (FY 2014)

US regional malls enjoy a higher average 2014E P/FFO multiple of 18.8x

compared to the Asian and European comparables of 16x and 10.52x

respectively. Based on a high 2014E P/FFO multiple of 22.4x, EMG may trade up

to AED 2.71.

Key expansions include addition of around 600 thousand sq. ft. of GLA in the

Fashion Avenue area of Dubai Mall which is expected to get completed in June

2016 and add around AED 307 million in rental income on an annual basis. We

have also estimated the income from Arabian Ranches 2 and Spring Village

Centre. However, we have excluded the Boulevard Expansion, Zabeel Expansion

and Al Reem shopping centre projects as these are yet to materialize.

KEY ESTIMATES

(AED MN) Total revenue FFO P/FFO

2013 2,395 1,406 23.1x

2014E 2,641 1,571 20.7x

2015E 2,797 1,701 19.1x

2016E 3,088 1,922 16.9x

CAGR 8.8% 11.0%

We arrive at a NAV of AED 2.28 per share for EMG based on income capitalisation. We expect a listing premium of 15% to our NAV owing to the Group’s holding of premium retail assets in a strong macro environment and a robust development pipeline

WEALTH MANAGEMENT

OUR NAV (AED) : 2.28

LIKELY LISTING PREMIUM : 15%

DUBAI

REAL ESTATE – REGIONAL MALLS

F I N C O R P W E A L T H M A N A G E M E N T

Page 2

EMAAR MALLS GROUP PJSC – IPO NOTE

COMPANY OVERVIEW

Emaar Malls Group (EMG) is the leading owner and operator of shopping malls in Dubai, UAE. Its portfolio of

properties comprises four shopping malls, 30 community shopping centers and other retail properties, which

together had a total Gross Leasable Area (GLA) of approximately 5.5 million sq ft. as at 30 June 2014 and a GLA

occupancy rate of 95% in the six months ended 30 June 2014.

EMG’s properties include some of the most iconic malls, entertainment and community integrated retail centers in

the Middle East, including The Dubai Mall, its flagship asset, which has been the most visited shopping and

entertainment mall worldwide in each of the last three years with approximately 75 million visitors in 2013. EMG’s

properties developed as an integral part of the master plan developments of its controlling shareholder, Emaar

Properties, are strategically located in key areas of Dubai that benefit from favorable socio-economic demographics

and increasing tourism.

EMG manages and operates its business through four primary divisions - Super-Regional Malls, Regional Malls,

Community Integrated Retail and Specialty Retail. The following chart shows the revenue contribution of each of the

four divisions along with a summary of its key properties and their respective occupancy rates:

Dubai Mall – The Flagship Asset

The Dubai Mall is a regional and global retail and fashion destination located in the prestigious Dubai Downtown

area. It has more than 1,000 main units, of which 26 are anchor tenants, including Bloomingdale’s and Galeries

Lafayette. Among its tenants are more than 80 international luxury fashion brands conveniently located in Fashion

Avenue, The Dubai Mall‘s destination shopping area for international luxury fashion brands. The Dubai Mall’s retail

units also include more than 40 high-end jewellery and watch brands, and more than 400 apparel and accessories

stores and electronics retailers. It has more than 170 food and beverage outlets located throughout the mall and in

two large food courts, including over 25 casual dining restaurants located on the Waterfront Promenade, which

enjoy views of the Dubai Fountain and Burj Khalifa, the world’s tallest building.


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Key Highlights of Dubai Mall

Dubai Mall was the most visited shopping and entertainment mall worldwide in 2011, 2012 and 2013

The Dubai Mall accounted for approximately 50% by value of all luxury goods sold in Dubai during 2013

It is the largest shopping mall in the world by total built-up area (approximately 12.1 million sq. ft.)

It is the sixth largest in the world by GLA (approximately 3.7 million sq ft.)

Source: FINCORP Investment Research, IPO Prospectus

SHAREHOLDING PATTERN

The following table illustrates the Company’s ownership structure and distribution of share capital between

shareholders before and after Offering:

Shareholding Pattern - Pre & Post IPO

Shareholders Pre-IPO Post-IPO Holding % being

offered through IPO No. of shares held post IPO

(FV AED 1.00)

Emaar Properties PJSC / Emirates Property Holdings Limited

100% 84.6% 15.4% 11.01 bn

Subscribing Shareholders - 15.4% - 2 bn

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Total revenue EBITDA FFO

AED

' mill

ion

Emaar Malls Group - Key Financials

2013 2014E 2015E 2016E

CAGR (2013 - 2016E)

8.8%CAGR (2013 - 2016E)

11.0%CAGR (2013 - 2016E)

10.3%


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EXPANSION PLANS

With a view to maximize returns from its existing portfolio through expansions and development of new assets,

EMG currently has the following development pipeline:

Development Description Expected Completion

Fashion Avenue Expansion of the Fashion Avenue area in The Dubai Mall which can accommodate over 200 units for some of the world’s top luxury brands and add approximately 600 thousand sq ft. of GLA to Fashion Avenue

March 2016

Springs Village Redevelopment of the existing mall in Springs Village 2015

Arabian Ranches II Development of a new community shopping centre adjacent to the existing Arabian Ranches development

End 2014

In addition, EMG, together with Emaar Properties, is currently evaluating the following projects which would be

developed by Emaar Properties. These projects comprise:

Project Description

The Boulevard Expansion

Conversion of a portion of the existing parking space of The Dubai Mall into retail space and constructing a connection to the retail space in the adjacent Fountain Views development, which, if undertaken, would add 400 thousand sq ft. of additional retail space to The Dubai Mall.

The Zabeel Expansion Expansion of The Dubai Mall in the adjacent Zabeel area on land which has been made available by the Government. If undertaken, the expansion could add 400 thousand sq ft. of new retail space and 4,000 car parking spaces. The expansion of parking facilities could be completed as early as 2015.

Al Reem Development of the Al Reem community shopping centre with an approximately 65 thousand sq ft. of GLA.

COMPETITIVE ADVANTAGES

EMG’s business benefits from Dubai’s high growth consumer oriented retail market that is forecast to grow at

a CAGR of 11.1% between 2013 and 2017 based on forecasts by Business Monitor International.

EMG’s key assets are iconic global retail and leisure destinations integrated within Dubai’s best known

attractions. The Dubai Mall has been the most visited shopping and entertainment mall worldwide for each of

the last three years.

EMG’s management has developed a best-in-class shopping mall portfolio and a track-record of creating

significant shareholder value, with double-digit annual revenue growth during the last five years.

EMG enjoys a strong, reputable and committed major shareholder in the form of Emaar Properties and has an

excellent working relationship with the Government.

EMG has unique access to attractive growth opportunities through its relationship with its parent Emaar

Properties, which are expected to drive future growth of the company.


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EMG’s strong balance sheet and prudent investment policy allows the Company to capitalize on growth

opportunities.

RISKS & CONCERNS

All of EMG’s properties are located in Dubai, and its financial performance is almost entirely dependent upon

trading at The Dubai Mall

EMG generated 83%, 84%, 83% and 82% of its rental income in 2011, 2012, 2013 and the first six months of

2014, respectively, from The Dubai Mall. Hence, any event that negatively affects the occupancy rate, rental

yields or the performance of The Dubai Mall would ultimately have an adverse effect on EMG’s financial

performance. Poor economic conditions generally result in decreased consumer spending and tenants seeking

to renegotiate the terms of their leases in their favour.

The value and operating results of EMG’s properties is dependent in part on the economic conditions that

affect the Dubai economy and the conditions in the Dubai commercial and retail real estate markets

Since all of EMG’s properties are located in Dubai, EMG’s results of operations can be significantly affected by

financial, economic and political developments in or affecting Dubai and the UAE. The Dubai commercial and

retail real estate markets may be affected by macroeconomic events, including the impact of adverse changes

in global and local economic conditions, real estate market conditions, changes in interest rates, consumer

spending, inflation rates, real estate taxes and other operating expenses, and the availability and cost of

financing.

EMG’s results of operations depend on tourism in Dubai

Approximately 40% of the visitors to The Dubai Mall in 2013 were tourists, including from countries such as

China, Saudi Arabia, Russia and India. Accordingly, a decline in the attractiveness of The Dubai Mall as well as

certain of EMG’s other properties to international visitors, and a decline in tourism generally, would have a

material adverse effect on total footfall levels, tenants’ trading performance, occupancy rates and rental

income.

The revenues of EMG’s properties depend on anchor tenants and other major retail, entertainment and

leisure tenants ability to attract shoppers

Shopping malls are typically anchored by department stores and other large nationally and internationally

recognized brands. As such, EMG’s business depends on its relationships with major retail groups that franchise

prominent or luxury brands and lease multiple units in its properties. EMG’s business and results of operations

could therefore be adversely affected if an anchor tenant or any of the major retail groups fail to comply with

their contractual obligations, seek concessions in order to continue operations, or cease or reduce their

operations.

Delays in completion of development projects can impact our forecasts

Delays in completion of development projects within the anticipated time frame and budget can have an

adverse effect on our forecasts.

Competition from other retail real estate assets in Dubai and elsewhere in the GCC

Any oversupply of competing shopping centers in Dubai or the GCC region (either as a result of new


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developments or a decrease in the number of tenants or other occupants due to a decline in economic activity)

may adversely affect EMG’s rental income. Upcoming retail spaces in Dubai from Mall of the Emirates (8 million

sq.ft. area project), Nakheel Mall and Citywalk may pose competition.

VALUATION

Following assumptions have been taken in our valuation

Rental Income

Growth in Rental income from existing properties is estimated at 10% YoY in FY 2014. With GLA

occupancy rate at 99% for Dubai Mall and 95% for Dubai Marina Mall, we expect rental income growth

for the existing properties at 5% in FY 2015 and FY 2016 (coming from expected hike in lease rentals).

We expect the development of Arabian Ranches 2 community shopping centre to get completed in

FY 2014 and contribute AED 23 million in rental income from FY 2015.

We expect the development of Springs Village Centre to get completed by the end of June 2016 and

have estimated a rental income of AED 22 million for the second half of FY 2016.

We expect the development of Fashion Avenue area of Dubai Mall to get completed by June 2016 and

generate a rental income of AED 153 million during the second half of FY 2016.

We have excluded the Boulevard Expansion, Zabeel Expansion and Al Reem shopping centre projects as

these are yet to materialize.

We have estimated development costs of AED 58 million for Arabian Ranches 2, AED 142 million for Springs

Village Centre and AED 1.3 billion for Fashion Avenue extension from FY 2014 to FY 2016. Average CIP refers to

the average cost of the property under development.

(AED Million) 2013 2014E 2015E 2016E

Property under development 62 510 1,170 0

Average CIP 286 840 585

Source: FINCORP Investment Research


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Emaar Malls - Valuation

(AED Million) 2014E 2015E 2016E

Rental Income

Existing properties 2,625 2,756 2,894

Arabian Ranches 2 23

Springs Village 22

Dubai Mall Fashion Avenue 153

Other income 17 18 20

Total revenue 2,641 2,797 3,088

Expenses

Operating exp (449) (461) (510)

Sales and marketing exp (53) (56) (62)

General and admin exp (158) (168) (185)

Total expenses (660) (685) (757)

Core NOI 1,981 2,111 2,332

Construction in Progress (CIP) 286 840 585

Est. Yield 10% 10% 10%

CIP NOI 29 84 59

Pro Forma NOI 2,010 2,195 2,390

Leasing commissions and structural reserve (79) (84) (93)

Tenant improvements (100) (100) (100)

Net Pro Forma NOI 1,830 2,011 2,197

Economic Cap Rate 5.06% 5.06% 5.06%

Gross Net Asset Value of Assets 36,174 39,741 43,418

Net Debt 6,560 6,560 6,560

Net Assets Value 29,614 33,181 36,858

No. of Shares (Million) 13,014.3 13,014.3 13,014.3

NAV per Share 2.28 2.55 2.83

Premium/(Discount) from IPO Price of AED 2.50 9.9% -1.9% -11.7%

Premium/(Discount) from IPO Price of AED 2.90 27.4% 13.7% 2.4%

Assumptions 2014E 2015E 2016E

Rental Income Growth from Existing Properties 10% 5% 5%

Operating exp/Revenue -17.0% -16.5% -16.5%

Sales & Marketing/Revenue -2.0% -2.0% -2.0%

General & Admn/Revenue -6.0% -6.0% -6.0%

Source: IPO Prospectus, FINCORP Investment Research

Our estimated net asset value for Emaar Malls is AED 2.28 against the valuation of AED 2.55 arrived at by Jones

Lang LaSalle, an independent real estate valuer. Due to the Group’s holding of premium retail assets in a strong

environment, a robust development pipeline and positive sentiment surrounding the IPO, the stock could see

an upside of 15% from our estimated NAV, resulting in a price of AED 2.62.


Page 8


While valuation of REITs can also be carried out using a dividend discount model, we have not employed the

same for EMG as dividend stream is not clear at this point. EMG did not pay any dividends in FY 2011 to FY

2013. Company paid dividends of AED 3.55 billion till date in FY 2014, of which AED 2.75 billion was funded by

receipts from Sukuk. While the company anticipates paying 50% to 70% of its funds from operations as

dividends, dividend payments can vary based on the capital expenditure needs, operating expenses including

interest and debt repayments. Estimation of beta is also difficult as there is no past trading history.

PEER VALUATION

We have also conducted a peer analysis based on Price to Funds From Operations (FFO) Multiple. We estimate FFO

of AED 1.57 billion for FY 2014 for EMG which amounts to AED 0.121 per share. US regional malls enjoy a higher

average 2014E P/FFO multiple of 18.8x compared to the Asian and European comparables of 16x and 10.52x

respectively. Based on a high P/FFO multiple of 22.4x, EMG may trade up to AED 2.71.

Name Ticker Country Mkt Cap Last Price

2014E

USD Mn LC High Low High Low High Low

GLIMCHER REALTY TRUST GRT UNITED STATES 1,980 $ 13.65 2.9% 18.20x 22.88x 13.76x 21.63x 17.10x 17.69x 8.80x

SIMON PROPERTY GROUP INC SPG UNITED STATES 52,056 $ 165.74 3.0% 18.17x 21.25x 16.17x 22.32x 17.29x 24.59x 17.60x

TAUBMAN CENTERS INC TCO UNITED STATES 4,731 $ 74.54 2.8% 20.94x 27.71x 17.51x 24.52x 12.76x 21.93x 12.78x

MACERICH CO/THE MAC UNITED STATES 9,175 $ 65.07 3.8% 18.23x 17.75x 13.85x 22.33x 14.61x 21.13x 15.12x

US Regional Mall Average 3.1% 18.88x 22.40x 15.32x 22.70x 15.44x 21.33x 13.57x

FORTUNE REIT FRT SINGAPORE 1,708 HK$ 7.08 5.5% 19.50x

MAPLETREE COMMERCIAL TRUST MCT SINGAPORE 2,314 SGD 1.40 5.4% 19.60x

AEON MALL CO LTD 8905 JAPAN 4,591 ¥ 2,193.00 1.0% 8.90x

Asia Mall Average 16.00x

CORIO NV CORA NETHERLANDS 5,066 € 39.05 5.5% 14.60x

KLEPIERRE LI FRANCE 8,863 € 34.50 4.5% 8.84x

HAMMERSON PLC HMSO BRITAIN 6,922 GBp 594.50 3.3% 8.12x

Europe Mall Average 10.52x

Source: Bloomberg, Fincorp Investment Research

FY 2013 FY 2012 FY 2011

Price/T12M FFO per ShareDividend

Yield


Page 9


FINANCIAL SUMMARY

AED 'mn 2011 2012 2013 2014E 2015E 2016E

REVENUE

Rental income 1,521 1,944 2,386 2,625 2,779 3,069

Other income 4 5 10 17 18 20

Total revenue 1,525 1,950 2,395 2,641 2,797 3,088

Operating expenses (354) (362) (437) (449) (461) (510)

General and administrative expenses (108) (102) (155) (53) (56) (62)

Sales and marketing expenses (25) (39) (64) (158) (168) (185)

EBITDA 1,037 1,446 1,739 1,981 2,111 2,332

Depreciation of property, plant and equipment (19) (17) (58) (75) (80) (85)

Depreciation of investment properties (297) (297) (249) (252) (255) (296)

EBIT 721 1,132 1,432 1,654 1,777 1,951

Finance costs (458) (401) (333) (410) (410) (410)

PROFIT FOR THE YEAR/ PERIOD 263 731 1,099 1,244 1,367 1,541

Earnings per share (AED):

-basic 878 2,436 3,665

-diluted 878 2,436 3,665 0.096 0.105 0.118

Reconciliation to Funds from Operations

Net Income 263 731 1,099 1,244 1,367 1,541

Depreciation of property, plant and equipment 19 17 58 75 80 85

Depreciation of investment properties 297 297 249 252 255 296

Funds from Operations 579 1,045 1,406 1,571 1,701 1,922

FFO/Share 0.108 0.121 0.131 0.148

Funds from Operations growth 81% 35% 12% 8% 13%

Rental Income Growth 28% 23% 10% 6% 10%

Operating exp/Revenue 23% 19% 18% 17% 17% 17%

Sales & Marketing/Revenue 2% 2% 3% 2% 2% 2%

General & Admn/Revenue 7% 5% 6% 6% 6% 6%

Source: IPO Prospectus, Fincorp Investment Research

Year ended 31 December


Page 10


RESEARCH

CONTACT DETAILS

Nandakumar Chenicheri (+968) 24822300 Ext: 353 [email protected]

Gaurav Ramaiya (+968) 24822300 Ext: 348 [email protected]

Mable C Pereira (+968) 24822300 Ext: 342 [email protected]

BROKERAGE

CONTACT DETAILS

Mohammad Al Ghalayini (+968) 24822300 Ext: 333 [email protected]

Deena Omeir (+968) 24822300 Ext: 334 [email protected]

The Financial Corporation Co SAOG (FINCORP)

PO Box 782, PC 131, Sultanate of Oman

Tel: +968 24822300 | Fax: +968 24812925

Disclaimer

The research team of The Financial Corporation, SAOG (hereto referred as FINCORP) has prepared the information, analysis and expressed its opinion on the subject matter

of this report. The information contained has been obtained from sources believed to be reliable and in good faith, but which may not be verified independently. While

utmost care has been taken in preparing the above report, FINCORP makes no guarantee, representation or warranty, whether express or implied, and accepts no

responsibility or liability as to its accuracy or completeness of the data, being provided. All investment information and opinions are subject to change without notice. The

investor will indemnify FINCORP and its directors, officers, and employees against any loss or damage or other liabilities (including costs), which they may suffer as a result of

reliance on this report. This report is not to be relied upon in substitution for the exercise of independent judgment.

Also, not all customers may receive the material at the same time. This document is for private circulation and information purposes only. It does not and should not be

construed as an offer to buy or sell securities mentioned herein. FINCORP will not be liable for any direct or indirect losses arising from the use thereof, and the investors are

expected to use the information contained herein at their own risk. FINCORP and its affiliates or their officers, directors and employees may own or have positions in any

investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. FINCORP and its affiliates may act as

market makers or underwrite securities of companies discussed herein (or investments related thereto), and may sell them to or buy them from customers on a principal

basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. Authors or contributors of this report could

have direct interest in the capital market or in the securities mentioned herein.

The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific

investment objectives and financial position, and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of

the investments, to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. This document is strictly for the use of recipients

only. None of the material provided herein may be reproduced, rewritten, rehashed, published, resold or distributed in any manner whatsoever without the prior and

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