Saudi Real Estate Company is a good strong firm, but one that is looking an expensive buy for investors.
Its underlying strength as a company remains positive, but for investors to find reason to part with their money at the current price of 29.30 Saudi riyals a share, the property firm will need a kick-start in the form of some new projects.
Saudi Real Estate's stock, now trading at about 12 per cent premium to book value, is not offering enough to entice investors and has been downgraded by analysts at JPMorgan from "overweight" to "neutral".
"With the stock now trading at a premium to book and offering a stable, but a mere 3.4 per cent dividend yield, we downgrade to 'neutral'," JPMorgan said in a note.
The downgrading is purely based on the valuation, which means while Saudi Real Estate may not be a hot stock right now, it could become so again.
Progress on funding and the launch of the company's first housing sales project - Akaria Village, Binban - could be a positive catalyst in the near term.
Saudi Real Estate's leasing revenue, which accounts for about 91 per cent of total income, is growing at a five-year compound annual growth rate of 6 per cent.
In addition, the company's investment portfolio offers exposure to Riyadh's rental market with overall leasable area of about 700 square kilometres and continues to enjoy healthy occupancy levels.
However, with four years earnings before deductibles at a compound annual growth of only 2 per cent, JPMorgan thinks the risk-reward balance is now out of kilter for investors, who can expect little upwards growth without progress on funding and the Binban project.
