BofA Says Aldar Sorouh Overvalued Amid Excess Abu Dhabi Housing

Aldar Sorouh Properties PJSC, the company resulting from the planned merger of two Abu Dhabi developers, is overvalued as the emirate’s real estate market suffers from excess supply, Bank of America Merrill Lynch said.

Aldar Sorouh’s market value of 10.5 billion dirhams ($2.86 billion), based on yesterday’s closing price, is 5 percent higher than it should be, BofA said in a note today. Sorouh Real Estate Co. (SOROUH) was lowered to underperform from neutral at BofA, which set the stock’s price estimate at 1.69 dirhams, compared with a closing price of 1.72 dirhams today.

Aldar Properties PJSC (ALDAR) said Jan. 21 it will offer 1.288 shares for each Sorouh share in a government-backed acquisition to create a group with assets of about $13 billion. Abu Dhabi, which spent $9.8 billion bailing out Aldar in 2011, is trying to revive its real estate market after prices dropped more than 50 percent during a property crash in the United Arab Emirates.

“While we view the proposed merger as positive for the Abu Dhabi real estate market, which continues to suffer from excess supply particularly in the residential sector, we think that the market could be overestimating the value of the combined entity,” BofA said.

Abu Dhabi, the largest of seven sheikhdoms that make up the U.A.E. federation, last year said it was resuming stalled projects including branches of the Louvre and Guggenheim museums. The emirate’s property industry is recovering more slowly than neighboring Dubai’s. The price of a mid-range apartment in Abu Dhabi fell 4.1 percent in the year to December, compared with an 18 percent jump in similar Dubai units, according to data of property broker Cluttons LLC.

‘Weaker’ Markets

“Aldar Sorouh generates less recurring revenue and operates in weaker real estate markets” than Dubai-based Emaar Properties PJSC (EMAAR), BofA said. Aldar and Sorouh derive all revenue from the U.A.E., while Emaar secures more than 15 percent from operations in countries including Egypt, Saudi Arabia and Turkey.

Property development and sales account for 93 percent of Aldar’s revenue compared with 49 percent for Emaar, which also derives 36 percent of revenue from leasing and 15 percent form hospitality, according to the latest quarterly results filings compiled by Bloomberg. Shares of Emaar, developer of the world’s tallest skyscraper, jumped 46 percent last year, outpacing the Aldar’s 38 percent advance.

Sorouh, whose shares fell 2.3 percent today, posted a 32 percent increase in 2012 profit, while Aldar’s net income more than doubled. Aldar’s stock tumbled 4.2 percent to 1.38 dirhams today.

Seven analysts recommend investors buy the shares of Sorouh while three have a hold rating on the stock and two advise on selling it, according to data compiled by Bloomberg. That compares with five buy, three hold and two sell recommendations for Aldar.

To contact the reporter on this story: Zahra Hankir in Dubai at zhankir@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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