Equity Analysis /
Saudi Arabia

Dar Alarkan: Residential projects to drive earnings

  • We believe project backlogs supported by new project sales should continue to drive future growth

  • In 2022 Dar Alarkan is expected to post earnings of SAR459mn, driven by strong sales of developed properties

  • We remain neutral on Dar Alarkan with a revised PT of SAR11.8

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

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SNB Capital
26 May 2022
Published bySNB Capital

We maintain our neutral rating on Dar Al Arkan with a PT of SAR11.8. We believe project backlogs supported by new project sales should continue to drive future growth. However, rising interest rates may cause headwinds that may impact the industry for the next few years. We expect net income in 2022f to reach SAR459mn, up 246% yoy due to higher contribution from the sale of developed properties. The stock is trading at a 2022f P/B of 0.6x, in-line with its historical average. 

  • Real-estate sector to start normalizing: Interest rates have shown a major increase from 0.94% at the beginning of the year to 1.96% toward the end of Q1 22 while real-estate prices increased significantly. Moreover, mortgage loans started to slowdown, declining by 26.2% yoy in Q1 22. We believe these factors could potentially lead to gradual normalisation in the real estate sector.

  • Project backlog to support revenue growth: In 2022 Dar Alarkan is expected to post earnings of SAR459mn, driven by strong sales of developed properties resulting in revenues of SAR3.6bn, while gross margins are expected to contract 220bps yoy to 33.8% in 2022f. The company has a strong project backlog including Shams AlRiyadh, Shams AlArous, Urban Oasis, Pagani Tower and W residences. The company has achieved a total booking of 72% (villa, apartments, plots) of its total offering. Shams AlRiyadh has 2,065 plots available for sale which were nearly sold, resulting in booked sales of SAR3.7bn, out of which only SAR454mn has been recognized under IFRS 15. Revenue recognition from developed projects is expected to be recorded over the forecast horizon in line with IFRS 15. We expect it to be SAR3.0bn in 2022f (84% of sales) and SAR2.7bn in 2023f (87% of sales).

  • Deleverage to mitigate the impact of rising lending rate: In Q1 22, the company had a total debt balance of SAR9.4bn, out of which SAR7.5bn is from fixed-rate Islamic Sukuk, whereas the remaining SAR1.9bn comes from Murabaha loans. The rising SAIBOR/LIBOR rate should result in higher finance expense for the remaining Murabaha loans. For 2022f, we expect finance expenses to stand at SAR595mn, lower than SAR663mn realized in 2021, primarily due to the repayment of SAR1.9bn Sukuk during 2022f. The effective Murabaha rate for 2022f is expected to stand at c6.5% compared to 6.2% realized in Q1 22 and 6.3% in 2021.

  • Remain Neutral with PT of SAR11.8: We remain neutral on Dar Alarkan with a revised PT of SAR11.8. We expect the company to continue recognizing sales from its Shams Al Riyadh project and begin realizing sales from its Dubai project this year, which will be a key positive. The stock is trading at a 2022f P/B of 0.6x, in-line with its historical average.