Emaar EC Losses Decline to SR160 mln during 1Q, down by 18%

Emaar the Economic City (Emaar EC) Company recorded losses after zakat and tax of SR160 million during the first quarter, compared to losses of SR194 million during the same quarter of the previous year, a decrease of 18%.

This came after Emaar announcement on Wednesday of the preliminary financial results for the period ending on March 31, 2022 (three months).

As for the operational loss, it amounted to SR128 million during the first quarter, compared to losses of SR159 million during the same quarter of the previous year, a decrease of 19%.

The gross loss amounted to SR7 million during the first quarter, compared to losses of SR17 million during the same quarter of the previous year, a decrease of 59%.

The gross per share during the current period amounted to SR0.14, compared to a loss of SR0.23 during the same period of the previous year.

The reason of the increase (decrease) in the net profit during the current quarter compared to the same quarter of the last year is:

Gross comprehensive loss for Quarter 1 “Q1” 2022 is SR 160M as compared to the total comprehensive loss of SR 181M in the corresponding quarter. Key factors impacting the net results for the current quarter are summarized below:

1) EEC Group has reported a gross loss of SR -6.5M during Q1 2022 which represents a decrease in loss by SR 10.6M (62%) as compared to the gross loss of SR -17M for the corresponding quarter. The variance is mainly due to the followings:

• Projects’ gross loss increased by SR -4.3M, from gross profit of SR 185K (Q1 2021) to gross loss of SR -4.18M (Q1 2022) mainly due to the following factors:

i. Reduction in order intake from SR 3.5M to SR -16M (mainly due to cancellation of IV 4D SR11.8M and Affordable Housing SR 5.1M). This reduction in order intake resulted in decrease in GP by SR -15.3M.

ii. The above negative variance was partially offset by SR 11M due to change in significant financing components (mainly because of reduction in order intake and rescheduling of billings during the quarter).

• Operation’s gross loss decreased by SR 14.9M from gross loss of SR -17.2M (Q1 2021) to SR -2.3M (Q1 2022) mainly due to the improvement in overall operations.

2) Decrease in depreciation expense by SR 5.5M mainly due to certain assets being fully depreciated prior to 2022.

3) Decrease in impairment loss by SR 11M during the current quarter. The impairment/ provision is calculated using Expected Credit Loss (ECL) model as required under “IFRS 9” against receivable balances of leasing, utilities and service charges.

4) Decrease in financial charges by SR 8.7M is mainly due to conversion of part of MOF loan into equity during 2021

5) Decrease in zakat charges by SR 8.2M mainly due to anticipated changes in Zakat base for the financial year “FY” 2022.

6) Decrease in general and administration expenses cost by SR 9.3M mainly due to various cost optimization measures taken during 2021, including reduction in employee costs

7) The above positive impacts are partially offset by the followings:

• Increase in selling and marketing expense by SR 6.7M mainly due increase in settlement discount offered to customers.

• Decrease in other income by SR 11.8M mainly due to reduction in donation income during 2022 from Lockheed Martin (LM) against EKC losses by SR 9.8M, due to exhaustion of the LM donation pool during 2021;

• Decrease in share of other comprehensive income from equity accounted investees (Port Development Company (PDC)) by SR 13.7M (Q1 2021 SR 13.75M income vs Q1 2022: SR 12K), arising from change in revaluation of Interest Rate Swap “IRS” arrangements made by PDC.

The reason of the increase (decrease) in the net profit during the current quarter compared to the previous period of the current year is:

Gross comprehensive loss for Q1 2022 is SR 160M as compared to the total comprehensive loss of SR 262M in the previous quarter. Key factors impacting the net results for the current quarter are summarized below:

1) EEC Group has reported a gross loss of SR -6.5M during Q1 2022 which represents a decrease in loss by SR 62.1M (91%) as compared to the gross loss of SR -68.6M for the previous quarter. The variance is mainly due to the followings:

• Projects’ gross loss decreased by SR 33M, from gross loss of SR 37.4M (Q4 2021) to gross loss of SR 4.18M (Q1 2022) mainly due to the following factors:

i. The group recorded impairment loss of SR 45M in Q4 2021 against development properties, whereas no such impairment were booked during Q1 2022.

ii. The above impact was partially offset by variance in order intake by SR -6M from order intake of SR -22M (Q4 2021) to negative order intake of SR -16M (Q1 2022).

• Operation’s gross loss decreased by SR 29M from gross loss of SR -31M (Q4 2021) to SR -2.3M (Q1 2022) mainly due to the improvement in overall operations of operating assets.

2) Decrease in selling and marketing expenses by SR 14.8M mainly due decrease in settlement discount offered to customers.

3) Decrease in general and admin expenses by SAR 24M mainly due to various cost optimization measures taken during 2022, including reduction in employees costs and professional fees.

4) Decrease in impairment loss by SR 20 M during the current quarter mainly due to impairment loss booked on one of the asset (Sales Centre) amounting to SR 15M whereas no such impairment was booked during current quarter.

5) Increase in share of results of equity accounted investees (Port Development Company (PDC)) by SR 10.5M.

The above positive impacts are partially offset by the followings:

• Increase in zakat charges by SR 10.5M mainly due to anticipated changes in Zakat base for FY 2022.

• Decrease in share of other comprehensive income from equity accounted investees (Port Development Company (PDC)) by SR 13.4M (Q4 2021 SR 13.4M vs Q1 2022 SR 12K), arising from change in revaluation of interest rate swap “IRS” arrangements made by PDC.

• Decrease in actuarial adjustments made based on the valuation of end of service benefit liability by the actuary by SR 7.5M.

We draw attention to Note 3 of the condensed consolidated interim financial statements, which indicates that the Group reported a net loss of SR 160.4 million during the period ended 31 March 2022 and, as of that date, the Group’s current liabilities exceeded its current assets by SR 2,800 million. These events or conditions, along with other matters as set forth therein, indicate that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern. Our Conclusion is not modified in respect of this matter.

The accumulated losses, as of 31 March 2022, amounted to SR 3,626 million, which is equivalent to 31.99% of the Company’s capital, amounting to SR 11,333 million.

The main causes of these accumulated losses are as follows:

Under Saudi Organization for Certified Public Accountants (SOCPA) accounting framework, EEC had a positive retained earning balance of SR 16.8M as at 31 Dec 2015. During 2017, SOCPA made it mandatory for listed companies to adopt the International Financial Reporting Standards (IFRS) retrospectively with effect from 01 Jan 2016. Due to the switch from SOCPA accounting framework to IFRS, positive retained earnings got converted into accumulated losses of SR 1.4B as of 01 Jan 2016, mainly due to change in impairment testing methodology of operating assets and change in revenue recognition policy. However, part of the accumulated losses pertaining to revenue recognition were reversed in subsequent periods in line with the projects progress.

In addition to this, during 2019, the IFRS Interpretation committee published an agenda decision “Over Time Transfer of Constructed Good – IAS 23 Borrowing Costs” which states that under construction inventories of real estate properties are not qualifying assets for capitalization of borrowing costs as these are ready for its intended sale in its current condition. Accordingly, capitalized borrowing costs pertaining to development properties (inventories), amounting to SR 252M, as of 31 December 2019, had been offloaded and charged to accumulated losses. Furthermore, the prevailing COVID 19 situation has resulted in impairment of development properties and operating assets, amounting to SR 177M and SR 187M respectively, which had been recognized in the books of accounts. In addition to this, financial charges pertaining to outstanding loans, losses related to operating assets being at infancy stage and depreciation, operations and maintenance of city infrastructure are other major contributors to the accumulated losses of the company as at March 31, 2022.

The company will apply the procedures and instructions issued by the Capital Market Authority for companies listed on the Saudi Stock Exchange, whose accumulated losses amounted to more than 20% of its share capital.