Egypt Property - Arqaam Capital€¦ · Company EV (USD mn) EV/EBITDA FY 14e P/E FY 14e P/B FY 14e...

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 [email protected] +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


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


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


Exhibit 3: CMP/NAV vs. up/downside potential


Exhibit 4: YTD performance vs. up/downside potential


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


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


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


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


Exhibit 8: GDP CAGR in real terms (3.7%) due to outpace growth in population (2%)


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

t

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


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


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


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


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


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


Exhibit 15: Lending rates in Egypt fell by c.100bps in the last 5 years, but remain at 15% above the MENA average


Exhibit 16: Lending rates in Egypt hover between 12% and 12.5% in the last 4 years


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


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


Exhibit 20: The supply gap falls to 92k units when accounting for government social housing (140k affordable units in FY 14-15e)


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


Official housing units(000)

Existing New- private New- Government Gaop

September 18 2014

Real Estate


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


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


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


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


Demand ('000 units)

Existing demand Increment Urbanisation ratio

September 18 2014

Real Estate


Exhibit 26: Residential prices in Six of October: flat q/q, -10% y/y


Exhibit 27: Similar trends in New Cairo: flat q/q, -10% y/y …………


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


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


Exhibit 29: Residential rents: Unchanged y/y in apartments, but declining in villas (-10%)


Exhibit 30: Hotel occupancy rates fall to 35% in Q1 14A on weak tourist arrivals


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


Exhibit 32: Tourist arrivals in FY 14 (Jan YTD) down 40% y/y, driving hotel occupancy to 35% from 51% y/y


-

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


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


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


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%


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


Comparative charts

Exhibit 36: TMG holds the strongest track record…


Exhibit 37: …and is due to hand over a further 38k units


Exhibit 38: Annual residential units handed over


Exhibit 39: Operational hotel keys


Exhibit 40: Most developers are highly exposed to residential cycles


Exhibit 41: Residual land bank by company: TMG holds greatest degree of land optionality


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


Exhibit 42: Outstanding sales backlog by company


Exhibit 43: Development pipeline % sold


Exhibit 44: Revenues


Exhibit 45: Gross margin %


Exhibit 46: Net margin %


Exhibit 47: Leverage is low across all developers in Egypt


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


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


September 18 2014

Real Estate


NAV sensitivity to land values

Exhibit 49: EV sensitivity to TMG land assumptions


Exhibit 50: EV sensitivity to SODIC land assumptions


Exhibit 51: EV sensitivity to MNHD land assumptions


Exhibit 52: EV sensitivity to ERC land assumptions


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


Valuation

Exhibit 53: TMG trades at the deepest discount (40%) to our target P/NAV range in MENA


Exhibit 54: TMG- cheapest developer in our coverage universe on current market price/NAV


Exhibit 55: P/E


Exhibit 56: EV/EBITDA


Exhibit 57: P/B


Exhibit 58: ROE


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


Exhibit 59: RoA


Exhibit 60: RoIC


Exhibit 61: TMG price performance

Source: Bloomberg, Arqaam Capital Research

Exhibit 62: SODIC price performance


Exhibit 63: MNHD price performance


Exhibit 64: ERC price performance


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


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



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



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 [email protected] Arqaam Capital Research Offshore s.a.l

+9714 507 1743

September 18 2014


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


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


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


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%)


Exhibit 3: SoTP breakdown: We see 67% of EV from land assets


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


Exhibit 4: Valuation summary


Exhibit 5: DCF sensitivity to property sales WACC


Exhibit 6: DCF sensitivity to recurring income WACC


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


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’


Exhibit 8: 19k units to be released in the coming 4 years


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


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%



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


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%


Exhibit 11: Recurring income evenly split in FY 14e


Exhibit 12: Property sales are expected to drive P&L in the coming 5 years (85%+ of total revenues)


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%


Revenue breakdown by segment

Property sales Hotel income Other income

September 18 2014


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%


September 18 2014


Exhibit 14: We value raw land in Madinaty at EGP 3.59/share (22% of EV)


Madinaty Phase 1+2 17,864 8.66 53.8%

Madinaty Phase 3 3,084 1.49 9.3%



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%



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


Exhibit 16: Blended gross margins across segments to gradually converge to 30% in 3 years


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%


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


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


Exhibit 18: Balance sheet levered at 14% D/E


(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


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)


S e p t e m b e r 1 8 2 0 1 4


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



52 Week range 21.2-52.8


Market cap (USDmn) 598


Average daily traded value (USDmn) 3.7


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



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


Profitability

Growth

Gearing

Valuation

-50%

0%

50%

2013 2014e 2015e 2016e 2017e


-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


-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


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


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


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



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.


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


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


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)




Profit before tax 268.0 (417.7) 226.9 230.8 517.3 449.9


Minorities 7.3 - - - - -


Net profit 257.4 (442.3) 148.6 144.9 350.7 331.9


Arqaam Net profit 257.4 (442.3) 148.6 144.9 350.7 331.9

Year-end 2012 2013 2014e 2015e 2016e 2017e


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


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


Dividends paid - - - - - -

Net inc/(dec) in borrowings 38.8 0.7 147.9 300.0 120.0 (180.0)


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 [email protected] Arqaam Capital Research Offshore s.a.l

+9714 507 1743

September 18 2014


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


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


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


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%)


Exhibit 3: Valuation components: Our EV estimate is driven by land (41%), developments (35%) and rental assets (24%)


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


Exhibit 4: Valuation summary


Exhibit 5: DCF sensitivity to property sales WACC


Exhibit 6: DCF sensitivity to recurring income cap rate


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


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


Exhibit 9: Deliveries/handovers equally spread in FY 14-15e, peak in FY 16e


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


Total unit deliveries

September 18 2014


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%


Exhibit 11: Recurring income portfolio turns fully operational in FY 17e: +56k sqm in FY 14e end, +70k sqm in FY 17e


Exhibit 12: Property sales to remain the largest contributor to revenues: 95%+ of total


--

56 56

126

--

20

40

60

80

100

120

140


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%


Revenue breakdown by segment

Property sales Rental income Other income

September 18 2014


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


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


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


Exhibit 15: Margins on sales range between 25% to 40% GPM


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


Exhibit 17: Leverage: D/E ~30% in FY 15e


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%


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


Total borrowings (EGP mn)

Total borrowings D/E (RHS)


S e p t e m b e r 1 8 2 0 1 4


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



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


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



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


Profitability

Growth

Gearing

Valuation

0%

20%

40%

60%

2013 2014e 2015e 2016e 2017e


-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


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


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


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



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).


Medinet Nasr Housing

Year-end 2012 2013 2014e 2015e 2016e 2017e


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


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




Profit before tax 130.0 247.1 286.8 448.6 545.2 501.7


Minorities (6.3) (10.9) (14.4) (22.5) (27.3) (26.9)


Net profit 85.9 176.0 186.4 291.6 354.3 349.4


Arqaam Net profit 85.9 176.0 186.4 291.6 354.3 349.4

Year-end 2012 2013 2014e 2015e 2016e 2017e


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


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


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)


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 [email protected] Arqaam Capital Research Offshore s.a.l

+9714 507 1743

September 18 2014


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


Exhibit 2: MNHD halted sales of land plots in FY 13A


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


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


September 18 2014


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


September 18 2014


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


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


Exhibit 6: 82% of FVE emanates from MNHD’s land bank


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%


Exhibit 8: MNHD valuation exercise highly sensitive to the discount applied on the undeveloped 9mn sqm


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


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


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


Exhibit 10: C. EGP 140mn will be spent over the next 4 years to complete Al Waha project


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


CAPEX (EGP mn)

September 18 2014


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


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


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 ……………..


Exhibit 14: The project requires EGP 276mn in CAPEX if resumed


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


S e p t e m b e r 1 8 2 0 1 4


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



52 Week range 0.9-2.1


Market cap (USD mn) 214


Average daily traded value (USD mn) 3.9


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



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


Profitability

Growth

Gearing

Valuation

-50%

0%

50%

100%

2014 2015e 2016e 2017e 2018e


-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


-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


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


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


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



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


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


Net profit (110.0) (47.7) (20.4) 96.2 83.8 220.7


Arqaam Net profit (110.0) (47.7) (20.4) 96.2 83.8 220.7

Year-end 2012 2013 2014e 2015e 2016e 2017e


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


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 [email protected] Arqaam Capital Research Offshore s.a.l

+9714 507 1743

September 18 2014


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


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


Exhibit 2: Services rendered provided c.70% of FY 09-12A revenues, as land sales stalled ………………………………..


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


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…


Exhibit 5: ….to finance CAPEX in the next two years


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


CAPEX (In EGP mn)

September 18 2014


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


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


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


September 18 2014


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


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


*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.

Important Notice

1. Author, regulator and responsibility Arqaam Capital Limited (“Arqaam”) is incorporated in the Dubai International Financial Centre (“DIFC”) and is authorised and regulated by the Dubai Financial Services Authority ("DFSA") to carry on financial services in

and from the DIFC. Arqaam publishes and distributes (i.e. issues) all research.

Arqaam Capital Research Offshore s.a.l. is a specialist research centre in Beirut, Lebanon, which assists in the production of research issued by Arqaam.

2. Purpose This document is provided for informational purposes only. Nothing contained in this document constitutes investment, legal, tax or other advice or guidance and should be disregarded when considering or making

investment decisions. In preparing this document, Arqaam did not take into account the investment objectives, financial situation and particular needs of any particular person. Accordingly, before acting on this

document, investors should independently evaluate the investments and strategies referred to herein and make their own determination of whether it is appropriate in light of their own financial circumstances and

objectives.

3. Rating system

Arqaam investment research is based on the analysis of regional and country economics, industries and company fundamentals. Arqaam company research reflects a long-term (12-month) fair value target for a

company or stock. The ratings bands are:

Ratings

Buy Total return > 20%

Hold -10% < Total return < 20%

Sell Total return < -10%

In certain circumstances, ratings may differ from those implied by a fair value target using the criteria above. Arqaam policy is to maintain up-to-date fair value targets on the companies under its coverage, reflecting

any material changes to the analyst’s outlook on a company. Share price volatility may cause a stock to move outside the rating range implied by Arqaam’s fair value target. Analysts may not necessarily change their

ratings ifn this happens, but are expected to disclose the rationale behind their view to Arqaam clients.

4. Accuracy of information The information contained in this document is based on current trade, statistical and other public information we consider reliable. We do not represent or warrant that such information is accurate or complete and it should not be relied upon as such. Any mention of market rumours has been derived from the markets and is not purported to be fact or reflect our opinions. Arqaam has no obligation to update, modify or amend this document or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. In accordance with Regulation AC of the 1934 Exchange Act, the views expressed in this research report accurately reflect the research analysts’ personal views about the subject securities or issuers and are subject to change without notice. No part of the research analysts’ compensation is related to the specific recommendations or views in the research report.

5. Recipients and sales and marketing restrictions 5.1 Nothing in this document should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction, or to provide any investment advice or service. 5.2 This document is directed at Professional Clients and not Retail Clients within the meaning of DFSA rules. Any investments or financial products referred to herein will only be made available to clients who Arqaam is satisfied qualifies as Professional Clients. Any other persons in receipt of this document must not rely upon or otherwise act upon it. 5.3 This document is only being distributed to investors who meet certain qualifications and to whom an investment or service may be offered or promoted in accordance with relevant country restrictions. This excludes the US except for SEC registered broker-dealers (or banks in permissible ”broker” or “dealer” capacity) acting on a principal or agency capacity, and major US institutional investors in accordance with SEC Rules 15a-6(a)(2). Details of other relevant country restrictions are set out on our website at http://www.arqaamcapital.com/english/system/footer/terms-of-use.aspx. Persons into whose possession this document comes are required to inform themselves about, and observe, such restrictions and should not rely upon or otherwise act upon this document where it is unlawful to make to such person such an offer or invitation or recommendation without compliance with any authorisation, registration or other legal requirements.

6. Risk warnings 6.1 Any prices, valuations or forecasts are indicative and are not intended to predict actual results, which may differ substantially from those reflected.

6.2 The value of an investment may go up as well as down. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including, without

limitation, foreseeable or unforeseeable changes in interest rates, foreign exchange rates, default rates, prepayment rates, political or financial conditions, etc.).

6.3 Past performance is not indicative of future results. Any opinions, estimates, valuations or projections (target prices and ratings in particular) are inherently imprecise and a matter of judgement. They are

statements of opinion and not of fact, based on current expectations, estimates and projections, and rely on beliefs and assumptions. Actual outcomes and returns may differ materially from what is expressed or

forecasted. There are no guarantees of future performance.

6.4 Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.

6.5 This document does not propose to identify or to suggest all of the risks (direct or indirect) which may be associated with the investments and strategies referred to herein.

7. Conflict 7.1 Arqaam and its affiliates provide full investment banking services, and they and their directors, officers and employees, may take positions which conflict with the views expressed in this document. Our salespeople,

traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in

this document. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this

document.

7.2 Arqaam may have or seek investment banking or other business relationships for which it will receive compensation from the companies that are the subject of this document.

7.3 Facts and views presented in this document have not been reviewed by, and may not reflect information known to, professionals in other Arqaam business areas, including investment banking personnel.

7.4 Emirates NBD PJSC owns 8.32% of Arqaam.

8. No warranty Arqaam makes no representations or warranties and, to the fullest extent permitted by applicable law, we hereby expressly disclaim any and all express, implied and statutory representations and warranties of any kind,

including, without limitation, any warranty as to accuracy, timeliness, completeness, merchantability, fitness for a particular purpose and/or non-infringement.

9. No liability Arqaam will accept no liability in any event including (without limitation) negligence for any damages or loss of any kind, including (without limitation) direct, indirect, incidental, special or consequential damages,

expenses or losses arising out of, or in connection with your use or inability to use this document, or in connection with any error, omission, defect, computer virus or system failure, or loss of any profit, goodwill or

reputation, even if expressly advised of the possibility of such loss or damages, arising out of or in connection with your use of this document. We do not exclude our duties or liabilities under binding applicable law.

10. Copyright and Confidentiality The entire content of this document is subject to copyright with all rights reserved and the information is private and confidential for your own personal use only. This document and the information contained herein

may not be reproduced, distributed or transmitted to any other person or incorporated in any way into another document or other material without our prior written consent.

11. Governing law English law governs this document and these disclaimers and any dispute in relation thereto shall be exclusively referred to the English Courts.

Egypt Property - Arqaam Capital€¦ · Company EV (USD mn) EV/EBITDA FY 14e P/E FY 14e P/B FY 14e...

Documents

Transcript of Egypt Property - Arqaam Capital€¦ · Company EV (USD mn) EV/EBITDA FY 14e P/E FY 14e P/B FY 14e...