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Securities & Investment

Tag: Real estate sector in Egypt

HC: TMG Holding witnesses exponential growth

Posted on by Marwa Nakhla

TMG Holding — Growing exponentially

  • Recent business expansions create sizeable value, offer exposure to regional economic growth, more recurring income, and hedge against EGP weakness

  • Hospitality expansions to boost recurring revenue in the short term, while Banan to positively impact the P&L by 2029e. We expect a 4-year CAGR of c42% in revenue, c58% in EBITDA, c78% in net profit

 

HC Brokerage issued their update about Egypt’s real estate sector through shedding the light on TMG Holding performance and studied how the aggressive expansionary mode affected its share’s price and turnover.

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “ An aggressive expansionary mode positively reflected on TMGH’s share price and turnover: TMG’s past year was full of mega expansions and updates. Most notably, the updates included, 1) announcing in September 2023 the development of a 10m sqm mixed-use project in Saudi Arabia in partnership with the Saudi National Housing Company (NHC) (with total expected proceeds of SAR40bn and investments of SAR31bn), granting it a regional foothold, substantial USD exposure and access to higher client spending power compared to Egypt, 2) acquiring in July 2023 a 51% majority stake with management rights in Legacy Hotels, in which TMGH is partnering with ADNEC Group, fully-owned by ADQ Holding, through its hospitality arm, ICON, which expands TMGH’s existing hotel portfolio of c1,000 rooms to c3,500 rooms in addition to c1,500 under development  in Egypt (currently a 2.1% market share of Egypt’s hospitality capacity, to increase to 3.0% once SouthMed hotels become operational, on our numbers), and 3) launching in July 2024 SouthMed, a mixed-use project in the North Coast, in partnership with the Egyptian government, granting the company sizeable cash flows with almost no execution risk. The updates have changed the company’s story, in our view, labeling it as a regional real estate developer and one of the largest hospitality players in Egypt. Also, this has positively reflected on its share price and turnover surpassing the USD10m average daily turnover mark y-t-d, from an average of USD1.38m in 2023. The increase in market cap led to the inclusion of the stock in the MSCI Egypt Index as part of the May 2024 semi-annual revision of the MSCI Global Standard Indexes after it was part of the MSCI Egypt Small Cap Index.

 

“ We expect strong real estate cash collections of EGP841bn over our 2Q24—30e forecast horizon: We estimate EGP841bn in collections over 2Q24—30e, including collections from existing receivables, new sales in the launched areas of Egypt projects, Banan, and income received from SouthMed sales which we estimate at EGP144bn. We estimate EGP577bn of real-estate revenue recognition over 2Q24–2030e, accounting for the outstanding backlog of EGP180bn and EGP397bn from new sales from the launched projects’ phases. We assume total real estate cost recognition of EGP368bn over this period, implying an average future gross profit margin of c36% for the launched projects. We expect hospitality revenue to grow at a 2023—27e CAGR of c69%, positively impacting TMGH’s margins and profitability. We expect a hospitality gross profit margin of c44% over 2024—30e. For rental, club, and other revenue, we expect a 2023—27e CAGR of c18% and a gross profit margin of c54% over 2Q24–2030e. TMGH has been increasing its third-party sales over the past several quarters, on which we estimate it receives a c8% share of sales; accordingly, we account for such sales over our forecast period. As profitability increases, we expect higher dividends starting 2026 (backed by Noor deliveries) and forecast a DPS of EGP3.92 then.” Mariam Elsaadany concluded.

 

HC: Heliopolis Housing, Accelerated monetization underway

Posted on by Marwa Nakhla

Heliopolis Housing

Accelerated monetization underway

  • Lucrative Heliopark sale valuation generates sizeable proceeds and sets a land valuation benchmark for HELI’s remaining land bank

  • HELI’s focus shifts to more revenue-sharing deals as the suboptimal execution pace weighs on its profitability

HC Brokerage issued their update about Egypt’s real estate sector shedding the light on Heliopolis Housing’s performance and foresee Solid profitability over the short-medium term.

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “ Heliopark sale kick starts land monetization efforts: Following years of sitting on an idle land bank, Heliopolis Housing’s (HELI) management has approved the sale of the 7.12m sqm of Heliopark land plot (representing c31% of its land bank then) to the National Organization for Social Insurance (NOSI) in October 2023 for a total value of EGP15bn (net proceeds of EGP13bn), implying a price of EGP2,107/sqm and the lump-sum transaction was executed in 4Q23. We believe the Heliopark deal valuation reflects positively on the valuation of HELI’s remaining land bank in New Heliopolis City. In November 2023, the company signed the final contract for a revenue-sharing project with Mg Developments to develop 77.19 feddans (0.32m sqm) in districts 10 and 11 of its New Heliopolis City land plot and its share of the project’s revenue is EGP3.39bn, representing 32.1% of the project’s total revenue. In January 2024, it signed a bigger deal with Middle East for Investment and Touristic Development to develop around 865 feddans (3.63m sqm) in New Heliopolis City, where HELI’s share of revenue is c28% of the semi-finished units, and c3% of the finishing value, with expected proceeds of EGP39.7bn and a minimum guarantee of EGP23bn and the size of the deal is subject to increase to 1,070 feddans. Also, in March 2024, HELI received from Mountain View an offer to develop a 517-feddan plot (2.17m sqm) in New Heliopolis City, and another offer from Madinet Nasr Housing (MASR EY) to develop three land plots in New Heliopolis City with a total area of 580 feddans under revenue-sharing terms.  The sale of Heliopark in addition to the revenue-sharing deals, leaves the company with 12.4m sqm of undeveloped land in New Heliopolis City, down from a total land bank of 22.2m sqm previously. The monetization update comes after years of efforts by the Ministry of Public Business Sector (MPBS) to extract value from the company’s assets. Going forward, we expect HELI to focus on more revenue-sharing deals to create a steady income, and the development of New Heliopolis City, after securing funding for infrastructure spending from the Heliopark sales proceeds with a cost of around EGP4bn, based on our understanding.”

“ Solid profitability over the short-medium term: Our revenue estimates for the company mainly come from its revenue-share agreement with SODIC (OCDI EY), followed by the EGP1.30bn worth of its finished units’ inventory. HELI has been consistently holding on to inventory over the past nine quarters, which hampered its profitability. The company recently announced its plan to sell 460 residential units in New Heliopolis City worth EGP1.30bn, which should reflect positively on its FY24 revenue and net income. Revenue from SODIC East will have the largest contribution to total recurring revenue, with a total contribution of c56% over FY24—26e followed by a c44% contribution from unit sales. We estimate revenue of EGP1.65bn from SODIC East, over FY24—26e. HELI has already booked EGP1.26bn from the project, c25% of the EGP5.01bn minimum guarantee. It is worth noting that SODIC East revenue is recorded at virtually no cost, allowing the company to report high margins. We estimate revenue of EGP1.30bn from 460 units to be offered in 2024, at an average margin of c40%. We will include future revenue from the revenue-sharing deals in our forecast when launched. Our blended gross profit margin estimate for 4Q23—FY26e is c79% as our total costs estimate is EGP3.40bn over the same period. The company’s existing receivables stand at EGP1.27bn, which we account for in our collection schedule over 4Q23—FY33e, in addition to the EGP1.30bn of future unit sales. We expect the company to reduce its debt over the coming period as it utilizes the Heliopark proceeds. We expect the net debt position of EGP1.45bn to reverse into a net cash position of EGP3.28bn in 4Q23, and we gradually lower the debt balance to EGP543m in FY25 from EGP1.74bn as of 3Q23. The proceeds strengthen HELI’s balance sheet significantly, despite our estimate of a sizeable FY23 DPS of EGP2.30, implying a net-of-tax yield of c18%, based on the March 10 closing price of EGP12.6/share.” Mariam Elsaadany concluded.

About HC Brokerage

HC Brokerage is an affiliate of HC Securities & Investment– a full-fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services. HC Brokerage is an Egyptian registered company and member of Egypt’s Financial Regulatory Authority (FRA), and its registered address is 34 Gezirat Al-Arab St., Mohandessin, Giza, Egypt, Dokki 12311

Orascom Development Egypt: Gouna masterplan amendments add value

Posted on by Marwa Nakhla

  • Amendments to the Gouna masterplan waive environmental fees, unlock value, and increase ODE’s hospitality exposure

  • ODE enjoys solid profitability in 2023e as the 3Q23 land sale should offset potential FX losses

In a recent report, HC Brokerage issued an update note about Egypt’s real-estate sector, through shedding the light on Orascom Development Egypt where they expect ODE to offset potential FX losses.

Mariam Elsaadany, real estate analyst at HC Brokerage commented: “Gouna masterplan amendments should pave the way for significant value unlocking: In February 2023, Orascom Development Egypt (ODE) signed a new masterplan agreement with the Egyptian authorities, including the following terms: (1) approval of a new master plan for the remaining land bank in El Gouna and 1,000 hotel rooms at the company’s discretion, (2) granting ODE the right to connect its lagoon system to the sea via two new water canals to improve water quality in existing and future projects, (3) reducing the shoreline setback for the remaining land bank from 200 meters to 105 meters, which allows ODE to make commercial use of the most prime land of the destination, and (4) amending the transfer fee payable by ODE on real estate sales for the remaining land bank, which is fixed for ten years and will be paid in advance over 15 years, and (5) granting environmental permits for 24 projects in Gouna and exonerating ODE from all charges and settlement of all disputes with the Environment Protection Agency (EPA). The amendments remove the overhang on the stock and allow significant value extraction from its 16.6m sqm, which we had previously valued at an NPV of only EGP209/sqm, compared to EGP402/sqm currently. Moreover, ODE’s recurring income business benefitted from a strong touristic season, contributing c32% to 1Q23 revenue, up from c28% in 1Q22, and c29% to EBITDA, up from c20% in 1Q22. Nonetheless, ODE’s USD and EUR debt balance, representing c73% of total debt, exposes it to significant FX losses during EGP devaluations, despite recording higher hospitality revenue in EGP terms helped by the EGP devaluation. Accordingly, we expect more one-off transactions, including land sales and non-core asset sales, to offset possible FX losses and margin compression from the real estate business, such as the company’s sale of an EGP390m high-margin land plot in Gouna in 3Q23.”

 

Mariam concluded: “We expect accelerated collections on shorter payment plans in first-home projects and expect reduced risk of margin erosion due to core and shell offerings: We assume substantial increases in ODE’s real estate selling prices, hospitality average room rates (ARRs), and rental prices to preserve its profitability amid inflationary pressures. Annual urban headline inflation averaged 31.6% in 1H23 compared to a c59% increase in residential selling price increase and a c86% increase in hospitality ARR over the same period, demonstrating the company’s efforts to preserve its margins. Margin compression for ODE is limited during the coming two years, in our view, due to (1) the company’s strategy to raise selling prices and (2) expected one-off sales going forward, and (3) more core and shell offerings allow it to avoid margin erosion on finishing materials. For the real estate business, we expect a drop in sales volumes over 2023—2024e, in line with management’s strategy to hold onto inventory, where it opts to reduce the number of units launched to the market during uncertain times and offers them when the profitability outlook is higher. Our total receivables estimates over our forecast period stand at EGP151bn, including the company’s share of O West receivables. Our CAPEX estimate is EGP90.2bn for the forecast period, which implies an average margin of c40% for the company’s residential business. Over our forecast period, we increased hospitality occupancy rates to range from c70%–80% in Gouna and increased ARRs at an average of c10% annually. We did not include in our estimates any of the 1,000 planned hotel rooms in Gouna, and it is worth noting that the company is not obliged to build these rooms and can abandon the plan if it chooses to. Our hospitality estimate yields a c28% 4-year CAGR in hospitality revenue, and we expect the company’s hospitality margin to average c30% over our 2H23–2027e forecast period. We expect ODE’s 2023e net debt-to-equity to drop to 0.46x from 1.10x in 2022 as its cash balance grows on the back of strong collections. It is worth noting that the company has reduced payment plans in O West, which we believe affirms strong demand.  We also highlight the increase in the company’s interest expense, especially on the EUR and USD debt, given that c73% of its debt is in these currencies.”

 

HC: Palm Hills Development… Resilient performance

Posted on by Marwa Nakhla

  • HC Brokerage issued their update about Egypt’s real estate sector shedding the light on Palm Hills Development performance and maintaining the Overweight rating.

  • Sales and construction pace are picking up despite pandemic difficulties; we positively view coastal expansions and new key management figures
  • We expect collections of EGP54.5bn over 3Q21—2030 against CAPEX spending of EGP27.7bn
  • We reduce our TP c26% to EGP2.82/share and maintain our Overweight rating as we account for the settlement of Botanica; stock is trading slightly below par value at a 2021e P/NAV of 0.45x

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “ Healthy sales growth and project expansion: We continue to see solid sales figures as the sector gradually recovers from the pandemic’s impact. In the future, we expect the real estate sector’s performance to pick up from current levels aided by the Central Bank of Egypt’s (CBE) new EGP50bn middle-income mortgage finance initiative at a declining 8% interest rate. The price ceiling of units in the initiative has been revised upward to EGP2.50/unit, and it can now finance units not registered at notary offices provided that the beneficiary can provide alternative collateral to the mortgage lender, as per the most recent amendments to the initiative. We see that PHD could benefit from the amendments to the initiative given its sizeable ready-to-move inventory. Developers have been reporting impressive pre-sales figures with Talaat Moustafa Group Holding (TMGH EY), Emaar Misr (EMFD EY), and SODIC (OCDI EY), all exceeding our FY20 pre-sales forecasts by c9%, c29% and c2%, respectively and by 4.1x, c27%, and 2.1x in 1H21. Palm Hills Developments (PHD) has been no exception, reporting healthy pre-sales numbers, aided by project expansion. In FY20, it slightly exceeded the EGP12.0bn pre-sales revised target and gave FY21 a big boost with a strong 1H21, with the company currently expecting pre-sales to increase c17% y-o-y in FY21 EGP15.0bn. Construction pace has also gained momentum with EGP2.50bn expected in CAPEX in 2021, c67% higher y-o-y as it plans to deliver 1,450 units and any excess going to its ready-to-move inventory with a value of around EGP3.2bn as of 2Q21.  We also positively perceive PHD’s recent agreement with Taaleem Management Services (TALM EY Equity) to establish a university in Badya and the expected 3Q21 delivery of residential units in the project. Given the recent change in management entailing the hiring of two co-CEOs and managing directors in May, we would not be surprised by strategic changes taking place in the company towards the end of the year, in our view. According to its chairman, decisions related to the company’s securitization program, the sale of Botanica land, and available financing options are open to reassessment by the new management team. In terms of expansions, new projects will likely be in coastal cities as management has noticed a pickup in demand in second homes since the pandemic and seeks to capitalize on it. PHD is currently working on finalizing a 0.57m sqm North Coast revenue-share project with Hassan Allam, having already launched Hacienda West, which will add more North Coast inventory. On a less positive note, some c58% of PHD’s FY2021—26e sellable inventory is in Badya, which increases the company’s concentration risk, in our view. Also, in our opinion, Badya faces competition from Orascom Development Egypt’s (ORHD EY, Overweight, TP EGP8.21/share) O West project in terms of location and pricing.”

“ We expect collections of EGP54.5bn over 3Q21–2030e against CAPEX spending of EGP27.7bn; reflecting positively on PHD’s balance sheet: Our EGP49.6bn of expected real-estate revenue recognized over 3Q21–31e includes EGP15.9bn of existing backlog, as we continue to account for only the launched phases of Badya in our forecasts, given that the project is only c5% sold. Our numbers point to an average future gross profit margin of c48% with total costs of EGP26.1bn. We expect new net contracted sales of EGP43.0bn over 3Q21–24e, which is reduced to EGP31.4bn when adjusted to PHD’s stakes in revenue-sharing projects, Badya, Palm Hills New Cairo (PHNC), Hacienda West, and Capital Gardens. We expect PHD to sell some 9,793 units over the same period, with PHNC accounting for c22%, Palm Hills Alexandria c20% and Capital Gardens c18%, and the remaining sales of the launched areas in Badya to account for c13%. Our numbers point to CAPEX spending of EGP27.7bn over 3Q21–2030e and collections of EGP54.5bn extending to 2030e. For deliveries, we expect the company to deliver 16,398 units over 3Q21–2028e. PHD is targeting EGP2.5bn worth of securitization transactions in 2021, of which it already closed an EGP1.20bn transaction in June. We estimate the company’s net debt/equity to drop to 0.37x by 2021e and to 0.25x by 2022e as its balance sheet improves due to good collections, better cash flow management, and especially in light of the low-interest-rate environment, in our view. The management is targeting to close 2021 with cash flow from operations of EGP2.00bn while we are estimating EGP1.49bn. It also targets a net debt figure of EGP1.50bn or less, while we estimate its net debt (excluding land liabilities) to reach EGP1.36bn by the end of 2021 (excluding the recently secured facility of EGP2.50bn for PHNC).” Mariam El Saadany added

The real estate analyst at HC concluded her update on PHD stating that: “We reduce our SOTP TP for PHD by c26% to EGP2.82/share and maintain our Overweight rating: Our sum-of-the-parts (SOTP) target price is lower as our model now captures the settlement on Botanica, our assumption of selling the plot as raw land over 5 years and using an average selling price of EGP2,000/sqm. This follows shareholder approval to return 50% of Botanica land (2.96m sqm) to the government and holding on to the remaining area, in addition to 1.47m sqm under registration. We only include the registered areas of 2.69m sqm as the sale of the plot yield a value of EGP1.09/share, on our estimates. We continue to include only launched areas of the Badya project in our numbers and add Hacienda West to our forecasts given its recent launch. We exclude the company’s 205-feddan West Cairo revenue-share project as PHD’s revenue-share has been revised downward to 20% from 40%. We value PHD’s real estate and hospitality businesses using a DCF methodology, which we lowered by c31% to EGP1.82/share, despite adding the company’s Ain Sokhna project, Laguna Bay, and Hacienda West in our numbers, mainly due to the extension in the collection period. The sale of Botanica and excluding PHD’s 5m sqm land bank in Saudi Arabia (we remove on lack of visibility) reduces our land valuation by c33% to EGP1.69/share. We use a 5-year moving WACC of 16.2% with a 5-year average pre-tax T-bill rate of 11.7% and a beta of 1.199. PHD’s net debt represents a negative EGP0.70/share as of 2Q21. This sums up to a target price of EGP2.82/share (down by c26% from our previous target price of EGP3.79/share adjusted to the recent capital reduction). This puts the company on a 2021e P/NAV of 0.67x (NAVPS of EGP4.22) and implies a c47% potential return over the 5 October closing price of EGP1.92/share. Therefore, we maintain our Overweight rating. In our view, the market continues to undervalue PHD’s land bank, especially after the Botanica settlement, pricing it at EGP770/sqm, which is a c53% discount to the market-implied land value of EGP1,643/sqm, on our calculations. The company trades at a 2021e P/NAV of 0.45x, and 0.42x for 2022e, and a PER of 6.82x for 2021e and 6.34x for 2022e. PHD has also announced a five-year dividend policy (which we are not accounting for in our numbers), and also announced a share buyback program as it bought 2.47% of the company as treasury shares of which it terminated 36.3m shares in June.”

Heliopolis Housing’s five-year strategy supports a kick-starting monetization

Posted on by Marwa Nakhla

HC Brokerage issued their update about Egypt’s real estate sector shedding the light on Heliopolis Housing’s performance and upgrading the rating to Overweight

  • The five-year strategy and the successful sale of a 270-feddan land plot are the new management’s first steps; we await more such efforts to turn around the company

  • A new revenue-share agreement with a private developer in the 7.1m sqm Heliopark plot could provide some EGP100bn in revenue stream over 15 years; according to management

  • We reduce our target price c24% to EGP8.41/share but upgrade our rating to Overweight from Neutral on the share price dip

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “We expect an operational turnaround following several weak quarters: Heliopolis Housing has reported net losses from 4Q19/20 to 2Q20/21 due to a slowdown in the Egyptian real estate market, impacting its unit sales. In October 2020, management outlined a 2020–25e strategy that addressed its plans for its 18.0m sqm of undeveloped land following the resignation of its previous board and management team. The strategy outlines the company’s land plots to develop independently and other plots it intends to develop under revenue-sharing terms in its two projects New Heliopolis City and Heliopark. Since this announcement, the company successfully sold a 270-feddan plot for EGP2.57bn (an average price of EGP2,263/sqm given the prime nature of the plot). The company has not yet agreed on a payment method with the buyer; however, payment over installments would increase the value to EGP4.00bn. For Heliopark, the company’s prime 7.12m sqm land plot, management seeks to assign an international company to design a new general master plan for the project during 2021. Management is also open for negotiations with major real estate developers to develop 1,000–1,200 feddans of the project under a revenue-sharing scheme and is planning to develop 200 feddans of the project on its own. Some ten real estate developers have bought the bidding terms for Heliopark, including SODIC (OCDI EY, Overweight, TP EGP30.0), Majid Al Futtaim (MAF), Mountain View, Madinet Nasr Housing (MNHD EY, Overweight, TP EGP7.05), Al Marasem Development, and Tiba Real Estate. The company is working on finalizing a deal in 3Q21. We expect Heliopolis Housing’s 5-year strategy to impact its financials and operations substantially, especially after it signs a revenue-sharing agreement for Heliopark, securing some EGP100bn in steady revenue stream over the coming 15 years, according to management.”

“Heliopark revenue-sharing agreement should be favorable to HELI: Although the company did not receive any bids yet for Heliopark, it has clarified that the terms could be advantageous to HELI and include a minimum cash guarantee. We do not include such a deal in our target price; however, using SODIC East’s NPV/sqm of EGP1,219/sqm for the entire 7.11m sqm of Heliopark yields a total valuation of EGP9.48bn or EGP7.10/share. This value implies a c2.1x premium to our valuation of EGP3.37/share for the plot using its current master plan as part of our land valuation. Additionally, the company plans to sell all of its finished inventory during 2021, which should reflect positively on its FY20/21 and FY21/22 financials as the 270-feddan land sale should boost FY20/21 profitability. As for financing, the company plans to borrow some EGP681m of bank debt to finance the necessary infrastructure in New Heliopolis City, after it borrowed a total of EGP2.77bn from FY17/18 to 2Q20/21 to finance infrastructure spending. Also, the company will implement a capital increase in 2022 as part of its five-year strategy. With a net debt-to-equity of 2.54x as of 2Q20/21, a capital increase should improve the company’s balance sheet. Management has guided the capital increase would be worth around EGP1.00bn, which would decrease net debt-to-equity to 0.40x, on our calculations. The increased future profitability should sustain the company’s dividend distribution policy, in our view, as the company will undertake the bulk of its infrastructure spending during 2021.” Mariam El Saadany added

The real estate analyst at HC concluded her update on HELI stating that: “We decrease our target price by c24% to EGP8.41/share but upgrade our recommendation to Overweight from Neutral: We reduce our target price for Heliopolis Housing by c24% to EGP8.41/share. We exclude future land sales from our forecasts in line with the company’s new strategy, which does not account for future land sales beyond the 270 feddans in New Heliopolis. Our target price implies a potential return of c83% on the 10 May 2021 closing price of EGP4.59/share; therefore, we upgrade our recommendation to Overweight from Neutral on the sharp share price decline. The sale of the 270-feddan plot decreases the company’s net debt balance to EGP175m from EGP1.34bn previously. In our previous target price, we had included EGP2.44/share of land sale proceeds for a total of 290 feddans worth of land sales which contributed c22% of our previous target price. Of our new target price, land valuation contributes c94% of the value with only c6% from our DCF, which is still higher than the negative DCF contribution to our previous target price due to the improved liquidity position. We do not account for new revenue-sharing agreements in our valuation as the company did not announce such deals yet. Our land valuation for the Heliopark plot implies total sales proceeds of EGP100bn. Still, a revenue-share deal with a reputable developer will serve as an upside to our numbers and will reflect positively on investor confidence, in our view. We use a DCF‐based sum-of-the-parts (SOTP) valuation model for the company with a 5-year average moving WACC of 17.32%. Our target price includes (1) EGP6.42/share for the company’s 18.0m sqm undeveloped land bank, (2) EGP2.59/share for its undeveloped residential and commercial phases of SODIC East, (3) EGP0.56/share for the units the company sells independently, and (4) EGP0.04/share for leased assets. We deduct a 4Q20/21e net debt position of EGP175m, which reduces our target price by a negligible EGP0.13/share, and the repurchase of the 0.71m sqm in New Heliopolis City reduces our target price by another EGP1.06/share (using an average repurchase price of EGP2,000 per sqm). Our target price of EGP8.41/share puts the company on an FY21/22e P/NAV of 0.22x, with the stock currently trading at an FY21/22e P/NAV of 0.12x, a c53% discount to peers’ trading average of 0.25x, which is no longer justified given (1) a new management team, (2) the sale of the 270-feddan plot for a lucrative value of EGP2.66bn, (3) the company expecting to finalize a revenue-share deal in 1Q21/22. We estimate the market is valuing the company’s proportionate land bank at EGP306/sqm, a c48% discount to our implied value of EGP590/sqm, which is significantly higher than the c12% discount in our previous valuation.”

HC: Madinet Nasr Housing is further challenged. However, we maintain our OW rating

Posted on by Marwa Nakhla

HC Brokerage issued their update about Egypt’s real estate sector assuring that sector conditions continuing to be difficult due to Coronavirus outbreak and they maintain the OW rating on Madinet Nasr Housing.

  • Sector conditions continuing to be difficult have pushed Madinet Nasr Housing to resort to one-off sales and cash sale discounts to overcome liquidity shortage

  • This has also impacted deliveries which are expected to pick up in 2021e. We forecast revenue to grow at 3-year CAGR of c21% and pre-sales to grow modestly at c3%

  • We maintain our OW rating on Madinet Nasr Housing, while lower our TP c44% to EGP7.05/share; implying a 2020e TP/NAV of 0.35x, while it is trading at half of that

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “Coronavirus worsens already difficult sector conditions impacting deliveries and pre-sales: Weak affordability has impacted the real estate sector pre-sales in 2019 leading to a muted c7% y-o-y growth, while the coronavirus has further worsened pre-sales and deliveries. Madinet Nasr Housing was no exception especially that it was facing fierce East Cairo competition, in addition to delivery delays. Despite its relatively strong balance sheet (net debt to equity stood at 0.39x in 2Q20), we believe the company has been facing some liquidity shortfall, triggered by the infrastructure spending needs mainly in Sarai, as well as the relaxed payment plans it introduced to the market during the launch of Sarai in late 2016. To resolve this, the company opted to: (1) offer more of its inventory on cash basis after slashing unit prices by up to c50% on some EGP500m worth of inventory, prioritizing cash flows over profitability, (2) resorting to bank debt by signing a EGP2.19bn syndicated loan with a consortium of banks (although management expects to only withdraw some EGP1.40–EGP1.50bn of the facility in 2020), (3) engaging in one-off commercial land plot sales, and (4) launching some EGP1bn of Sarai Mansions, selling residential land to individuals, which offers a different product to the company’s portfolio. It is worth mentioning that the company has delayed its delivery time for new sales currently to 4 years from 3 years previously to accommodate the delays in delivery. The company has been steadily growing its backlog, which grew at a 3-year CAGR of c28%, standing at EGP8.53bn in 2Q20 with 2020 expected to be a strong year for its deliveries as it had targeted to handover some 2,500 units, implying 14.1x y-o-y growth. With the economic implications of the coronavirus affecting all sectors indiscriminately, we believe the company may not be able to meet this target, further affecting the pace of its execution cycle.”

“We expect total pre-sales of EGP14.6bn over 2020–22e implying a 3-year CAGR of c3%: We expect collections of EGP21.8bn over 2020–30e and CAPEX of EGP9.22bn over 2020–25e. Our estimates take into account the launched phases of Taj City (including Tag Sultan, T-Zone, Shalya, Lake Park Studios, and Cobalt) and Sarai (including Taval, Croons Condos, S2, Cavana Lakes, while we exclude future sales from MNHD’s 36% stake in its JV with Palm Hills Developments (PHDC EY, Overweight, TP EGP3.75) Capital Gardens and only accounting for the project’s existing backlog). We expect the company’s backlog to be maintained at current levels as it delivers S1 in Sarai that it launched in 4Q16. Our collection period across the company’s project portfolio is also extended to capture the company’s relaxed payment plans approach in sales as the 7-year and 8-year plan are currently the most prevalent. We exclude the company’s Nasr Gardens from our forecasts and value the project’s inventory at book value. Despite our expectation for delays in deliveries, we expect 2020–25e revenue of EGP19.7bn, with an average gross profit of EGP10.1bn, implying a margin of c51% as the company delivers its backlog. We expect the company’s cash offers to have little impact on its receivables portfolio average collection period and margins, as units sold on cash basis were only around EGP500m, c5% of its receivables portfolio’s balance.” Mariam El Saadany added

The real estate analyst at HC concluded her update on MNHD stating that: “We lower our TP c44% to EGP7.05/share but maintain our OW rating: We use a DCF valuation to value MNHD’s launched real estate phases in its 2 projects, Taj City and Sarai and value the company’s undeveloped land bank by accounting for the present value of the potential cash flows from developing this land in the future, using the master plan for each plot. We exclude future sales from Capital Gardens from our valuation due to lack of visibility on future launches and on the slow sales pace, while only account for the project’s existing backlog. Our 5-year average moving WACC stands at 16.6%. Of our TP, c27% is from DCF and c73% is from land valuation, with the DCF value of launched real estate project at EGP2.90/share, undeveloped land value at EGP5.14/share, while a net debt position of EGP1.42bn shaves off a total of EGP0.99/share and yields a DCF value of EGP7.05/share. Our TP puts the company at a P/NAV of 0.35x, and implies a potential return of c107% over the 25 August closing price of EGP3.41/share, leading us to maintain our Overweight rating. We estimate the stock is trading at a 2020e P/NAV of 0.17x, lower than the peer average of 0.28x. On our numbers, the market is assigning a value of EGP406/sqm to the company’s undeveloped land compared to our valuation of EGP1,395/sqm (c33% lower than our previous value of EGP2,076/sqm), and representing a c71% discount to market prices.”