Sunday 17, January 2010 by

RAM Ratings looks over Saudi-based Dar Al-Arkan

RAM said the ratings reflect Dar Al-Arkan’s strong market position within the Saudi Arabian property sector. Between 2002 and 2008, the Group had completed about 13 residential projects in the kingdom’s key cities of Riyadh, Mecca, Jeddah, Medinah and Yanbu. The group had also consistently sold more than 1,000 acres of land each year between 2006 and 2008, and an average of 1,100 units of residential properties per annum. Dar Al-Arkan is currently one of the largest property developers in the kingdom, and is also the largest developer listed on the Saudi Stock Exchange (in terms of revenue and assets).

“The group’s strong market position augurs well for its future projects,” the rating agency said. “Meanwhile, prospects for Saudi Arabia’s property sector remain bright, underpinned by steady population growth and healthy demographics, the kingdom’s economic growth (and consequently higher per capita income), and the potential introduction of mortgage laws.”

Driven by the healthy demand for properties in Saudi Arabia, the group posted double-digit revenue growth between fiscal 2006 and 2008, with robust margins on Operating Profit Before Depreciation, Interest and Tax (OPBDIT) of 40 per cent to 50 per cent in the last five years. Moving forward, Dar Al-Arkan’s large tracts of land in Riyadh, Jeddah, Dammam, Medinah and Makkah – which carried a net book value of SAR 14.95 billion ($4 billion) as at end-September 2009 – will sustain it over the longer term.

“These cities are a hive of economic activity, being the kingdom’s capital and financial hubs, the gateway and home to the world’s holiest sites for the Muslim population, and the industrial heart of Saudi oil fields,” RAM said.

The ratings are, however, moderated by Dar Al-Arkan’s exposure to the inherently cyclical nature of the property sector, given the Group’s lack of business diversity.

Any slowdown in Saudi Arabia’s economy or property sector is expected to have an adverse impact on the group’s financial performance, although RAM Ratings notes the strong fundamentals of the property sector over the intermediate term. That said, Dar Al-Arkan still faces geographical-concentration risk because its activities are based entirely in Saudi Arabia. In addition, the kingdom is exposed to geopolitical risks that affect countries within the Gulf region; while we note that Saudi Arabia has remained relatively sheltered from such geopolitical upheavals to date, the threat of war and/or terrorism on its shores cannot be discounted.

Meanwhile, Dar Al-Arkan shoulders a hefty debt burden, compounded by a lumpy debt-maturity profile. As at end-September 2009, the Group’s debt level stood at SAR 8.34 billion ($2.22 billion); it is also subject to hefty Sukuk repayments in 2010 and 2012. Moving forward, the group’s debt load is expected to increase.

“While the Group’s absolute debt level is high, its gearing ratio is expected to stay below 0.7 times. In addition, its OPBDIT debt coverage ratio and FFO debt coverage ratio are projected to remain healthy at above 0.2 times over the next five years,” said Shahina Azura Halip, RAM Ratings’ Head of Real Estate and Construction Ratings.

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