Download Dar Al Arkan has a huge amount of land

Ahmad A. Al-Dossary
200700669
Dr. Ashraf
Learning Assessment III
Dar Al-Arkan Research Report
Ticker
8310
Recommendation
Overweight
12-month price target
SAR 12.8
Current Price
SAR 8.30
Dar al-Arkan Real Estate Development Company
2008A
2009A
2010A
2011A
EPS
2.18
1.97
1.35
1.01
P/E Ratio
3.80
4.21
6.14
8.21
Highlights
- Experts estimate Real Estate Sector volume in KSA by more than SAR 1.3 trillion.
-
Dar Al Arkan does not depend on external funding significantly to complete existing projects
and buy new land.
-
Dar Al Arkan has about 35 million square meters of land, which is about 80% of the company's
total assets.
-
According to economists, anticipated mortgage law will positively affect the company.
-
P/E ratio is increasing every year, while earning per share decreasing.
-
The company has to pay SAR 2.4 billion as value of instruments during 2014 and 2012.
Business Description
Dar al-Arkan Real Estate Development Company is a Saudi joint stock company. It was established in
1994 with a capital of 10.8 billion S.R. Company’s activity is about developing gated communities,
and building houses. Dar Al-Arkan has evolved from a small developer to one of the largest real
estate development companies in Saudi Arabia. It has evolved in three stages:
The first phase (1994 - 1999): The Company started as a real estate developer focused on processing
infrastructure for its lands in Riyadh, where the company acquired large tracts of land and introduced
water, electricity services, sanitation, and other facilities such as streets and sidewalks. The company
divided their lands into small pieces and sold them to individuals, investors and developers.
The second phase (2000 - 2004): Dar al-Arkan became gradually toward housing development
through the implementation of several housing projects for low-income owners. Company’s activity
has extended to the western and eastern regions.
The Third phase: (2005 - present): The Company is currently focusing on large-scale residential
projects through the development of integrated residential complexes which contain villas and
apartments.
The company's strategy is to focus on residential projects to provide good quality houses for middleincome earners.
Sales and marketing operations:
Dar al-Arkan uses several strategies to market their products. It has sales offices within the projects
sites, through real estate brokers, and through auctions.
Alliances and partnerships:
Dar Al Arkan has held several partnerships with local and international companies. These
partnerships helped Dar Al Arkan in upgrading the company's business. These alliances include:
1) Kingdom Company & Saudi Home Loans (Provide housing mortgage to Dar Al Arkan
customers.
2) Turner Construction. (For planning and managing projects.)
3) Cluttons. For supporting marketing business, making researches, and staff training.
Major projects:
-
Al-Yarmouk Project: It consists of 389 housing units on 409.775 square meters in Riyadh.
-
Al-Monsah Project: It consists of 259 residential units on 285.822 square meters in Riyadh.
-
Coral Villas project: It is located in Yanbu city and consists of 28 housing units.
-
Towers Project: It is located in a great location near the Grand Mosque in Mecca. It consists of
400 units.
-
Al-Manar Project: It is located in Jeddah. It contains 28 residential units on 25.143 square
meters.
-
Awali Villas project: It is located in Mecca on 41.168 square meters. It consists of 55
residential units.
-
Al-Tawan Project: It is located in Riyadh and consists of 42 residential units on 30.506 square
meters.
-
Al-Falah project: It is located in Riyadh. It consists of 139 residential units on 110.843 square
meters.
-
Al-Rabie project: It is located in Riyadh. It consists of units 368 units on 349.943 square
meters.
-
Al-Noor Villas project: It is located in the Al- Medina after only six kilometers from the Haram.
It consists of 105 housing units.
-
Shams Al-Riyadh project: It is located in Riyadh. The project is on an area of 5 million square
meters and contains of 8,000 housing units.
-
Al Qasr project: It is located in Riyadh and consists of 822 housing units.
-
Golden Beach project: It is located in one of the most beautiful areas in Jeddah on 279.436
square meters and contains 398 residential units.
-
Al-Telal Project: It is located in Al-Medina on 2.22 million square meters and consists of 1,437
units.
-
Makkah Towers project: It is located in Mecca on 64.621 square meters and contains of 7
towers.
Industry Overview:
Real estate sector is one of the largest non-oil sectors in Saudi Arabia. It has 10% of Saudi Arabia's
GDP. There are no official statistics for the trade volume in the real estate sector in Saudi Arabia, but
some experts estimate its volume by more than 1.3 trillion S.R.
There are some factors that have contributed to the growth of the real estate development sector,
including increased government spending, low interest rates and establishment of economic cities.
Saudi government has increased its spending for some reasons such as high oil prices, facilitate the
procedures by government, and allowing foreigners to own homes.
During 2008, the real estate investment profits fell due to rising prices of major construction
materials by more than 50% and a severe shortage in supply. These reasons have made the Saudi
government in collaboration with the private sector to mobilize the necessary resources to meet the
growing demand for housing. After the global financial crisis, the prices of construction materials
such as cement and iron decreased significantly due to the negative situation that it was in investors.
Houses in Saudi Arabia represent more than 70% of the volume of the real estate sector, where there
are more than 4 million units. This figure is set to rise according to development plan prepared by the
government, where experts predict that the demand for housing will increase with an average of
200,000 units per year.
Real estate development companies have less than 10% of the residential sector market, but their
shares are growing. Residential complexes provided by Dar Al-Arkan and other companies are
acceptable to citizens and foreigners as well. Their residential complexes developed on large tracts of
land and include all necessary facilities such as parks, sports facilities, entertainment, clinics,
supermarkets and others.
Housing market in Saudi Arabia is facing a large deficit in supply, particularly affordable housing that
help low-income owners to own the houses. The plan developed by the Saudi government indicates
that the percentage of homeowners in Saudi Arabia declined from 65% to 55 % (Dar Al-Arkan annual
report 2008). High prices of lands and construction materials were the most important reasons for the
low rate of home ownership. For that, the government has dealt with this situation seriously. It
issued a mortgage law and increased capital allocated to real estate development fund to help
citizens own houses.
Investment Summary
Dar Al-Arkan is the largest real estate development company by market capitalization in Saudi Arabia.
Company’s activity is focusing on providing houses for middle-income earners through the
development of an integrated residential environment. Company has huge reserves of lands.
Positive factors for investment in the company:
- The strong demand for the company's product as a result of the substantial shortfall in low-cost
housing.
- Anticipated mortgage system will increase the number of customers of the company.
- Recent major projects for the company expected to boost revenue during the next five years.
- The company's share provides a good opportunity for investment compared to competing
companies.
- Dar Al Arkan has a huge amount of land
Investment Risks:

Funding gap:
The developer will not be able to use the revenue earned from the old project to fund a new
project. Those revenues should be used on the same project, which raised funds for it. So the
list of the new laws will limit the freedom of developers to dispose of those revenues and
earmarked for projects that require immediate funding, it will also limit the internal sources
of funding also.

Economic slowdown weakens demand:
Economic slowdown and credit environment could lead to a decline in demand for real
estate. Speculators and home buyers may postpone their purchase processes to any Real
Estate in the hope of falling prices.

Regulatory changes:
Changes in laws and regulations may affect the financial performance and prospects for
growth of Dar Al-Arkan, such as costs and pressure to protect the consumer through greater
transparency.
Financial Analysis
Current Ratio, EPS, ROE Ratio, and ROA Ratio are the main tools used to analyze the financial
performance of Dar Al-Arkan during the last five years and the forecasted 2013 performance. These
tools were used to assess the company’s ability to generate earnings as compared with its expenses
and other relevant costs.
By looking at this table, we can see the performance of Dar Al-Arkan Company in four years based
on different ratios.
Paid-up capital:
SAR 10,800,000,000
Shares Outstanding:
1.1 Billion
Year
2008
2009
2010
2011
Current Ratio
1.95
1.12
1.79
1.12
P/E Ratio
3.80
4.21
6.14
8.21
Gross Profit Margin %
50.70%
45.88%
42.59%
41.32%
ROE %
18.29%
15.38%
10.22%
7.29%
ROA %
10.64%
9.24%
6.35%
4.71%
Debt-Equity Ratio
71.80%
66.39%
61.03%
54.61%
EPS
2.18
1.97
1.35
1.01
Amount in SARmn
1Q-2011
2Q-2011
3Q-2011
4Q-2011
1Q-2012
2Q-2012
3Q-2012
Sales revenues
955
791
755
811
868
1,084
728.5
Gross profit
367
338
321
344
367
388
329.4
Operation profit
340
306
290
315
331
342
270.1
Net Profit
273
298
227
290
293
331
220.9
EPS
0.25
0.28
0.21
0.27
0.27
0.31
0,20
Source: Company quarterly reports
During 2011 and half of 2012, the company was trying to collect cash to repay the loan. The liquidity
of the Company in the past twenty months has not reinvested, but was kept to repay the loan. At the
end of third quarter of 2012, the company got a net profit of SAR221 million and EPS: 0.2. The
company's sales fell by 3.5% for the third quarter compared to the same period last year due to
lower sales. On the other side, the gross margin rose by 276 basis points (annualized) and by 940
basis points (quarterly), with an increase of 45.2% in the third quarter of 2012. Over the last 5 years,
Dar Al Arkan has managed to maintain healthy debt ratios. The debt amount has never exceeded
66% of Dar Al Arkan’s land bank. In 2011, it came at 41%.
The value of cash was 2.5 billion in 2011, with an increase of 111% compared with 1.2 billion in 2010.
This increase came when Dar Al-Arkan paid all debts which worth 932 million. The company also
invested 845 Million Saudi riyals in investment properties and 1,003 million Saudi riyals in the
company's projects (Shams Riyadh and sun bride).
The amount of cash outflow of the company during the past five years is 20 billion riyals, which is
about SAR 5 billion for repayment loans, SAR 4.3 billion as dividend for shareholders, SAR 6 billion
spent for developing the projects, and SAR 4 billion for purchasing new land.
Indicators of activity and capital are noticeable that there is an increase in revenue and expenses,
while asset turnover was low. This reflects the inability of sales to support the asset and therefore
funding. Negative point in the capital is growing debt to assets with the highest point in 2009 and the
same logic to the ratio of liabilities. Liquidity indicators were low, profits went down, PE decreased
which gives us a negative impression of market valuation of the company and reduced positive
expectations around it.
Quarterly profit indicators were negative, average take a negative trend, and sales did not differ from
the profitability curve, which means that the company lost a large part of the market which led to a
decline in sales.
The situation reflects a decline in the performance of the Company. Inability to sell the products of
the (palace) project has had a significant impact on the company and profitability as well as project
delays (Telal and Khouzam).
However, Analysts believe that the company's financial situation is still strong and we have felt that
when the company was able to repay the debt at the end of the first half of 2012. At the beginning of
2013, the company will start selling their products and making profits.
Performance of share price compared with TASI index
Share price performance with real estate sector.
Appendixes
Appendixes 1
All figures are in Thousand Saudi Riyals.
INCOME STATEMENTS
Revenue
Cost of Sales
Gross Profit
Depreciation
2008/12/31
5,610,767
2,765,586
2,845,181
22,252
2009/12/31
5,464,053
2,956,916
2,507,137
17,531
2010/12/31
4,141,981
2,377,724
1,764,257
14,260
2011/12/31
3,312,510
1,943,497
1,369,013
8,510
Total Expenses
Net Income Before Zakat
Zakat
Net Income
Balance End Period
2,416,670
60,423
2,356,247
337,162
2,172,679
50,000
2,122,679
2,596,908
360,910
1,482,711
27,000
1,455,711
1,455,711
331,403
1,137,309
49,374
1,087,935
1,087,935
Appendixes 2
All figures are in Thousand Saudi Riyals.
BALANCE SHEET
Current Assets
2008/12/31
4,727,599
2009/12/31
4,268,981
2010/12/31
3,868,815
2011/12/31
6,411,458
Total Assets
20,163,980
23,501,477
23,348,861
24,100,759
Current Liabilities
Non-Current Liabilities
Other Liabilities
Shareholder's Equity
Total Liabilities & Shareholder Equity
2,419,594
6,007,889
0
11,736,497
20,163,980
3,793,853
5,583,707
0
14,123, 917
23,501,477
2,157,558
6,691,675
0
14,499,628
23,348,861
5,741,282
2,771,914
0
15,587,563
24,100,759
Appendixes 3
All figures are in Thousand Saudi Riyals.
CASH FLOWS
Net Income
Depreciation
Accounts Receivable
Prepaid Expenses
Accounts Payable
Other Changes in Oper. Activity
Purchases of Fixed Assets
Other Changes in Investing Act.
Increase in Debts
Other Changes in Financing Act.
Cash at Beginning of Period
Cash at End of Period
2008/12/31
2,146,670
22,253
- 3,473
3,346,865
716,475
2009/12/31
2,172,679
17,531
102,735
1,503,829
299,750
362,695
-2,232
-3,939,968
719,742
270,259
716,475
2,223,495
2010/12/31
1,482,711
14,260
-821,088
-25,812
-47,138
607,908
-1,603
-559,020
-605,200
-1,080,000
2,223,495
1,188,513
2011/12/31
1,137,309
14,287
439,292
6,169
-42,814
461,180
-124
-350,398
-347,640
0
1,188,513
2,505,774
References
1- www.alarkan.com.
2- www.alriyadh.com.
3- www.aljaziracapital.com.sa/jaziracapital/report_file/company/FUN-179.pdf.
4- www.tadawul.com.sa.
5- www.investing.businessweek.com.