Damac to remain under pressure, EFG Hermes says

The company is expected to produce 'disappointing' numbers in 2019 through to 2021

Damac reported a slide in its first-quarter net profit and revenues. Jeff Topping

The property sector in Dubai is expected to remain stable this year, helped by government initiatives in the pipeline to prop up the market but, unlike some of its peers, Damac Properties is unlikely to benefit from the positive trend.

“We believe the property market in Dubai will be stable in 2019 and that there would be some initiatives to revive the sector ahead of the Expo 2020,” Mai Attia, an analyst at Egyptian investment bank EFG Hermes, wrote in a note to investors. “We think Damac will not be in a position to leverage on this positive trend [relative to its peer Emaar Development], should it materialise.”

EFG Hermes, one of the biggest listed investment banks in the region, has cut its target-price for Damac shares to Dh0.95 each from its previous recommendation of Dh1.60, which reflects continued lacklustre operating and financial results of the company.

The developer, which owns and operates the Middle East's sole Trump-branded golf club, has reported “disappointing numbers” over the past two quarters. Its first-quarter sales came in line with the previous quarters’ average, and yet there is minimal upside, which puts pressure on on the company’s future sales and Damac’s profitability.

“Hence, we see no positive trigger that can support the stock performance over the coming 12 months, especially with unattractive trading multiples and dividend yield,” Ms Attia said.

Damac has struggled to maintain profit growth amid softer property market conditions as supply outweighs demand. The company, like other developers, is realigning its business priorities to cut costs and continue to deliver projects to maintain healthy revenue streams. Property prices in Dubai dropped over the past two years, which has crimped the earnings of developers and construction companies.

In May Damac reported a 94 per cent plunge in its first quarter net income, extending a decline in profitability from last year. Net profit for the first three months to March 31 fell to Dh31.1 million, it said at the time in a statement to the Dubai Financial Market, where its shares trade. The earnings missed the lowest estimate of analysts polled by Bloomberg and quarterly revenues also declined, by 53 per cent to Dh896m.

The financial performance of the company is not forecast to change in the immediate future, EFG Hermes said.

“We expect the company to report disappointing numbers in 2019-21, with a year-on-year slump in revenue in 2019 [due to lower sales] and, consequently, margins pressure,” Ms Attia said.

This would hit the net income of the developer, which EFG Hermes estimated at would be Dh207m this year, down from Dh1.21 billion 2018. The bottom line is expected to drop further to Dh35m in 2020, it added.

Damac did not pay dividends for 2018 although it has indicated that it targets deliveries of 4,000 units in 2019 with cash releases from the escrow account estimated at $500m, which might indicate a possibility of paying out dividends, especially with no pending debt obligation up until 2022.

“However, we opt not to assume dividend payment in 2019-21, given our operational forecast, which entails continued pressure on sales,” EFG Hermes said.