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Egypt PropertyAddressing housing shortages in a recovering market
Sector and Company Report | September 18th 2014
S e c t o r C o v e r a g e
S e p t e m b e r 1 8 2 0 1 4
Mohammad Kamal mohammad.kamal@arqaamcapital.com +9714 507 1743
Mohamad Haidar, CFA Heba Khalil Arqaam Capital Research Offshore s.a.l
Egypt property
Addressing housing shortages in a recovering market
Egypt’s property sector holds a USD 200bn+ long term development opportunity: Egypt’s existing residential stock is largely informally built (90%) and lacking in quality. The endemic housing shortage stands at 1.5mn units today, and will widen by c.100k units every year. The country’s political system has found its feet, and has prioritized the rehabilitation and expansion of the country’s stock of residential units. We believe that publicly administered housing schemes and resumed private sector involvement will deliver 150k units/annum, leaving the gap potentially unclosed for the next 10 years. Property is perceived as a hedge against currency risk, and this adds another leg to demand. Egypt’s expatriate population across MENA stands at c.5mn nationals, who are likely to route capital towards homes in Cairo’s new districts.
We see an existing shortage of 3mn units overall (10% of which in urban districts). Egypt’s young population base (86mn individuals, 50% below the age of 24) will in our view generate demand for c.30k additional units per annum going forward, in urban cities. This assumes no improvement in real wages. When factored in, improving disposable income levels and access to mortgage financing should produce an incremental 8% in residential property demand, widening the supply gap by 12%. We therefore estimate that total demand holds potential to grow at 10%/annum in the coming 4 years, reaching 374k units by FY 15e. Mid-range and affordable housing will in our view drive the bulk of demand for residential space in Egypt, which we calculate accounts for 90% of property demand overall (inclusive of ownership and rentals).
Value for money: At USD 94/sqft, average residential prices in Cairo are a fraction of prices in Dubai and Abu Dhabi (-75%), and roughly in-line with offered prices in Jeddah (USD 109/sqft, 15% discount) but above than those observed in Riyadh (USD 67/sqft, +40%). In the context of wages, average salaries in Egypt remain the lowest in MENA at USD 315/month, far behind lower-end comparable wages in KSA (USD 720) and UAE (USD 1k), and remain prone to inflation.
Valuation is cheap: Egyptian property names trade at 0.66x CMP/NAV, rendering them the cheapest among peer sets in the UAE (0.71x) and KSA (0.76x), and hold the largest upside potential to NAV (20%+), largely in the form of undeveloped quality land assets held on their books.
Picks: We favor TMG (Buy, EGP 14.7, 32% upside) as the cheapest property play within our coverage universe, exhibiting one of the largest discounts to NAV (0.46x CMP/NAV vs. 0.74x MENA average) and SODIC (Buy, EGP 57, 21%) which holds 5.2mn sqm of land assets, now free of all legal disputes, and generates massively superior margins, RoE and ROIC vs. the sector (10.2% vs. 3.7% for TMG in FY 16e). We stand neutral on MNHD (Hold, EGP 41, -6%) which exhibits full value at 0.88x CMP/NAV, while we see downside risk at ERC (Sell, EGP 1.2, -18%).
Risks: The pace of macroeconomic recovery and currency movements.
Summary of recommendations
Bloomberg code TMGH EY
Company name Talaat Moustafa Price target EGP 14.7,
Upside +32%
Rating Buy
Bloomberg code OCDI EY
Company name Six of October Price target EGP 57
Upside +21%
Rating Buy
Bloomberg code MNHD EY
Company name Medinet Nasr Housing Price target EGP 41.0
Upside -6%
Rating Hold
Bloomberg code EGTS EY
Company name Egyptian Resorts Company Price target EGP 1.20
Upside -18%
Rating Sell
© Copyright 2014, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 2
Table of Contents
MENA property coverage universe ................................................................................. 3
Summary of recommendations ....................................................................................... 4
Market fundamentals: Macroeconomic drivers ............................................................. 6
The property market in Egypt ....................................................................................... 11
Legal precedents set by the settlement of land disputes ............................................. 16
Property plays in Egypt: land assets and NAV sensitivity .............................................. 17
Comparative charts ....................................................................................................... 18
Valuation ....................................................................................................................... 22
Talaat Moustafa Group: Cheapest in MENA ................................................................. 24
Six of October: Hugely cash generative......................................................................... 36
Medinet Nasr Housing: The right product for a price sensitive market ....................... 47
Egyptian Resorts Company: Downside risks outweigh growth potential .................... 59
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 3
MENA property coverage universe
Exhibit 1: MENA property coverage universe
Company FVE (in LC) Rating Upside/Downside ADTV (USD mn) Index Free float NAV (USD mn)
Egypt property
TMG 14.7 Buy 34% 4.69 EGX 50% 7,075
SODIC 57.2 Buy 21% 3.73 EGX 73% 874
ERC 1.2 Sell (18%) 3.75 EGX 52% 352
MNHD 40.5 Hold (7%) 1.38 EGX 47% 1,073
MENA property
Emaar 14.0 Buy 27% 67.25 DFM 71% 24,023
Aldar 5.4 Buy 33% 57.67 ADX 68% 13,185
Damac 25.0 Buy 24% -- LSE NA 5,418
UP 3.0 Buy 41% 54.52 DFM 86% 3,464
Eshraq 2.0 Buy 54% 30.03 ADX 80% 1,121
Emirates REIT 1.5 Hold 8% -- Nasdaq DXB 100% 464
Dar AlArkan 14.0 Hold (5%) 111.26 SASEIDX 93% 6,718
SRECO 36.0 Hold (29%) 5.66 SASEIDX 34% 1,858
Company EV (USD mn) EV/EBITDA FY 14e P/E FY 14e P/B FY 14e RoE FY 14e Dividend yield FY 14e CMP/NAV
Egypt property
TMG 3,512 19.96x 28.25x 0.86x 3.0% 1% 0.46
SODIC 592 15.17x 28.84x 1.45x 5.0% 0% 0.70
ERC 218 nm nm 1.71x (2.5%) 0% 0.61
MNHD 929 25.09x 42.17x 8.84x 24.3% 0% 0.89
20.07x 33.08x 3.22x
MENA property
Emaar 20,830 17.94x 22.53x 2.09x 9.3% 1% 0.68
Aldar 10,431 32.56x 15.65x 1.76x 11.2% 2% 0.66
Damac 3,754 5.13x 5.99x 3.65x 60.9% 4% 0.80
UP 2,366 45.01x 16.04x 1.23x 9.2% 0% 0.59
Eshraq 538 6.60x 7.31x 1.04x 14.2% 3% 0.65
Emirates REIT 526 25.51x 14.06x 1.02x 7.2% 3% 0.93
Dar AlArkan 5,555 18.06x 19.49x 0.90x 4.6% 0% 0.63
SRECO 1,608 28.82x 31.76x 1.80x 5.7% 2% 0.87
Source: Company Data, Arqaam Capital Research
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 4
Summary of recommendations
Exhibit 2: Summary of recommendations
Company Rating FVE (EGP) Key thesis elements
TMG Buy 14.7 Largest discount to NAV within our real estate coverage universe (0.46x CMP/NAV vs. 0.74x sector average)
SODIC Buy 57 SODIC is poised to monetise its dispute-free raw land bank in the next 5 years (5.2mn sqm)
MNHD Hold 41 Turnaround story with long-term growth elements, fully focused on undersupplied mid-income segment
ERC Sell 1.2 Growth potential overshadowed by medium-term challenges to the secondary/vacation home market in Egypt
Source: Company Data, Arqaam Capital Research
Exhibit 3: CMP/NAV vs. up/downside potential
Source: Company Data, Arqaam Capital Research
Exhibit 4: YTD performance vs. up/downside potential
Source: Company Data, Arqaam Capital Research
Talaat Mustafa Group- TMG (Buy, EGP 14.7, 32% upside) is the cheapest property play within
our coverage universe, exhibiting one of the largest discounts to NAV (0.46x CMP/NAV vs.
0.74x MENA average). Current market price/NAV appears to reflect the value of developed
land in Madinaty (1+2) but excludes value in free, infrastructure-installed, idle land. TMG’s pre-
sold pipeline consists of c.21k residential units to be delivered in FY 14-17e, out of a total
inventory of 47k units currently being developed (c.26k units yet to be sold). Its recurring
income capacity is due 17% CAGR over the next 5 years, through growth in service fees and
retail revenues. Despite strong recent price performance (+25% 3M return), we believe the
market has yet to fairly acknowledged the value inherent in TMG’s sizable property portfolio,
and is not fully pricing-in the true value of land assets in current share price. We initiate with a
Buy recommendation and EGP 14.7 FVE.
REIT DU
Eshraq UH
UPP UH
ALDAR UH
SRECO AB
EMAAR UHDMC LI
EGTS EY
MNHD EY
TMGH EY
OCDI EY
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
- 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00
CMP/NAV
Upside remaining %
REIT DU
Eshraq UH
UPP UH
ALDAR UH
SRECO AB
EMAAR UH
MABANEE KKDMC LI
EGTS EY
TMGH EY
OCDI EY
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
-40% -20% 0% 20% 40% 60% 80% 100% 120% 140%
Remaining upside
YTD performance
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 5
Six of October Development- SODIC (Buy, EGP 57, 21% upside) is a play on the high-end real
estate market in Egypt, as it offers community services to 400k+ residents in the Six of October
and New Cairo districts through 9 major developments and complexes. The business holds
5.2mn sqm of land assets, now free of all legal disputes, and generates massively superior
margins, RoE and ROIC vs. the sector (10.2% vs. 3.7% for TMG in FY 16e). SODIC is set to deliver
c.4k units in the coming 5 years against a total sales backlog of EGP 8bn. The business is further
planning the launch of a recurring income portfolio, via the release of c.110k sqm of retail and
commercial space and a 150-key hotel asset by FY 15-16e. We believe SODIC can further
monetize the remaining 3.9mn sqm of raw land at its disposal, and another 1.26mn sqm of
prime land recently acquired in New Cairo, through the development of new mixed-use
projects. SODIC trades at 0.71x p/NAV, 29x P/E, 13.6x EV/EBITDA vs. sector multiples of 0.65x
p/NAV, 30.4x P/E and 18.9x EV/EBITDA. We initiate with a Buy rating and EGP 57 FVE.
Medinet Nasr Housing and Development- MNHD (Hold, EGP 41, 6% downside) is a middle-
income home builder with turnaround potential. We see a long-term EPS growth story as the
business develops c.100mn sqft of ready-for-development land into affordable housing
solutions, and delivers >2.5k residential units by FY 18e. MNHD has successfully launched 2
residential projects, Hayy Al Waha (916 units) and Tag Sultan (1,700 units), still under
development, yielding a 5-yr revenue visibility of c.EGP 2bn. The business further sits on
c.100mn sqft of undeveloped land that may be monetised via the activation of latent projects
in KM 45 (59.3mn sqft) in FY 14e, and Teegan (35.5mn sqft) in the next 2-3 years. We believe
the business can generate massively stronger shareholder returns by transitioning into mid-
income property development and sales, and away from land resale. Valuation is however rich,
compelling us to initiate coverage with a Hold recommendation and EGP 41 FVE.
Egyptian Resorts Company- ERC (Sell, EGP 1.2, 18% downside) is a developer of
secondary/vacation homes along the Red Sea coast. We do not see convincing demand
drivers for high-end secondary home ownership in Egypt over the next 5 years. The business
owns c.441mn sq ft of land in Sahl Hasheesh, out of which only 20.1mn sq ft (4.5%) have been
converted into land plots and properties ready for sale. We see material downside risks to
sales guidance numbers, and consequently view current valuation multiples (0.5x p/tNAV,
17.1x FY 15e P/E) as overly generous, given ERC’s high degree of reliance on land sales for cash
generation (1.8-2.3x of operating cash flows in FY 15e/16e generated by land sales). We
initiate coverage of ERC with a Sell rating and EGP 1.2 FVE.
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 6
Market fundamentals
Demographics: household formation is highest in MENA
Exhibit 5: Population base in Egypt to grow at c.2% p.a.
Source: IMF, World Economic Outlook Database, Arqaam Capital Research
Exhibit 6: 1/3 of Egypt’s population is <15 years old
Source: IMF, World Economic Outlook Database, Arqaam Capital Research
Population growth has averaged 1.9%/annum in the last 3 years. Egypt’s birth rate of 24.2
births/1000 residents is high in relative terms (+19% vs. MENA average (20.2 births/1000)), and
absolute terms (4.79 deaths/1000 residents, +18% vs. MENA).
Egypt’s population is young: 50% of the Egyptian population is below the age of 24, while the
median age is 24.8 years (compared to 44% below the age of 24 and a median age of 27 years
in MENA). This suggests massive incoming pressure on housing supply, as we estimate the
formation of 600k households/annum on average over the next 5 years (at a 6% 5-yr CAGR).
Urbanisation potential is huge: We expect the Egyptian population to grow at 2% CAGR in FY
14-18e. Rising urbanization (0.5% pa to 46% FY15e from a base of 44.5% today) should
accelerate as employment opportunities and real wages improve going forward.
Exhibit 7: MENA population and household sizes
Source: IMF, World Economic Outlook Database, Arqaam Capital Research
Exhibit 8: GDP CAGR in real terms (3.7%) due to outpace growth in population (2%)
Source: IMF, World Economic Outlook Database, Arqaam Capital Research
82.584.2
85.887.6
89.391.1
92.994.8
70
75
80
85
90
95
100
FY 12A FY 13A FY 14e FY 15e FY 16e FY 17e FY 18e FY 19e
Population (mn persons)
41% 37% 36% 32% 30% 28% 28% 27% 27% 25% 25% 24% 23% 21% 20%13%
52% 59% 60%61% 66% 65% 65% 68% 66% 70% 68% 70% 61% 75% 75% 83%
7% 4% 4% 7% 4% 6% 8% 5% 7% 5% 7% 6%16%
4% 6% 4%
--
20%
40%
60%
80%
100%
Sud
an
Iraq
Jord
an
Egyp
t
Om
an
Alg
eri
a
KSA
Lib
ya
Mo
rocc
o
Ku
wai
t
Leb
ano
n
Iran
Tun
isia
UA
E
Bah
rain
Qat
ar
Population breakdown by age group
< 15 years 15-65 years > 65 years
--
1
2
3
4
5
6
7
8
9
--102030405060708090
100
Egyp
t
Iran
Alg
eri
a
Iraq
Sud
an
Mo
rocc
o
KSA
Tun
isia
UA
E
Jord
an
Lib
ya
Leb
ano
n
Ku
wai
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Om
an
Qat
ar
Bah
rain
Population FY 14e (mn) Average household size (RHS)
JordanBahrain
Egypt
Iran
Iraq
Algeria
Kuwait
Lebanon
LibyaMorocco
Oman
Qatar
KSA
Sudan
Tunisia
UAE
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%
FY 13A-18e population CAGR
FY 13A-18e GDP CAGR
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 7
Wages: per capital income lowest in MENA
Wage reform raises minimum household earnings by 70%: 87% of the workforce in Egypt
currently earns a monthly salary below USD 1k. 1/4 of this wage bracket survives below a
poverty line of USD 1.65/day. In 2013, the Egyptian government approved a 70% increase in
minimum wages earned by public sector employees, to EGP 1.2k per month (up from EGP
700/month), affecting 4.9mn workers in the public sector in Egypt. This was implemented in
Q1 14A. In a regional context, GDP/capita in Egypt currently ranks lowest in MENA at USD
3.75k in FY 13A, c.85% below the MENA average of USD 20.2k/capita. Furthermore, the lowest-
paid employees within a corporate entity will not have to pay income taxes on their wages, as
the lowest income bracket was raised from EGP 5k/year to EGP 12k/year.
Exhibit 9: Income distribution: Egypt suffers from significant income inequity
Range % of population
Range 1 <$1,000 per month 87%
Range 2 $1,000-2,000 per month 10%
Range 3 >$2,000 per month 3%
Source: UNDP Human Development, Company Data, Arqaam Capital Research
Affordability
65% of residential demand emanates from low-mid income wage brackets, and this places
home ownership out of reach for the average Cairo resident. We run our calculations on the
maximum mortgage financing available (0.55x LTV) and derived the range of monthly
mortgage installment payments required towards property ownership in Egypt:
Exhibit 10: Average apartment prices in Egypt
Apartment Average selling price (EGP/sqft) Average 1BR size (sqft) Apartment value (EGP mn)
Low-end 279 646 0.18
Mid-end 670 861 0.58
High-end 1,115 1,077 1.20
Source: JLL, Arqaam Capital Research
Exhibit 11: Average monthly mortgage installments on apartments in Egypt
Apartment Loan/value (x) Loan value (EGP mn) Monthly mortgage payment (EGP)
Low-end 0.55 0.10 709
Mid-end 0.55 0.32 2,272
High-end 0.55 0.66 4,729
Source: JLL, Arqaam Capital Research
Assuming an instalment-to-salary ratio of 30%, the annual implied salary that allows for
mortgage-financed ownership of low-end apartments should be no less than USD 4k/annum,
while customers desiring mortgages on mid-end and high-end apartments should at least earn
USD 13k/annum and USD 27k/annum, respectively.
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 8
Exhibit 12: Mortgage-eligible salary range in Egypt
Apartment Minimum required monthly salary (EGP) Implied annual salary (EGP) Implied annual salary (USD)
Low-end 2,364 28,371 4,053
Mid-end 7,572 90,868 12,981
High-end 15,763 189,155 27,022
Source: JLL, Arqaam Capital Research
Our estimates of salaries in Egypt show that (i) 29% of the working population (largely workers
in the public sector) cannot afford to buy any type of apartments on mortgage and require
employer-guaranteed housing or informal/alternative accommodation. (ii) 58% of the
addressable population can secure mortgage financing towards low-end apartments, (iii) 10%
of total workers can afford to buy mid-end apartments while (iv) only 3% of the workforce can
afford to mortgage all types of apartments in Egypt. As a result, demand for affordable low-
end residential units has been extremely high in Egypt over the past 5 years, leading to a
widening in the supply-demand gap (and the current shortage of c.200k units in urban cities),
compared to an abundance of high-end units potentially desired by less than 3% of property
buyers in Egypt.
Exhibit 13: Residential affordability in Egypt: 29% of total labour force requires employer-guaranteed housing, while only 3% (c. 800k individuals) can afford to buy all types of apartments on offer
Egypt labor force Annual salary range in Egypt (USD) % of population Workers (mn) Affordable apartments
Agriculture 2,000-4,000 29% 7.66 None
Industry 4,000-8,000 24% 6.34 Low
Services 8,000-12,000 34% 8.98 Low
Industry 12,000-24,000 10% 2.64 Low, mid
Services above 24,000 3% 0.79 All
Source: CIA, Arqaam Capital Research
But affordability has improved at the lower end of the spectrum: Average residential
apartment selling price in Egypt have remained unchanged over the past 2 years in New Cairo
and Six of October (average USD 1.1k/sqm), but minimum wages have increased by 70% in Q1
14A, up from a minimum wage of EGP 700/month first set in 2012. This has brought c.20%
more potential buyers within reach of home ownership, by our estimates.
Cash vs. mortgage buyers: We estimate that more than 50% of property buyers in Egypt
purchase homes without mortgage finance, i.e. in cash, while the remaining finance their
homes through one of the 11 available mortgage finance providers in Egypt. Their collective
home loan book currently stands at c.EGP 4.3bn, and experienced a loan delinquency rate of
5.1% in FY 13A. The Central Bank of Egypt has allocated c.EGP 10bn in the next 3 years towards
financing mortgages for individuals earning low-middle income paychecks. It intends to
stimulate home ownership by (i) offering extended loan terms at attractive prices (long-term
loans over a 20-year period priced at 7% to low-income residents vs. a maximum loan tenure
of 15 years and a lending rate of c.12.5% currently offered at banks) and (ii) growing the
available cash funds assigned for mortgage financing at banks (aggregate mortgage loans due
to quadruple in the coming 3 years). On the other hand, mid-to-high wage residents have
demonstrated an increased appetite for cash-based home purchases, where buyers are now
deliberately paying 20-30% of home values via cash down payments, while required to only
commit 10% at signing by developers.
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 9
The evolution of mortgage laws in Egypt
A larger segment of low-wage residents now qualifies for home financing given a revised
mortgage law: The mortgage finance market in Egypt is governed by law No. 140, issued in
2001, supervised by the Egyptian Financial Services Authority. The law has over the last 10
years been adjusted for a series of amendments that have resulted in the formation of:
(i) An adjusted real estate registration system, which reduced registration fees to
EGP 2k (at maximum), and exempts the mortgage finance contracts from the
proportional stamp tax
(ii) A new protocol with NUCA to facilitate real estate registration procedures applied
to new urban communities, allowing for transformation of ‘allocation letters’ into
‘recordable legal documents’ and permitting partial registration of projects,
(iii) A larger beneficiary base by raising the average size of an entitlement from the
Mortgage Finance Subsidy and Guarantee Fund to EGP 15k (vs. EGP 10k) and
raising the limits of monthly income and level of financing to the below:
Exhibit 14: Mortgage rules on wage brackets
Low-income
Total monthly limit Individuals EGP 1,750
Families EGP 2,500
Maximum level of financing Residential apartment EGP 95,000
Maximum level of financing (mid-income) Residential apartment EGP 300,000
Source: EFSA, Arqaam Capital Research
(iv) The Egyptian Mortgage Refinance Company (EMRC), which provides long-term
funding to mortgage finance companies and commercial banks that lend into
home ownership. The ECB has allocated EGP 10bn to finance mortgages for
people on low and middle incomes.
Maximum allowed mortgages imply a 0.5-0.55x loan-to-value ratio, by our estimates: Low-
income workers are permitted by regulation to raise a maximum housing loan of EGP 95k (the
fund finances individuals earning less than EGP 1.75k/month and families earning a maximum
of EGP 2.5k/month), while middle-income earners can undertake mortgages worth up to EGP
300k on an absolute basis. When compared to our estimates of average apartment prices (EGP
180k for low-end apartments, and EGP 580k for mid-end apartments), available mortgage
limits 0.5-0.55x the average price of an addressable apartment, implying that buyers on
average pay c.50% of their homes in the form of down payments and quarterly instalments,
prior to receiving their keys.
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 10
Exhibit 15: Lending rates in Egypt fell by c.100bps in the last 5 years, but remain at 15% above the MENA average
Source: EFSA, Arqaam Capital Research
Exhibit 16: Lending rates in Egypt hover between 12% and 12.5% in the last 4 years
Source: EFSA, Arqaam Capital Research
Mortgage lending in Egypt has grown at 25%/annum over the last 4 years- 4x faster than
growth in aggregate combined loans: The Central Bank of Egypt is planning to expand the
mortgage lending base to c.EGP 10bn in the next 3 years for individuals earning low-mid
income (vs. c. EGP 4bn in FY 13A), in an effort to boost the availability and uptake of housing
finance. More than 40% of property buyers in Egypt currently use mortgages in financing their
residences. We expect the ratio to gradually grow as further government subsidies are
released, thereby benefiting low-income employees that earn a maximum monthly salary of
EGP 20k (the Egyptian government subsidized 10k units in FY 10A, 65k units in FY 12A, an
expected 50k units in FY 14e, and a further 90k units in FY 15e). Debt finance has been
extended to low-income families through the Guarantee and Subsidy Fund (GSF), providing up
to 15% of the value of a residence. Lending rates in Egypt stood at 12.1% in FY 13A, and are
expected to remain fixed throughout FY 14e.
Exhibit 17: Mortgage lending in Egypt grew at a 25% 4-yr CAGR in FY 09-13A…
Source: IMF, Arqaam Capital Research
Exhibit 18: …4x faster than growth in aggregate loans (of all types) in Egypt (which grew at 6% 4-yr CAGR)
Source: ECB, Arqaam Capital Research
--
2%
4%
6%
8%
10%
12%
14%
16%
18%
Iran
Mo
rocc
o
Iraq
Egyp
t
Leb
ano
n
Jord
an
Bah
rain
Alg
eri
a
KSA
Qat
ar
Om
an
Ku
wai
t
UA
E
Lending rates
FY 09A FY 14e
12.49%
12.49%
12.50%
12.35%
12.40%
12.18%
12.30%
12.37%
12.21%
12.19%12.20%
12.31%
12.05%
12.12% 12.09%
12.11%
11.80%
11.90%
12.00%
12.10%
12.20%
12.30%
12.40%
12.50%
12.60%
Q1
10
A
Q2
10
A
Q3
10
A
Q4
10
A
Q1
11
A
Q2
11
A
Q3
11
A
Q4
11
A
Q1
12
A
Q2
12
A
Q3
12
A
Q4
12
A
Q1
13
A
Q2
13
A
Q3
13
A
Q4
13
A
Average Interest Rate
--
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Q1
10
A
Q2
10
A
Q3
10
A
Q4
10
A
Q1
11
A
Q2
11
A
Q3
11
A
Q4
11
A
Q1
12
A
Q2
12
A
Q3
12
A
Q4
12
A
Q1
13
A
Q2
13
A
Q3
13
A
Q4
13
A
Total Value of Mortgage Loans (LE million)
Jan. 25 revolution
-15.0%
-10.0%
-5.0%
0%
5.0%
10.0%
15.0%
0
100
200
300
400
500
600
FY 08A FY 09A FY 10A FY 11A FY 12A FY 13A
Total loans in Egypt (EGP bn)
Total loans Loan growth q/q
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 11
The property market in Egypt- structurally underdeveloped, but
with huge growth potential
In volume terms, Egypt is home to the largest population base in MENA, constituting one of
the fastest growing property markets in the region. The property market in Egypt suffers from
an endemic shortage in housing units, which has been exacerbated during the last 3 years of
political and economic instability. The period resulted in a slowdown in construction activity
and project award momentum, despite growing demand (we estimate an annual increment of
c.30k housing units over an existing shortage of c.300k units). Recent political stability has
however has generated positive growth catalysts for the property sector in Egypt, as several
key government initiatives has been geared towards (i) filling the existing supply shortage (via
delivering 50k affordable residential units in FY 14e and another 90k units in FY 15e, which
brings the gap down to 92k units in FY 15e from c.200k units currently, by our estimates) and
(ii) reviving tourism, suggesting improved hotel yields going forward (current ADRs in Q1 14A
at USD 101 (+60% q/q, +2x y/y) at 35% average occupancy).
Residential
Exhibit 19: Only 10% of the housing market is built formally in Egypt- Cairo’s housing shortages stand at c.200k units in 2015
Source: JLL, Arqaam Capital Research
Exhibit 20: The supply gap falls to 92k units when accounting for government social housing (140k affordable units in FY 14-15e)
Source: JLL, Arqaam Capital Research
The residential property sector is characterized by a huge demand-supply gap that currently
exists due to rapidly expanding housing needs (c.30k units/annum largely emanating from
expanding urban cities), and the shortage of formal housing solutions (we estimate by c.100k
units). Formal housing has not been sufficient, neither in volume nor in location, to absorb
demand for 350k units within new cities. The supply shortage is largely concentrated in the
low-income segment, which reflects a shortage of about 40k units per year. 90% of demand is
informally addressed, while only 10% is supplied by professional property developers. By
1994, 70% of housing construction projects were managed by the public sector, while 30%
were privately developed. That proportion, however, was reversed by 2010, directly impacting
the development of low-income housing units, as private developers tended to prioritise the
construction of high-margin luxury residential product, in pursuit of stronger margins.
0
50
100
150
200
250
300
350
400
Sup
ply
De
man
d
Sup
ply
De
man
d
Sup
ply
De
man
d
Sup
ply
De
man
d
Sup
ply
De
man
d
FY 11A FY 12A FY 13A FY 14e FY 15e
Official housing units(000)
Existing New Gap
Gap of c. 200k
191 207 233
176
92
--
50
100
150
200
250
300
350
400
Sup
ply
De
man
d
Sup
ply
De
man
d
Sup
ply
De
man
d
Sup
ply
De
man
d
Sup
ply
De
man
d
FY 11A FY 12A FY 13A FY 14e FY 15e
Official housing units(000)
Existing New- private New- Government Gaop
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 12
Supply: 55% of opportunity in the low-end segment
Exhibit 21: Existing residential stock (86k units): 60% of total available units are in the mid-end category
Source: Arqaam Capital Research
Exhibit 22: While 55% of the supply/demand gap falls in the low-end range
Source: TMG, Arqaam Capital Research
Public-private partnerships (PPP) should receive new incentives going forward: The Egyptian
government has announced its first tangible steps towards tackling the supply gap, via a major
USD40bn affordable housing project that engages UAE-based developer Arabtec to build 1 mn
housing units over the next 6 years (The project will be built across 13 governorates within
Egypt, at a total built-up area of 5mn+ sqm spread across 160mn sqm of land, 93% of which to
be built in the capital- Cairo). Though widely regarded as a political statement, the initiative
remains likely to materialize to some proportion of its announced size and scope, due to the
involvement of regional governments in its funding, and the assignment of large, experienced
regional contractors to the task. The project is by design intended to address the shortage in
affordable housing in Egypt, and is likely to create a substantial number of new jobs in the
country.
Exhibit 23: Residential stock (in gated communities) set to rise 1.7x in the next 2 years
Source: JLL, Arqaam Capital Research
Exhibit 24: Owners and tenants occupy 80% of the total residential stock in Egypt
Source: Global Property Guide, Arqaam Capital Research
Mid-end, 60%
High-end, 30%
Low-end, 10%
Housing stock occupancy by type
Low-end, 70
Mid-end, 50
High-end, 5
Supply/demand gap ('000 units)
67 74 85 86
1207
11
34
22
0
20
40
60
80
100
120
140
160
FY 11A FY 12A FY 13A FY 14A FY 15A
Gated communities residential stock ('000s)
Units ('000) Future supply ('000)
44%
36%
14%
6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Owners Rents Gifts and privileges Public housing
Housing population by accomodation type in Egypt
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 13
Demand: we expect an annual demand increment of c.30k (+8%) units in
new cities
We see an existing shortage of 3mn units overall (10% of which in urban districts). Egypt’s
young population base (86mn individuals, 50% below the age of 24) will in our view generate
demand for c.30k additional units per annum going forward, in urban cities. This assumes no
improvement in real wages. When factored in, improving disposable income levels and access
to mortgage financing should produce an incremental 8% in residential property demand,
widening the supply gap by 12%. We therefore estimate that total demand holds potential to
grow at 10%/annum in the coming 4 years, reaching 374k units by FY 15e. Mid-range and
affordable housing will in our view drive the bulk of demand for residential space in Egypt,
which we calculate accounts for 90% of property demand overall (inclusive of ownership and
rentals).
Exhibit 25: Existing demand of c.320k units to grow at 10%/annum in the coming 4 years, by our estimates
Source: Company Data, Arqaam Capital Research
Value for money: prices are cheap in regional context
Prices of high end product have moved substantially, given replacement demand and
expatriate home purchases: The average sales price for apartments in New Cairo has
remained stable in Q1 14A (USD 1,125/sqm) while the average price of a villa has only
marginally increased by 2% (USD 1,732/sqm). Similarly, in Six of October, a new Cairo City,
apartment and villa prices remained flat q/q, at USD 897/sqm and USD 1,111/sqm,
respectively. On a y/y basis, apartment prices in Six of October have retraced by c.15% y/y,
while villas registered a 5% decline in prices during the period. In New Cairo however,
apartment prices have remained unchanged at USD 1,125/sqm (-4% y/y), while villa prices
declined 16% y/y. Prices in some luxury urban communities have however risen 30% y/y in Q1
14A, (e.g. Eastown and Westown offered by SODIC). We believe that prices of high-end
product have performed well as a result of (i) replacement demand emanating from the upper
quartile of income earning households, and (ii) expatriate residents in the GCC, whose income
profiles also diverge from average wage levels within Egypt.
44.0%
44.6%
45.3%
45.9%
46.5%
42.5%
43.0%
43.5%
44.0%
44.5%
45.0%
45.5%
46.0%
46.5%
47.0%
--
50
100
150
200
250
300
350
400
450
FY 11A FY 12A FY 13A FY 14e FY 15e
Demand ('000 units)
Existing demand Increment Urbanisation ratio
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 14
Exhibit 26: Residential prices in Six of October: flat q/q, -10% y/y
Source: JLL, Arqaam Capital Research
Exhibit 27: Similar trends in New Cairo: flat q/q, -10% y/y …………
Source: JLL, Arqaam Capital Research
Average residential prices are well behind current levels in broader MENA, particularly
employment centers such as the UAE, but are in-line with prices of comparable product in
KSA: At USD 94/sqft, average residential prices in Cairo are a fraction of prices in Dubai and
Abu Dhabi (75% cheaper), but are roughly in-line with offered prices in Jeddah (USD 109/sqft,
15% discount) but above than those observed in Riyadh (USD 67/sqft, +40%).
Exhibit 28: Residential prices in context: Prices in Egypt sit at a huge discount to UAE prices (-75%) but in-line with KSA on average
Average selling prices (USD/sqft) Dubai ∆% Abu Dhabi ∆% Jeddah ∆% Riya h ∆% Cairo
Low-end 236 255% 226 241% 70 5% 43 -36% 66
Mid-end 369 293% 354 277% 109 17% 67 -29% 94
High-end 518 212% 497 200% 154 -7% 94 -43% 166
Source: JLL, Arqaam Capital Research
Rents largely move in tandem with prices
Market competition is increasing, rents likely to remain at current levels: Demand for
residential rentals in the past 2 quarters has began to shift away from villas towards
apartments (which are smaller and more affordable, and situated closer to business centres in
urban cities), which resulted in a decline in villa rents of 17% in New Cairo (USD 3,367/month,
3BR) and by 8% in Six of October (USD 2,900/month, 3BR). Apartment rents, despite stronger
demand drivers, have remained relatively fixed over the past 3 years (and even so in nominal
terms), due to increasingly competitive market, averaging around USD 1,162/month in New
Cairo (for a 2BR unit) and USD 868/month in Six of October (2BR). Occupancy rates in the
residential leasing sector remain very strong at 95% on average. Prices and rents imply a net
residential yield of 7% in Cairo, compared to a gross yield of 10%. Commercial rents on average
have remained fixed over the past 3 quarters in New and West Cairo, having declined by 20%
over the past 3 years in Central Cairo (USD 35/sqm/month). Average occupancy levels in ‘grade
A’ assets stood at 79% in Q1 14A, implying a net average yield of 8.8%. Annual retail rents
however continue to soften in regional malls (USD 720/sqm, -22% y/y) and super regional
malls (USD 1,320/sqm, -6% y/y) and reflect an average 75% occupancy rate across assets.
920 920 990 993
1,071
897 897 897 897
1,250 1,250 1,190
1,096 1,173
1,111 1,111 1,111 1,111
-
200
400
600
800
1,000
1,200
1,400
Q1
12
A
Q2
12
A
Q3
12
A
Q4
12
A
Q1
13
A
Q2
13
A
Q3
13
A
Q4
13
A
Q1
14
A
6th of October residential prices performance (USD/sqm)
Apartment Villa
1,050 1,050 1,198 1,136
1,180 1,125 1,125 1,100 1,125
1,780 1,780 1,609
1,813 1,974
1,741 1,659 1,700 1,732
-
500
1,000
1,500
2,000
2,500
Q1
12
A
Q2
12
A
Q3
12
A
Q4
12
A
Q1
13
A
Q2
13
A
Q3
13
A
Q4
13
A
Q1
14
A
New Cairo residential prices performance (USD/sqm)
Apartment Villa
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 15
Exhibit 29: Residential rents: Unchanged y/y in apartments, but declining in villas (-10%)
Source: JLL, Arqaam Capital Research
Exhibit 30: Hotel occupancy rates fall to 35% in Q1 14A on weak tourist arrivals
Source: JLL, Arqaam Capital Research
Hospitality and hotels
Tourist activity is highly sensitive to political stability: 27.7k guest rooms are currently
supplied by 161 hotels in Cairo, 55% of which are classified as 5-star assets. The hospitality
sector in Egypt was significantly impacted in FY 11A by political headwind (occupancy declined
to 44% from 65% in FY 10A, while ADRs decreased 40% to USD 53), but partially recovered in
FY 12A (+9pp in occupancy) on a slight improvement in tourism numbers (+18% in terms of
arrivals vs. 9.7mn tourists in FY 11A). Occupancy remained fairly constant throughout FY 13A
(c.50% on average), but significantly dropped to 35% in Q1 14A on the back of a 40% decrease
in the volume of tourist arrivals (642k tourists) and tourist nights (10mn nights, -17% y/y).
ADRs nonetheless surprisingly rose to USD 101 (+100% y/y, +70% q/q), whereas RevPARs only
increased by 30-40% over the period, due to the drop in occupancy rates.
Exhibit 31: 27.7k guest rooms available in Cairo, 55% of which in 5-star hotels
Source: JLL, Arqaam Capital Research
Exhibit 32: Tourist arrivals in FY 14 (Jan YTD) down 40% y/y, driving hotel occupancy to 35% from 51% y/y
Source: JLL, Arqaam Capital Research
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Q1
12
A
Q2
12
A
Q3
12
A
Q4
12
A
Q1
13
A
Q2
13
A
Q3
13
A
Q4
13
A
Q1
14
A
Residential rents performance (USD/unit/month)
6th of October- Apartment 6th of October- Villa
New Cairo- Apartment New Cairo- Villa
45%
49%
53%56%
51%49%
56%
48%
35%
0%
10%
20%
30%
40%
50%
60%
-
20
40
60
80
100
120
Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13A Q4 13A Q1 14A
YTD ADR (USD) YTD RevPar (USD) YTD Occupancy (RHS)
0
5
10
15
20
25
30
35
40
45
50
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
5 stars 4 stars 3 stars 2 stars 1 star Unclassified
Current hotel supply
Rooms Hotels (RHS)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0
2
4
6
8
10
12
14
2012 YTD 2013 YTD 2014 YTD
Current hotel demand
Number of nights (mn) Number of tourists (RHS, mn)
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 16
Land disputes as they currently stand
Exhibit 33: SODIC land is free of dispute, while final court rulings on TMG and ERC land are yet to be made
Company Land Area subject to dispute (mn sqm) % of total land Status Settlement type Settlement value
TMG Madinty 33.6 78% Pending Unit handovers 7% of BUA
TMG Marsa Alam 3.2 7% Pending In-progress In-progress
SODIC Eastown 0.86 8% Settled Cash EGP 900mn
SODIC Westown-Solidere 0.25 2% Settled Cash EGP 247mn
ERC Sahl Hasheesh 30.9 100% Pending NA NA
Source: Company Data, Arqaam Capital Research
SODIC fully closes its land disputes in cash settlements: in Q4 13A, SODIC reached an
agreement with NUCA on the settlement of disputes over land assets in Eastown (0.86mn
sqm), requiring SODIC to make a total cash payment of EGP 900mn to NUCA, payable over a
period of 7 years (semi-annual payments), EGP 100mn of which were paid as a down payment.
Furthermore in Q1 14A, SODIC finalised its dispute with Solidere International regarding land
assets in Westown (250k sqm) and agreed to pay EGP 247mn in a cash settlement, which
SODIC has fully settled and paid as of August 2014.
Government share of Madinty land likely to remain at 7% of BUA: TMG previously acquired
Madinty land (33.6mn sqm) from the government (NUCA) through a direct order rather than
going through an auction bidding process, and as a result, has agreed to deliver 7% of the total
BUA of each phase to the government (via finished units/apartments) upon construction
completion. The total value of the delivered BUA (7% of total, 2.7mn sqm) should not be less
than EGP 9.9bn (as per November 2010 agreement with NUCA), on the 6 phases of Madinty.
TMG has already delivered a portfolio worth EGP 6.5bn (1mn sqm) to the Government from
constructed land in phase 1 of Madinty, leaving 1.7mn sqm of BUA (via complete units valued
at EGP 11bn) to be delivered from future developments in phases 3-6.
Legal cases may affect >70% of ERC’s land bank. ERC faces 2 legal cases regarding its land
assets: (i) The government withdrew land plots from ERC after the 2011 revolution, claiming
that the Tourism Development Authority- TDA breached laws by allocating the land to
developers via direct order. Management contends that the law does not apply to ERC, as the
business is only mandated with the development of infrastructure, and not the actual end-user
properties. (ii) The TDA withdrew plots behind Phase III (305mn sq ft) of Sahl Hasheesh from
ERC, due to delays in submitting master plans, without prior notice. Litigation has been in
process since 2010-11.
MNHD’s land bank free of any disputes: The Company sits on c.9mn sqm of undeveloped land,
free of disputes as land was acquired via a presidential decree. MNHD nevertheless has a
further 28 plots (3.9mn sqm) under legal disputes with 3rd
parties, which we exclude from our
land bank math.
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 17
Property plays in Egypt: land assets and NAV sensitivity
Exhibit 34: Proximity lo urban districts: TMG, SODIC and MNHD land is largely concentrated around developed urban districts in New Cairo and Six of October
Source: Company Data, Arqaam Capital Research * Circle size denotes land area available
Exhibit 35: Land banks remain largely undeveloped and hold NAV upside potential
Company Land bank size % utilized % dispute free % assigned to development Residual land value (EGP mn) % of FVE Upside risk in NAV
TMG 47.2 42% 90% 90% 22,326 70% 73%
SODIC 11.3 55% 100% 75% 6,353 42% 13%
MNHD 8.9 4% 100% 98% 11,193 82% 16%
ERC 3.3 9% 0% 31% 2,571 96% 79%
Source: Company Data, Arqaam Capital Research
Developers in Egypt hold quality land assets in urban districts, in which the potential for
growth in prices is strong: Over 54mn sqm of dispute-free land assets across New Cairo and Six
of October are currently owned by TMG (33.6mn sqm), MNHD (8.9mn sqm) and SODIC
(11.3mn sqm), of which c.35mn sqm stands raw, with master-planned projects intended for
development over the next 10 years. New developments in urban cities are centered within
gated communities, which offer owners and tenants community services and leisure facilities.
As a result, product uptake has been strong, as reflected in pre-sales figures: 95% sales uptake
in Westown, 94% in Eastown, and 90% in Allegria. Land assets in Central Cairo, on average,
constitute the bulk of our NAV valuations (70%+ on average), and hold substantial valuation
upside not fully reflected on our price targets.
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 18
Comparative charts
Exhibit 36: TMG holds the strongest track record…
Source: Company Data, Arqaam Capital Research
Exhibit 37: …and is due to hand over a further 38k units
Source: Company Data, Arqaam Capital Research
Exhibit 38: Annual residential units handed over
Source: Company Data, Arqaam Capital Research
Exhibit 39: Operational hotel keys
Source: Company Data, Arqaam Capital Research
Exhibit 40: Most developers are highly exposed to residential cycles
Source: Company Data, Arqaam Capital Research
Exhibit 41: Residual land bank by company: TMG holds greatest degree of land optionality
Source: Company Data, Arqaam Capital Research
60,000
50,000
1,700 138--
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Talaat Mostafa Medinet Nasr SODIC Egyptian Resorts
Number of units delivered
38,400
3,600 2,425 145
--
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
TMG SODIC MNHD ERC
Development pipeline (units)
3,300
462 137 8
4,300
562 392
36
--
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
TMG SODIC MNHD ERC
Expected handovers (units)
FY 14e FY 15e
2,900
875
NA NA--
500
1,000
1,500
2,000
2,500
3,000
ERC TMG SODIC MNHD
Operational hotel rooms
78.9%
14.1%
2.1% 0.7%
25.8%
14.8%
4.1%0.7%
--
20%
40%
60%
80%
100%
ERC TMG SODIC MNHD
Recurring income/total revenue
FY 13A FY 16e
27.2
8.9
5.2
2.7
--
5
10
15
20
25
30
TMG MNHD SODIC ERC
Total residual land (mn sqm)
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 19
Exhibit 42: Outstanding sales backlog by company
Source: Company Data, Arqaam Capital Research
Exhibit 43: Development pipeline % sold
Source: Company Data, Arqaam Capital Research
Exhibit 44: Revenues
Source: Company Data, Arqaam Capital Research
Exhibit 45: Gross margin %
Source: Company Data, Arqaam Capital Research
Exhibit 46: Net margin %
Source: Company Data, Arqaam Capital Research
Exhibit 47: Leverage is low across all developers in Egypt
Source: Company Data, Arqaam Capital Research
20.00
5.10
1.05 0.02
-
5.00
10.00
15.00
20.00
25.00
TMG SODIC MNHD ERC
Cumulative outstanding backlog of sales (EGP bn)
93%
49%43%
13%
--
20%
40%
60%
80%
100%
SODIC TMG MNHD ERC
Sold units/total developemnt pipeline
4,976
1,559
613
51
6,061
1,015 705
51
--
1,000
2,000
3,000
4,000
5,000
6,000
7,000
TMGH EY OCDI EY MNHD EY EGTS EY
Revenues (EGP mn)
FY 13A FY 14e
76%71% 68%
55%
45% 44% 43%
35% 38%31%
22% 22%
--
10%
20%
30%
40%
50%
60%
70%
80%
REI
T D
U
SREC
O A
B
Mab
ane
e K
K
Emaa
r U
H
Esh
raq
UH
MN
HD
EY
AlA
rkan
AB
Ald
ar U
H
OC
DI E
Y
TMG
H E
Y
UP
P U
H
EGTS
EY
Gross margin FY 14e (%)
68%
58%
47% 44%37%
33%27%
23%16%
12%
(34%)(40%)
(20%)
--
20%
40%
60%
80%
SREC
O A
B
Mab
ane
e K
K
Ald
ar U
H
Esh
raq
UH
UP
P U
H
Emaa
r U
H
AlA
rkan
AB
MN
HD
EY
TMG
H E
Y
OC
DI E
Y
EGTS
EY
Net margin FY 14e (%)
23%
14%
4%
1%
0%
5%
10%
15%
20%
25%
OCDI EY TMGH EY MNHD EY EGTS EY
Debt/Equity
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 20
MENA coverage universe – Key performance indicators
Exhibit 48: MENA coverage universe – Key performance indicators
Egypt UAE KSA
Talaat
Mostafa SODIC
Medinet Nasr
Egyptian Resorts
Emaar Aldar Eshraq Damac Union
Properties Emirates
REIT AlArkan
Saudi Real Estate
Land assets (mn sqm) 27.20 5.20 8.90 3.27 19.00 75.50 0.14 55.00 0.95 -- 33.00 13.27
Land assets (mn USD) 4,227 908 33 86 3,884 6,172 62 513 1,082 -- 3,677 302
Historical developed units 60,000 1,700 50,000 138 37,500 7,000 na 9,895 na NA 15,000 --
Upcoming units 38,400 3,600 2,425 87 16,500 2,313 960 25,000 1,951 NA 250 --
Current GLA ('000 sqm) 125 -- 80 6 594 1,300 -- -- 33 150 500 595
Current hotel keys 875 -- -- 2,900 1,780 2,590 90 -- -- -- -- --
Implied cap rate 5% 9% NA 8.2% 5.5% 5.7% 7.2% NA 8.3% 5.4% 7.0% 9.2%
D/E FY 14e 19% 19% 2% -- 33% 47% 1% 54% 20% 30% 33% --
EPS FY 14e 0.39 1.64 1.04 (0.02) 0.49 0.26 0.18 3.36 0.13 0.10 0.76 1.59
DPS FY 14e 15% -- -- -- 8% 7% 4% 89% -- 5% -- 119%
FY 14-17e Revenue CAGR 18.1% 18.0% 14.1% 100.2% 22.7% 14.9% 35.7% 26.8% 54.0% 22.7% 4.6% 7.9%
FY 14-17e EPS CAGR 30.8% 30.7% 23.3% (317.5%) 42.0% 2.6% 28.4% 29.5% 46.3% 21.3% 14.6% 8.3%
Dividend yield 1.3% -- -- -- 0.8% 1.7% 3.3% 4.4% -- 3.5% -- 2.4%
ROE FY 14e 3.0% 5.0% 24.3% (2.6%) 9.3% 11.2% 14.2% 60.9% 9.2% 7.2% 4.6% 5.7%
RoA FY 14e 1.5% 1.5% 9.4% (1.6%) 4.7% 5.4% 10.5% 12.1% 5.6% 5.4% 3.3% 5.4%
RoIC FY 14e 2.7% 4.5% 23.9% (2.6%) 6.8% 8.3% 14.2% 39.4% 3.5% 5.7% 4.9% 4.8%
NAV FY 14e (USD) 7,075 874 1,073 352 24,023 13,185 1,121 5,418 3,464 464 6,718 1,858
NAV/share (USD) 3.43 9.64 6.93 0.34 4.41 1.67 0.65 25.00 0.98 1.55 6.22 15.48
Current P/NAV 0.46 0.70 0.89 0.61 0.68 0.66 0.55 0.80 0.59 0.93 0.63 0.87
Target P/NAV (As per AC) 0.69 0.85 0.84 0.50 0.86 0.88 0.84 1.00 0.86 1.00 0.60 0.62
Current market price (USD) 1.57 6.70 6.17 0.21 3.01 1.10 0.36 20.00 0.58 1.44 3.84 13.53
Source: Company Data, Arqaam Capital Research
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 21
NAV sensitivity to land values
Exhibit 49: EV sensitivity to TMG land assumptions
Source: Company Data, Arqaam Capital Research
Exhibit 50: EV sensitivity to SODIC land assumptions
Source: Company Data, Arqaam Capital Research
Exhibit 51: EV sensitivity to MNHD land assumptions
Source: Company Data, Arqaam Capital Research
Exhibit 52: EV sensitivity to ERC land assumptions
Source: Company Data, Arqaam Capital Research
Madinaty Commercial land
14.7 14,000 14,500 15,000 15,500 16,000
550 14.1 14.1 14.1 14.1 14.1
600 14.4 14.4 14.4 14.4 14.4
650 14.7 14.7 14.7 14.7 14.7
700 15.0 15.0 15.0 15.0 15.0
750 15.2 15.2 15.2 15.2 15.2
DCF sensitivity- Land prices (EGP/sqft)
Westown Eastown
57 1,700 1,800 1,900 2,000 2,100
1,300 55 56 56 57 57
1,400 56 56 57 57 58
1,500 56 57 57 58 58
1,600 57 57 58 58 59
1,700 57 58 58 59 59
DCF sensitivity- Land price (EGP/sqft)
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 22
Valuation
Exhibit 53: TMG trades at the deepest discount (40%) to our target P/NAV range in MENA
Source: Company Data, Arqaam Capital Research
Exhibit 54: TMG- cheapest developer in our coverage universe on current market price/NAV
Source: Company Data, Arqaam Capital Research
Exhibit 55: P/E
Source: Company Data, Arqaam Capital Research
Exhibit 56: EV/EBITDA
Source: Company Data, Arqaam Capital Research
Exhibit 57: P/B
Source: Company Data, Arqaam Capital Research
Exhibit 58: ROE
Source: Company Data, Arqaam Capital Research
1.13 1.04
1.00 0.91 0.88
0.84 0.84 0.83
0.62 0.61 0.60
0.50
-
0.20
0.40
0.60
0.80
1.00
1.20
Emaa
r
DA
MA
C
REI
T
SOD
IC
Ald
ar
Esh
raq
MN
HD UP
SREC
O
TMG
Ala
rkan
Egyp
tian
R
eso
rts
tP/NAV0.92 0.89 0.89 0.87 0.84
0.70 0.66
0.63 0.61 0.59
0.55
0.46
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
REI
T
MN
HD
Emaa
r
SREC
O
DA
MA
C
SOD
IC
Ald
ar
Ala
rkan
Egyp
tian
R
eso
rts
UP
Esh
raq
TMG
CMP/NAV
43.6
38.6
28.9 28.0 25.6 25.4
17.9 16.3 16.0 15.7
7.9
--
5
10
15
20
25
30
35
40
45
50
OC
DI E
Y
REI
T D
U
SREC
O A
B
MN
HD
EY
TMG
H E
Y
Emaa
r U
H
AlA
rkan
AB
Ald
ar U
H
UP
P U
H
Mab
ane
e K
K
Esh
raq
UH
P/E FY 14e46.2
33.1 32.8
26.4 26.1
18.3 17.2 16.4 14.5 13.2
6.7
--
5
10
15
20
25
30
35
40
45
50
UP
P U
H
Ald
ar U
H
REI
T D
U
TMG
H E
Y
SREC
O A
B
Emaa
r U
H
MN
HD
EY
AlA
rkan
AB
Mab
ane
e K
K
OC
DI E
Y
Esh
raq
UH
Current EV/EBITDA FY 14e
6.86
2.75 2.50 1.95 1.83 1.64 1.61
1.21 1.09 1.08 0.84 0.77
--
1
2
3
4
5
6
7
8
MN
HD
EY
Mab
ane
e K
K
EGTS
EY
Emaa
r U
H
Ald
ar U
H
SREC
O A
B
UP
P U
H
Esh
raq
UH
OC
DI E
Y
REI
T D
U
AlA
rkan
AB
TMG
H E
Y
P/B FY14e
25%
18%15%
11% 10%8%
6% 5%3% 3% 2%
-1%
(5%)
--
5%
10%
15%
20%
25%
30%
MN
HD
EY
Mab
ane
e K
K
Esh
raq
UH
Ald
ar U
H
UP
P U
H
Emaa
r U
H
SREC
O A
B
AlA
rkan
AB
TMG
H E
Y
REI
T D
U
OC
DI E
Y
EGTS
EY
Return on equity FY 14e (%)
September 18 2014
Real Estate
Real Estate © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 23
Exhibit 59: RoA
Source: Company Data, Arqaam Capital Research
Exhibit 60: RoIC
Source: Company Data, Arqaam Capital Research
Exhibit 61: TMG price performance
Source: Bloomberg, Arqaam Capital Research
Exhibit 62: SODIC price performance
Source: Bloomberg, Arqaam Capital Research
Exhibit 63: MNHD price performance
Source: Bloomberg, Arqaam Capital Research
Exhibit 64: ERC price performance
Source: Bloomberg, Arqaam Capital Research
12%11%
8%
6%5% 5%
4%3%
2%2%
1% (1%)
(2%)
--
2%
4%
6%
8%
10%
12%
14%
Esh
raq
UH
Mab
ane
e K
K
MN
HD
EY
UP
P U
H
Ald
ar U
H
SREC
O A
B
Emaa
r U
H
AlA
rkan
AB
REI
T D
U
TMG
H E
Y
OC
DI E
Y
EGTS
EY
Return on assets FY 14e (%)
22%
15%13%
8%6%
5% 5% 4% 3% 2% 2%
(1%)
(5%)
--
5%
10%
15%
20%
25%
MN
HD
EY
Esh
raq
UH
Mab
ane
e K
K
Ald
ar U
H
Emaa
r U
H
AlA
rkan
AB
SREC
O A
B
UP
P U
H
TMG
H E
Y
REI
T D
U
OC
DI E
Y
EGTS
EY
RoIC FY 14e (%)
50
80
110
140
170
200
230
260
Sep
13
Oct
13
No
v 1
3
De
c 1
3
Jan
14
Feb
14
Mar
14
Ap
r 1
4
May
14
Jun
14
Jul 1
4
Au
g 1
4
Sep
14
TMGH EY Equity HERMES INDEX
50
75
100
125
150
175
200
225
250Se
p 1
3
Oct
13
No
v 1
3
De
c 1
3
Jan
14
Feb
14
Mar
14
Ap
r 1
4
May
14
Jun
14
Jul 1
4
Au
g 1
4
Sep
14
OCDI EY Equity HERMES INDEX
50
80
110
140
170
200
230
260
Sep
13
Oct
13
No
v 1
3
De
c 1
3
Jan
14
Feb
14
Mar
14
Ap
r 1
4
May
14
Jun
14
Jul 1
4
Au
g 1
4
Sep
14
MNHD EY Equity HERMES INDEX
50
80
110
140
170
200
230
260
Sep
13
Oct
13
No
v 1
3
De
c 1
3
Jan
14
Feb
14
Mar
14
Ap
r 1
4
May
14
Jun
14
Jul 1
4
Au
g 1
4
Sep
14
EGTS EY Equity HERMES INDEX
I n i t i a t i o n R e p o r t
S e p t e m b e r 1 8 2 0 1 4
Mohammad Kamal mohammad.kamal@arqaamcapital.com +9714 507 1743
Mohamad Haidar, CFA Arqaam Capital Research Offshore s.a.l
Egypt – Real Estate Talaat Moustafa Group: Cheapest in MENA
BUY
Real Estate / Egypt Bloomberg code TMGH EY
Market index EGX
Price target (local) 14.7
Upside (%) 32.6
Market data 16/09/2014
Last closing price 11.1
52 Week range 4.9-11.4
Market cap (EGPmn) 22,844
Market cap (USDmn) 3,195
Average daily traded value (EGPmn) 33.4
Average daily traded value (USDmn) 4.7
Year-end (local mn) 2013 2014e 2015e 2016e
Revenues 4,858.3 5,089.7 5,763.5 6,891.9
EBITDA 918.6 1,258.7 1,295.2 1,598.3
EPS 0.3 0.4 0.4 0.5
P/E (target price) 51.8 37.8 37.3 30.0
Net debt 3,075.8 4,529.9 4,216.8 3,848.7
BVPS 12.6 12.8 13.0 13.4
P/B (target price) 0.9 0.9 0.8 0.8
EV/EBITDA (target price) 36.2 26.4 25.7 20.8
Div. yield (%) - 1.3 1.3 1.5
FCF margin (%) 4.3 (20.6) 12.8 11.8
Net debt/EBITDA (x) 3.3 3.6 3.3 2.4
Net debt/Capital (%) 10.4 14.4 13.2 12.1
Interest cover (x) 6.1 7.4 6.7 9.0
RoAA (%) 1.1 1.5 1.5 1.9
RoAE (%) 2.3 3.1 3.0 3.7
RoIC (%) 2.1 2.7 2.7 3.3
A deep value play on the prime property space in Egypt: TMG is
the owner of the largest residential pipeline in Egypt, and
holder of significant, quality land assets
Extremely attractive entry point at 0.46x CMP/NAV. Initiate
with Buy and EGP 14.7 FVE
Talaat Moustafa Group (TMG) is a leading property developer in Egypt, and
the owner of the largest gated community in its vicinity (Madinty). The
business controls land assets of 50mn sqm, of which 8.5mn sqm is
developed and on which 9.9mn sqm of BUA is pre-sold. We initiate with a
Buy rating and EGP 14.7 FVE as TMG reflects the cheapest valuation profile
under coverage at 0.46 CMP/NAV, vs. a regional sector that currently trades
at 0.70x.
TMG’s development pipeline is the largest among peers, by far: With over
60k units handed over or under contract, TMG holds the strongest track
record of handovers in Cairo. The business has scheduled handovers for a
further c.17k residential units in FY 14-17e, leaving 21k of units of inventory
available for future sale, at strengthening prices. In addition to property
sales, TMG manages a hospitality portfolio of 875 operating rooms in 4
hotels. TMG is due to add 1,750 new keys by FY 20e, through 5 new hotels
and resorts, and provides community management services to a pool of
retail, commercial, and leisure assets across its developments. The business
still holds c.27mn sqm of undeveloped land (88% in Madinty, 12% in Marsa
Alam) allocated for future project expansions, inclusive of c.6mn sqm of
commercial land currently available for sale.
We model for 12% 3-yr revenue CAGR in FY 14-16e: We expect property
sales to continue to drive the bulk of FY 14-18e revenues (85%+ of total) on
the handover of 24k units (17k contracted, 7k new unit sales) against a total
sellable value of EGP 29bn, and model for recurring income expansion of
15% per annum over the coming 5 years.
Valuation is attractive in regional context, despite steep earnings
multiples: Despite the stock’s strong price performance (+25% 3M return),
we believe the market has not fully acknowledged the value inherent in
TMG’s sizable property portfolio, nor land assets in Madinty and Al Rehab at
current P/NAV. Our price target implies 37.8x/37.3x FY 14/15e EPS and
1.11x/1.09x FY 14/15e BV, a 20% premium to local peers. With over 20mn
sqm of idle land available, our NAV valuation captures the assets at a 70%+
discount to prevailing market prices. This still results in a CMP/NAV ratio of
0.46x vs. a sector average of 0.7x, which in our view is extremely attractive.
Risk: Macroeconomics, FX losses, TDA dispute affecting 10% of land assets.
EGP 14.7
© Copyright 2014, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
75
93
111
129
147
165
Jan-14 Apr-14 Jul-14
TMGH EY EGX
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 25
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
20%
40%
2013 2014e 2015e 2016e 2017e
EBITDA Margin Net Margin
-10%
0%
10%
20%
30%
2013 2014e 2015e 2016e 2017e
Revenues Assets
0%
10%
20%
0.0
2.0
4.0
2013 2014e 2015e 2016e 2017e
Net Debt/Capital Net Debt/EBITDA
0
20
40
60
2013 2014e 2015e 2016e 2017e
P/E P/E Sector
Talaat Moustafa Group
Year-end 2012 2013 2014e 2015e 2016e 2017e
Financial summary
Reported EPS 0.26 0.28 0.39 0.39 0.49 0.87
Diluted EPS 0.26 0.28 0.39 0.39 0.49 0.87
DPS - - 0.15 0.15 0.16 0.17
BVPS 12.30 12.57 12.81 13.04 13.37 14.07
Weighted average shares 2,063.56 2,063.56 2,063.56 2,063.56 2,063.56 2,063.56
Average market cap 10,317.81 16,508.50 22,699.19 22,699.19 22,699.19 22,699.19
Year-end 2012 2013 2014e 2015e 2016e 2017e
Valuation metrics
P/E (x) (current price) 41.6 38.8 28.3 27.4 22.5 12.7
P/E (x) (target price) 55.5 51.8 37.8 37.3 30.0 16.9
P/BV (x) (target price) 1.2 1.2 1.1 1.1 1.1 1.0
EV/EBITDA (x) 37.1 36.2 26.4 25.7 20.8 13.5
EV/FCF (x) (112.6) 160.4 (31.7) 44.9 40.9 9.4
EV/Invested capital (x) 1.2 1.2 1.1 1.1 1.1 1.1
Dividend yield (%) - - 1.3 1.3 1.5 1.5
Year-end 2012 2013 2014e 2015e 2016e 2017e
Growth (%)
Revenues (9.1) 4.8 4.8 13.2 19.6 21.8
EBITDA 4.0 2.7 37.0 2.9 23.4 53.9
EBIT 6.7 4.1 42.8 3.2 25.9 58.4
Net income (5.5) 7.2 37.1 1.2 24.4 77.7
Year-end 2012 2013 2014e 2015e 2016e 2017e
Margins (%)
EBITDA 19.3 18.9 24.7 22.5 23.2 29.3
EBIT 16.5 16.4 22.3 20.3 21.4 27.8
Net 11.8 12.0 15.8 14.1 14.6 21.4
Year-end 2012 2013 2014e 2015e 2016e 2017e
Returns (%)
RoAA 1.0 1.1 1.5 1.5 1.9 3.4
RoAE 2.2 2.3 3.1 3.0 3.7 6.3
RoIC 2.0 2.1 2.7 2.7 3.3 5.8
FCF margin (6.4) 4.3 (20.6) 12.8 11.8 42.2
Year-end 2012 2013 2014e 2015e 2016e 2017e
Gearing (%)
Net debt/Capital 11.4 10.4 14.4 13.2 12.1 2.3
Net debt/Equity 13.0 11.9 17.1 15.7 13.9 2.6
Interest cover (x) 4.8 6.1 7.4 6.7 9.0 17.6
Net debt/EBITDA (x) 3.7 3.3 3.6 3.3 2.4 0.3
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 26
Abacus Arqaam Capital Fundamental Data
Company profile
Talaat Moustafa Group (TMG) is a leading
property developer in Egypt and the owner of
the largest all-inclusive city complex
(Madinty) in the region. The company
controls a land bank of 50mn sqm of which
8.5mn sqm is developed and 9.9mn sqm of
BUA is sold. TMG transferred ownership of its
first development in 1990 upon the
completion of Al Rawda Al Khadra, after
which it launched sales in Virginia Beach
Village, May Fair, Al Rabwa I and Al Rehab I
complexes consecutively. In FY 06, TMG
released its flagship development Madinty
which occupies 67% of the company’s total
land bank and is planned to host 600k
residents over 6 phases of construction.
Ownership and management
ShareholdersTMG for Touristic and Real Estate Investment 47.1%
Public 45.3%
Other 7.6%
Source: Zawya
Board of DirectorsMr Tarek Talaat Moustafa Chairman
Mr Hani Talaat Moustafa Director
Mr Akbar Mohammed Ali Mw ala Director
Mr Ali Abdullah Ali Director
Mr Yehia Mohammed Aw ad Binladin Director
Dr Jamal Salaheddine Aw ad Director
Mr Houssameddine Mohammed Abdullah Hilal Director
Mr Mohammed Hesham Al Sharif Director
Source: Zawya
Talaat Moustafa Group
Year-end 2012 2013 2014e 2015e 2016e 2017e
Income statement (EGP mn)
Sales revenue 4,636.3 4,858.3 5,089.7 5,763.5 6,891.9 8,392.1
Gross profit 1,227.8 1,284.6 1,595.9 1,677.1 2,054.9 3,016.2
SG&A (333.2) (366.0) (337.2) (381.9) (456.6) (556.1)
EBITDA 894.7 918.6 1,258.7 1,295.2 1,598.3 2,460.2
Depreciation & Amortisation 131.1 123.8 123.8 124.0 124.0 124.5
EBIT 763.6 794.8 1,134.8 1,171.2 1,474.2 2,335.7
Net interest income(expense) (158.0) (130.9) (153.8) (175.3) (163.4) (132.7)
Associates/affiliates - - - - - -
Exceptionals/extraordinaries - - - - - -
Other pre-tax income/(expense) 85.8 51.7 137.3 163.7 131.1 174.3
Profit before tax 691.4 715.6 1,118.4 1,159.6 1,441.9 2,377.3
Income tax expense (181.2) (175.6) (335.5) (347.9) (432.6) (583.4)
Minorities 35.5 45.2 19.3 - - -
Other post-tax income/(expense) - - - - - -
Net profit 545.7 585.2 802.2 811.7 1,009.4 1,793.9
Arqaam adjustments (including dilution) - - - - - -
Arqaam Net profit 545.7 585.2 802.2 811.7 1,009.4 1,793.9
Year-end 2012 2013 2014e 2015e 2016e 2017e
Balance sheet (EGP mn)
Cash and equivalents 331.7 680.6 396.5 798.0 402.8 2,498.9
Receivables 15,425.6 16,286.1 14,671.5 12,632.8 11,960.4 12,391.8
Tangible fixed assets 4,122.4 4,028.0 4,031.4 4,034.2 4,048.0 4,749.4
Development/Investment properties 18,487.5 17,690.2 18,998.5 19,575.3 19,340.7 18,090.7
Other assets including goodwill 16,596.9 16,611.2 16,611.2 16,611.2 16,611.2 16,611.2
Total assets 54,964.2 55,296.1 54,709.1 53,651.5 52,363.2 54,342.1
Payables 4,731.3 5,502.0 5,162.3 5,260.9 5,702.6 6,189.2
Interest bearing debt 3,634.9 3,756.4 4,926.4 4,974.4 4,251.6 3,240.5
Other liabilities 20,250.6 19,141.8 17,221.6 15,504.9 13,858.8 14,919.0
Total liabilities 28,616.9 28,400.2 27,310.3 25,740.1 23,813.0 24,348.7
Shareholders equity 25,389.4 25,938.0 26,440.9 26,953.4 27,592.3 29,035.4
Minorities 957.9 957.9 957.9 957.9 957.9 957.9
Total liabilities & shareholders equity 54,964.2 55,296.1 54,709.1 53,651.5 52,363.2 54,342.1
Year-end 2012 2013 2014e 2015e 2016e 2017e
Cash flow (EGP mn)
Cashflow from operations (97.2) 354.0 (810.3) 976.4 1,021.0 3,696.1
Net capex (197.8) (146.8) (239.2) (196.8) (207.8) (153.9)
Free cash flow (295.0) 207.2 (1,049.5) 779.6 813.2 3,542.2
Equity raised/(bought back) - - - - - -
Dividends paid - - (299.2) (299.2) (330.2) (350.8)
Net inc/(dec) in borrowings 385.9 190.0 1,169.9 48.0 (722.8) (1,011.0)
Other investing/financing cash flows - - - - - -
Net cash flow 85.7 396.4 (284.1) 401.5 (354.8) 2,096.1
Change in working capital (576.2) (478.4) (1,841.7) (86.2) (227.4) 1,693.4
Mohammad Kamal Mohamad Haidar, CFA mohammad.kamal@arqaamcapital.com Arqaam Capital Research Offshore s.a.l
+9714 507 1743
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 27
We initiate coverage of TMG with a Buy rating and EGP 14.7 FVE
A great play on Egypt property: 17k contracted units to bring in EGP 22bn in
revenues in FY 14-17e, leaving 21k units in inventory
Market price largely disregards value in land assets at 0.85x/0.84x FY 14/15e BVPS,
0.46x CMP/NAV. Initiate with Buy and EGP 14.7 FVE
Talaat Moustafa Group (TMG) is a leading property developer in Egypt, and the owner of the
largest gated community in its region (Madinty). The company controls an aggregate land bank
of 50mn sqm, of which 8.5mn sqm is developed and on which 9.9mn sqm of BUA is sold. TMG
transferred ownership of its first development in 1990 upon the completion of Al Rawda Al
Khadra, after which it launched sales in Virginia Beach Village, May Fair, Al Rabwa I and Al
Rehab I, consecutively. In 2006, TMG released its flagship development- Madinty, which
occupies 67% of the business’s overall land bank. Madinty is intended to host 600k residents
over 6 phases of construction.
TMG’s development pipeline is the largest among peers, by far: With over 60k units handed
over or under contract, TMG holds the strongest track record of handovers in Cairo among
peers. TMG is scheduled to hand over a further c.17k residential keys in the Madinty I and II, Al
Rabwa I and II and Al Rehab II developments in FY 14-17e, leaving a pipeline of 21k of
inventory in its development portfolio, held for future growth. In terms of recurring income
assets, TMG manages a hospitality portfolio of 875 operating rooms in 4 hotels. TMG is due to
add 1,750 new keys by FY 20e, through 5 new hotels and resorts, and provides community
management services to a pool of retail, commercial, and leisure assets across its
developments. The business still holds c.27mn sqm of undeveloped land (88% in Madinaty,
12% in Marsa Alam) allocated for future project expansions, inclusive of c.6mn sqm of
commercial land currently available for sale.
We model for 12% 3-yr revenue CAGR in FY 14-16e: We expect property sales to continue to
drive the bulk of FY 14-18e revenues (85%+ of total) on the handover of 24k units (17k
contracted, 7k new unit sales), against a total sales value of EGP 29bn, and model for recurring
income expansion of 15% per annum over the coming 5 years.
Current P/NAV discount is attractive: Despite the stock’s strong price performance (+25% 3M
return), we believe the market has not yet fairly acknowledged the value inherent in TMG’s
sizable property portfolio, nor value behind land assets in Madinty and Al Rehab, in CMP/NAV.
Our FVE implies 37.8x/37.3x FY 14/15e EPS and 1.11x/1.09x FY 14/15e BV, a 20% premium to
local peers. Our NAV exercise discounts land values on 20mn sqm of idle prime land by 70%,
and still suggests that CMP/NAV stands at 0.46x, vs. a sector average of 0.7x. This in our view
constitutes an extremely attractive entry point. Rich near term earnings multiples, in our view,
are warranted given massive EPS growth (>25% FY 16e, >75% FY 17e) in the pipeline.
Risk: Disputes with TDA affecting 10% of land assets. Politics and macroeconomics in Egypt
could result in project delays and a slowdown in sales, limiting TMG’s ability to cover its cash
liabilities on time. We also remain cautious of further devaluation in the EGP, which could
impact margins on residential sales.
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 28
Valuation: ultra cheap on p/NAV- earnings multiples irrelevant in
context of 35% EPS CAGR in FY 14e-17e
TMG exhibits the largest discount to NAV among regional peers under coverage at
0.46x CMP/NAV (vs. 0.70x sector). Initiate with Buy and EGP 14.7 FVE
Our FVE implies a tP/NAV of 0.61x: We value TMG at EGP 14.7/share using an SOTP model.
We apply a 10-yr DCF treatment to TMG’s sales pipeline (14.6% WACC) and value its recurring
income portfolio on a 10-yr DCF basis at a 10% cap rate, while we value residual land at a
blended market price of EGP 820/sqm. Our FVE implies 37.8x/37.3x FY 14/15e EPS and
1.11x/1.09x FY 14/15e BV, at a 20% premium to local peers. We find a premium warranted
given the strong market positioning of TMG, and the stronger EPS growth potential present via
its development portfolios, compared to local rivals. With more than 50% of land assets
currently idle and carried well-below market value, TMG offers an extremely cheap entry level
at 0.46x CMP/NAV.
Exhibit 1: SoTP summary
SOTP valuation Fair value (EGP mn) Per share (EGP) % of EV
Property portfolio 8,516 4.1 25.6%
Residual land 22,326 10.8 67.2%
Investment portfolio 2,384 1.2 7.2%
Enterprise value 33,225 16.1 100.0%
Less: Net debt (3,076) (1.5)
Less: NCI (912) (0.4)
Add: JV and other assets 1,057 0.5
Equity value 30,294 14.7
NOSH 2,064
Equity value per share (EGP) 14.7
Source: Company Data, Arqaam Capital Research
Our DCF-based SOTP valuation is composed of:
NPV- Development properties: We value the development portfolio at EGP 4.1/share
(26% of EV estimate) on a 10-yr DCF basis using a WACC of 14.6%. Fair value is
derived from total unit sales in Madinty (EGP 2.88/share), Al Rehab (EGP 0.77/share),
and other developments (EGP 0.45/share), inclusive of unsold units in the residential
portfolio, which we assume will experience 100% uptake in the long run (7-10 years).
NPV- Investment properties: We apply a 10-yr DCF exercise on income from rental
assets (hospitality and services income) using a cap rate of 10% (14.0% WACC, 4.0%
TGR), which results in a total fair value estimate on the recurring income portfolio of
EGP 1.2/share (7% of our total EV estimate).
Fair value of land: We value TMG’s residual land bank at EGP 10.8/share, using a 73%
discount to current market prices (blended at EGP 820/sqm), on a pre-tax basis. Total
raw land currently stands at 27mn sqm.
Gross debt: Overall borrowings in H1 14A stand at EGP 3.75bn.
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 29
Exhibit 2: We value TMG at EGP 14.7/share, at an implied 0.60x tP/NAV
EGP mn except where stated BV, FY
13A AC
valuation Methodology
Property assets 12,997 18,597 27k contracted/AFS units at EGP 1.2mn/unit
Land assets 4,679 22,326 Market-to-market, after-tax EGP 820/sqm
blended
Rental assets 2,998 2,384 DCF, cap rate 10%
PPE 1,030 1,030 At BV
Receivables 16,286 16,286 At BV
Goodwill 15,394 15,394 At BV
Cash 681 681 At BV
Other assets 1,232 1,232 At BV
Total assets 55,296 77,928
Debt 3,756 3,756 At BV
Payables and advances 22,291 22,291 At BV
Other liabilities 2,352 2,352 At BV
Total liabilites 28,400 28,400
Equity (implied) 26,896 49,528
NOSH 2,064 2,064
BVPS/NAVPS (AED) 13.0 24.0
SoTP-based Fair Value Estimates (EGP)
14.7
Discount to FY 14e NAV
(39%)
CMP (EGP)
11.0
Discount to target NAV
(54%)
Source: Company Data, Arqaam Capital Research
Exhibit 3: SoTP breakdown: We see 67% of EV from land assets
Source: Company Data, Arqaam Capital Research
2.9 3.6 3.7 4.1
14.9
16.1 16.4
14.7
14.7
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
NP
V-
Mad
inat
y
NP
V-
Al
Re
hab
NP
V-
Al
Rab
wa
NP
V-
Oth
er
asse
ts
NP
V-
Lan
d
NP
V-
Re
nta
l as
sets C
ash
De
bt
Fair
val
ue
p
er
shar
e
Valuation waterfall (EGP)
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 30
Exhibit 4: Valuation summary
Source: Company Data, Arqaam Capital Research
Exhibit 5: DCF sensitivity to property sales WACC
Source: Company Data, Arqaam Capital Research
Exhibit 6: DCF sensitivity to recurring income WACC
Source: Company Data, Arqaam Capital Research
Risk: Politics and macroeconomics in Egypt could result in project delays and a slowdown in
sales, limiting TMG’s ability to cover its cash liabilities on time. We also remain cautious of
further devaluation in the EGP, which could impact margins on residential sales.
TMG
DCF summary
EGPmn unless otherwise stated FY 14e FY 15e FY 16e FY 17e FY 18e
EBIT (1-τ) 881 907 1,119 1,856 1,937
Depreciation & Amortization 124 124 124 124 146
EBITDA 1,005 1,031 1,243 1,981 2,083
Working Capital Changes (1,842) (86) (227) 1,693 5,291
Operating Cash Flow (837) 944 1,015 3,674 7,374
Purchase of PPE (239) (197) (208) (154) (119)
Free Cash Flow to Firm (1,076) 748 808 3,520 7,255
Discount Factor 0.87 0.76 0.66 0.58 0.51
PV of Visible FCFF (939) 569 537 2,042 3,671
Terminal Value 5,097
Equity Valuation WACC parameters
PV of Visible FCFF 9,694 Rf 12.0%
PV of Terminal Value 1,206 EMRP 5.0%
Fair value of land 22,326 Adjusted Beta 1.20
Enterprise Value 33,225 Cost of Equity 18.0%
Cash & Cash Equivalents 1,737 Marginal tax rate 25.0%
Less: Net (Debt) Funds (4,668) Cost of Debt 11.3%
D/C (market) 50.0%
Equity Value 30,294 WACC 14.6%
NOSH 2,064 WACC IP 14.0%
Equity Value per Share 14.7 Perpetual grow th 4.0%
Implied multiples
EV/EBITDA 26.4 25.7 20.8 13.5 12.9
P/E 37.8 37.3 30.0 16.9 16.0
P/B 1.11 1.09 1.06 1.01 0.96
Rf Beta
14.7 1.4 1.3 1.2 1.1 1.0
13.0% 14.5 14.5 14.6 14.6 14.7
12.5% 14.5 14.6 14.6 14.7 14.7
12.0% 14.6 14.6 14.7 14.7 14.8
11.5% 14.6 14.7 14.7 14.8 14.8
11.0% 14.7 14.7 14.8 14.8 14.9
DCF sensitivity- Cost components
WACC TGR
14.7 3.00% 3.50% 4.00% 4.50% 5.00%
16.0% 14.4 14.4 14.4 14.5 14.5
15.0% 14.5 14.5 14.5 14.6 14.6
14.0% 14.6 14.6 14.7 14.7 14.8
13.0% 14.8 14.8 14.8 14.9 14.9
12.0% 15.0 15.0 15.1 15.1 15.2
DCF sensitivity- recurring income WACC
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 31
Appendix 1: Portfolio details
We expect 24k unit handovers in FY 14-18e, 73% of which are pre-sold
Further leverage beyond 25% D/E could pressure debt service
Property portfolio (26% of EV)
Sales portfolio: TMG is due to deliver c.17k contracted units in the coming 4 years through 3
main flagship developments, Madinty (51k units, 36% pre-sold), Al Rehab (14.5k units, 78%
pre-sold) and Al Rabwa (1k units, 95% pre-sold), in addition to an expected 7k units from new
sales over the same period. Its combined sales backlog (contracted and new) aggregates to
EGP 28.7bn, by our estimates, of which we expect 38% to be recognised in FY 15-16e upon the
delivery of units in Madinty and Al Rehab. TMG sells its residential product at an average price
of EGP 6k-8k/sqm for apartments and EGP 11k-14k/sqm for villas, and aims to raise its selling
prices by 6%/annum going forward. We expect handovers to constitute 85%+ of total revenues
in FY 14-18e and to continue to drive future sales (beyond FY 17e) via 21k unsold units, which
TMG can sell at strengthening prices.
Exhibit 7: 60% of total handovers are ‘Made in Madinty’
Source: Company Data, Arqaam Capital Research
Exhibit 8: 19k units to be released in the coming 4 years
Source: Company Data, Arqaam Capital Research
76% of TMG’s EV rests in Madinty: Over 60% of the currently contracted sales at TMG are
signed in Madinty (51k units, 35% sold, completion FY 17e), which along with developed land
held for sale (6mn sqm) constitute 54% of our total EV estimate, while the remaining 4 phases
of the project (c.64k planned units) are assumed to remain undeveloped in our base case
scenario, and account for 22% of our EV estimate as part of our residual land valuation.
Exhibit 9: c.75% of our total EV estimate emanates from Madinty
SOTP valuation Fair value (EGP mn) Per share (EGP) % of EV
Madinaty 25,276 12.25 76.1%
Al Rehab 4,579 2.22 13.8%
Al Rabwa 87 0.04 0.3%
Other Properties 900 0.44 2.7%
Marsa Alam -- -- --%
Hospitality and other 2,384 1.16 7.2%
Enterprise value 33,225 16.10 100.0%
Source: Company Data, Arqaam Capital Research
10,884
7,428
259
10,262
7,967
545
--
2,000
4,000
6,000
8,000
10,000
12,000
Madinaty Al Rehab Al Rabwa
FY 14-17e handovers
Units Value (EGP mn)
3,341
4,299
5,271 5,660
--
1,000
2,000
3,000
4,000
5,000
6,000
FY 14e FY 15e FY 16e FY 17e
Unit handovers
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 32
Rental portfolio (7% of EV)
Income from service revenues to grow 2x in 3 years: TMG administers community services
across its portfolio of retail, commercial and leisure facilities. Service revenues have grown at
a 3-yr CAGR (FY 10-13A) of 35%, and are further projected to grow at 3-yr CAGR (FY 14-17e) of
20%, on growth in retail capacity and the expansion of school and healthcare facilities, driving
higher footfall activity in TMG’s complexes.
Hotel assets, on the contrary, are struggling: TMG operates 875 keys in 4 operating hotels and
plans to add 1.7k keys via 5 new facilities by FY 18e. We solely account for the addition of 96
keys (Four Seasons Sharm Extension, completion FY 17e) in our base case model, given the
continued weakness in the tourism sector in Egypt. Weak tourist numbers have resulted in
delays in the launch of construction works within the sector, in general. The hotel industry was
significantly impacted in FY 11A by the political unrest in the region, and within Egypt (-43% y/y
in revenues), but partially recovered in FY 12A (+20% y/y) on a slight improvement in tourist
numbers. Occupancy rates consequently rose from 35% in FY 11A to 43% in FY 12A). We model
for further recovery in occupancy rates in FY 14e (to an average of 46% vs. 40% in FY 13A), and
expect continued gradual improvement in FY 15-17e (+3%/annum). We however hold our
hotel ADR assumptions fixed (at an average EGP 1,420/night) in the next 2 years. Total
recurring income constitutes c.15% of FY 14-15e revenues and account for 7% of our overall EV
estimate.
Exhibit 10: Hotels/hospitality income drives c.3% of our EV estimate of TMG
Hotel Keys Status Completion Occupancy % FY 14e ADR (EGP) Revenues (EGP mn) % of EV Scenario applied
Four Seasons Sharm 255 Operational -- 50% 1,848 135 0.96% Base case
Nile Plaza 366 Operational -- 40% 1,379 147 1.21% Base case
San Stefano 118 Operational -- 60% 1,610 70 0.57% Base case
Kepminski Nile 191 Operational -- 40% 840 47 0.39% Base case
Four Seasons Sharm Extension 96 WIP FY 17e --% -- -- 0.37% Base case
Four Seasons Luxor 201 Planned FY 17e --% -- -- --% Bull case
Marsa Alam 1,000 Planned FY 18e --% -- -- --% Bull case
TMG Building Hotel 200 Planned FY 19e --% -- -- --% Bull case
Four Seasons Madinty 240 Planned FY 19e --% -- -- --% Bull case
Total 2,667
21% 631 399 3.49%
Source: Company Data, Arqaam Capital Research
Exhibit 11: Recurring income evenly split in FY 14e
Source: Company Data, Arqaam Capital Research
Exhibit 12: Property sales are expected to drive P&L in the coming 5 years (85%+ of total revenues)
Source: Company Data, Arqaam Capital Research
421 373 399 405
215 311
389 467
--%
5%
10%
15%
20%
25%
30%
35%
--
100
200
300
400
500
600
700
800
900
1,000
FY 12A FY 13A FY 14e FY 15e
Recurring income (EGP mn)
Hospitality income Services revenues Recurring income growth (RHS)
86.3% 85.9% 84.5% 84.9%
9.1% 7.7%
7.8% 7.0%
4.6% 6.4% 7.6% 8.1%
75%
80%
85%
90%
95%
100%
FY 12A FY 13A FY 14e FY 15e
Revenue breakdown by segment
Property sales Hotel income Other income
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 33
Land portfolio (67% of EV)
Available land remains largely undeveloped. We estimate 10% of which is at risk of
impairment due to ongoing disputes with the Tousirsm Development Authority: TMG owns
and manages 47mn sqm of land, of which c.50% is utilised and on which 9.6mn sqm of BUA is
sold (+60k units). Madinty (33.6mn sqm) is TMG’s largest development, planned to host 600k
residents in +115k residential units within 6 gated communities. Within Madinty, only phases 1
and 2 are currently under development. Remaining undeveloped land in Madinaty (16.8mn
sqm) constitutes 62% of TMG’s total residual land assets, followed by (i) developed land held
for sale in Madinty 1+2 (6mn sqm), (ii) Marsa Alam Resort (750 hospitality keys, 2.25k
residential units, 3.2mn sqm) and (iii) remaining land in Al Rehab (1 mn sqm).
The government’s share of Madinty land likely to remain at 7% of BUA: TMG previously
acquired land at Madinty (33.6mn sqm) from the government (NUCA) through a direct order
rather than a formal auction/bidding process. As a result, TMG has agreed to deliver 7% of the
total BUA within each phase (via finished units/apartments) upon completion, back to the
government. The total value of delivered BUA (7% of total, 2.7mn sqm) should not equate to
less than EGP 9.9bn (as per the November 2010 agreement with NUCA), from the 6 phases of
Madinty. TMG has so far delivered a total of EGP 6.5bn in units (1mn sqm in total) to the
government, from constructed land in phase 1 of Madinty. This leaves 1.7mn sqm of BUA (via
complete units valued at EGP 11bn) to be delivered through future handovers in phases 3-6.
We value land at an implied c.70% discount to market: We value residual land at a blended
EGP 820/sqm, accounting for (i) a 10% discount on Madinty (EGP 600/sqm), (ii) an 80%
discount on ‘regional services’ land in Madinty 1+2 and Al Rehab, priced at EGP 10k/sqm in the
market, and (iii) a full discount assigned to Marsa Alam land (3.2mn sqm), given unresolved
disputes with the government. This exercise combines into an overall 73% pre-tax discount to
mark-to-market value, which results in a fair value estimate of land of EGP 22.3bn (67% of our
total EV estimate).
Exhibit 13: We value residual land in TMG at EGP 22.3bn, constituting 67% of our EV estimate
Land bank Area sqm Market price (EGP/sqm) Market value (EGP mn) (Discount)/premium % Fair value (EGP mn)
Madinaty 3 6,986,273 650 4,541 (10%) 4,087
Madinaty 4 5,125,680 650 3,332 (10%) 2,999
Madinaty 5 2,525,040 650 1,641 (10%) 1,477
Madinaty 6 2,152,080 650 1,399 (10%) 1,259
Al Rehab 924,225 1,400 1,294 (10%) 1,165
Marsa Alam 3,256,285 1,400 4,559 (100%) --
Land for Mega development 6,200,000 15,000 93,000 (80%) 18,600
Total 27,169,583
109,766 (73%) 29,586
Discount on land (73%)
Tax rate 25%
Fair value of land- pre dispute resolution (EGP mn) 22,326
% of EV 67%
Source: Company Data, Arqaam Capital Research
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 34
Exhibit 14: We value raw land in Madinaty at EGP 3.59/share (22% of EV)
SOTP valuation Fair value (EGP mn) Per share (EGP) % of EV
Madinaty Phase 1+2 17,864 8.66 53.8%
Madinaty Phase 3 3,084 1.49 9.3%
Madinaty Phase 4 2,263 1.10 6.8%
Madinaty Phase 5 1,115 0.54 3.4%
Madinaty Phase 6 950 0.46 2.9%
Al Rehab 4,579 2.22 13.8%
Al Rabwa 87 0.04 0.3%
Other Properties 900 0.44 2.7%
Marsa Alam -- -- --%
Hospitality and other 2,384 1.16 7.2%
Enterprise value 33,225 16.10 100.0%
Source: Company Data, Arqaam Capital Research
P&L
We see margins strengthening in the next 2 years: Gross margins on villa sales hover between
35%-40% while apartment sales yield a gross margin of 22%, on average. Villas are expected to
constitute c.15% and 10% of FY 14e and FY 15e handovers, and to drive a significant margin
improvement in FY 14e and FY 15e as compared to FY 13A (+300-500bps). Margins in FY 14e
are also supported by the sale of a land plot in Saudi Arabia (SAR 500mn, 33% NPM). TMG’s
hotel assets, on the other hand, have been operating at a gross margin of 26% in FY 12A and
20% in FY 13A. We expect 20-25% in hotel GPM in FY 14-15e, as margins are capped by low
occupancy rates in the segment (45%), as a result of an overall weakening in the tourism sector
in Egypt. We expect gross margins on service revenues to gradually rise in the coming years on
an expanding resident population in TMG’s complexes, and to reach 30% in FY 16e (15% in FY
13A). Blended gross margins are likely to arrive at 31.4% and 29.1% in FY 14e and FY 15e,
whereas net margins are projected to come in at 15.7% and 13.4% over the period.
Exhibit 15: Property sales dominate the margin mix. Service revenues hold strongest margin growth potential
Source: Company Data, Arqaam Capital Research
Exhibit 16: Blended gross margins across segments to gradually converge to 30% in 3 years
Source: Company Data, Arqaam Capital Research
26.5% 26.4%
31.4% 29.1%
16.5% 16.4%
22.3% 20.3%
11.8% 12.0%
15.8% 13.4%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
FY 12A FY 13A FY 14e FY 15e
Gross margin EBIT margin Net margin
27.8% 29.8%
20.3%
25.0%
15.4%
25.0%
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
FY 13A FY 15e FY 13A FY 15e FY 13A FY 15e
Property sales Hospitality Services revenues
Gross margin by business type
September 18 2014
Talaat Moustafa Group © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 35
Balance sheet
We expect TMG to internally fund its development CAPEX via customer advances and
installments on sold property: We calculate c.EGP 14bn in remaining CAPEX on existing (but
incomplete) flagship developments (Madinty 1+2, Al Rehab 1+2 and Al Rabwa) over the coming
4 years, which in our view will be largely funded through internal cash flow generation from
property/land sales and rentals. TMG is also due to put an additional EGP 1.5bn towards
expanding its hotel keys (Sharm El Sheikh Four Seasons, 96 keys) and ongoing maintenance.
Leverage stands at 14% D/E in FY 13A, with total outstanding borrowings of c.EGP 3.75bn.
We believe that TMG will require minor additional capital (c.EGP 1bn in debt) to fully cover its
CAPEX commitments in the coming 4 years, after which we expect the business to repay all of
its dues by FY 17e, as cash accumulates through collections on properties handed over.
Exhibit 17: Cash flows
Source: Company Data, Arqaam Capital Research
Exhibit 18: Balance sheet levered at 14% D/E
Source: Company Data, Arqaam Capital Research
(20.0%)
(10.0%)
--%
10.0%
20.0%
30.0%
40.0%
50.0%
(6,000)
(4,000)
(2,000)
--
2,000
4,000
6,000
8,000
FY 14e FY 15e FY 16e FY 16e
EGP mn
CFO CAPEX CFO/sales (RHS)
--%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
--
1,000
2,000
3,000
4,000
5,000
6,000
FY 12A FY 13A FY 14e FY 15e FY 16e
Total borrowings (EGP mn)
Total borrowings D/E (RHS)
I n i t i a t i o n R e p o r t
S e p t e m b e r 1 8 2 0 1 4
Mohammad Kamal mohammad.kamal@arqaamcapital.com +9714 507 1743
Mohamad Haidar, CFA Arqaam Capital Research Offshore s.a.l
Egypt – Real Estate Six of October: Hugely cash generative
BUY
Real Estate / Egypt Bloomberg code OCDI EY
Market index EGX
Price target (local) 57
Upside (%) 21.3
Market data 16/09/2014
Last closing price 47.2
52 Week range 21.2-52.8
Market cap (EGPmn) 4,279
Market cap (USDmn) 598
Average daily traded value (EGPmn) 26.5
Average daily traded value (USDmn) 3.7
Year-end (local mn) 2013 2014e 2015e 2016e
Revenues 1,324.4 1,232.9 1,335.5 2,522.3
EBITDA (120.2) 278.8 305.0 575.2
EPS (4.9) 1.6 1.6 3.9
P/E (target price) (11.7) 34.9 35.8 14.8
Net debt (34.6) (24.0) (395.2) (460.6)
BVPS 19.8 32.5 34.1 38.0
P/B (target price) 2.4 1.5 1.4 1.3
EV/EBITDA (target price) (42.5) 18.3 16.7 8.9
Div. yield (%) - - - -
FCF margin (%) (4.3) (133.3) 120.2 46.4
Net debt/EBITDA (x) 0.3 (0.1) (1.3) (0.8)
Net debt/Capital (%) (1.6) (0.7) (10.0) (10.4)
Interest cover (x) (0.5) 3.8 2.9 4.3
RoAA (%) (6.1) 1.7 1.5 4.1
RoAE (%) (22.6) 6.3 4.8 10.7
RoIC (%) (23.4) 4.5 3.8 8.2
High-margin, cash generative developer (45% FCF/sales), and
owner of significant brand equity (project pipeline 95% pre-
sold). Land is dispute-free and on course to unbolt value via new
developments (42% of EV). Initiate with Buy and EGP 57 FVE
SODIC is a leading high-end developer in Egypt, and has built
communities that house 400k+ residents in the Six of October and
New Cairo districts. Strong EPS visibility in FY 14-17e: SODIC’s
development pipeline is 95% sold, while recurring income is due for
55% CAGR in the next 3 years. SODIC sits on an 11.3mn sqm land bank
(55% utilised) and is set to deliver c.3.6k units in the coming 5 years
against a total sales backlog of EGP 8bn. In parallel with unit
handovers, SODIC is due to launch a recurring income portfolio via the
release of c.110k sqm of retail and commercial space and a 56-key
hotel in FY 15-17e. The market in our view has overlooked the
potential development upside behind raw land assets, and has not
fully grasped the potential for EPS growth through the utilisation of
SODIC’s rental assets at current market multiples. We initiate with
Buy and EGP 57 FVE, suggesting >20% in potential upside.
Raw land holds development value not reflected in share price: we
believe SODIC can monetize the 3.9mn sqm of raw land at its disposal,
and another 1.26mn sqm of prime land recently acquired in New
Cairo, through the development of new mixed-use projects. SODIC
holds an aggregate land bank of 11.3mn sqm, of which 6.1mn sqm is
utilised, while 3.6mn sqm stands raw across Six of October (1.87mn
sqm), Eastown (0.5mn sqm), and New Cairo (1.26mn sqm). We value
residual land at a blended pre-tax market prices of EGP 1.2k/sqm,
which results in a total after-tax fair value of EGP 2.1bn (42% of total
EV estimate), net of all land-related liabilities.
Margins due to improve on strong rental income growth: The Strip
(64% GPM) and WTR (41% GPM) enjoy the highest margins within
SODIC’s sales portfolio, and can potentially dominate the EPS mix in
FY 14-16e. We see rental income contribution in FY 15e+, which we
model at 70% GPM. We expect blended gross margins to arrive at
c.40%, and net margins to settle at >12% in FY 15e onwards.
Potential revaluation of land assets brings our target p/NAV to 0.85x
from current 0.70x: We value SODIC at EGP 57/share using SOTP. We
apply a 5-yr DCF model on both the sales portfolio (14.6% WACC) and
recurring income portfolio (9.5% cap rate), while we value residual
land at market prices. Our price target implies 34.9x/35.8x FY 14/15e
EPS and 1.73x/1.65x FY 14/15e BV, at a 20% premium to local peers.
Risk: Macroeconomic instability, FX losses and concentration risk.
EGP 57
© Copyright 2014, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
89
116
143
170
197
224
Jan-14 Apr-14 Jul-14
OCDI EY EGX
September 18 2014
Six of October © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 37
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
-50%
0%
50%
2013 2014e 2015e 2016e 2017e
EBITDA Margin Net Margin
-50%
0%
50%
100%
2013 2014e 2015e 2016e 2017e
Revenues Assets
-15%
-10%
-5%
0%
-2.0
-1.0
0.0
1.0
2013 2014e 2015e 2016e 2017e
Net Debt/Capital Net Debt/EBITDA
-20
0
20
40
60
2013 2014e 2015e 2016e 2017e
P/E P/E Sector
Six of October
Year-end 2012 2013 2014e 2015e 2016e 2017e
Financial summary
Reported EPS 2.84 (4.88) 1.64 1.60 3.87 3.66
Diluted EPS 2.84 (4.88) 1.64 1.60 3.87 3.66
DPS - - - - - -
BVPS 23.30 19.84 32.51 34.10 37.97 41.63
Weighted average shares 90.68 90.68 90.68 90.68 90.68 90.68
Average market cap 1,632.17 3,445.70 4,325.26 4,325.26 4,325.26 4,325.26
Year-end 2012 2013 2014e 2015e 2016e 2017e
Valuation metrics
P/E (x) (current price) 16.8 (9.8) 29.1 29.9 12.3 13.0
P/E (x) (target price) 20.2 (11.7) 34.9 35.8 14.8 15.6
P/BV (x) (target price) 2.5 2.9 1.8 1.7 1.5 1.4
EV/EBITDA (x) 16.3 (42.5) 18.3 16.7 8.9 10.3
EV/FCF (x) (25.6) (89.3) (3.1) 3.2 4.4 5.3
EV/Invested capital (x) 2.2 2.7 1.5 1.4 1.2 1.2
Dividend yield (%) - - - - - -
Year-end 2012 2013 2014e 2015e 2016e 2017e
Growth (%)
Revenues 163.0 (7.1) (6.9) 8.3 88.9 (19.7)
EBITDA (288.7) (138.3) (331.9) 9.4 88.6 (13.4)
EBIT (252.0) (149.4) (285.6) 9.7 92.8 (15.1)
Net income (233.3) (271.8) (133.6) (2.5) 142.1 (5.4)
Year-end 2012 2013 2014e 2015e 2016e 2017e
Margins (%)
EBITDA 22.0 (9.1) 22.6 22.8 22.8 24.6
EBIT 20.2 (10.7) 21.4 21.7 22.1 23.4
Net 18.1 (33.4) 12.1 10.8 13.9 16.4
Year-end 2012 2013 2014e 2015e 2016e 2017e
Returns (%)
RoAA 3.9 (6.1) 1.7 1.5 4.1 4.9
RoAE 12.8 (22.6) 6.3 4.8 10.7 9.2
RoIC 10.9 (23.4) 4.5 3.8 8.2 7.5
FCF margin (14.0) (4.3) (133.3) 120.2 46.4 48.0
Year-end 2012 2013 2014e 2015e 2016e 2017e
Gearing (%)
Net debt/Capital 4.5 (1.6) (0.7) (10.0) (10.4) (9.7)
Net debt/Equity 5.4 (1.9) (0.8) (12.8) (13.4) (11.8)
Interest cover (x) 4.8 (0.5) 3.8 2.9 4.3 3.8
Net debt/EBITDA (x) 0.4 0.3 (0.1) (1.3) (0.8) (0.9)
September 18 2014
Six of October © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 38
Abacus Arqaam Capital Fundamental Data
Company profile
SODIC offers community services to residents in the Six of October and New Cairo districts through 9 major developments and complexes. The company primarily engages in developing and selling residential units in addition to managing an investment properties portfolio (retail, commercial, hospitality and leisure services) across its projects. Two years after its foundation, SODIC launched its first project- Beverly Hills (fully sold and operational) in 1997, and later added to its development portfolio through a series of product launches, after completing a management restructuring process and raising an EGP 1.1bn capital injection in 2006. The business introduced its largest project, Allegria (1.25k units), in 2006, and recently released several phases of Eastown Residences (6 phases, fully sold) in H1 14A.
Ownership and management
ShareholdersPublic 44%
Olayan Group 12%
Ripplew ood 9%
EFG Hermes 4%
Abanumay Family 13%
Other 17%
Source: Company Data
Board of DirectorsDr. Hani Sarieldin Chairman
Mr Ahmed Badraw i Managing Director
Eng Safw an Thabet Director
Mr Shafik El Baghdady Director
Dr Walid Abanumay Director
Mr Sabah Barakat Director
Mr Omar El Hamaw y Director
Eng Shehab El Orabi Director
Mr Basil Ramzy Director
Source: Company Data
Six of October
Year-end 2012 2013 2014e 2015e 2016e 2017e
Income statement (EGP mn)
Sales revenue 1,426.0 1,324.4 1,232.9 1,335.5 2,522.3 2,024.3
Gross profit 497.2 355.3 468.0 530.1 1,012.7 828.4
SG&A (209.4) (497.5) (203.9) (240.4) (454.0) (354.2)
EBITDA 314.0 (120.2) 278.8 305.0 575.2 497.9
Depreciation & Amortisation 26.3 22.1 14.7 15.3 16.5 23.8
EBIT 287.8 (142.3) 264.1 289.7 558.7 474.1
Net interest income(expense) (60.0) (310.3) (68.9) (100.3) (129.7) (125.5)
Associates/affiliates - - - - - -
Exceptionals/extraordinaries - - - - - -
Other pre-tax income/(expense) 40.3 34.9 31.7 41.3 88.3 101.3
Profit before tax 268.0 (417.7) 226.9 230.8 517.3 449.9
Income tax expense (10.6) (24.5) (78.2) (85.9) (166.6) (118.0)
Minorities 7.3 - - - - -
Other post-tax income/(expense) - - - - - -
Net profit 257.4 (442.3) 148.6 144.9 350.7 331.9
Arqaam adjustments (including dilution) - - - - - -
Arqaam Net profit 257.4 (442.3) 148.6 144.9 350.7 331.9
Year-end 2012 2013 2014e 2015e 2016e 2017e
Balance sheet (EGP mn)
Cash and equivalents 320.0 453.1 590.4 1,261.6 1,447.1 1,251.5
Receivables 1,420.0 1,459.0 2,015.5 2,144.5 1,253.5 444.0
Tangible fixed assets 212.9 125.5 119.5 113.0 107.6 102.6
Development/Investment properties 4,857.8 5,518.5 7,050.7 5,879.1 4,814.2 4,144.5
Other assets including goodwill 105.6 30.1 30.1 30.1 30.1 30.1
Total assets 6,916.2 7,586.2 9,806.2 9,428.4 7,652.6 5,972.7
Payables 631.4 919.9 801.7 910.4 1,004.8 1,022.9
Interest bearing debt 434.8 418.5 566.4 866.4 986.4 806.4
Other liabilities 3,685.1 4,397.1 5,438.9 4,507.5 2,166.6 316.7
Total liabilities 4,751.3 5,735.5 6,807.0 6,284.3 4,157.8 2,146.0
Shareholders equity 2,113.2 1,798.9 2,947.6 3,092.4 3,443.1 3,775.0
Minorities 51.7 51.7 51.7 51.7 51.7 51.7
Total liabilities & shareholders equity 6,916.2 7,586.2 9,806.2 9,428.4 7,652.6 5,972.7
Year-end 2012 2013 2014e 2015e 2016e 2017e
Cash flow (EGP mn)
Cashflow from operations (182.8) (47.6) (1,634.2) 1,615.1 1,183.0 991.4
Net capex (16.7) (9.6) (8.9) (9.7) (12.6) (20.2)
Free cash flow (199.5) (57.2) (1,643.1) 1,605.4 1,170.4 971.2
Equity raised/(bought back) - - - - - -
Dividends paid - - - - - -
Net inc/(dec) in borrowings 38.8 0.7 147.9 300.0 120.0 (180.0)
Other investing/financing cash flows - - - - - -
Net cash flow (181.5) 133.2 (862.7) 671.2 185.5 (195.6)
Change in working capital (549.3) (66.7) (1,834.8) 1,396.0 774.5 611.5
Mohammad Kamal Mohamad Haidar, CFA mohammad.kamal@arqaamcapital.com Arqaam Capital Research Offshore s.a.l
+9714 507 1743
September 18 2014
Six of October © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 39
Raw land assets hold substantial development value not reflected
in share price: initiating with Buy and EGP 57 FVE
Land assets acquired free of cost and continually replenished, project pipeline is 95%
pre-sold. Cash generation is huge as a result (45%+ FCF margin)
Revaluation of Idle land assets suggests NAV upside (target p/NAV at 0.85x vs. 0.70x
CMP/NAV). Initiate with Buy and EGP 57 FVE
SODIC is a leading real estate developer in Egypt, as it offers community services to 400k+
residents in the Six of October and New Cairo districts through 9 major developments and
complexes. The company primarily engages in developing and selling residential units, in
addition to managing an investment properties portfolio (retail, commercial, hospitality and
leisure) across its projects. The company introduced its largest project Allegria (1.25k units) in
FY 06 and recently released several phases of its newest product, Eastown Residences (EGP
1.7bn launched, fully sold), in H1 14A.
Strong EPS visibility in FY 14-17e: SODIC sits on 11.3mn sqm of land, of which 55% is utilized,
and is set to deliver c.3.6k units in the coming 5 years against a total sales backlog of EGP 8bn.
In parallel with residential handovers, SODIC is due to launch a recurring income portfolio via
the release of c.125k sqm of retail and commercial spaces, and a 56-key hotel by FY 15-16e.
We expect its property portfolio to deliver strong sales growth in FY 14-15e, on the delivery of
1k units in Allegria, Kattameya Plaza, Forty West and The Polygon, and another c.2.6k units in
Westown and Eastown Residences in FY 16-18e. In parallel, recurring income holds potential to
grow at a 3-yr CAGR of 55% in FY 14-16e, as retail and commercial units in The Polygon, The
Strip, Forty West and WT Hub are leased out. We believe SODIC can further monetize the
3.9mn sqm of raw land at its disposal, and another 1.26mn sqm of prime land recently
acquired in New Cairo, through the development of new mixed-use projects. With a project
pipeline that is 95% pre-sold, we believe the market is not pricing in the impact of upcoming
unit handovers on EPS and growth, and is not adequately rewarding SODIC for its huge cash
generation at current multiples. We initiate with a Buy rating and EGP 57 FVE.
Valuable land assets compel us to assign a target p/NAV of 0.85x, in-line with broader
MENA: We value SODIC at EGP 57/share using an SOTP model. We apply a 5-yr DCF treatment
to both the sales (14.6% WACC) and recurring income portfolios (9.5% cap rate). We mark
residual land up to 90% of prevailing average prices. Our fair value estimate implies
34.9x/35.8x FY 14/15e EPS and 1.73x/1.65x FY 14/15e BV, a 20% premium to local peers. The
premium in our view is warranted due to superior near term revenue and EPS growth (22%
and 12% 3-yr CAGR) over peers (13% and 11% for TMG, though TMG holds substantial medium
term growth potential in FY 16e+). The market in our view is overlooking the impact of the
potential development of raw land on EPS and valuation, and is not fully reflecting the upside
risk that could emanate from the utilisation of SODIC’s rental assets in current multiples. We
see a fair target P/NAV of 0.85x, in-line with leading MENA developers under coverage as a
result, and this suggests 20%+ in potential upside from current market price. We initiate with
a Buy rating and EGP 57 FVE.
September 18 2014
Six of October © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 40
Valuation: Upside risk to NAV largely rests in 5.2mn sqm of
available land. Recurring income assets add 23% to FVE. We
initiate with a Buy rating and EGP 57 FVE
We value SODIC at EGP 57/share using an SOTP model. We apply a 5-yr DCF treatment to
both the sales (14.6% WACC) and recurring income portfolios (9.5% cap rate). We value
residual land assets by marking them up to 90% of the prevailing market price today (pre-tax).
Our FVE implies 34.9x/35.8x FY 14/15e EPS and 1.73x/1.65x FY 14/15e BV, a 20% premium to local
peers. We believe the market has not priced in SODIC’s recurring income portfolio, and is not
fully factoring in its property and land assets at current multiples.
Exhibit 1: SOTP summary
SOTP valuation
% of EV Per share (EGP)
Development properties
34.8% 19.6
Investment properties
24.4% 13.7
Fair value of residual bank
40.8% 23.0
Cash & Equivalents
15.5% 8.7
Gross debt
(13.8%) (7.8)
Fair value per share
57
Equity value (EGP mn)
5,190
EV (EGP mn)
5,107
Implied multiples FY 14e FY 15e FY 16e
EV/EBITDA 18.3 16.7 8.9
P/E 34.9 35.8 14.8
P/B 1.73 1.65 1.49
Source: Company Data, Arqaam Capital Research
Our DCF-based SOTP valuation is composed of:
NPV- Development properties: We value the development portfolio at EGP
19.6/share on a 5-yr DCF basis using a WACC of 14.6%. Fair value includes total
current sales backlog (EGP 5.6bn) and remaining inventory of unsold units (EGP
2.4bn).
NPV- Investment properties: Our investment properties portfolio valuation captures
free cash flows from recurring income in the next 5 years. We value the segment at
EGP 13.7/share, using a capitalisaiton rate of 9.5% (13.5% WACC, 4.0% TGR). This
component constitutes 24% of our EV estimate.
NPV- residual land: We value residual land at EGP 23/share using current market
prices (EGP 1,900/sqm for Eastown, EGP 1,500/sqm for Westown, EGP 700/sqm for
Al Yosr Land and EGP 2,896/sqm for New Cairo Land), and apply a 10% discount to
market values. Total raw land currently stands at 5.2mn sqm.
Gross debt: Total borrowings in FY 13A stood at EGP 419mn.
September 18 2014
Six of October © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 41
Exhibit 2: At 0.70x p/NAV, we believe current market valuation overlooks significant NAV upside
EGP mn except where stated BV, FY 13A AC valuation Methodology
Property assets 2,230 3,368 2.9k undelivered units at EGP 2mn/unit, 40% GPM
Land assets 650 2,478 Market-to-market, after-tax EGP 1,231/sqm blended
Rental assets 85 1,246 DCF, cap rate 10%
PPE 125 125 At BV
Receivables 3,604 3,604 At BV
Cash 453 453 At BV
Other assets 439 439 At BV
Total assets 7,586 11,713
Debt 419 419 At BV
Payables and advances 4,484 4,484 At BV
Other liabilities 694 694 At BV
Total liabilites 5,596 5,596
Equity (implied) 1,851 6,117
NOSH 91 91
BVPS/NAVPS (AED) 20 67
SoTP-based Fair Value Estimates (EGP) 57
Discount to FY 14e NAV (15.1%)
CMP (EGP)
47
Discount to target NAV (30.0%)
Source: Company Data, Arqaam Capital Research
Exhibit 3: Valuation components: Our EV estimate is driven by land (41%), developments (35%) and rental assets (24%)
Source: Company Data, Arqaam Capital Research
19.6
13.7
23.0
8.7
(7.8)
57
--
10.00
20.00
30.00
40.00
50.00
60.00
70.00
NP
V-
De
velo
pm
ent
po
rtfo
lio
NP
V-R
ecu
rrin
g in
com
e
NP
V-L
and
Cas
h
De
bt
Fair
val
ue
pe
r sh
are
Valuation waterfall (USD)
September 18 2014
Six of October © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 42
Exhibit 4: Valuation summary
Source: Company Data, Arqaam Capital Research
Exhibit 5: DCF sensitivity to property sales WACC
Source: Company Data, Arqaam Capital Research
Exhibit 6: DCF sensitivity to recurring income cap rate
Source: Company Data, Arqaam Capital Research
The pace of macroeconomic recovery and currency movements remain key downside risks.
Delays to macroeconomic recovery could result in a weakened home ownership sentiment and
sales activity. Further devaluation/depreciation of the EGP could also potentially impact
margins on sales (though exposure to FX (Euro, USD) is minor).
SODIC
DCF summary
EGP mn unless otherwise stated FY 14e FY 15e FY 16e FY 17e FY 18e
EBIT (1-τ) 173 204 392 356 339
Depreciation & Amortization 15 15 16 24 79
EBITDA 188 219 409 380 418
Working Capital Changes (1,767) 1,462 771 609 1,098
Operating Cash Flow (1,579) 1,681 1,180 988 1,516
Purchase of PPE (9) (10) (13) (20) (32)
Free Cash Flow to Firm (1,588) 1,672 1,167 968 1,484
Discount Factor 0.91 0.73 0.66 0.58 0.51
PV of Visible FCFF (1,445) 1,220 776 562 755
Terminal Value 2,175
Equity Valuation WACC parameters
PV of Visible FCFF 1,868 Rf 12.0%
PV of Terminal Value 1,154 EMRP 5.0%
Fair value of land 2,084 Adjusted Beta 1.20
Enterprise Value 5,107 Cost of Equity 18.0%
Cash & Cash Equivalents 789 Marginal tax rate 25.0%
Less: Net (Debt) Funds (706) Cost of Debt 11.3%
D/C (market) 50.0%
Equity Value 5,190 WACC 14.6%
NOSH 91 WACC IP 13.5%
Equity Value per Share 57 Perpetual grow th 4.0%
Implied multiples
EV/EBITDA 18.3 16.7 8.9 10.3 8.5
P/E 34.9 35.8 14.8 15.6 13.6
P/B 1.73 1.65 1.49 1.36 1.23
Rf Beta
57 1.4 1.3 1.2 1.1 1.0
13.0% 56 56 57 57 57
12.5% 56 57 57 57 58
12.0% 57 57 57 58 58
11.5% 57 57 58 58 58
11.0% 57 58 58 58 59
DCF sensitivity- Cost components
WACC TGR
57 3.0% 3.5% 4.0% 4.5% 5.0%
15.5% 53 54 54 55 55
14.5% 54 55 55 56 57
13.5% 56 57 57 58 59
12.5% 58 59 59 60 62
11.5% 60 61 62 64 65
DCF sensitivity- recurring income WACC
September 18 2014
Six of October © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 43
Appendix 1: Portfolio details
We see 24% 3-yr revenue CAGR (FY 14-16e) driven by property handovers (2.5k units)
EGP 1.25bn in new debt and EGP 1bn in new equity, earmarked for land acquisitions.
D/E in FY 14e grows to 30.7% (vs. 25% in FY 13A)
Property portfolio
Delivery pipeline of 4k units via 7 projects in the coming 5 years against EGP 8bn in aggregate
sales value: We see 1k units handed over in FY 14-15e on the full completion of Allegria, Forty
West, Polygon, The Strip and Kattameya Plaza, while 2.3k units are due to be handed over in FY
16-17e via Westown and Eastown Residences. All in, we model for EGP 2.45bn in sales
recognitions in FY 14-15e (EGP 1.2bn FY 14e and EGP 1.25bn in FY 15e), and EGP 2.42bn in FY
16e. SODIC sells its units at an average price of EGP 2.4mn/unit, implying a market price of EGP
1.14k/sqft (Min: EGP 556/sqft, Max: EGP 1,800/sqft). The variability in market prices is likely to
have minimal impact on our pricing assumptions going forward, given that 90%+ of SODIC’s
sales pipeline is already pre-sold. We however model for an average 10% nominal increase in
prices of unsold units in FY 14e and FY 15e, to account for medium term inflation
(11.3%/11.5% in FY 14/15e). SODIC’s total property portfolio constitutes 35% of our EV
estimate.
Exhibit 7: Portfolio summary: 90%+ of total inventory is sold, 30% delivered
Deliveries (units)
Projects Total units Sales/Lease ratio % sold % delivered Project value
(EGP mn) Gross margin % FY 14e FY 15e FY 16e FY 17e
Allegria 1,255 100% 94% 85% 4,379 40% 194 -- -- --
Westown* 1,800 100% 90% --% 3,081 41% -- 393 773 477
Eastown* 1,600 100% 100% --% 3,645 38% -- -- 720 472
Kattameya Plaza 465 100% 100% 67% 601 31% 152 -- -- --
Polygon 250 80% 71% 33% 622 34% 60 108 -- --
Forty West 133 86% 66% 23% 568 27% 34 68 -- --
The Strip 69 82% 80% 32% 361 30% 23 24 -- --
Total 5,572
93% 27% 13,259
462 594 1,493 949
Source: Company Data, Arqaam Capital Research *Including AC estimate of new product launches
Exhibit 8: Demand for SODIC’s products is strong: Project pipeline is 90%+ pre-sold
Source: Company Data, Arqaam Capital Research
Exhibit 9: Deliveries/handovers equally spread in FY 14-15e, peak in FY 16e
Source: Company Data, Arqaam Capital Research
95%
90%
94%
100%
55% 57% 50%--
200
400
600
800
1,000
1,200
1,400
1,600
Westown Allegria Eastown Kattameya Plaza
Polygon Forty West
The Strip
Total launched units
Sold Unsold
462 594
1,493
949
--
200
400
600
800
1,000
1,200
1,400
1,600
FY 14e FY 15e FY 16e FY 17e
Total unit deliveries
September 18 2014
Six of October © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 44
Recurring income assets (highly profitable at 70% GPM) add c.EGP 140mn in top-line
by FY 17e, driving 24% of our EV estimate
Land is acquired free of charge on books, carries substantial revaluation upside from
potential new developments (+90%)
Rental portfolio
We expect recurring income to grow at a 3-yr CAGR of 55% on the addition of c.125k sqm of
commercial and retail space coming on-stream in the next 3 years via 4 projects (20k sqm
commercial in The Polygon, 12k sqm mix-use in Forty West, 8k sqm retail in The Strip and 15k
sqm retail in WT Hub, 70k sqm Eastown retail). The projects are slated for completion by the
end of FY 14e, and we model for them to be operational in FY 15e at an average occupancy
rate of 50%+ in FY 15e, 70%+ in FY 15e and 80%+ in FY 16e. SODIC is further planning the
introduction of a 56-key hotel (50%+ of construction is complete) in FY 16e, which we expect
to commence operations in FY 17e at a 40% occupancy rate, out of conservatism. We see
rental income touching EGP 40mn+ in FY 15e (currently nil), supported by a further EGP 39mn
via community services management in Beverly Hills, Allegria and other communities, which
we expect to break even in FY 16e (currently loss making), on growth in service fees and an
expanding resident population. Total recurring income can potentially constitute 6% of total
revenues in FY 15e, and drives c.20% of our EV estimate, on the full utilization of leasable units
in our terminal year.
Exhibit 10: Rental portfolio drives 6% of total revenues in FY 15e, 24% of our EV estimate
Project GLA (sqm) Type Completion FY 16e revenues (EGP mn) % of total recurring % of total revenues % of EV
The Polygon 20,028 Mixed use FY 14e 21 35% 0.8% 6.8%
Forty West 12,205 Mixed use FY 14e 11 19% 0.5% 3.7%
The Strip 8,125 Retail FY 14e 8 14% 0.3% 2.5%
Westown Retail Hub 15,576 Retail FY 14e 19 31% 0.7% 6.0%
Eastown retail 70,544 Retail FY 17e --
Forty West Hotel 56 keys Hospitality FY 16e -- --% --% 5.4%
Total 126,478
59 100% 2.3% 24.4%
Source: Company Data, Arqaam Capital Research
Exhibit 11: Recurring income portfolio turns fully operational in FY 17e: +56k sqm in FY 14e end, +70k sqm in FY 17e
Source: Company Data, Arqaam Capital Research
Exhibit 12: Property sales to remain the largest contributor to revenues: 95%+ of total
Source: Company Data, Arqaam Capital Research
--
56 56
126
--
20
40
60
80
100
120
140
FY 14e FY 15e FY 16e FY 17e
Total GLA (sqm)
98% 97%
97%
94%
96%
3%
2%
2% 2% 3% 3% 2%
90%
91%
92%
93%
94%
95%
96%
97%
98%
99%
100%
FY 12A FY 13A FY 14e FY 15e FY 16e
Revenue breakdown by segment
Property sales Rental income Other income
September 18 2014
Six of October © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 45
Land
Land sits entirely free on books: SODIC holds an aggregate land bank of 11.3mn sqm, of which
6.1mn sqm is utilised via 9 standalone developments, while 5.2mn sqm stands raw across Six
of October (1.87mn sqm), Eastown (0.5mn sqm, net of new assumed launches), Syria (1.56mn
sqm), and New Cairo (1.26mn sqm). We value residual land at market prices of EGP 1,900/sqm
for Eastown, EGP 1,500/sqm for Westown and EGP 700/sqm for Al Yosr Land (1.26mn sqm in
Six of October). We value the newly-acquired plot in New Cairo at EGP 2,896/sqm, which
results in a total after-tax fair value of EGP 2.1bn (42% of total EV estimate), net of all required
cash payments on acquired/settled land (at NPV). Our fair value estimate of land excludes
plots in Syria, as we currently find it unlikely for any development/sales scenario to take place
given the ongoing and protracted political turmoil in the country.
Exhibit 13: Land assets capture 42% of our EV estimate
Land plot Area (mn sqm) Price (EGP/sqm) Market value (EGP mn)
Al Yosr Lands 1.26 700 882
Westown 0.54 1,500 815
Eastown 0.52 1,900 982
New Cairo land 1.26 2,896 3,649
Syria 1.56 500 780
Total 5.14
7,109
Discount/premium (11%)
Tax rate 25%
Less: PV of cash settlements/acquisition (2,663)
Fair value (EGP mn) 2,084
Source: Company Data, Arqaam Capital Research
SODIC fully addressed its land disputes via cash settlements: in Q4 13A, SODIC reached an
agreement with NUCA on the settlement of disputes over land assets in Eastown (0.86mn
sqm), requiring SODIC to make a total cash payment of EGP 900mn to NUCA, payable over a
period of 7 years (semi-annualy), EGP 100mn of which was paid as a down payment.
Furthermore in Q1 14A, SODIC finalised its dispute with Solidere International regarding land
assets in Westown (250k sqm), and agreed to pay EGP 247mn in a cash settlement, which it
has fully settled and paid as of August 2014, capitalising the cost of land on its books. SODIC
secured an EGP 950mn loan with AAIB (EGP 255mn withdrawn), and is planning an EGP 1bn
capital raise this year, to help fund maturing land liabilities in the coming 3 years in addition to
development costs on the new 301 acres of land.
SODIC has acquired new land through auction: At EGP 1,915/sqm, SODIC purchased a new
land plot in New Cairo (1.26mn sqm) at a total cost of EGP 2.4bn, having submitted the highest
bid among competing bidders. As per management guidance, the land asset could potentially
result in total sales proceeds of EGP 10bn+ (at 35% GPM and 21% NPM) upon development.
We model for plots to be sold over the course of the next 5 years, starting in FY 15e. Assuming
a handover plan of 3 years in FY 19-21e, we value the New Cairo land assets at EGP 2,896/sqm
(+51% to BV).
September 18 2014
Six of October © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 46
Margins
We see maergins widening on strong rental income contribution: The Strip (64% GPM) and
WTR (41% GPM) enjoy the highest margins within SODIC’s sales portfolio, and are expected to
dominate the EPS mix in FY 14-16e. Going forward, EPS is likely to see rental income
contribution in FY 15e onwards, which we model at 70% GPM, as per management guidance.
We expect blended gross margins to arrive at 38% and 40% and net margins to settle at 12%
and 11% in FY 14e and FY 15e, respectively.
Exhibit 14: Margins likely to remain flat in the coming 3 years
Source: Company Data, Arqaam Capital Research
Exhibit 15: Margins on sales range between 25% to 40% GPM
Source: Company Data, Arqaam Capital Research
Balance sheet
Cash inflows in FY 14-15e sufficient to cover 3 years of CAPEX. SODIC expects EGP 3.5bn of
cash inflows in FY 14-15e from receivables due on pre-sold units, and awaits a further EGP
1.4bn of collections in FY 16-17e. SODIC is due to deploy EGP 3.5bn of CAPEX on its incomplete
developments and land acquisitions, which it is planning to fund through (i) cash collections,
(ii) new debt facilities (EGP 1.25bn), in addition to (iii) an EGP 1bn capital raise, due to be
closed in Q4 14e.
Exhibit 16: Blended cash generation/outflow
Source: Company Data, Arqaam Capital Research
Exhibit 17: Leverage: D/E ~30% in FY 15e
Source: Company Data, Arqaam Capital Research
34.9%
26.8%
38.0% 39.7% 40.1%
20.2%
(10.7%)
21.4% 21.7% 22.1% 18.1%
(33.8%)
12.1% 10.8% 13.9%
(40.0%)
(30.0%)
(20.0%)
(10.0%)
--%
10.0%
20.0%
30.0%
40.0%
50.0%
FY 12A FY 13A FY 14e FY 15e FY 16e
Margins
Gross margin EBIT margin Net margin
41% 40% 38%
34% 31%
27%
--%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Allegria Westown Eastown Polygon KP Forty West
Gross margin by product type
(2,500)
(2,000)
(1,500)
(1,000)
(500)
--
500
1,000
1,500
2,000
FY 13A FY 14e FY 15e FY 16e
Cash inflows and outflows
∆ WC CAPEX
--%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
--
100
200
300
400
500
600
700
800
900
1,000
FY 11A FY 12A FY 13A FY 14e FY 15e
Total borrowings (EGP mn)
Total borrowings D/E (RHS)
I n i t i a t i o n R e p o r t
S e p t e m b e r 1 8 2 0 1 4
Mohammad Kamal mohammad.kamal@arqaamcapital.com +9714 507 1743
Heba Khalil Arqaam Capital Research Offshore s.a.l
Egypt – Real Estate Medinet Nasr Housing: The right product for a price sensitive market
HOLD
Real Estate / Egypt Bloomberg code MNHD EY
Market index EGX
Price target (local) 41
tP/NAV (x) 0.84
Upside (%) -6.5
Market data 16/09/2014
Last closing price 43.3
52 Week range 18.5-49.8
Market cap (EGP mn) 6,704
Market cap (USD mn) 938
Average Daily Traded Value (EGP mn) 9.7
Average Daily Traded Value (USD mn) 1.4
Year-end (local mn) 2013 2014e 2015e 2016e
Revenues 718.5 805.7 1,074.8 1,225.7
EBITDA 237.1 264.9 413.2 487.3
EPS 1.1 1.0 1.6 2.0
P/E (current price) 38.4 41.7 26.7 22.0
Net debt (101.6) (255.6) (503.3) (362.9)
BVPS 4.3 4.9 6.8 9.1
P/B (current price) 10.1 8.7 6.3 4.7
EV/EBITDA (target price) 26.1 23.4 15.0 12.7
Div. yield (%) 0.2 - - -
FCF margin (%) 11.8 - 8.3 0.2
Net debt/EBITDA (x) (0.4) (1.0) (1.2) (0.7)
Net debt/Capital (%) (16.9) (32.7) (47.0) (25.5)
Interest cover (x) (128.8) (32.7) (19.5) (11.3)
RoAA (%) 11.4 10.2 13.2 14.0
RoAE (%) 35.3 27.7 32.0 28.7
RoIC (%) 29.5 23.9 27.3 25.0
EGP 41
© Copyright 2014, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
87
119
151
183
215
247
Sep-13 Dec-13 Mar-14 Jun-14
MNHD EY EGX
MNHD EY EGX
MNHD targets an undersupplied middle-income market
But current market valuation full at 0.84x tP/NAV
Potential upside catalysts via launch of KM 45 and Teegan in FY 14-
16e. Initiate coverage with Hold and EGP 41 FVE
Medinet Nasr Housing Development- MNHD is among the oldest
developers in Egypt, focused on the middle-income segment of the
market. MNHD developed the majority of the Nasr City district in Cairo
(430mn sqft). Since its restructuring in 2006, the business has resumed
property sales with the launch of 2 residential projects, Hayy Al Waha
and Tag Sultan, both of which are still under development. It further
owns c.100mn sqft of undeveloped land, which it may begin monetising
through new product, namely KM 45 (59.3mn sqft) in FY 14e, and
Teegan (35.5mn sqft) in the next 2-3 years. We believe the business is
successfully transitioning back into property development, away from
land sales, and is building product that is very well suited for Egypt’s
underpenetrated mid and low-income home owner markets. We
initiate coverage with a Hold rating and EGP 41 FVE, as current market
price appears to fully reflect our target P/NAV of 0.84x.
Solid sales momentum at high margins. MNHD holds a track record of
high-margin sales (revenue 3-yr CAGR 24%, GPM average of 66%),
generated largely by lad sales. As of FY 13A, the business resumed
property development, and we expect to see gross development
margins averaging c.55% in the next 5 years. This should continue to
generate massively superior RoEs (~30%), despite some mild dilution
due to the long term change in revenue mix. We expect the handover of
2.7k units in Hayy Al Waha and Tag Sultan by FY 18e, at an aggregate
sales potential of EGP 1.5bn (50%+ of revenues in FY 14-18e).
Market valuation implies strong confidence in sales projections, but
leaves little potential upside (but early-stage upside catalysts exist):
Current market price fully reflects MNHD’s (i) land bank (EGP
33.5/share) at MV, (ii) remaining NPV of Hayy Al Waha and Tag Sultan
(c.EGP 5.5/share), (iii) contracting business (EGP 2.3/share), and (iv)
other assets and net debt (EGP 4.7/share). MNHD currently trades at
41.7-26.7x FY 14-15e P/E, at 40% premium to peers, which we find rich.
Risks: Lack of recurring income assets, customer payment defaults.
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 48
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
0%
20%
40%
60%
2013 2014e 2015e 2016e 2017e
EBITDA Margin Net Margin
-20%
0%
20%
40%
60%
2013 2014e 2015e 2016e 2017e
Revenues Assets
-60%
-40%
-20%
0%
-1.5
-1.0
-0.5
0.0
2013 2014e 2015e 2016e 2017e
Net Debt/Capital Net Debt/EBITDA
0
20
40
60
2013 2014e 2015e 2016e 2017e
P/E P/E Sector
Medinet Nasr Housing
Year-end 2012 2013 2014e 2015e 2016e 2017e
Financial summary
Reported EPS 0.65 1.13 1.04 1.62 1.97 1.94
Diluted EPS 0.75 1.30 1.20 1.88 2.29 2.25
DPS 0.09 0.10 - - - 0.23
BVPS 3.62 4.30 4.95 6.83 9.11 11.14
Weighted average shares 115.00 125.00 145.00 155.00 155.00 155.00
Average market cap 1,521 2,455 5,121 5,121 5,121 5,121
Year-end 2012 2013 2014e 2015e 2016e 2017e
Valuation metrics
P/E (x) (current price) 66.8 38.4 41.7 26.7 22.0 22.3
P/E (x) (target price) 62.6 36.0 39.1 25.0 20.6 20.9
P/BV (x) (target price) 11.2 9.4 8.2 5.9 4.4 3.6
EV/EBITDA (x) 43.9 26.1 23.4 15.0 12.7 13.6
EV/FCF (x) 183.7 72.9 (19,282.6) 69.2 2,915.0 31.0
EV/Invested capital (x) 14.3 10.4 7.9 5.8 4.4 3.6
Dividend yield (%) 0.2 0.2 - - - 0.5
Year-end 2012 2013 2014e 2015e 2016e 2017e
Growth (%)
Revenues 22.4 45.1 12.1 33.4 14.0 (2.3)
EBITDA 50.9 68.1 11.7 56.0 17.9 (6.7)
EBIT 42.3 91.7 14.4 56.1 18.0 (6.6)
Net income 43.5 104.8 5.9 56.4 21.5 (1.4)
Year-end 2012 2013 2014e 2015e 2016e 2017e
Margins (%)
EBITDA 28.5 33.0 32.9 38.4 39.8 38.0
EBIT 24.4 32.2 32.9 38.5 39.8 38.1
Net 17.4 24.5 23.1 27.1 28.9 29.2
Year-end 2012 2013 2014e 2015e 2016e 2017e
Returns (%)
RoAA 6.5 11.4 10.2 13.2 14.0 13.4
RoAE 22.7 35.3 27.7 32.0 28.7 22.3
RoIC 19.9 29.5 23.9 27.3 25.0 20.2
FCF margin 6.8 11.8 - 8.3 0.2 16.7
Year-end 2012 2013 2014e 2015e 2016e 2017e
Gearing (%)
Net debt/Capital (15.9) (16.9) (32.7) (47.0) (25.5) (16.6)
Net debt/Equity (16.6) (17.5) (33.3) (47.6) (25.7) (16.6)
Interest cover (x) (820.1) (128.8) (32.7) (19.5) (11.3) (14.3)
Net debt/EBITDA (x) (0.5) (0.4) (1.0) (1.2) (0.7) (0.6)
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 49
Abacus Arqaam Capital Fundamental Data
Company profile
Medinet Nasr Housing Development is one of
the oldest property businesses in Egypt,
focused on urban development. MNHD
developed the majority of the Nasr City
district in Cairo (430mn sqft). MNHD mainly
caters for the mid-income market and offers
budget housing. The company is one of the
few suppliers of raw land plots (c. 100mn
sqft), free of any legal disputes, in Egypt.
MNHD has been engaged in a comprehensive
restructuring exercise after Beltone Private
Equity acquired 30.88% in the company in
2006.
Current activity: MNHD has two ongoing
projects: Tag Sultan (part of the Teegan
deevlopment), which is now in the design
phase, and Hayy Al Waha. It also owns 2
contacting subsidiaries, Nasr Civil Works (51%
owned) and Nasr Utilities and Installations
(98%), which currently operate at a combined
backlog of EGP 700mn.
12-month potential catalyst: (i) KM 45
Development (50.4mn sqft BUA) – master
plan approved by the government in Q2 13A
and (ii) Teegan (35.5mn sqft).
Ownership and management
Medinet Nasr Housing
Year-end 2012 2013 2014e 2015e 2016e 2017e
Income statement (EGP mn)
Sales revenue 495.2 718.5 805.7 1,074.8 1,225.7 1,197.1
Gross profit 202.3 325.1 354.1 524.3 612.1 577.7
SG&A (56.9) (84.3) (84.2) (105.8) (118.9) (116.8)
EBITDA 141.0 237.1 264.9 413.2 487.3 454.5
Depreciation & Amortisation 4.4 3.7 4.9 5.3 5.9 6.5
EBIT 120.8 231.6 265.0 413.7 488.3 456.1
Net interest income(expense) 0.1 1.8 8.1 21.3 43.1 31.9
Associates/affiliates - - - - - -
Exceptionals/extraordinaries - - - - - -
Other pre-tax income/(expense) 9.1 13.7 13.7 13.7 13.7 13.7
Profit before tax 130.0 247.1 286.8 448.6 545.2 501.7
Income tax expense (37.8) (60.2) (86.0) (134.6) (163.6) (125.4)
Minorities (6.3) (10.9) (14.4) (22.5) (27.3) (26.9)
Other post-tax income/(expense) - - - - - -
Net profit 85.9 176.0 186.4 291.6 354.3 349.4
Arqaam adjustments (including dilution) - - - - - -
Arqaam Net profit 85.9 176.0 186.4 291.6 354.3 349.4
Year-end 2012 2013 2014e 2015e 2016e 2017e
Balance sheet (EGP mn)
Cash and equivalents 85.2 122.3 271.7 516.4 373.0 294.5
Receivables 787.1 868.9 951.2 1,115.2 1,448.6 1,758.5
Development work in progress 190.3 294.1 197.6 259.1 259.1 17.5
Investment properties 5.9 5.9 5.9 5.9 5.9 5.9
Other assets including goodwill 327.9 400.8 551.3 532.4 528.3 535.4
Total assets 1,396.4 1,691.9 1,977.7 2,428.9 2,614.8 2,611.7
Payables 87.0 136.4 93.3 107.8 111.4 51.9
Interest bearing debt 16.2 20.7 16.1 13.1 10.0 7.0
Other liabilities 785.9 864.9 1,020.3 1,176.8 1,016.1 769.4
Total liabilities 931.6 1,055.2 1,154.6 1,314.2 1,145.8 828.3
Shareholders equity 416.8 580.1 766.5 1,058.1 1,412.4 1,726.8
Minorities 48.0 56.6 56.6 56.6 56.6 56.6
Total liabilities & shareholders equity 1,396.4 1,691.9 1,977.7 2,428.9 2,614.8 2,611.7
Year-end 2012 2013 2014e 2015e 2016e 2017e
Cash flow (EGP mn)
Cashflow from operations 41.4 90.3 5.3 96.6 9.6 207.1
Net capex (7.7) (5.4) (5.6) (7.1) (7.5) (7.5)
Free cash flow 33.7 84.9 (0.3) 89.4 2.1 199.5
Equity raised/(bought back) - - - - - -
Dividends paid (10.3) (13.4) - - - (34.9)
Net inc/(dec) in borrowings 10.1 4.5 (3.0) (3.1) (3.1) (3.1)
Other investing/financing cash flows - - - - - -
Net cash flow 11.8 85.3 149.5 244.7 (143.5) (78.5)
Change in working capital (65.9) (108.4) (274.6) (333.2) (496.0) (267.5)
Mohammad Kamal Heba Khalil mohammad.kamal@arqaamcapital.com Arqaam Capital Research Offshore s.a.l
+9714 507 1743
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 50
We initiate coverage with a Hold rating and EGP 41 FVE
We see strong demand for Tag Sultan and Hayy Al Waha units (which drive 45% of
revenues in FY 14-18e)
Potential upside catalyst in new product (Teegan and KM 45), which can add 20-25%
to FVE
MNHD is an urban developer targeting the middle income segment of home ownership
demand in Egypt. MNHD is among the oldest real estate developers in Egypt, having
developed the majority of the Nasr City district in Cairo (430mn sqft) and built >50k units since
its inception. The company was established in 1959 by the Egyptian government, which later
reduced its stake to 15% in 2006. Beltone Private Equity has since taken a 31% stake in the
business, and is engaged in its day-to-day management and medium term strategic
stewardship. MNHD owns c.9mn sqm of raw land, free of disputes with the government, as
land was acquired through a presidential decree at the time of the company’s establishment.
MNHD sells semi-complete units, as opposed to fully-fitted units sold by other developers.
This has resulted in product that is more accessible in terms of affordability, and one that is not
necessarily purchased by eventual occupants. The economic downturn that ensued in 2011-12
in Egypt, due to political transition, resulted in a substantial increase in demand for property,
which continues to be perceived as a hedge against currency devaluation risk. Shell and core
and semi-complete units have consequently received substantial demand.
Exhibit 1: >90% of MNHD’s land bank is raw/undeveloped
Source: Company Data, Arqaam Capital Research
Exhibit 2: MNHD halted sales of land plots in FY 13A
Source: Company Data, Arqaam Capital Research
MNHD’s land bank, which represents 93% of our NAV, is largely un-developed (90%). This
suggests far greater scope for new residential product launches going forward. The company
sits on c.100mn sqft of land held at a BV of EGP 240mn, or EGP 2.4/sq ft, well-behind prevailing
land values today. The monetization of land assets into residential units will drive revenue
growth in the next 5 years.
59.359
38.037
7.104
0.680 0.508
--
10
20
30
40
50
60
70
KM 45 Teegan Nasr Gardens Land plots Hayy Al Waha
Land bank (mn sqft)
109 136 161
315 294
476
597
44 27 20
-
--
100
200
300
400
500
600
700
FY 10A FY 11A FY 12A FY 13A FY 14e FY 15e FY 16e
Revenues (in EGP mn)
Residential units Land
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 51
We see strong revenue visibility, as the c.EGP 2.2bn in development value behind Hayy Al
Waha and Tag Sultan drives 50%+ of our aggregate sales forecasts in 14-18e. In the next 1-2
years, we believe MNHD will deliver products that will enjoy strong uptake. Furthermore, the
business has reduced the average construction period behind a project to 14-18 months, from
3 years previously, largely be streamlining design and execution functions. We believe this
would positively impact short-term profitability as the business more readily hedges costs
against inflation. Furthermore, we see CAPEX requirements met largely through internally
generated funds, as the business introduced off-plan sales as a substitute to sales upon
completion, allowing it access to the majority of a unit’s sellable value ahead of its handover.
Exhibit 3: MNHD trades at a 7% premium to our target P/NAV– Current market price includes MV of land assets (93% of NAV)
Q1 14A AC estimates Methodology
Net debt
Long-term loans 25 25
Trade payables 88 88
Deferred profits & interests on outstanding installments
350 350
Customer advances 49 49
Others 547 547
Total 1,060 1,060 At BV
Cash and bank balances (170) (170)
Net debt 889 889 At BV
Receivables and other debit balances 968 968 At BV
Investment properties 6 6
Land bank
Teegan (35.5mn sqft)
3,718
At 15% discount to MV - EGP 186/sqft Less infrastructure cost (EGP 1bn)
KM 45 (59.2mn sqft)
2,992 At 15% discount to MV - EGP 74/sqft
Legacy land (0.368mn sqft)
260 At MV - EGP 478/sqft
Total 223 6,970
Construction in progress 18 18 At BV
Housing & development projects -WIP 103 144 40% margin
Housing & development projects -Finished 90 140 55% margin
Other assets
Fixed assets (Net) 29 29 At BV
Inventory 47 47 At BV
Others 68 68 At BV
Total shareholders' equity 608
Minorities interest 56
NAV
7,501
NAV/share
48.4
CMP
43.3
CMP/NAV
0.89x
FVE/NAV
0.84x
Source: Company Data, Arqaam Capital Research
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 52
We initiate coverage of MNHD with a Hold rating and EGP 41 FVE, at 0.84x tP/NAV. In our
NAV assessment, we mark land values up to market prices (to a range of 3x-20x BV), and apply
a 15% illiquidity discount, to arrive at EGP 45/share (93% of NAV). We value projects in
progress and finished unit sales at 40% and 55% margins, respectively (in total contributing
EGP 1.83/share, 3.7% of NAV). The BV of other assets and net debt constitutes the remaining
EGP 1.44/share. MNHD is currently trading at a 7% premium to our target NAV, which offers
limited upside potential until new growth catalysts (launch of KM 45 and Teegan) become
quantifiable and visible.
Exhibit 4: MNHD sits on c.100mn sqft ready-for-development land
Source: Company Data, Arqaam Capital Research
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 53
Initiate with Hold and EGP 41 FVE: CMP reflects land assets at
market rates, and fully captures development potential. More
value to be unlocked through eventual launch of new product
Property sales: MNHD has 3 main projects in the pipeline, of which 2 are under development,
constituting of 12.9k sellable units. Nasr Gardens (9.1k units) is currently on hold, on its
association with the previous ruling party. The company currently has >2.5k units under
development in Hayy Al Waha (916), and Tag Sultan (1.7k). We expect MNHD to report full
product uptake, and generate EGP 2.2bn in related sales revenues until FY 18e.
Exhibit 5: >2.5k units under development
Project Name Location # of
units # of units
sold % of finished
units % of units delivered
Status
Nasr Gardens Six of October 9,100 140 708 -- On hold
Hayy Al Waha - Phase I
Nasr City
500 500 500 500
On going Hayy Al Waha - Phase II 575 575 575 575
Hayy Al Waha - Phase III 546 115 329 115
Hayy Al Waha - Block 16 485 -- -- --
Tag Sultan Nasr City 1,700 931 -- -- On going
Source: Company Data, Arqaam Capital Research
Land bank: MNHD sits on c.100mn sqft of ready-for-development land. The company halted
land sales, and will instead develop the plots into sellable units, which we believe generates far
greater value.
Recurring income: MNHD’s rental portfolio is currently minor in size (<EGP 5mn). The units are
leased under outdated rental laws, and can only be re-leased at current rental rates after the
departure of the second generation tenants.
Contracting business: MNHD operates 2 contracting subsidiaries, Nasr Civil Works (51%
owned) and Nasr Utilities and Installations (98%), which operate at a combined backlog of EGP
700mn. NUI has been restructured, after a period of losses. It currently breaks even at the
gross level.
We believe current share price fully reflects our target P/NAV of 0.84x. The market appears
to fully reward the business for turnaround potential, and RoE recovery. CMP further implies
that land assets are reflected at market prices, suggesting limited further NAV upside. We
currently estimate that new product, to be released in FY 15e+, can potentially add 20-25% to
our FVE.
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 54
Exhibit 6: 82% of FVE emanates from MNHD’s land bank
Source: Company Data, Arqaam Capital Research
SOTP constituents:
Development properties: We assume the full sale and delivery of Hayy Al Waha and
Tag Sultan by FY 18e. We forecast cash flows of AED 1.7bn from the 2 projects to be
spread over FY 14-33e, given the current payment term structure (avg. 12 yrs for Hayy
Al Waha and 9 yrs for Tag Sultan). We value the NPV of Hayy Al Waha and Tag Sultan
at EGP 1.63/share and EGP 3.84/share, respectively.
Residual land: Management plans to begin developing KM 45 (59.3mn sqft) in H2 14e
and the remaining 35.5mn sqft of Teegan in the next 2-3 years. We refrain from
modeling the projects on lack of details, and instead mark the land to market and
apply a 25% illiquidity discount. We estimate a value of EGP 33.57 EGP/share on
undeveloped land, driving 82% of SOTP value valuation.
Contracting subsidiaries: We value MNHD’s contracting business using a 5-yr DCF
(16.6% WACC, 4% g) at 2.31/share at 14.7x implied FY 15e EV/EBITDA.
Exhibit 7: We model for Hayy Al Waha and Tag Sultan to be fully sold by FY 18e
per share
%
Property sales (NPV)
5.5
13%
Add: MV of residual land 33.6
82%
Add: Subsidiaries & other items
1.4
3%
Less: Net debt
(0.9)
2%
Less: NCI
0.4
(1%)
Fair value per share
41.0
100%
Source: Company Data, Arqaam Capital Research
Exhibit 8: MNHD valuation exercise highly sensitive to the discount applied on the undeveloped 9mn sqm
Source: Company Data, Arqaam Capital Research
1.6
3.8 2.3 0.9
33.6 0.9 0.4 41.0
--5
10 15 20 25 30 35 40 45
NPV
-Hay
y Al
Wah
a
NPV
-Tag
Su
ltan
DCF -
Subs
idia
ries
DCF -
othe
r op
erat
ing
item
s
MV
of L
and
Net d
ebt
Non-
cont
rolli
ng
inte
rest
FVE
AED/share
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 55
Key risks
Downside
Affordability: We estimate that MNHD’s product has experienced a 30%+ increase in
average prices over the past 5 years. Further momentum would potentially price out a
proportion of the addressable buyer pool. Costs, on the other hand, are prone to
inflation, and absence of hedges.
Customer default: MNHD reduced its term payment structure from 15 years to 9
years to mitigate customer default risk and accelerate cash collections. We believe
the risk can be reduced further if the business were to engage 3rd
party mortgage
lenders, mitigating its exposure to buyer creditworthiness.
Currency risk minimal: The business incurs costs in EGP while its sales are earned in USD, circumventing much of the currency risks faced by peers.
Lack of recurring income, with MNHD managing a negligible investment portfolio of
EGP 1mn limited to rentals under old rental laws (at very cheap rent/sqm). The
Teegan and KM 45 projects might introduce new GLA elements.
Upside
Development of KM 45 and Teegan. We currently estimate that the development of
KM 45 (25% footprint) and Teegan (40%) would yield an additional 20-25% to our FVE.
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 56
Development Pipeline
Hayy Al Waha and Tag Sultan to generate EGP 2.2bn sales in the next 5 years
Further upside (and potentially recurring income elements) on launch of Teegan and
KM 45 (+20-25% FVE)
Hayy Al Waha
The project is spread over c.508k sqft with 40% of inventory available for sale. The remaining
units are in Phase III and Block 16 (under design), and are offered at c.276k EGP/sqft- thereby
targeting the middle-income segment. Hayy Al Waha is a fully operational development, and
we expect the company to complete the construction of remaining units in the next 2-3 years.
We forecast EGP 150mn and EGP 260mn in sales for FY 14e and FY 15e respectively, 18-20%
below management’s guidance (EGP 185mn FY 14e), out of prudence.
Exhibit 9: 1,206 units to be fully sold by FY 18e for c.EGP 560mn
Source: Company Data, Arqaam Capital Research
Exhibit 10: C. EGP 140mn will be spent over the next 4 years to complete Al Waha project
Source: Company Data, Arqaam Capital Research
Phases 1 and 2 – fully sold in FY 13A. The 13 remaining units of Phase I and 125 units of Phase
II were sold last year at c.EGP 1.24mn/unit and c.560k/unit respectively.
Phase 3
MNHD will complete the development of the 546 units (avg. area of 1.6k sqft) by FY 16e. We
forecast an annual CAPEX requirement of EGP 22mn to be spent during FY 14-16e. 115 units
are already sold, and we estimate an average of 170 units to be sold p.a. during the next 2
years, at an average price of 430k EGP/unit.
Block 16
The phase is currently being designed with 485 units planned for release. We model for c.120
units to be sold annually during FY 15-18e. MNHD allocated CAPEX of EGP 53mn for Block 16.
We expect construction to commence in FY 15e and to extend for 3 years (c.EGP 18mn CAPEX
p.a.).
153
261 306
121 146
65
114
133
54 65
--
20
40
60
80
100
120
140
--
50
100
150
200
250
300
350
FY 14e FY 15e FY 16e FY 17e FY 18e
Units sold (LHS) Sales (EGP mn)
22
39 39
18
--
5
10
15
20
25
30
35
40
45
FY 14e FY 15e FY 16e FY 17e
CAPEX (EGP mn)
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 57
Teegan
Teegan covers an area of 35.5mn sqft, over which MNHD is due to build c.15k units in FY 15-
16e (39.3mn sqft BUA). The project will be divided into 8-12 phases (18 months/phase).
Teegan will be sold on an off-plan basis, and as such CAPEX would be largely customer-
financed.
Tag Sultan
Tag Sultan (8% of Teegan) was launched in Q3 12A. The project involves c.3.3mn sqft of BUA
and would yield revenues of EGP 1.82bn. 2012 sales targets were reached before the official
launch. We expect the project to be completed by FY 16e, as per management guidance. We
also believe that accelerated construction (to 6-12 months per building) would allow MNHD to
begin handovers in Q3 15e (2-3 years from sale). 930 units (55% of total) have been sold to
date. We model for full product uptake by FY 15e, and forecast c.EGP 580mn of sales p.a. in FY
14-15e.
Exhibit 11: Strong demand for Tag Sultan product
Source: Company data, Arqaam Capital Research
Exhibit 12: Handovers to begin in Q3 15e
Source: Company data, Arqaam Capital Research
KM 45
The tentative master plan for KM 45 (50.4mn sqft of BUA) was approved by the government in
Q2 13A. MNHD plans to replicate the Teegan product in KM 45, which is located in a prime
area of Cairo (near Madinty by TMG). MNHD projects sales of 400mn p.a. in FY 14e and FY 15e.
We withhold from explicitly modeling for the project until a tangible launch date is
communicated.
135
482 544 539
145
517
583 578
--
100
200
300
400
500
600
--
100
200
300
400
500
600
FY 12A FY 13A FY 14e FY 15e
Units sold (LHS) Sales (EGP mn)
255
723 723
--
100
200
300
400
500
600
700
800
FY 15e FY 16e FY 17e
Units delivered
September 18 2014
Medinet Nasr Housing © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 58
Nasr Gardens
Minor impairment risk: Also known as the Mubarak Housing Project, Nasr Gardens is a low-
income budget residential project launched in January 2011. This public-private sector
partnership was put on hold after the fall of ex-President Mubarak’s regime. Around 9k units
were planned for development.
MNHD to be compensated for expenditures if the project is withdrawn: The project has had
minimal traction, with only 140 units sold and built. Units will likely not be handed over until
the government supplies the required infrastructure. If the project is withdrawn, MNHD will be
compensated for expenses incurred, and remaining land cost (on c.7.1mn sqft) either
reimbursed or netted out from tax payments due. In the event the project is resumed, EGP
276mn would be required to complete the remaining 8.9k units. The outstanding land
payment (of EGP 19mn) will not be paid until the dispute is resolved.
Exhibit 13: Only 10% of Nasr Gardens has been built ……………..
Source: Company Data, Arqaam Capital Research
Exhibit 14: The project requires EGP 276mn in CAPEX if resumed
Source: Company Data, Arqaam Capital Research
Subsidiaries
Restructuring is ongoing: Al Nasr for Utilities and Installation is 98% owned by MNHD and acts
as an in-house contractor for the company. It has incurred losses on mismanagement and
inefficiency. MNHD has recently restructured the unit for better cash management and
improved operations. We expect the subsidiary to start contributing to MNHD EPS, though
marginally, in FY 14e, after breaking-even in FY 13A.
Land disputes
28 land plots are currently under legal dispute, and can provide upside potential if reclaimed:
42mn sqft are currently excluded from our assessment of MNHD’s land bank, as they are under
legal arbitration proceedings:
9 plots (c.315k sqft), with relatively minor disputes, nearing resolution
15 plots (c.6.2mn sqft), facing resolvable disputes
4 plots (c.35.5mn sqft) including Ezbet Al Haganah and Ezbet Al Arab, facing disputes
that are difficult to resolve, according to management
708 760
2,106
5,526
--
1,000
2,000
3,000
4,000
5,000
6,000
Under construction
Ready for construction
Awaiting permits Under planning
Project status
27
60
146
44
--
20
40
60
80
100
120
140
160
Phase I Phase II Whole project
Cost (EGP mn)
Infrastructure cost Construction cost Services
I n i t i a t i o n R e p o r t
S e p t e m b e r 1 8 2 0 1 4
Mohammad Kamal mohammad.kamal@arqaamcapital.com +9714 507 1743
Heba Khalil Arqaam Capital Research Offshore s.a.l
Egypt – Real Estate Egyptian Resorts Company: Downside risks outweigh growth potential
SELL
Real Estate / Egypt Bloomberg code EGTS EY
Market index EGX
Price target (local) 1.20
tP/NAV 0.5x
Upside (%) -17.7
Market data 17/09/2014
Last closing price 1.46
52 Week range 0.9-2.1
Market cap (EGPmn) 1,533
Market cap (USD mn) 214
Average daily traded value (EGPmn) 27.6
Average daily traded value (USD mn) 3.9
Year-end (local mn) 2013 2014e 2015e 2016e
Revenues 28.9 59.6 218.0 233.9
EBITDA (21.1) (8.9) 111.4 117.7
EPS - - 0.1 0.1
P/E (current price) (37.0) (95.7) 20.3 23.3
Net debt (100.1) (55.5) (61.5) (65.4)
BVPS 0.8 0.8 0.9 0.9
P/B (current price) 1.9 1.9 1.7 1.6
EV/EBITDA (current price) (73.6) (175.4) 14.0 13.2
Div. yield (%) - - - -
FCF margin (%) (220.5) (82.8) 1.6 0.6
Net debt/EBITDA (x) 4.7 6.3 (0.6) (0.6)
Net debt/Capital (%) (12.1) (6.9) (6.9) (6.7)
Interest cover (x) (19.0) (12.1) 50.0 53.4
RoAA (%) (3.6) (1.6) 7.2 5.9
RoAE (%) (5.7) (2.5) 11.4 8.9
RoIC (%) (5.8) (2.6) 10.7 8.6
EGP 1.20
© Copyright 2014, Arqaam Capital Limited. All Rights Reserved.
See Important Notice.
Price Performance
89
116
143
170
197
224
Sep-13 Dec-13 Mar-14 Jun-14
EGTS EY EGX
Downside risks trump growth potential: We see serious
medium term challenges to secondary home demand in Egypt
Initiate coverage with a Sell rating and EGP 1.2 FVE
Demand for secondary homes in Egypt is a function of disposable
income and asset price reflation, both of which are coming off a low
base: ERC’s product is concentrated in the secondary/vacation home
market on the Red Sea coast, in which demand is typically (i) highly
cyclical, and (ii) a function of perceived current and future wealth.
Asset values on the Red Sea are likely sensitive to overall income
growth in the upper quartile of the income-earning population (average
monthly wages for the segment are 5-7% up y/y), and tourist traffic
numbers, which remain subdued (9.5mn tourists in FY 13A, 28% below
historical averages. We see material challenges to sales, though unit
numbers in absolute terms are small (87 units in 4 years). We view
current valuation multiples (0.5x p/tNAV, 29.9x FY 15e P/E) as overly
generous. We see a high degree of reliance on land sales for cash
generation, which may impact liquidity (>100% of operating cash flows
in FY 15e/16e). We initiate with a Sell rating and EGP 1.2 FVE.
Disputes may affect >70% of ERC’s land assets. ERC is engaged in 2
cases requiring arbitration, with the Egyptian government and the
Tourism Development Authority. If ruled against ERC’s favor, the cases
can result in the loss of >70% of the ERC’s land assets. Litigation has
been in process since 2010-11.
Market-implied CMP/NAV of 0.60x is generous in our view, placing
ERC on par with MENA developers that enjoy cash flow generation via
recurring income, substantial land assets, and proximity to strong sales
drivers. Our NAV valuation implies 0.5x tP/NAV, at an 17% discount to
current market valuation, which we think is fair given product uptake
challenges.
Potential upside catalyst: ERC plans to launch Sawari Marina (1.2k
units), contingent on resolving land disputes with the TDA. We estimate
that the project could add EGP 2-3/share (+80-160% further upside to
FVE), if executed.
Risks: (i) Politics and security along the Red Sea coast, (ii) currency
depreciation, and (iii) land disputes.
September 18 2014
Egyptian Resorts Company © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 60
Abacus Arqaam Capital Fundamental Data
Profitability
Growth
Gearing
Valuation
-50%
0%
50%
100%
2014 2015e 2016e 2017e 2018e
EBITDA Margin Net Margin
-100%
0%
100%
200%
300%
2014 2015e 2016e 2017e 2018e
Revenues Assets
-10%
-5%
0%
5%
-5.0
0.0
5.0
10.0
2014 2015e 2016e 2017e 2018e
Net Debt/Capital Net Debt/EBITDA
-200
-100
0
100
2014 2015e 2016e 2017e 2018e
P/E P/E Sector
Egyptian Resorts Company
Year-end 2012 2013 2014e 2015e 2016e 2017e
Financial summary
Reported EPS (0.09) (0.04) (0.02) 0.07 0.06 0.16
Diluted EPS (0.10) (0.05) (0.02) 0.09 0.08 0.21
DPS - - - - - -
BVPS 0.83 0.78 0.76 0.85 0.93 1.14
Weighted average shares 1,050.00 1,050.00 1,050.00 1,050.00 1,050.00 1,050.00
Average market cap 1,228.50 2,100.00 1,795.50 1,795.50 1,795.50 1,795.50
Year-end 2012 2013 2014e 2015e 2016e 2017e
Valuation metrics
P/E (x) (current price) (15.4) (37.0) (95.7) 20.3 23.3 8.9
P/E (x) (target price) (13.0) (31.2) (80.7) 17.1 19.7 7.5
P/BV (x) (target price) 1.5 1.6 1.6 1.4 1.3 1.1
EV/EBITDA (x) (53.7) (59.2) (141.1) 11.2 10.6 4.1
EV/FCF (x) (26.4) (19.6) (25.4) 351.5 960.1 245.5
EV/Invested capital (x) 1.4 1.5 1.6 1.4 1.3 1.0
Dividend yield (%) - - - - - -
Year-end 2012 2013 2014e 2015e 2016e 2017e
Growth (%)
Revenues 19.0 (22.1) 106.0 266.1 7.3 105.6
EBITDA 39.4 (9.4) (58.0) nm 5.6 160.8
EBIT* 34.0 (3.5) (36.4) nm 6.8 182.0
Net income 1,379.2 (56.6) (57.2) nm (12.9) 163.4
Year-end 2012 2013 2014e 2015e 2016e 2017e
Margins (%)
EBITDA (62.9) (73.1) (14.9) 51.1 50.3 63.8
EBIT (103.2) (127.9) (39.5) 44.7 44.5 61.0
Net (296.5) (165.1) (34.3) 44.2 35.8 45.9
Year-end 2012 2013 2014e 2015e 2016e 2017e
Returns (%)
RoAA (7.8) (3.6) (1.6) 7.2 5.9 14.1
RoAE (11.9) (5.7) (2.5) 11.4 8.9 20.2
RoIC (12.7) (5.8) (2.6) 10.7 8.6 18.4
FCF margin (127.9) (220.5) (82.8) 1.6 0.6 1.1
Year-end 2012 2013 2014e 2015e 2016e 2017e
Gearing (%)
Net debt/Capital (12.5) (12.1) (6.9) (6.9) (6.7) (6.1)
Net debt/Equity (12.5) (12.2) (6.9) (6.9) (6.7) (6.1)
Interest cover (x) - (19.0) (12.1) 50.0 53.4 150.5
Net debt/EBITDA (x) 4.6 4.7 6.3 (0.6) (0.6) (0.2)
September 18 2014
Egyptian Resorts Company © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 61
Abacus Arqaam Capital Fundamental Data
Company profile
Egyptian Resorts Company was established in 1996 to build an integrated tourist compound in the Sahl Hasheesh area on the Red Sea in Egypt. The business acquired 441mn sq ft of land in the process, divided across 3 development phases that end in 2025.
ERC currently generates revenues from (i) selling land plots to sub-developers, once infrastructure is installed, (ii) developing residential projects for sale, (iii) managing a recurring income portfolio of strategic real estate assets, and (iv) supplying utilities and community management services to its residents.
FY 15e potential upside catalyst:
- The launch of Sawari Marina, contingent on resolving a dispute with the Tourism & Development Authority (TDA).
Ownership
Shareholders
KATO Investment 12%
Rowad Tourism Company 10%
First Arabian Company 10%
Others 36%
Free Float 32% Source: Zawya
Board of Directors
Mohammed Kamel CEO
Samir Makary Chairman
Darren Gibson Vice President
Wael Abu Alam Director
Mohammed Saad Director
Carlos Arenas Director
Osama Shendy Director
Source: Zawya
Egyptian Resorts Company
Year-end 2012 2013 2014e 2015e 2016e 2017e
Income statement (EGP mn)
Sales revenue 37.1 28.9 59.6 218.0 233.9 481.0
Gross profit (16.2) (23.1) 12.8 130.7 139.7 351.7
SG&A (27.4) (33.6) (36.4) (33.3) (35.7) (58.3)
EBITDA (23.3) (21.1) (8.9) 111.4 117.7 306.8
Depreciation & Amortisation (15.0) (15.8) (14.6) (14.0) (13.6) (13.4)
EBIT (38.3) (37.0) (23.5) 97.4 104.0 293.4
Net interest income(expense) 18.5 2.7 2.7 0.4 0.7 0.9
Other pre-tax income/(expense) (87.2) (8.9) - - - -
Profit before tax (107.0) (43.1) (20.8) 97.8 104.7 294.2
Income tax expense (3.1) (4.6) 0.3 (1.6) (20.9) (73.6)
Minorities (10.5) (6.3) (4.4) 20.8 18.1 47.6
Other post-tax income/(expense) - - - - - -
Net profit (110.0) (47.7) (20.4) 96.2 83.8 220.7
Arqaam adjustments (including dilution) - - - - - -
Arqaam Net profit (110.0) (47.7) (20.4) 96.2 83.8 220.7
Year-end 2012 2013 2014e 2015e 2016e 2017e
Balance sheet (EGP mn)
Cash and equivalents 108.3 108.9 55.5 61.5 65.4 73.3
Receivables 304.7 324.4 326.4 358.7 401.8 498.1
Tangible fixed assets 149.8 142.1 133.0 126.6 122.5 120.5
Investment properties 45.9 27.3 62.7 141.0 178.4 323.3
Other assets including goodwill 53.8 - - - - -
Total assets 1,365.9 1,308.8 1,282.1 1,374.1 1,457.9 1,678.6
Payables 101.4 50.2 50.2 50.2 50.2 50.2
Interest bearing debt - 8.8 - - - -
Other liabilities 396.7 429.8 432.4 428.1 428.1 428.1
Total liabilities 498.1 488.8 482.5 478.3 478.3 478.3
Shareholders’ equity 867.8 820.0 799.6 895.8 979.6 1,200.3
Total liabilities & shareholders’ equity 1,365.9 1,308.8 1,282.1 1,374.1 1,457.9 1,678.6
Year-end 2012 2013 2014e 2015e 2016e 2017e
Cash flow (EGP mn)
Cashflow from operations (43.7) (63.4) (43.5) 11.6 11.8 17.4
Net capex (3.8) (0.4) (5.8) (8.1) (10.5) (12.3)
Free cash flow (47.5) (63.8) (49.3) 3.6 1.3 5.1
Equity raised/(bought back) - - - - - -
Dividends paid - - - - - -
Net inc/(dec) in borrowings - 8.8 (8.8) - - -
Other investing/financing cash flows - - 4.7 2.4 2.6 2.8
Net cash flow (49.8) (20.0) (53.4) 6.0 4.0 7.9
Change in working capital (44.9) (63.1) (33.0) (96.2) (83.0) (213.9)
Mohammad Kamal Heba Khalil mohammad.kamal@arqaamcapital.com Arqaam Capital Research Offshore s.a.l
+9714 507 1743
September 18 2014
Egyptian Resorts Company © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 62
Initiating coverage with a Sell rating and EGP 1.2 FVE
Developer of secondary/vacation homes along the Red Sea coast: Egyptian Resorts Company-
ERC is a master developer of resorts and secondary homes in Sahl Hasheesh Bay on the Red
Sea in Egypt. ERC retains control over the design of the master plan, and sells land plots to
developers who in turn build and sell residential and commercial projects. ERC maintains
architectural control across its developments.
Land sales to 3rd
party developers drive revenues, but face challenges in current economic
environment: The business owns a c.441mn sq ft land bank in Sahl Hasheesh, out of which
20.1mn sq ft (4.6mn sq ft in Phase I and 15.5mn sq ft in Phase II) are currently ready for sale.
The remaining 8.6mn sq ft is undeveloped and requires EGP 116mn in CAPEX (equivalent to
9.2% of the existing development properties account, and 3.7% assets) to become ready for
sale to 3rd
party developers. We see challenges to land sales of this profile in the current
economic climate in Egypt, which we believe will impede investment in luxury accommodation
and secondary homes, both from the supply side (developers) and demand (end buyers). The
allocation of 305mn sq ft in Phase III by TDA to ERC was withdrawn due to delays in the
submission of plans. EGP 72mn CAPEX has been incurred. With Phase III land not currently
available for sale due to legal challenges, and weak 3rd
party developer interest in it (in our
view), we expect serious challenges to cash generation to precipitate in FY 15-17e.
Recurring income assets (70% revenues): ERC has recently developed strategic assets (Sawari
Marina, Jamaran, and Old Town) in order to drive asset values up in the vicinity of its land
bank. The 3 assets comprise of residential, retail, and leisure facilities, which are intended to
drive footfall within the community. ERC currently manages the community and provides
utility services. This has allowed some revenue diversification away from land sales (70%
services, 30% land FY 13A vs. 100% land FY 08A), providing some immunity from property
market cycles.
Exhibit 1: Development pipeline
Number/area Total revenue Status
Phase I
Old Town 51 apartments EGP 47mn Completed
Jamaran 47 villas EGP 122mn In-progress
Land 4.6mn sq ft (5 plots) EGP 370mn Developed
Phase II Sawari Marina
1,020 apartments 171 villas
EGP 3.8bn On hold - connected to phase III
Land 24.1mn sq ft EGP 1.9bn 60% developed
Phase III Land 305mn sq ft EGP 262bn Under legal dispute
Source: Company Data, Arqaam Capital Research
Demand for secondary homes in Egypt is a function of disposable income and asset price
reflation, both of which are coming off a low base: ERC’s product is concentrated in the
secondary/vacation home market on the Red Sea coast, in which demand is typically (i) highly
cyclical, and (ii) a function of perceived current and future wealth. Asset values on the Red Sea
are likely sensitive to overall income growth in the upper quartile of the income-earning
population (average wages for the segment are 5-7% up y/y), and tourist traffic numbers,
which remain subdued (9.5mn tourists in FY 13A, 28% below historical averages).
September 18 2014
Egyptian Resorts Company © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 63
Exhibit 2: Services rendered provided c.70% of FY 09-12A revenues, as land sales stalled ………………………………..
Source: Company Data, Arqaam Capital Research
Exhibit 3: 70% of ERC's land bank was withdrawn by the TDA due to legal disputes regarding the submission of master plans- we omit land from our model
Source: Company Data, Arqaam Capital Research
Legal cases may affect >70% of ERC’s land bank. ERC faces 2 legal cases regarding its land
assets: (i) The government withdrew land plots from ERC after the 2011 revolution, claiming
that the Tourism Development Authority- TDA breached laws by allocating the land to
developers via direct order. Management contends that the law does not apply to ERC, as the
business is only mandated with the development of infrastructure, and not the actual end-user
properties. (ii) The TDA withdrew plots behind Phase III (305mn sq ft) of Sahl Hasheesh from
ERC, due to delays in submitting master plans, without prior notice. Litigation has been in
process since 2010-11.
Near-term CAPEX on hold: ERC is exercising cash flow prudence by cutting CAPEX byc.50%.
Cash reserves (EGP 99mn Q1 14A) appear sufficient to meet FY 14-15e CAPEX (c.EGP 43mn),
given that the business will solely roll out critical infrastructure going forward. Going forward,
we estimate that 60% of infrastructure CAPEX has already been incurred, and expect the
remaining EGP 217mn to be spent in phases over the next 6 years.
Exhibit 4: Cash and receivables barely sufficient…
Source: Company Data, Arqaam Capital Research
Exhibit 5: ….to finance CAPEX in the next two years
Source: Company Data, Arqaam Capital Research
40%99% 54%
82%1%
36%
15%
60%
10%
--
3%
--
5
10
15
20
25
30
35
40
FY 09A FY 10A FY 11A FY 12A
Historical revenue breakdown (mn EGP)
Revenues from services Development propeties Other income Rentals
60.3 52.3 4.6
75.7 70.4 24.1
301.4
0
50
100
150
200
250
300
350
400
450
500
Total Sellable Remaining
Land bank (mn sqft)
Phase I Phase II Phase III
108 109 56 61 65 73
305 324 326 359 402
498
(271) (236) (230) (226) (226) (226)
(227) (252) (252) (252) (252) (252)
(600)
(400)
(200)
--
200
400
600
800
FY 12A FY 13A FY 14e FY 15e FY 16e FY 17e
In EGP mn
Cash on hand & at banks Accounts & notes receivable (net)
Short-term liabilities Long-term liabilities
21 21
44 44
--
5
10
15
20
25
30
35
40
45
50
FY 14e FY 15e FY 16e FY 17e
CAPEX (In EGP mn)
September 18 2014
Egyptian Resorts Company © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 64
Valuation: ERC trades at 0.6x P/NAV, on par with far better
positioned developers in MENA
Our NAV assessment implies 0.5x P/NAV, which we believe is fair given business risk: We
value ERC’s land bank at EGP 2.17/share (90% of NAV) by applying a 20% discount to current
market prices (EGP 80/sq ft) and excluding Phase III. We apply a 60% margin to Jamaran’s BV,
which is already carried at near-zero on the balance sheet.
Recurring income: We value ERC’s recurring income portfolio at EGP 0.06/share (2.4% of NAV)
using a 7-yr DCF model. The BV of other assets and net debt constitute the remainder of our
NAV estimate (EGP 0.17/share). ERC is currently trading at a 40% premium to our target NAV,
which we find unwarranted given serious challenges to the business’s ability to monetize its
land assets in the medium term.
We do not expect dividends in FY 15e/16e: We believe ERC will not pay any dividends in the
next 2-3 years, as it aims to route funds towards developing its income-generating assets, and
purchasing new land plots.
Risks: Downside: (i) Politics and security along the Red Sea coast in Egypt, which has been the
target of several attacks on tourists in recent years, (ii) currency depreciation, (iii) land
disputes. Upside: economic growth and recovery, which will drive disposable income levels
and perceptions of wealth, which in turn drive demand for secondary and vacation homes.
Exhibit 6: SOTP components
Source: Company Data, Arqaam Capital Research
1.15 0.01 0.04 0.06 (0.07) (0.08) 0.05 1.2
--
0.20
0.40
0.60
0.80
1.00
1.20
1.40
MV
of
lan
d
NP
V -
Old
To
wn
NP
V -
Jam
aran
DC
F-re
curr
ing
inco
me
po
rtfo
lio
DC
F-o
the
r o
pe
rati
ng
ite
ms
Ne
t d
eb
t
NC
I
FVE
EGP/share
September 18 2014
Egyptian Resorts Company © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 65
NAV details
Exhibit 7: NAV breakdown
Q1 14A Fair value (AC estimate) Methodology
Short-term
Receivables - advance payments 53 53
Sundry creditors and other credit balances 60 60
Due to ATD 33 33
Provision for claims 13 13
Estimated cost of development of sold land 77 77
Bank - credit facilities 10 10
Long-term
Purchase of land creditors 250 250
Due to ATD 1 1
Cash on hand & at banks (99) (99)
Net debt 397 397 At BV
Land bank
Work in process - land (phase I) 29 246 At 20% discount to MV - EGP 80/sq ft
Work in process - land (phase II) 181 1,410
At 20% discount to MV - EGP 80/sq ft Less infrastructure cost (EGP 116mn)
Work in process - land (phase III) 303 --
At 100% discount to MV - EGP 80/sq ft Under legal dispute
Projects
Work in process - Jamaran 0 0 At 60% gross margin
Work in process - Sawari Marina 11 11 At 0% margin – under legal dispute
Investment properties
Build to-lease land
Plot 9-A 12 65 7-yr DCF, 18.7% WACC, 8.2% implied cap rate
Plot 19 10 54 At 20% discount to MV - EGP 80/sq ft
Build to-sell land
Plot 13 62 397
At 20% discount to MV - EGP 80/sq ft
Plot 16 14 92
Plot 49 12 76
Other 72 72 At BV
Total 182 748
Fixed assets (net) 148 148 At BV
Accounts & notes receivable (net) 335 335 At BV
Inventory 2 2 At BV
Projects under progress 3 3 At BV
Sundry creditors and other credit balances 10 10 At BV
Equity 808 2,522
Less: CAPEX - (land - phase II) (116) (116)
Add: Reimbursement for land payments from TDA (phase III)
113 113
NAV 733 2,514
NAV/share
2.4
FVE/NAV
0.5
Source: Company Data, Arqaam Capital Research
September 18 2014
Egyptian Resorts Company © Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 66
SOTP
Land bank: ERC sits on c.441mn sqft out of which only 6.5% (4.6mn sqft in Phase I and 24.1mn
sqft in Phase II) is available for sale. The allocation of 305mn sqft towards Phase III was blocked
by the Tourism Development Authority for delays in submitting master plans.
Exhibit 8: Around 6.5% of ERC’s land bank (c.441mn sqft) is available for sale
In sqft Total area Area available for sale Remaining area
available for sale
Phase I 60.3 52.3 4.6
Phase II 75.7 70.4 24.1
Phase III 304.8 215.3 --
Total 440.8 338.0 28.7
Source: Company Data, Arqaam Capital Research
Property sales: ERC’s portfolio consists of 87 units available for sale (90% of total) in Old Town
(51 apartments, 47 remaining) and Jamaran (47 villas, 40 remaining). The 2 developments are
high-margin projects (c.60% GPM) given extremely cheap land acquisition cost.
Recurring income portfolio: Sahl Hasheesh Company, ERC’s subsidiary (78.43% owned),
operates 100% of the company’s recurring income portfolio. ERC also provides community and
utilities management services (water, electricity, and communication) to Sahl Hasheesh. We
expect recurring income to grow at a 5-year CAGR of c.18% driven by an increase in occupancy
(+2x by FY 18e), which is contingent on building new traffic for the destination.
Exhibit 9: Recurring income portfolio linked to footfall/visitation traffic in Sahl Hasheesh
Type Total % leased Average area Total area
Retail shops 118 47% 570 100,298
F&B outlets 23 13% 3,638 91,138
Spa & health club 2 --% 6,243 12,669
Cinemas 3 --% 5,382 16,146
Apartments* 16 100% 689 46,188
Pub 1 100% 2,917 2,917
269,356
Source: Company Data, Arqaam Capital Research
*The 16 leased apartments may be sold if demand arises
Land bank: We value phases I and II (28.7mn sqft) using market prices (EGP 80/sqft) adjusted
for (i) development CAPEX (c.EGP 116mn) behind raw land in phase II (8.6mn sqft) and (ii)
illiquidity (40% discount). We exclude phase III land (305mn sqft) from our valuation and add
back the payment (c.EGP 41mn) that has already been made to the TDA. We arrive at EGP
1.15/share (96% of FVE) and acknowledge significant upside (+2x) to our FVE, if ERC succeeds
in resolving its legal disputes with the TDA.
NPV of sales portfolio: We forecast the full sale of Old Town and Jamaran to generate c.EGP
100mn of net cash flow in FY 14-21e. We value the projects at EGP 0.01/share (0.8% of FVE)
and EGP 0.04/share (3.3%), respectively. Recurring income portfolio: We use a 7-yr DCF
(18.7% WACC, 4% growth) to value ERC’s recurring income portfolio and arrive at 0.06
EGP/share (5% of FVE) and an 8.2% implied cap rate.
September 18 2014
© Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice.
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