Developer's cash flow a cause of irritation

Emaar Economic City disappoints analysts with revenue projections.

While an initial public offering (IPO) is generally used to provide a capital boost to a company until its cash flow can get up to speed, investors become impatient if the second half of that process is delayed. That is the situation at the Saudi developer Emaar Economic City (EEC).

Since EEC went public in 2006, it has faced a deteriorating cash balance, with most of its contribution from the IPO channelled into developments that have not generated enough revenue to support operations, according to the Kuwaiti investment company Global Investment House.

"Since raising the initial 2.6 billion Saudi riyals of IPO proceeds and the founder's seed contribution of 4.3bn riyals in 2006, no new financing of any kind was tapped," said Mostafa el Maghraby, an analyst at Global Investment. "At the end of last year, EEC's balance sheet reported an alarming cash balance of 339 million riyals and a working capital of 130m riyals on current assets of 1.6bn riyals."

The company has not posted an annual profit since 2007, he said.

EEC's business model is focused on the development of King Abdullah Economic City, a mixed-use development close to Jeddah.

The project comprises several developments that are aimed at creating an urban community and attracting business ventures as well as driving population density away from the overpopulated city.

Because of the nature of the project, developing basic amenities on the unserviced land was expensive.

The initial plan was for the project to be built in four phases with the first phase scheduled to be completed this year.

The target was missed because of delivery delays and a lack of investor interest on the back of the global economic downturn, Mr el Maghraby said.

The analyst initiated coverage of EEC with a "hold" rating and price target of 7.20 riyals, up 7 per cent from where it is currently trading at 6.75 riyals. Shares of EEC were flat yesterday.