ODE - Initiation of Coverage - August 2017

PRIME INVESTMENT RESEARCH AUTOMOTIVE |EGYPT

GB AUTO – INITIATION OF COVERAGE JANUARY, 14TH 2016

PRIME RESEARCH TOURISM & REAL ESTATE|EGYPT

ORASCOM DEVELOPMENT EGYPT – INITIATION OF COVERAGE AUGUST, 21ST 2017

We initiate our coverage for ODE with a Strong Buy call, derived from an 109% upside assuming an average WACC over our forecast horizon of 14.8% vs. 13.0% in 2017. The upside story is derived from 1) a weaker EGP in 2017-2021 vs. 2016 average, positively impacting the company's hospitality business, in time tourism is picking up. 2) Real Estate offering in El Gouna, representing c. 95% of ODE RE operations, sold in USD or USD – tagged. 3) A massive residual land bank tagged in USD, although we valued at a major discount, still adds massive value. 4) ODE contacted its lenders for a debt re-scheduling plan with an average of 3-years grace period and 5-years repayment tenor.

ODE was severely hit following the EGP flotation, as its debt balances were revalued by around EGP 1.3bn, derived from c. 83% of debt denominated in USD and EUR. Over the upcoming 3 years, we believe that ODE will book around EGP 400mn of debt revaluation gains during 2017-2019, the current grace period. Lowering outstanding debt, before debt repayment starts; addressing worried investors concerning about the company’s Debt to Equity of 2.95x by 2016 (reaching 1.14x by 2019 – debt repayment start July 2019). ODE would book more revaluation gains in P&L in case the EGP appreciated above EGP 15.13/USD by 2019, as we maintained such rates thereafter for the current time up till revisiting our macro assumptions.

In 2017F, We forecast EGP 2.17bn of revenues, 49% up YoY, and EGP 239mn of attributable net income; on the back of stronger operations, although we estimated EGP 376mn of interest expenses during 2017. In 2017, we expect the full year average rate to stand at EGP 17.5/USD, leading to EGP 69mn of FX gain derived by debt revaluation by 4Q2017, besides the EGP 114mn booked earlier, from resettlement.

Our valuation for ORHD, is based on a SoTP-DCF methodology, in which we considered the company’s residual land bank based on our Discounted – NAV methodology, adding EGP 23.73/share. The hospitality segment came in 2nd place in value contribution, adding EGP 17.73/share, as occupancy rates are back to health, and Average Room Rates (ARR) are ramping up. We segregated the company’s other business lines into, Destination Management – Utilities, adds EGP -0.4/share, Towns’ Amenities adds EGP 2.43/share and considered ODE’s net book value for Tamweel, as we did not have the business segregated performance to apply a residual income model. ODE’s launched real estate projects yielded contributed to enterprise value by EGP 1.48/share. Hence, ODE’s operations and land bank aggregately resulted in an Enterprise Value of EGP 45.95/share or EGP 10.19bn, leading to an Equity value of EGP 5.19bn or EGP 23.43/share after deducting 1H2017 net debt of EGP 3.64bn and valued minority interest of EGP 1.35bn.

ODE announced that it is looking for new opportunities to tap the North Coast Secondary homes market; management indicated that no land less than 1mn Sqm should be considered in order to be value additive. We believe such move will be a huge success for ODE, given the company’s experience in the secondary homes market, entertainment and hospitality. The move will also add more diversification to ODE. The move would help maintaining ODE’s place as the largest land owner; and sets the company one move away from being the most diversified RE and hospitality company, through considering high-end projects in Cairo.

ORASCOM DEVELOPMENT EGYPT … An inevitable turn around … A story to be considered, given the desirable diversified exposure it offers …

“STRONG BUY” MARKET PRICE EGP 11.21 FAIR VALUE EGP 23.43 UPSIDE 109%

INVESTMENT GRADE “GROWTH”

Stock Data Outstanding Shares [in mn] 221.7 Mkt. Cap [in mn] 2,484.8 Bloomberg – Reuters ORHD EY / ORHD.CA 52-WEEKS LOW/HIGH EGP 3.61 – EGP 12.80 52-WEEKS DAILY TURNOVER EGP 0.34MN

Ownership Orascom Development Holding 84.8% Free Float 15.2%

Source: Bloomberg

Mohamed Marei Senior Analyst [email protected] Dir.: +202 – 33005725

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mailto:[email protected]

PRIME RESEARCH ORHD – INITIATION OF COVERAGE

AUGUST, 2017

SOURCE: PRIME RESEARCH

ODE Valuation - in EGP mn Estimated Value Value per share Contribution to EV Gouna Residual Land 4,509.3 20.34 44.3% Makadi Residual Land 460.83 2.08 4.5%

Taba Residual Land 174.61 0.79 1.7% Fayoum Residual Land 116.05 0.52 1.1%

Aggregate Residual Land Valuation 5,260.79 23.73 51.7% Hospitality Segment 2,930.95 17.73 38.6%

Real Estate Segment 327.34 1.48 3.2% Town Amenities 537.87 2.43 5.3%

Tamweel Net Assets 216.28 0.98 2.1% Destination Management - Utilities (87.91) (0.40) (0.9%)

Enterprise Value 10,185.33 45.95 100.0% Add: Cash 924.70 4.17 Less: Minority Interest (1,351.55) (6.10) Less: Debt (4,564.77) (20.59) Equity Value 5,193.71 23.43 Market Cap 2,484.83 11.21

Upside (Downside) Potential 109%

Upside Risks 1) Faster than anticipated pickup in tourism activity; and lift of all travel bans.

2) Deleveraging the balance sheet faster than anticipated, as we maintain the EGP/USD rate at EGP 15.13

beyond 2019; hence and EGP appreciation would lead to more revaluation gains as only 18% of debt is in EGP.

3) Development acceleration for the company’s residual land bank.

4) Concluding a land acquisition/Co-development agreement in North Coast, will be strongly value additive, given ODE’s strong client base, used to the luxurious offering and amenities of El Gouna and Makadi.

5) Interest rate cuts beyond anticipation; EGP weighted average cost of debt in 2017F: 10%, in 2018F: 9.5%.

Downside Risks 1) Weaker net contracted sales than anticipated, on the back of higher than accounted for elasticity.

2) The high exposure to secondary homes, remains a major risk, although in Fayoum and Makadi, the gated

communities are livable.

3) Further Interest rate hikes; would negatively hit the company’s mortgage business, besides lowering the consolidated profitability, as interest expenses go beyond expectations.

Investment Note: In our view, ODE represent a new kind of exposure to the ordinary real estate story; as the company has already passed the worst period in operations’ history with least injuries. And now it is reaping the fruits of tourism pickup, and tourists regained interest in El Gouna and Makadi Real Estate offering, given the discounted prices as ODE has been fixing the EGP/USD rate way below market EGP at 13-13.5/share. The company’s outstanding debt is huge for sure, however, as we expect interest cuts to take place starting 4Q2017-1Q2018, such huge outstanding debt might turn into a valuation bless. As WACC will further drop, while interest expenses adverse impact through eroding profitability will ease.

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AUGUST, 2017

SOURCE: ODE, PRIME RESEARCH

Company Synopsis Orascom Development Egypt (ODE) was established in 1989, with the intent of developing touristic destinations, through offering secondary homes and hotel developments. The company currently owns 45.71mn Sqm. ODE currently owns 27 hotels of which 20 are self-managed and 7 are under management contracts. ODE hotels’ portfolio currently features 5,979 rooms divided between the Red Sea Coast in the Red Sea Governorate and Sinai, all placed under the supervision of Orascom Hotel Management (OHM) established in 2013 to oversee the hospitality operations. Besides launching the company’s newest hotel in Fayoum “Bayoum Lakeside Hotel” in September, 2016; featuring 50 rooms. ODE also owns 87% stake in Tamweel, a financial services company providing mortgage, leasing and insurance.

In 1991, the first phase of El Gouna project was launched, and by 1997 the company started developing its 2nd destination on the Gulf of Aqaba “ Taba Heights”. The following year in 1998, the company was awarded a 1.2mn Sqm in Fayoum Governorate to develop two residential communities, Roboua and Bayoum, of which Bayoum is already launched. The company continued its touristic destinations hunt, and expanded further in the Red Sea Governorate through launching Makadi Bay, 28 Km away from Hurghada in 2009, which currently features 3 well established hotels. Besides being the first gated community in Hurghada with a commercial area, residential units, a medical center and a school.

In 2008, Orascom Development established Orascom Development holding (ODH) with its headquarters in Switzerland and listed on the Swiss Exchange; which acquired 99.7% of ODE through a tender offer and thus trading on EGX was halted. In 2015, ODH sold 15% of ODE to reactivate the stock’s trading on EGX with the intent of resettling part of the company’s debt, the stock became active again and trading was effective by January 6th, 2015.

Business Segments ODE operates 4 main related businesses that give the company’s developments the full taste of livable cities. As besides the company’s hospitality developments, ODE develops its own land into small-to-medium sized real estate projects. The hotels and real estate projects across the company’s different destinations are usually complemented with educational services, medical centers, golf courses and other amenities that suffice residents to make it a primary location for residence. Apparent through the company’s recent campaign for “G-natives”, comprising of people who chose Al Gouna as their primary residential destination. And to feed such concept, the company launched phase one of its first office complex “G-Space” which offers private office spaces and is currently working on launching the 2nd phase of G-Space.

All amenities management comes under the Other Operations segment, a complementary segment aiming to service both concepts of livable and short-stay purposes simultaneously. ODE has also separated the destinations management into a standalone business, managing all destinations’ utilities.

Other Operations

Orascom Development Egypt

Tamweel

Owns 87%

Hotels - OHM Real Estate Destination Management

34%

32%

9%

25%

Revenues by Segment - 2016 Hotels

RE

DM

OtherOperations

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28%

7%

24%

Revenues by Segment - 1H2017 Hotels

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OtherOperations

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AUGUST, 2017


Land Owned by Destination … as of 1H2017


1- Land Bank Status & Valuation ODE is currently Egypt’s largest private land owner; However, the company is not into the primary residential race, instead the majority of ODE’s developments are touristic in the first place. Out of ODE’s owned 45.7mn Sqm of land, 21.5mn Sqm have been developed into secondary homes, hotels and recurring revenue properties; with c. 53% of land bank remains undeveloped.

Destination Name Total Land Bank –mnSqm Developed Free Land Bank

El Gouna 36.92 15.64 21.28 Taba Heights 4.27 2.56 1.71

Fayoum 1.08 0.4 0.68 Makadi 3.44 2.92 0.52

Total ODE's Land Bank 45.71 21.52 24.19

Beyond ODE’s announced projects as of 1H2017, which we valued on a DCF basis; we valued the residual land bank based on our discounted – NAV methodology. Through our discounted – NAV methodology, we determined the time frame it took ODE to reach the current land bank developed status. And assumed the same rate of development to prevail for the remaining free land bank. Hence, we valued El Gouna’s residual as if the destination’s free land bank will be equally sold over 44 years starting 2017, while we assumed Makadi to be sold over 25 years, which is lower than the project’s development pace. However, as ODE is currently constructing the destination’s Club house and other amenities we stepped up the assumed sales area. We maintained the same rationale in setting our assumptions for Taba heights and Fayoum land bank, although both destinations might witness a ramp up in development over the upcoming few years. In Valuing El Gouna Residual land bank, the largest in value contribution to ODE. We assumed the first year average price to be USD 73/Sqm; which was the average price assigned by an independent appraiser to ODE recently. We then assumed the appropriate escalation rate in our view, and then discounted such proceeds to add EGP 4.51bn to ODE enterprise value or EGP 20.3/share. Equivalent to valuing the whole residual land at the current moment at a rate of USD 12.1/Sqm, 83% discount to the independent appraiser assigned by ODE, as we account for the time value needed to develop or sell such huge residual land.

Total Gouna Land bank – in Sqm / in USD-EGP mn 2017F 2018F 2019F 2020F 2021F 2061F Equal Area Land Sale – in Sqm 472,889 472,889 472,889 472,889 472,889 472,889

Residual Land – in Sqm 21,280,000 Developed Land – in Sqm 15,640,000

Price/Sqm (in USD) 73.0 74.1 75.2 76.3 77.5 252.7 Land Sale Proceeds - in USD mn 34.5 35.0 35.6 36.1 36.6 119.5 Aggregate Proceeds - in USD mn 2,459.6 Land Proceeds – in EGP mn 604.1 569.4 537.9 546.0 554.2 1,807.7 Aggregate Proceeds - in EGP mn 45,850.1

Discounted NAV 577.3 487.0 406.5 360.8 312.2 3.1 Aggregate Discounted NAV 4,509.5 NPV/Share 20.3 Current NAV in EGP mn 27,185.2 @ USD 73/Sqm Discount to NAV 83% NPV equivalent rate per Sqm - USD 12.1

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AUGUST, 2017




We valued Makadi Bay residual land bank at a discount of 50% to El Gouna; given the dynamics of El Gouna being more developed. Our discounted – NAV resulted in EGP 461mn of value to ODE, yielding EGP 2.1/share, which is equivalent to valuing the destination's residual land bank at USD 9/Sqm, a 75% discount to the current assumed NAV.

Total Makadi Land bank – in Sqm / in USD-EGP mn 2017F 2018F 2019F 2020F 2021F 2041 Equal Area Land Sale – in Sqm 116,800 116,800 116,800 116,800 116,800 116,800

Residual Land – in Sqm 2,920,000 Developed Land – in Sqm 470,000

Price/Sqm (in USD) 36.5 37.2 38.0 38.7 39.5 71.4 Land Sale Proceeds - in USD mn 4.3 4.3 4.4 4.5 4.6 8.3 Aggregate Proceeds - in USD mn 149.9 Land Proceeds – in EGP mn 74.6 65.2 62.1 60.2 58.3 100.1 Aggregate Proceeds - in EGP mn 1,854.7

Discounted NAV 71.3 55.8 46.9 39.8 32.9 3.0 Aggregate Discounted NAV 460.9 NPV/Share 2.1 Current NAV in EGP mn 1,865.2 @ USD 36.5/Sqm Discount to NAV 75% NPV equivalent rate per Sqm - USD 9.0

Following our methodology, we found that Taba residual land bank adds EGP 0.8/Share to ODE's valuation although we are conservatively pricing the destination, which adds to ODE's future upside potential. Our discounted – NAV methodology yielded an equivalent rate of USD 5.8/Sqm which is a 60% discount to 2017F conservative pricing of USD 14.6/Sqm.

Total Taba Land bank – in Sqm / in USD-EGP mn 2017F 2018F 2019F 2020F 2021F 2029F Equal Area Land Sale – in Sqm 131,538 131,538 131,538 131,538 131,538 131,538

Residual Land – in Sqm 1,710,000 Developed Land – in Sqm 2,560,000

Price/Sqm (in USD) 14.6 14.9 15.2 15.5 15.8 20.0 Land Sale Proceeds - in USD mn 1.9 2.0 2.0 2.0 2.1 2.6 Aggregate Proceeds - in USD mn 29.0 Land Proceeds – in EGP mn 33.6 29.4 28.0 27.1 26.3 31.6 Aggregate Proceeds - in EGP mn 373.1

Discounted NAV 32.1 25.1 21.1 17.9 14.8 5.2 Aggregate Discounted NAV 174.6 NPV/Share 0.8 Current NAV in EGP mn 436.9 USD 14.6/Sqm Discount to NAV 60% NPV equivalent rate per Sqm - USD 5.8

Continuing our exercise, Fayoum residual land adds EGP 0.5/share; valued at 67% discount to our current assumed price of USD 29.2/Sqm.

Total Fayoum Land bank – in Sqm / in USD-EGP mn 2017F 2018F 2019F 2020F 2021F

2033F Equal Area Land Sale – in Sqm 40,000 40,000 40,000 40,000 40,000

40,000

Residual Land – in Sqm 680,000 Developed Land – in Sqm 400,000

Price/Sqm (in USD) 29.2 29.8 30.4 31.0 31.6

45.1 Land Sale Proceeds - in USD mn 1.2 1.2 1.2 1.2 1.3

1.8

Aggregate Proceeds - in USD mn 24.6 Land Proceeds – in EGP mn 20.4 17.9 17.0 16.5 16.0

21.7

Aggregate Proceeds - in EGP mn 309.8 Discounted NAV 19.5 15.3 12.9 10.9 9.0

2.1

Aggregate Discounted NAV 116.1 NPV/Share 0.5 Current NAV in EGP mn 347.5 USD 29.2/Sqm

Discount to NAV 67% NPV equivalent rate per Sqm - USD 9.8

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AUGUST, 2017

A rise in nights spent means more USD inflows … as Egypt remains among the cheapest destinations

SOURCE: CBE, PRIME RESEARCH SOURCE: CBE, PRIME RESEARCH

Europe and Asia & the Pacific to contribute 77% of nights spent as UK and Russia resumes tourism flow by FY2018

SOURCE: CBE, PRIME RESEARCH SOURCE: CBE, PRIME RESEARCH

2- Hospitality Segment - OHM In 2013, ODE established Orascom Hotels Management, to be focused with managing the segment’s operations; the same approach the company is following with all other segments, to be managed separately under one umbrella of ODE.

The company’s hospitality segment, has been under pressure for the past several years since 2011, as a result of the travel bans imposed on Egypt from major tourism supplying countries. However, the company was still able to maneuver such travel bans as the percentage of locals visiting El Gouna was on the rise. We believe that Egypt tourism status is through the bottle neck, as the EGP flotation has turned Egypt into one of the cheapest destinations worldwide.

We expect 9.5mn tourists to visit Egypt during FY2018, with c. 36% YoY increase, and to spend around 97K nights, as of the end of FY2018F we do not expect the EGP to appreciate above EGP 15.5-16/USD, hence a longer stay will be more feasible. We believe El Gouna is the most equipped destination to receive major part of such flows, followed by Makadi bay and Taba Heights, which we expect both to show notable enhancement in occupancy rates by 2018.

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Europe Middle East AfricaAmericas Asia & The Pacific Others

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Europe Middle East AfricaAmericas Asia & The Pacific Others

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AUGUST, 2017

SOURCE: ODE, PRIME RESEARCH SOURCE: ODE, PRIME RESEARCH

Occupancy rise along with ARR – due to foreigners and locals demand – leads to unprecedented performance

A- El Gouna El Gouna currently features 2,424 hotel keys as of 1H2017, dropping from 2,506 in 1H2016, as the management has transferred 82 hotel rooms into serviced apartments that were successfully sold among the company’s real estate offering. ODE effective ownership in El Gouna hospitality stands at c. 81-83% as per our estimate, as the company manages some of the properties itself besides partnering with international hotel chains and franchises ranging from 3 stars to 5 stars hotels.

El Gouna represents ODE flagship, the highest destination in occupancy and the main contributor to the group hospitality revenues, as it represented 84% of hospitality revenues in 2016, and 86% in 1H2017, out of the segment’s total revenues of EGP 499mn in 2016 and EGP 449mn in 1H2017. El Gouna helped smoothing down the segment’s Gross Operating Losses (GOL/P) to a loss of EGP 106mn in 2016, thanks to its GOP of EGP 135mn in time Taba, Makadi, the floating hotel and the newly launched Lakeside hotel in Fayoum were aggregately recording GOL of EGP 29mn.

We expect the average room rate to grow by c. 55% in 2017 to stand at EGP 814/room/night, along with F&B and other services spending to grow by 59%, to stand at around 52% of room revenues as we believe 2017 average occupancy rate for the group’s portfolio in El Gouna to stand at 77%. Hence, we believe 2017 Gouna hotels’ revenues will stand at EGP 842.7mn with a GPM of 45%.

Going forward, we expect El Gouna’s T.Rev PAR (Total Revenue Per Available Room) to grow at a CAGR of 31% in 2016-2021, along with a 36% CAGR in GOP during the same period, on the back of our forecast for a growing occupancy rate reaching 90% by 2021. Along with a growth in ARR denominated in EGP, thanks to modest increases in ARR in USD denomination over the years. Taking into account that usually 60-80% of hotel bookings in El Gouna are registered by foreigners; benefiting from the current EGP status. We forecast a prevailing undervalued EGP status, standing at EGP 15.13/USD in 2019-2021. Although, room rates in EGP are high as locals demand for El Gouna hospitality increases.

414 525

814 1,017

1,119 1,231

1,329

67% 59%

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AUGUST, 2017


A gradual enhancement in Taba Heights Performance as travel bans ease

B- Taba Heights One of Egypt’ blessings, located as the intersection where Sinai mountains meets the sea, offering a one of a kind scenery for visitors. However, Taba heights has been the most negatively impacted touristic destination in ODE’s portfolio since 2011. As several countries have been issuing travel warnings against the Sinai Peninsula, although it is located in South Sinai which was never part of any terror actions itself, while all terror actions were targeting North Sinai.

However, ODE was able to slightly maneuver such restrictions through conducting bilateral deals with neighboring countries, that yielded success, as weekly flights were organized to the destination from Jordan, which helped smooth down the worsened economic conditions the destination was facing. Recently as military actions against all outlaws have been rapidly increasing in intensity, to help shorten the time it takes to end all terror threats in all parts of Sinai, we find this encouraging for a probable travel ban reversal by 2018. Helping occupancy rates to jump to at least to 30% in 2018 and 45% in 2019. In time ODE is reopening more rooms which translates to higher rooms sold during the upcoming years.

ODE has a total of 2,365 rooms available in Taba Heights, divided between 6 hotels ranging from 4-5 stars, the resort also features commercial outlets, a hospital and a school making it a self-sufficient livable community. By the end of 2016, ODE had 718 rooms operating versus 412 rooms in 2015. During 1H2017, ODE reopened more rooms, to reach 992 operating rooms, with plans to reach 1,141 operating rooms by 2H2017 - 1H2018; hence, operating 4 out of 6 hotels.

Although the stressed conditions Taba Heights is being operated in, it contributed to revenues during 2016 by 8.5% of hotel revenues, equivalent to EGP 42.5mn. However, the harsh operating conditions and high overheads to revenues, led to a Gross Operating Loss of EGP 9.4mn, which was considered an enhancement in comparison with 2015 GOL of EGP 38.4mn.

ODE was able to further curb its GOL in 1H2017, as they reopened rooms to cater for the slight increase in domestic, Jordanian and other nationalities visits. Helping ODE to achieve a 147% YoY increase in revenues in 1H2017 to EGP 24.4mn. And hence helped smoothing the overheads and fixed costs, taking the GOL to EGP 7.9mn down from a loss of EGP 11.3mn in 1H2016.

In 2017F, we expect occupancy to stand at 25% out of the year average rooms available calculated as c. 950 rooms, providing 345K of nights available. We believe that over the course of the upcoming period, rooms sold will increase as occupancy increases as a reflection for travel warnings ease, Sinai Development and the construction of the new tunnels leading there.

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AUGUST, 2017

C- Makadi Hotels Makadi is considered a smaller scale natural extension to El Gouna, the resort contains 3 hotels with a total number of keys of 1,113. The 3 hotels are currently leased to Germany’s FTI Group, in which Mr. Sameh Sawiris owns a majority stake. The lease is a 3-year agreement, ending by 2019 year end; for a total consideration of EUR 3.3mn per annum subject to increases. As tourism to Egypt pick up again by 2019, the Azur chain might be able to regain its healthy and strong operations that it used to account for. As the properties aggregate GOP stood at EGP 21.4mn in 2015, thanks to occupancy rates of 63%, while in 2016, it recorded a gross operating loss of EGP 17.9mn, on the back of operating with less than half the hotel keys available, along with a drop in occupancy rates for those operating rooms to 31%. For the sake of forecasting this line of business, we assume the properties lease to be renewed until the management provides the market with new guidance. As the leased properties will be returned to ODE's control whether after 3 years or after another renewal period, it is an operating lease, where the lessor (ODE) will consolidate its rental revenues with hotels revenues. And depreciate the asset over its useful life, estimated to range in between EGP 11-16mn per annum in 2017-2021.

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AUGUST, 2017

A gradual enhancement in Taba Heights Performance as travel bans ease



D- Fayoum ODE launched "Bayoum lakeside Hotel" during 4Q2016, with a capacity of 50 rooms, that witnessed a relatively high occupancy rate for a new launch of 43% the period ending 2016. However, we believe that only half of the hotel capacity was operational during 4Q2016, as the total number of nights available was 1,967 nights of which 838 were booked. In 2016, the hotel T.Rev PAR was EGP 323, with a GOL PAR of EGP 209, given the launch expenses. In 1H2017, occupancy rates for the total available rooms (50 rooms) rose to 46% although ODE raised its average room rates to EGP 500/510 per room versus EGP 472/room in 2016. The increase in occupancy rates and hence other revenues in addition to the hike in average rooms' rates helped the hotel's T.Rev PAR to go up to EGP 391 in 1H2017 vs. EGP 323 in 2016, recording an increase of 21%. In time, ODE was able to curb the hotel's GOL to EGP 2 per room, equivalent to total GOL of EGP 18.3K. Meaning that in 2Q2017, the hotel was successfully able to generate a GOP of EGP 22.4K. In 2017, we expect an occupancy rate of 55%, and for the ARR during the full year to reach EGP 542/room; positively impacting the expected T.Rev PAR to reach EGP 433/room, up 34% YoY. We believe the year end GOP PAR will reach EGP 22/room, as an outcome for the hotel's increasing revenues in relation to the fixed costs component. Going forward, we believe that the T.Rev PAR will grow at a CAGR of 27% in 2016-2021, while GOP PAR will grow at a CAGR of 96% in 2017-2021, given the low comparable base of 2017. The rationale behind the strong improvement in performance we see is mainly driven from the exclusivity of Fayoum, as according to our research, ODE's eligible peers in Fayoum are limited to around 7 hotels. Over the forecasting period, we believe the hotel total revenues will grow to EGP 19.4mn by 2021, up from EGP 0.64mn in 2016, and EGP 7.9mn in 2017. And we believe the hotel's GOP will reach EGP 5.8mn by 2021, up from a loss of EGP 0.41mn in 2016, and a GOP of EGP 0.39mn in 2017.

KPIs in EGP mn 2016 2017F 2018F 2019F 2020F 2021F Revenues 0.6 7.9 11.0 14.6 18.4 19.4

Estimated Room Revenues 0.4 5.4 7.7 10.2 12.8 13.4 Estimated Other Revenues 0.2 2.4 3.2 4.4 5.6 6.0

Gross Operating Profit (Loss) (0.4) 0.4 1.6 2.9 4.6 5.8

1,967

18,250 18,250 18,250 18,250 18,250

838

10,038 11,863

13,688 15,513 15,513

43%

55%

65%

75%

85% 85%

0%

20%

40%

60%

80%

100%

-

5,000

10,000

15,000

20,000

2016 2017F 2018F 2019F 2020F 2021F

Rooms Available - nightsRooms Sold - nightsOccupancy Rates

472 542

651 748

823 864

323 432

601 803

1,008 1,065

(209)

22 90 161

252 320

(400)

(200)

-

200

400

600

800

1,000

1,200

2016 2017F 2018F 2019F 2020F 2021F

ARR - in EGP T.REV PAR GOP PAR

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AUGUST, 2017



In our view, one of ODE’s most exclusive business lines, expected to grow as Cultural Tourism pick up again

E- The Floating hotel – Oberoi Zahra Nile Cruise A luxurious cruise featuring 27 cabins and suites that offers a 7-day cruise in which guests get to enjoy Egypt's history through sailing to/from Aswan and Luxor temples and monuments. The floating hotel occupancy rate and performance was hit hard during 2015 and 2016, as tourists flow to Aswan and Luxor dropped severely. However, as tourists' arrivals to Egypt is picking up again, the hotel has been able to report an operational enhancement. Although, the floating hotel room rates are the highest within ODE hotels' portfolio, the hotel has been subject to GOL over 2015 and 2016, as occupancy rates fell dramatically. In 2015, occupancy reached 13%, with an ARR of EGP 3,849, a weak T.Rev PAR of EGP 704/room and a GOL PAR of EGP 96/room. The hotel's status worsened further during 2016, although ODE rose the ARR significantly by 37% to EGP 5,256/room. However, as occupancy fell further to 7% the T.Rev PAR dropped to EGP 516/room, marking a 27% decrease, while GOL PAR worsened to EGP 188/room. During 1H2017, occupancy reached 23%, with a T.Rev PAR of EGP 1,830 and a GOP PAR of EGP 586 versus a T.Rev PAR of EGP 392 and a GOL of EGP 342 in 1H2016. In 2017F, we expect the floating hotel to generate revenues of EGP 17.1mn, almost 3 folds higher YoY, with a GOP of EGP 5.3mn. Equivalent to a T.Rev PAR of EGP 1,915 and a GOP PAR of EGP 594, as we expect a very strong performance to be recorded during 4Q2017, which marks the highest domestic and foreign tourism flow to Aswan and Luxor, due to the suitable weather conditions. Going forward, we believe revenues will grow at a CAGR of 60% in 2016-2021 to EGP 47.9mn in 2021, due to the enhancement in tourism flow and hence occupancy rates, which would enable ODE to further increase its ARR and find more demand on the other provided services on the back of the weaker EGP. In 2017-2021, GOP is expected grow at a CAGR of 28.3% to reach EGP 14.4mn in 2021.

KPIs in EGP mn 2016 2017F 2018F 2019F 2020F 2021F Revenues 4.6 17.1 31.3 39.0 43.4 47.9

Estimated Room Revenues 3.5 12.7 23.5 29.3 32.6 36.0 Estimated Other Revenues 1.1 4.4 7.8 9.7 10.8 11.9

Gross Operating Profit (Loss) (1.7) 5.3 9.4 11.7 13.0 14.4

8,910 8,937 8,937 8,937 8,937 8,937 8,937

1,122 659

2,234

4,022 4,915

5,362 5,809

13%

7%

25%

45%

55% 60% 65%

0%

10%

20%

30%

40%

50%

60%

70%

0

2,000

4,000

6,000

8,000

10,000

2015 2016 2017F 2018F 2019F 2020F 2021F

Rooms Available - nightsRooms Sold - nightsOccupancy Rates

3,849

5,256 5,676 5,846 5,963 6,083 6,204

704 516

1,916

3,499

4,362 4,854

5,364

-96 (188)

594 1,050 1,309 1,456 1,609

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2015 2016 2017F 2018F 2019F 2020F 2021F

ARR - in EGP T.REV PAR GOP PAR

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AUGUST, 2017


Hospitality Segment KPIs & Valuation KPIs in EGP mn 2016 2017F 2018F 2019F 2020F 2021F

Gouna Hotel Revenues 416.8 842.7 1,087.2 1,262.2 1,427.8 1,566.5 Taba Hotel Revenues 42.5 59.8 103.2 196.3 284.4 364.8

Makadi Hotel Revenues 31.6 60.7 59.8 57.3 59.0 60.8 Bayoum Lakeside Hotel Revenues 0.6 7.9 11.0 14.6 18.4 19.4

Floating Hotel Revenues 4.6 17.1 31.3 39.0 43.4 47.9 Total Hotels Revenues 496.2 988.2 1,292.4 1,569.5 1,833.0 2,059.6

Gouna Contribution to Revenues 84.0% 85.3% 84.1% 80.4% 77.9% 76.1% Taba Contribution to Revenues 8.6% 6.1% 8.0% 12.5% 15.5% 17.7%

Makadi Contribution to Revenues 6.4% 6.1% 4.6% 3.7% 3.2% 3.0% Bayoum Contribution to Revenues 0.1% 0.8% 0.8% 0.9% 1.0% 0.9%

Floating Hotel Contribution to Revenues 0.9% 1.7% 2.4% 2.5% 2.4% 2.3% Gouna Hotel GOP 135.3 379.2 467.5 517.5 571.1 626.6

Taba Hotel GOP -9.4 -9.0 5.2 19.6 42.7 91.2 Makadi Hotel GOP -17.9 0.0 0.0 0.0 0.0 0.0

Bayoum Lakeside Hotel GOP -0.4 0.4 1.6 2.9 4.6 5.8 Floating Hotel GOP -1.7 5.3 9.4 11.7 13.0 14.4

Total Hotels Revenues 105.8 375.9 483.7 551.8 631.4 738.0 GOP Margin 21% 38% 37% 35% 34% 36%

NOPLAT 208.9 246.9 260.4 287.9 341.3 Gross CF 277.1 323.2 353.0 396.1 462.9

FCF 183.9 218.9 236.2 265.3 316.4 Terminal Value 5,389.7 Discount Factor 1.05 1.17 1.32 1.51 1.78

DCF 175.7 187.2 178.5 175.3 3214.2 NPV 3,931.0 NPV per Share 17.7

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AUGUST, 2017

Current released inventory to lead to record backlog and net contracted sales in 2017 – in EGP mn


3- Real Estate Segment ODE's RE majority offering is secondary-home focused, with c. 95% of sales and revenues generated from El Gouna. ODE usually launch 2 projects in El Gouna per year, during the second and fourth quarters, as those are the most highly occupied seasons for El Gouna timed with Easter and Christmas holidays. Other smaller launches or inventories release usually take place during the year from other developments in Fayoum and Makadi, as both developments target primary residential needs as well as secondary. In 2016, the real estate segment contributed to ODE's total revenues by 32%, equivalent to EGP 467mn, while COGS stood at EGP 245mn, resulting in a segment's GPM of c. 48%. The segment is characterized by its high margins, as the company’s clientele and exclusive offering is well differentiated, with nearly no direct competition in proximity. The segment’s performance and momentum is believed to strongly continue over the upcoming year, with a low risk high return profile for the company’s real estate products in El Gouna. As launched projects are usually marketed in USD or USD-tagged. In time, the higher part of construction and contracting costs relative to revenues are denominated in EGP. Taking into account that following the EGP flotation, ODE fixed the FX-rate at EGP 13-13.5/USD, up till 1H2017 sales registered, with plans to raise the rate during 2H2017 for the new launches; assumed in our forecast at EGP 17.5/USD, which should translate to an average increase of 200-300bps in RE segment’s GPM over the upcoming 2-3 years. In 1H2017, ODE was able to achieve record sales of EGP 718.7mn, 98% of which was accounted for by El Gouna RE segment; 2Q2017 only accounted for EGP 527mn of net sales, as ODE launched Fanadir Bay II, with a total inventory of USD 10.5mn that was successfully sold out. ODE also launched “Tawila” with a total inventory of USD 22.4mn, from which 40% was successfully sold. Besides, transferring 82 hotel rooms into real estate products that were sold out during 2Q2017, resulting in a total sales value of USD 13.5mn. In 2H2017, we expect “Tawila” released inventory sell out to reach 50% along with a new inventory release in El Gouna planned for 4Q2017, worth USD 19.5mn. We believe all outstanding inventory to be sold by 2019, which is a conservative assumption, given that ODE successfully conclude its new launches in the span of 12-18 months, as the company releases limited number of units; to maintain its clientele appetite and suitably move prices. ODE average price per Sqm rose 35% YoY in 1H2017 to stand at EGP 31.5K/Sqm across destinations, skewed by Gouna’s EGP 33K vs. EGP 24.9K a year earlier.

959

1,608 1,580

1,125

641

485

467 447

800 844

484 156

48% 47%

50% 50%

51%

54%

42%

44%

46%

48%

50%

52%

54%

56%

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2016 2017F 2018F 2019F 2020F 2021F

Revenues Backlog Earned Revenues GPM

781

1,096

772

390

55%

40%

-30%

-49% -60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2016 2017F 2018F 2019F

Net contracted Sales % Change in Net Sales

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Real Estate KPIs & Valuation We valued ODE’s RE segment at EGP 327mn driven from the outstanding working capital and remaining recognition for 10 launched projects across El Gouna, Fayoum and Makadi; including 1H2017 products and the expected 4Q2017 USD 19.5mn launch in El Gouna.

KPIs in EGP mn 2016 2017F 2018F 2019F 2020F 2021F

Total RE Revenues 467.0 446.6 800.2 844.3 484.1 156.0 COGS 245.0 237.0 403.1 418.8 236.0 71.2

Gross Profit 222.0 209.6 397.1 425.5 248.1 84.8 GPM 47.5% 46.9% 49.6% 50.4% 51.3% 54.3%

NOPLAT 34.2 224.1 287.4 192.3 65.7 Change in WC (202.5) (364.7) (304.4) 23.9 296.7

FCF (168.3) (140.7) (16.9) 216.1 362.4 Discount Factor 1.0 1.2 1.3 1.5 1.8

DCF (160.8) (120.3) (12.8) 142.8 204.2 NPV 327.3 NPV per Share 1.5

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AUGUST, 2017


Outstanding Debt – in Denominated CCY - Mn

Outstanding Debt – in EGP Mn

Debt Contribution by CCY – in EGP terms

Flotation Impact &Debt Path … An upside story from now on … By December 2016, as the EGP flotation took place, ODE suffered from its impact on the company’s net monetary liability position that led to a one off loss transferred to OCI of EGP 636.6mn; intensifying the company’s own retained losses.

While the one time allowed debt and related assets revaluation/recapitalization, had an impact on the company’s outstanding debt by December 2016 of around EGP 1,300.7mn, while assets related to such revalued debt balances were increased by EGP 503.7mn. ODE was able to record around EGP 25.79mn of gains from foreign operations subsidiaries, due to the company’s net asset position during a period of depreciating home currency (EGP). However, such account in OCI might turn into losses as the net asset position is translated going forward along with an appreciating EGP.

However, as the EGP flotation had its adverse impact on the company’s debt balances, skyrocketing to new high levels by the end of 2016. We believe that ODE’s debt rescheduling deal, promises to smooth down the company’s outstanding debt balances held in foreign currencies even before principal repayment takes place by mid-2019. As the expected appreciation in EGP will have its positive impact through non-cash FX gains to be booked on the company’s P&L statement. However, on a cash flow basis, FCY balances will be repaid in full FCY denomination.

ODE rescheduled debt plan, states that the company will enjoy a grace period from mid-2016 for 3 years, and to start repaying the outstanding principals by mid-2019. As we understood from the provided disclosures, that all medium term and long term debt are included in such deal; hence, we constructed the company’s debt runoff plan for such amounts excluding the current overdraft balance, which we believe will smooth down gradually over the upcoming years, as ODE’s operations and liquidity enhance.

718 833 789

678

188 188 183 162

29 23 22 20 0

200

400

600

800

1000

2016 2017F 2018F 2019F

EGP USD EUR

4,647 4,545 4,152

3,436

-

1,000

2,000

3,000

4,000

5,000

2016 2017F 2018F 2019F

EGP USD EUR Total Debt

15.5%

72.6%

11.9% 2016

EGP USD EUR

18.3%

72.3%

9.4% 2017F

EGP USD EUR

19.0%

71.8%

9.2%

2018F EGP USD EUR

19.7%

71.2%

9.1% 2019F

EGP USD EUR

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AUGUST, 2017

New Assumed Debt Structure – EGP mn

Capping the EGP appreciation by 2019 – halts FX gains



Debt Repayments – in EGP mn 2017F 2018F 2019F 2020F 2021F Debt Installments Repayment 0.00 0.00 260.79 521.58 521.58 Principal Repayment Portion 0.00 0.00 58.68 339.68 380.10

Interest Charge Portion 237.85 219.31 202.11 181.90 141.48 Interest Charge on Overdraft 137.96 130.92 91.74 72.58 63.41

Total Interest Expense - Charged to P&L 375.81 350.23 293.85 254.48 204.89

-1,300

69 173 156

- 2 4 6 8 10 12 14 16 18 20

(1,500)

(1,000)

(500)

-

500

2016 2017F 2018F 2019F

FX revaluation/ recapitalization ImpactEGP-USDEGP-EUR

1,641 1,682 1,616

1,147

2,979 2,698

1,878 1,597

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2016 2017F 2018F 2019F

Over Draft Medium - Long Term Debt

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AUGUST, 2017


♦ Financial Statements … Historical & Forecast Income Statement Brief Hist. Forecast

In EGP Mn 2016 2017F 2018F 2019F Net Revenues 1,455.45 2,165.71 2,873.56 3,239.62

Change -17.89% 48.80% 32.68% 12.74% COGS 1,240.87 1,486.04 1,889.27 2,125.90

Change 5.86% 19.76% 27.13% 12.53% Gross Profit 214.58 679.67 984.30 1,113.72

SG&A 110.08 101.79 172.41 194.38 EBITDA 89.14 796.86 819.56 930.10

Interest Expense 340.43 375.81 350.23 293.85 Net Income After MI -377.47 238.81 327.79 395.39

Balance Sheet Brief Hist. Forecast In EGP Mn 2016 2017F 2018F 2019F

Cash 871.12 686.57 1,008.64 1,091.50 Short Term Receivables 790.42 1,307.58 948.42 591.58

Inventory - WIP 585.96 742.85 903.16 949.30 Other Current Assets 683.14 964.50 1,222.27 1,313.18 Total Current Assets 2,930.64 3,701.50 4,082.48 3,945.56

Net PPE 3,439.90 3,298.57 3,313.87 3,338.75 Long Term Notes Receivables 638.00 609.29 578.28 544.80

Other LT-Assets 2,090.43 2,138.86 2,045.25 1,951.65 Total Long Term Assets 6,168.33 6,046.72 5,937.41 5,835.19

Total Assets 9,098.97 9,748.22 10,019.89 9,780.75

Liabilities

STD - incl CPLTD 3,624.30 1,682.44 1,616.26 1,407.58 Advances From Customers 213.27 718.07 641.87 321.56

Other Current Liabilities 1,024.47 512.21 671.63 853.45 Total Current Liabilities 4,862.04 2,912.72 2,929.76 2,582.58

LTD 1,023.11 2,937.14 2,763.85 2,347.10 Other Long Term Liabilities 1,638.22 1,604.14 1,575.74 1,552.07

Total Liabilities 7,523.38 7,454.00 7,269.35 6,481.75

Equity

Reserves 1,100.36 1,124.24 1,157.02 1,196.56

Retained Earnings (Losses) (611.34) (396.41) (113.34) 226.12

Minority Interests 355.73 458.08 598.56 768.01

Total Equity 1,575.58 2,294.22 2,750.54 3,299.00

Margins & Ratios

2016 2017F 2018F 2019F

GPM 14.74% 31.38% 34.25% 34.38% EBITDA Margin 6.12% 36.79% 28.52% 28.71%

NPM -25.94% 11.03% 11.41% 12.20% EPS (1.70) 1.08 1.48 1.78 P/E (6.58) 10.40 7.58 6.28 DPS 0.00 0.00 0.00 0.00 DY 0.00% 0.00% 0.00% 0.00%

ROA -4.56% 2.53% 3.32% 3.99% ROE -17.69% 12.34% 13.00% 13.07%

Debt/Equity 2.95 2.01 1.59 1.14

17


AUGUST, 2017

Stock Recommendation Guidelines

Recommendation Target-to-Market Price (x)

Buy x > 15%

Accumulate 5%< x <15%

Hold -5% < x < 5%

Reduce -15% < x < -5%

Sell x < -15%

Strong Buy x > 40%

Investment Grade Explanation

Growth 3 Yr. Earnings CAGR > 20%

Value Equity Positioned Within Maturity Stage of Cycle

Speculative Quality Earnings Reflect Above Normal Risk Factor

18


AUGUST, 2017

PRIME SECURITIES

Hassan Samir Managing Director +202 3300 5611 [email protected] RESEARCH TEAM

Aboubakr Emam, CFA Head of Research +202 3300 5724 [email protected]

Eman Negm, MSc Senior Economist +202 3300 5716 [email protected]

Mohamed Marei Senior Equity Analyst +202 3300 5725 [email protected]

Omneya El Hammamy Equity Analyst +202 3300 5718 [email protected]

Mohamed Magdi Equity Analyst +202 3300 5720 [email protected]

Mai Abdelaziz Junior Analyst +202 3300 5727 [email protected]

SALES TEAM

Mohamed Ezzat Head of Sales & Branches +202 3300 5784 [email protected]

ShawkatRaslan Heliopolis Branch Manager +202 3300 5110 [email protected]

Amr Alaa, CFTe Team Head – Institutions Desk +202 3300 5659 [email protected]

Amr Saber Manager +202 3300 5609 [email protected]

Mohamed Elmetwaly Manager +202 3300 5610 [email protected]

Emad Elsafoury Manager +202 3300 5624 [email protected] HEAD OFFICE PRIME SECURITIES S.A.E. Regulated by CMA license no. 179 Members of the Cairo Stock Exchange 2 Wadi El Nil St., Liberty Tower, 7th-8thFloor, Mohandessin, Giza, Egypt Tel: +202 33005700/770/650/649 Fax: +202 3760 7543

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ODE - Initiation of Coverage - August 2017

Economy & Finance

Transcript of ODE - Initiation of Coverage - August 2017