SOLIDERE Current Price: Equity Research September 23 · starting 2013e we expect the cash position...

TABLE OF CONTENTS TABLE OF CONTENTS

In USD millions 2010a 2011e 2012e 2013e

Revenues 382 258 189 492

EBITDA 226 146 97 356

Net income 196 128 82 301

EPS 1.28 0.84 0.54 1.98

P/E 11.9 18.3 28.5 7.7

P/B 1.27 1.28 1.33 1.23

EV/EBITDA 12.9 20.1 30.1 8.2

SOLIDERE Equity Research September 23rd, 2011 Sector: Real Estate Country: Lebanon

Current Price: SOLA USD 15.29; SOLB USD 15.16

Target Price: USD 22.00

Recommendation: OVERWEIGHT

Largest real estate master developer in Lebanon Created in 1994 for the purpose of reconstructing the Beirut City Center, Solidere emerged as a prominent player in the Lebanese real estate market, providing quality property and infrastructure and transforming the Beirut Central District (BCD) into a thriving downtown area of the Capital. Solidere is also responsible to reclaim land and develop it into a Waterfront District with two marinas and is engaged in real estate development outside Lebanon through its associate Solidere International.

Revenue diversification strategy to offset the depletion of the land bank Solidere as a master developer with a sizeable land bank has traditionally focused on land sales in the BCD with 88% of revenues generated from land sales in 2010. In light of the expected depletion of its land bank over the next 15 years, the Company’s focus is to secure additional revenue streams through: i) the development of a real estate portfolio in view of strengthening rental income ii) property management and services and, iii) contribution from Solidere International.

Improved financial performance in 2010 and encouraging land bank signings despite challenging macroeconomic and real estate conditions In 2010, Solidere recognized revenues of USD 382 million resulting mainly from land sales which were realized from previous years by drawing on its sales backlog. The Company’s EBITDA and net profits totaled USD 226 million and USD 196 million, respectively. Into 2011e, the softer economic and real estate market conditions amid growing political uncertainties did not deter Solidere from intensifying negotiations regarding the waterfront area. The Company signed two land sales valued at USD 50 million each and expects to close few more by end of the year, which contrasts with the lack of any selling activity for over a year.

Investing For The Longer Term To Reward Patient Investors

We like Solidere’s longer term outlook as land sales drive solid margins, profitability and cash flows, however are concerned in the shorter term as Solidere continues its capital intensive program against an uncertain economic and political backdrop influencing the real estate market We recognize Solidere’s position in its domestic market as the prime land owner and master developer in the Beirut Central District (BCD), its strong track record in developing superior quality properties and infrastructure, and its revenue diversification strategy to counterbalance the depletion of its land bank. We like the firm’s high operating margins, relatively low levels of indebtedness, and are encouraged by recent land signings on the Waterfront area despite softer macroeconomic and real estate conditions. While upcoming investments are expected to strain cash flows in the short term, we expect the cash position to improve starting 2013e as the real estate cycle improves driving land sales and funding requirements subside, translating into favorable returns for long-term investors. We rate Solidere shares at Overweight with a fair value estimate of USD 22.00 per share Based on our revised forecasts and updated valuation, our fair value estimate is USD 22.00 per share, which implies a P/B of 1.8x, a P/E of 17.1x, and an EV/EBITDA of 10.7x. We accordingly assign an Overweight recommendation given that the current price is at a discount of more than 10% to our fair value estimate.

Contacts: Head of Research: Nadim Kabbara, CFA [email protected] +961 1 985 195 Analyst: Raya Freyha [email protected] +961 1 985 195 Sales and Trading, FFA Private Bank (Beirut) +961 1 985 225 Sales and Trading, FFA Dubai ltd (DIFC) +971 4 3230300

Disclaimer: This document has been issued by FFA Private Bank for informational purposes only. This document is not an offer or a solicitation to buy or sell the securities mentioned. Although FFA Private Bank s.a.l. makes reasonable efforts to provide accurate information and projections, certain statements in this document constitute forward-looking statements or statements which may be deemed or construed to be forward-looking statements. These forward-looking statements involve, and are subject to known and unknown risks, uncertainties and other factors which could cause the actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Therefore, FFA Private Bank makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned, and accepts no responsibility or liability for damages incurred as a result of opinions formed and decisions made based on information presented in this document. All opinions expressed herein are subject to change without prior notice.

Share Data

Share Price Information*

Share Price Performance (In USD)

Key Performance Indicators

Listing (Class A & B shares): Beirut Stock Exchange Ticker symbol: SOLA; SOLB Listing GDRs: London Stock Exchange Ticker symbol: SLED Market capitalization*: USD 2,522.9 million Number of common shares: 165.0 million 12-month average daily volume: 37,660

Δ YTD -17.5% Δ 1M -4.9% Δ 3M -13.7% Δ 12M -20.4% 52-Week range USD 15.11 – 20.40

*Solidere A shares as of market close on September 23rd 2011.

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18

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22

Sep-10 Dec-10 Mar-11 Jun-11 Sep-11

We expect upcoming investments to build longer term shareholder returns but put a strain on cash flows in the near future In the shorter term, we expect the Company will have to invest around USD 500 million to complete the infrastructure mainly related to the waterfront district, to fund its real estate developments, as well as its working capital requirements in order to facilitate operations. These capital-intensive years will likely drive Solidere to increase borrowings to bridge shortfalls and to finance its dividend program. However, starting 2013e we expect the cash position to improve as land selling momentum intensifies and funding requirements subside. In 2013e, we expect Solidere to generate USD 492 million, USD 356 million and USD 301 million in revenues, EBITDA and net profits respectively corresponding to 72.4% and 16.5% in EBITDA margins and ROE respectively.

EQUITY RESEARCH REAL ESTATE - SOLIDERE

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TABLE OF CONTENTS

INVESTMENT OPINION ................................................................................................................. 4

COMPANY OVERVIEW .................................................................................................................. 6

Brief Background ................................................................................................................................. 6

Share Capital ....................................................................................................................................... 6

Latest Developments .......................................................................................................................... 6

Business Lines and Strategy ................................................................................................................ 7

SWOT Analysis ..................................................................................................................................... 9

REAL ESTATE SECTOR HIGHLIGHTS .............................................................................................. 10

Sector Fundamentals ........................................................................................................................ 10

Sector Performance .......................................................................................................................... 11

Property Prices and Emerging Trends ............................................................................................... 12

MACROECONOMIC HIGHLIGHTS ................................................................................................. 13

Economic Highlights 2010 ................................................................................................................. 13

Economic Highlights 2011 ................................................................................................................. 14

FINANCIAL HIGHLIGHTS AND FORECASTS .................................................................................... 15

VALUATION AND RECOMMENDATION ........................................................................................ 18

KEY INVESTMENT RISKS .............................................................................................................. 19

APPENDIX .................................................................................................................................. 20

Comparable Valuation ...................................................................................................................... 20

Financial Statements ......................................................................................................................... 21


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INVESTMENT OPINION We like Solidere’s longer term outlook as land sales drive solid margins, profitability, and cash flows, however are concerned in the shorter term as Solidere continues its capital intensive program against an uncertain economic and political backdrop influencing the real estate market We recognize Solidere’s position in its domestic market as the prime land owner and master developer in the Beirut Central District (BCD), its strong track record in developing superior quality properties and infrastructure, and its revenue diversification strategy to counterbalance the depletion of its land bank. We like the firm’s high operating margins, relatively low levels of indebtedness, and are encouraged by recent land signings in the Waterfront area despite softer macroeconomic and real estate conditions. While upcoming investments are expected to strain cash flows in the shorter term, we expect the cash position to improve starting 2013e as the real estate cycle improves driving land sales and funding requirements subside, translating into favorable returns for long-term investors.

1. Largest real estate developer in its domestic market as the sole owner and master developer of prime land in the BCD area Solidere was established in 1994 for the purpose of reconstructing the Beirut City Center. It has emerged since then as a prominent player in the Lebanese real estate market, master planning, urban planning, developing and selling land plots in the BCD area. Solidere is also responsible for the expansion of the Beirut City Center into a Waterfront District with infrastructure largely completed. Outside the BCD area, Solidere is engaged in real estate developments through its associate Solidere International.

2. Revenue diversification strategy to counterbalance the depletion of its land bank While Solidere has already sold or developed (by Solidere or third party developers) 2.1 million sqm BUA, it still holds 1.9 million sqm BUA split between 1.5 million sqm BUA in the reclaimed area and 0.4 million sqm BUA in the traditional area. With the depletion of the land bank expected over the next 15 years, management is deploying efforts in view of decreasing the reliance from land sales (88% in 2010) by securing new revenue streams through property rentals from the development of a real estate portfolio, property management and services, and contribution from Solidere International. We modeled the depletion of the land bank towards the end of 2030e.

3. Improved financial performance in 2010 and encouraging recent land signings despite

challenging macroeconomic and real estate conditions In 2010, Solidere recognized revenues amounted to USD 382 million with the bulk being generated from land sales. Estimated EBITDA and net profits totaled USD 226 million and USD 196 million for the year translating into EBITDA margins of 59.0% with EPS of USD 1.28. Witnessing a decline in investor appetite in light of the political uncertainties in Lebanon impacting economic conditions (slower GDP growth down to 1.5 % according to the IMF and slower capital inflows), we are encouraged that Solidere intensified negotiations in the waterfront area and signed two land sales valued at USD 50 million each and expects to close few more by year-end, which contrasts with the lack of any selling activity in 2010.

4. There is scope for improvement in operating performance over the medium term as

Solidere completes its real estate portfolio and land selling momentum intensifies We see potential for improvement in operating performance in the medium term given the following factors: (i) In the shorter term, the Company will have to invest around USD 500 million to complete the

infrastructure tied to the Waterfront District and to fund its real estate developments, as


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well as its working capital requirements. These capital-intensive years will likely drive Solidere to increase its borrowings to bridge shortfalls and to finance its dividend program. While upcoming investments are expected to put a strain on cash flows in the short term, we expect the cash position to improve starting 2013e as funding requirements subside.

(ii) While recent political tension in the region and to a lesser extent in Lebanon have softened macroeconomic conditions and impacted investors and property buyer sentiment, the Lebanese real estate market is currently witnessing slower activity as highlighted by a mismatch between buyers and sellers in the high-end residential segment translating into a drop in property transactions and a relative consolidation in apartments prices. We believe there is longer term upside as geopolitical shocks abate, the real estate cycle improves, and land sales accelerate, translating into improved profitability.

5. Believe the valuation is compelling for longer term investors and we rate Solidere shares

at Overweight with a fair value estimate of USD 22.00 An expected improvement in operating performance in the longer term should drive earnings higher as the shares benefit from an improvement in market sentiment on the back of greater macroeconomic and real estate sector visibility. We believe this will provide upside for Solidere shares in the longer term. Our value estimate of USD 22.00 per share is derived using a sum of the parts approach, adjusting the land bank to estimated end user market prices, applying a discounted cash flow to the property portfolio and property management income, and adjusting for certain balance sheet items. Our fair value estimate of USD 22.00 implies a P/B of 1.8x, a P/E of 17.1x, and an EV/EBITDA of 10.7x. While Solidere shares have traded at a premium valuation to MENA real estate peers particularly between the recent global financial crisis until late 2010 on a P/E basis, we highlight the firm’s cleaner balance sheet and slightly higher five-year ROE levels. We assign an Overweight recommendation given that current shares represent a greater than 10% discount to our fair value estimate of USD 22.00. We believe investors should take the equity market weakness on regional and domestic political uncertainties in the short term as an opportunity to participate in this longer term growth story.


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COMPANY OVERVIEW

Brief Background

Founded in 1994 for the purpose of rebuilding and developing the Beirut Central District

Founded in 1994 by a Ministerial Decree, the Lebanese Company for the Development and Reconstruction of Beirut Central District also known as Solidere has since been redeveloping the Beirut Central District after its destruction following the 1975-1990 civil war. The Company’s mission is to rebuild Beirut’s downtown area according to a master plan and to re-establish its role as the country’s center for economic, business, entertainment and cultural activities. In addition, Solidere is also responsible to reclaim land and develop it into a Waterfront District with two marinas. The Company is also engaged in real estate development outside the BCD through Solidere International.

Share Capital

Solidere’s Class A and Class B common shares are listed on the Beirut Stock Exchange while the GDRs are traded on the London Stock Exchange.

Common shares : Capital consists of 165,000,000 shares of USD 10 par value, authorized and fully paid and divided in accordance with Law 117/91 into the following:

• Class A amounting to 100,000,000 shares representing contributions in-kind of properties in the BCD, based on the resolutions of the High Appraisal Committee. All Class A shares were deemed to have been issued and outstanding since the establishment of the Company.

• Class B amounting to 65,000,000 shares representing cash subscriptions and all are issued and fully paid at the establishment of the Company.

• Share ownership by any one shareholder is limited to 10%.

Treasury shares: The Company has approximately 8% of its authorized capital in treasury shares, and is limited to purchase up to 10% as per its articles of incorporation. We estimate that treasury shares will be reduced by 3% from 8% to 5% after the dividend announced in 2011.

Latest Developments 2011 dividend payments: Solidere announced the payment of cash dividends amounting to USD 0.40

per share and a bonus share for every 30 held by existing shareholders in 2011 for the 2010 financial year. Distribution of dividends will take place starting October 31, 2011 for shareholders of record at August 19, 2011.

2010 financial results: Solidere recognized revenues in 2010 of USD 382 million resulting mainly from land sales. The Company realized land sales from previous years drawing on its sales backlog as no transactions were made since 2010. The Company’s EBITDA and net profits for 2010 totaled USD 226 million and USD 196 million, respectively. EPS was USD 1.28 in 2010.

Recent land sales: Solidere recently intensified negotiations regarding the waterfront area and signed two land sales valued at USD 50 million each and expects to close few more by end of the year, which contrasts with the lack of any selling activity for over a year.

Update on the Waterfront area: Solidere recently provided an update on Zaitunay Bay, a joint

venture project with Stow Waterfront Development, encompassing 20,000 sqm BUA which will include furnished apartments, a yacht club, retail shops, restaurants, and promenade, with the first sections targeting an opening in the second half of 2011.


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Business Lines and Strategy

Revenue diversification strategy by business line and by geography to counterbalance the depletion of its land bank

Solidere’s activities are organized into three major operating lines:

• Land and real estate sales

• Property rentals and

• Property management and services

As a master developer with a sizeable land bank, Solidere has traditionally focused on land sales in the BCD. In 2010, the revenue mix highlights that land sales still account for the bulk of the Company’s revenues (88%). A comparison with previous years highlights a slight shift in revenue mix towards a lower dependence on land sales (92% for 2007 vs. 88% in 2010). The diagram below depicts the revenue mix for the year 2010: Figure 1: Solidere’s revenue mix for 2010

Source: Solidere reports

While Solidere has already sold or developed (by Solidere and third party developers) 2.1 million sqm Built Up Area (BUA), it still holds 1.9 million sqm BUA, split between 1.5 million sqm BUA in the reclaimed area and 0.4 million sqm BUA in the traditional area. Management expects the depletion of the 1.9 million sqm BUA land bank over the next 15 years, judging by the historical 115,000 sqm BUA yearly average sold between 1995 and 2010. We estimate the depletion of the land bank towards the end of 2030e. Figure 2: Master plan BUA Figure 3: Current BUA breakdown

Source: Solidere reports Source: Solidere reports

The Company’s main focus in the long term, in light of its depleting land bank (which is geographically limited to the Beirut City Center), is to diversify its revenue mix by securing additional streams which consist mainly of increasing rental income. This revenue diversification strategy also includes increasing contributions from property management and services and capturing opportunities from international operations.

Land and real estate sales

88%

Property rentals

11%

Property management and services

1 %

Revenue mix in 2010

45%2.1 mn sqm

BUA

15%0.7 mn sqm

BUA

32%1.5 mn sqm

BUA

8%0.4 mn sqm

BUA

BUA sold and/or developed BUA exemptBUA remaining/reclaimed BUA remaining/traditional

45%

24%

11%

5%9%

5%

Residential OfficesMixed- use RetailHotels/Furn. Appt Government/CulturalReligious


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Increasing rental income by growing the real estate portfolio

Solidere seeks to double its contribution from rental income from its property portfolio: the aim is to generate rental revenue of USD 100 million in the next 5 years, which will encompass income from property rentals (current properties and real estate developments in the pipeline) and property management and services. The pipeline consists of the North section of the Beirut Souks (North Souks) which will include a movie theater and a department store. The real estate pipeline also includes a residential project (in Saifi), a mixed-use development (in Mina El Hosn), an office building (in Mina El Hosn) and a boutique hotel (in Bachoura). The current real estate portfolio includes certain properties and the South Souks.

The capital expenditures required to complete properties in the pipeline along with the remaining infrastructure is estimated at USD 500 million, with the bulk of the outlays in years 3-5. Table 1: Real estate property portfolio

Current Pipeline Total

Real estate property portfolio

Pre-Souks portfolio

South Souks North Souks Residential, mixed- use, office building,

boutique hotel

Completion date Completed Completed Cineplex 2012,

Department store 2014

2014-2015

Leasable space 86,000 sqm 53,500 sqm 41,000 sqm 64,500 sqm 245,000 sqm Recurring rental income USD 22 m USD 25 m USD 20 m USD 33 m USD 100 m

Source: Solidere reports

Increasing income from property management and services

Property management and services include property maintenance, security, broadband network, cultural and artistic activities as well as hospitality services. Solidere is looking to develop this segment notably through partnerships with owners and developers for tourism and hospitality projects. Beirut Hospitality Company (BHC) was established for this purpose and has already partnered with reputable restaurants in the BCD.

Continue to seek opportunities for international expansion through Solidere International

Solidere established Solidere International (SI) in 2006 in an effort to expand urban planning and real estate developments outside the BCD perimeter. Solidere invested USD 237 million in SI with a 39.0% ownership through Solidere International Holdings. Current international projects encompass: Al Zorah project in UAE, Eastown and Westown projects in Egypt, a residential tower and a mixed-use development in KSA as well as a residential community in Lebanon (Hazmieh). In light of the downturn which affected the regional real estate sector in 2008 and amplified by the current regional tensions, Solidere International projects were affected.

• Hazmieh/Lebanon project: An urban development project expected to be completed by 2015.

• Al Zorah project (Ajman, UAE): The project was reduced in size in 2010 and its concept was modified from residential to touristic. Infrastructure works should begin early 2012 and the infrastructure of the re-phased area is expected to be completed in four years.

• Eastown & Westown projects (Cairo, Egypt): Solidere International partnered with SODIC to assist in the master plan, design, develop, build, invest, market and property manage Eastown and Westown projects.

• KSA projects: Solidere has two projects planned in the Kingdom of Saudi Arabia, one in Riyadh and the other in Jeddah.


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SWOT Analysis

Source: FFA Private Bank

Strengths

• Strong domestic franchise with a prime land bank

• Favorable real estate prices for land and properties

• High operating margins and relatively clean balance sheet

• Positive track record despite relatively challenging macroeconomic and political conditions

Weaknesses

• Business model based on a finite land bank

• High dependence on land sales in a limited geographic area

• Significant client concentration

Opportunities

• Attractive long-term fundamentals in the real estate sector

• Demand from Gulf nationals and Lebanese expatriates particularly from oil exporting nations

• Potential to reduce dependence on land sales by increasing rental and other income from current levels

Threats

• High sensitivity of the real estate sector to macroeconomic conditions

• Uncertainty from domestic political instability and regional turmoil hurting investor sentiment


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REAL ESTATE SECTOR HIGHLIGHTS

Sector Fundamentals

The Lebanese real estate sector boasts solid demographic and economic/financial fundamentals

Lebanon’s real estate sector has historically benefited from the country’s prime location on the East Coast of the Mediterranean Sea, which lies at the crossroads of Africa, Asia and Europe as well as from its moderate climate. Due to Lebanon’s small geography, the scarcity of land in the country helped drive real estate prices despite numerous episodes of political and security unrest. The lack of restrictions on movement of capital and the sound banking system supported real estate investment appetite. The promulgation in 2005 of several decrees facilitating foreign ownership in Lebanon, supported Gulf investors investments in the Lebanese real estate sector, although restricted by foreign ownership limits at 3,000 sqm. The conservative nature of the Lebanese banking sector and the strict regulations from the Central Bank helped shield excesses in the real estate market by prohibiting banks from lending more than 60% of the value of real estate projects while exercising vigilance towards mortgage originations. Below are demographic and economic/financial factors that should support the real estate sector in the long term within a favorable macroeconomic environment stemming from relatively stable political and security conditions.

Demographic fundamentals

• A steadily growing resident population: The Lebanese population grew at an annual rate of 1.3% in 2010, estimated to be sustained over the next couple of years according to the IMF.

• A significant portion of the population under the age of 25: According to the UN, 46% of the population is under the age of 25, which we see as beneficial to household formation, a driver to real estate demand.

• The large size of the Lebanese Diaspora: Considered to be one of the largest in terms of proportion to the resident population, the Lebanese Diaspora fuels demand for real estate directly through the acquisition of lands and properties and FDI’s as well as indirectly through remittances. The Lebanese Diaspora reportedly accounts for about 60% of total demand for Lebanese properties.

In addition to the above-mentioned demographic drivers, the demand for Lebanese estates benefits from the economic/financial drivers found below:

Economic/Financial fundamentals

• A relatively high GDP per capita (PPP): According to the IMF, the GDP per capita (PPP) for Lebanon stood at USD 15,239 in 2010 as compared to the average for MENA countries at USD 9,071; supporting demand from Lebanese nationals.

• The accessibility of financing: Recent years were characterized by solid lending activities as witnessed by a 23% increase in loans in 2010, benefiting from high commercial bank liquidity levels and by the incentives of the Central Bank to subsidize some type of loans (including housing). A substantial portion of total lending is allocated to the property market (31% in 2010).

Source: Banque du Liban Source: Banque du Liban

Figure 4: Bank loans to construction Figure 5: Bank loans to housing

2,864 3,1564,313 4,839

6,298

0

2,000

4,000

6,000

8,000

2006 2007 2008 2009 2010

USD

Mill

ions

Bank loans to construction

1,138 1,3221,768

2,805

4,511

0

2,000

4,000

6,000

2006 2007 2008 2009 2010

USD

Mill

ions

Bank loans to housing


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• Remittances from Lebanese expatriates: Remittances amounted to USD 7.6 billion and USD 8.2 billion for 2009 and 2010 respectively claiming a large portion of GDP at nearly 21%.

• FDI into the Lebanese real estate sector: The real estate sector has traditionally benefited from strong interest of regional investors opting to channel their liquidity into Lebanese properties. When excluding oil exporting nations, Lebanon is one of the largest recipients of FDI in the region (nearly USD 5 billion for 2010) and foreign investments in Lebanon mainly pool towards real estate (44% for 2009) according to IDAL.

Sector Performance

Softness in the real estate market felt since late 2010 after strong performances in recent years

Over the past few years, the Lebanese real estate sector saw a solid performance driven by favorable macro factors including robust economic conditions and strong capital inflows into Lebanon. This was particularly felt in prime areas of the capital including the residential segment of the Beirut Central District where prices witnessed a drastic increase in the past few years fueled by Arab and expatriate demand for large and luxurious high-end apartments. Based on data from the Real Estate Registry, the value of property transactions grew at a 32% CAGR between 2006 and 2010 (and peaked in 2010 at USD 9,479 million) while the number of property transactions grew at a 17% CAGR over the same period. Simultaneously, construction permits and cement deliveries, the main indicators of oncoming supply, increased by 23% and 7% to reach 17.6 million sqm and 5.2 million tons respectively for 2010.

Table 2: Property transactions (in value and in number)

Source: Real Estate Registry

In light of a decline in investor and consumer confidence stemming from softer economic conditions and rising political uncertainties in Lebanon and the region, the Lebanese real estate sector has seen softer activity since late 2010. The first half of 2011 saw disagreement between buyers and sellers, resulting in an 18% yoy drop in value of property transactions to USD 3,850 million. A drop in the number of transactions (at 19%) seems to explain the decrease in the value of property sales transactions as investors have adopted a wait and see attitude in the wake of domestic and regional developments given little change in prices. The slowdown in demand is particularly felt at the level of very large sized apartments in expensive locations of the Capital.

Figure 6: Construction permits Figure 7: Cement deliveries

Source: Banque Du Liban Source: Banque Du Liban

The statistics released by the Central Bank pinpoint that construction permits and cement deliveries were slightly up in the first half of 2011 (+2% and +3% respectively), reflecting the supply/demand imbalance and the relative inelasticity of supply to demand pressures as developers execute existing projects in the pipeline and opportunistically target other segments of the market including smaller-sized apartments and developments in less affluent residential areas located on Beirut’s periphery.

2006 2007 2008 2009 2010 June 2011

Value of property sales transactions (USD million) 3,139 4,198 6,481 6,955 9,479 3,850

Yoy growth rates -5% +34% +54% +7% +36% -18%

Number of property sales transactions 50,140 67,107 80,709 83,622 94,202 37,386

Yoy growth rates -3% +34% +20% +4% +13% -19%

8.7 9.0

16.0 14.317.6

8.4 8.6

0

5

10

15

20

2006 2007 2008 2009 2010 6M-106M-11

Mill

ions

sqm

3.43.9 4.2

4.9 5.2

2.6 2.7

0

2

4

6

2006 2007 2008 2009 2010 6M-10 6M-11

Mill

ions

tons


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Property Prices and Emerging Trends

Lackluster property market expected in the short term although favorable fundamentals should support prices longer term

After years of a rapid surge in prices (2005 to 2009), the property market entered a phase of relative consolidation in late 2010, which became even more evident in the first half of 2011 when demand levels decreased as highlighted by a contraction in property sales. While developers have enjoyed strong bargaining power in recent years, in light of softer conditions buyers have become more price-sensitive and been able to exert more pressure in search of value enhancement, ranging from more favorable pricing to more customized amenities.

In the short term we expect real estate activity to remain lackluster as sellers will be unwilling to lower prices in an effort to protect margins following previous land purchases at record highs, while buyers remain on the sidelines particularly in the residential luxury segment until visibility on economic and political conditions improves. Furthermore, projects are somewhat financed through equity rather than debt, which we believe limits distressed sales during difficult times to satisfy loan obligations. Over the medium to long term, however, we believe favorable fundamentals will continue to support the real estate market in Lebanon.

Beirut remains the benchmark in terms of real estate demand and prices dynamics and the BCD continues to lead the market with the most expensive selling prices nearing USD 10,000/sqm on the Waterfront of Beirut City Center according to RAMCO, while the average prices of new apartments in the BCD starts at USD 6,000/sqm. The following table highlights prices of new residential units in prime locations of the BCD. Table 3: Range of prices in the BCD key area

Source: Commerce du Levant – Ramco Real Estate Advisors – 2011

Emerging demand trends: shift towards i) smaller sized apartments and ii) residential suburbs of the capital

Over the past few years, the Lebanese real estate sector witnessed a significant supply of large-sized luxurious residential apartments in the Capital, which is expected to be sustained for the coming few years giving the numerous projects underway. In light of the recent slowdown in real estate activity, developers are starting to adapt to new market conditions by building residential developments with smaller sized units and turning to the capital peripheries in order to target more price conscious buyers.

The rising attractiveness of smaller residential units ranging between 100 sqm and 250 sqm was triggered by the surge in prices in recent years and the current slowdown in economic growth that have impacted home buyers and investor sentiment and widened the gap between the selling prices in key areas of Beirut and the purchasing power of buyers. Furthermore, demand drivers have been witnessing a shift from wealthy Lebanese expatriates and Gulf nationals to local citizens, which led developers to start reducing the size of apartments to cater to a different market. This trend could gain momentum as some new cultural behaviors comprise i) a willingness to live in smaller apartments and ii) a change in households characteristics. This emerging trend is being mainly triggered by the younger population with individuals willing to live away from their families and from newly married couples wishing to start a family.

Price sensitive buyers are more and more looking at acquiring apartments in key residential suburbs of Beirut in areas such as Aramoun, Broumana, Dbayeh, Hazmieh, Horsh Tabet, Monteverde,Yarze; willing to exchange extra commuting time for more favorable pricing and added value.

BCD key areas USD per sqm BCD key areas USD per sqm

Wadi Abou Jamil 6,000-6,500 Park Avenue 6,500

Omar Daouk Street 6,000-6,500 Port Street 6,500

Bechara el-Khoury Avenue 6,300-6,500 Saifi Village 6,500

Adnan Hakim Street 6,500-7,000 Waterfront 9,000-10,000


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MACROECONOMIC HIGHLIGHTS Economic Highlights 2010

Robust economic growth continues into 2010…

The Lebanese economy continued to grow vigorously in 2010 with a GDP growth of 7.5% according to the International Monetary Fund (IMF). Capital inflows into Lebanon amounted to USD 17.0 billion for 2010 which comfortably offset the large trade deficit at nearly USD 13.7 billion. Foreign Direct Investments (FDI) into Lebanon have been on an upward trend over the last years with the bulk being geared towards real estate and residential sectors (44.4% in 2009 according to IDAL). Supported by a buoyant economic performance in 2010, FDI reached USD 5.0 billion representing a near 3% increase compared to 2009 according to the figures released by the United Nations Conference on Trade and Development (UNCTAD), with FDI accounting for nearly 13% of GDP. Figure 8: Real GDP growth Figure 9: Balance of payments surpluses Source : IMF Source: Banque du Liban

In parallel, remittances from the Lebanese Diaspora, considered to be one of the largest in the world in terms of proportion to the resident population, remained strong in 2010. According to the World Bank, remittances into Lebanon are estimated to have reached USD 8.2 billion in 2010 (around 21% of GDP), substantially up from USD 7.6 billion in 2009 and USD 7.2 billion in 2008, ranking Lebanon first in the MENA region with remittances received in 2010. More generally, and as a consequence of a large surplus in its capital and financial accounts, the balance of payments remained broadly favorable as it reached a surplus of USD 3.3 billion for that year. Although the absolute value in the public debt has continued to worsen, it should be noted that the favorable macroeconomic situation led to a further improvement in the debt-to-GDP ratio in 2010, with the debt-to-GDP reaching 134% by year-end compared to 146% in 2009 and 156% in 2008. However, this ratio continues to be among the highest in the world, suggesting continued improvements required to improve the country’s financial health.

Figure 10: FDI inflows Figure 11: Remittances inflows

Source: UNCTAD Source: World Bank

0.6%

7.5%9.3% 8.5%

7.5%

1.5%

0%2%4%6%8%

10%

2006 2007 2008 2009 2010e 2011e

Real GDP growth

2,7952,037

3,462

7,899

3,325

0

2,000

4,000

6,000

8,000

10,000

2006 2007 2008 2009 2010

USD

Mill

ions

Balance of payments surpluses

3,132 3,3764,333 4,804 4,955

0

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010

USD

Mill

ions

FDI inflows

5,202 5,7697,181 7,558 8,177

0

2,000

4,000

6,000

8,000

10,000

2006 2007 2008 2009 2010

USD

Mill

ions

Remittances inflows


14

….Amid solid performances in key sectors

The performance of key sectors were all notably on the rise in 2010, reflecting favorable economic conditions. Tourism, financial services, and real estate (which are viewed as the backbone of the Lebanese economy) were strong. Incoming tourists reached 2.17 million, representing an increase of roughly 17% compared to 1.85 million tourists in 2009. Aside from the continued expansion in tourism, real estate activity also remained strong over 2010: demand for real estate continued to rise as the value of property sales transactions grew by 36% and construction permits rose 23% yoy while cement deliveries, a coincident indicator of building activity, registered a 7% yoy increase. Moreover, the financial and banking sectors prospered, underpinned by solid capital inflows throughout the year. The growth of assets and deposits in Lebanese banks neared 12% in 2010 for both indicators while private sector lending registered a 23% growth rate for the year. The favorable movement of de-dollarization of deposits initiated in 2008 continued in 2010 as dollarization declined from 65% at end 2009 to a record of 63% in late 2010, evidencing an increased confidence in Lebanese pound and the Lebanese economy on a broader level.

Economic Highlights 2011

Slowdown in economic growth in 2011 in light of political tensions domestically and unrest in the region

During the first half of 2011, economic developments have been soft in light of a decline in confidence due to the local political impasse, while the uncertainties created by regional political and security turmoil have slowed capital flows into Lebanon, a usual driving force for the Lebanese economy. In Lebanon, despite the formation of a government in June 2011 after a five-month political crisis over the cabinet’s make-up, the country is still facing considerable political challenges as the Special Tribunal for Lebanon carries on its investigation into the assassination of the former Prime Minister Rafik Hariri into the next years. In parallel to the expected slowdown of the Lebanese economy, as shown by estimates of real GDP growth at 1.5% for 2011 according to the IMF (compared to 8.5% for 2009 and 7.5% for 2010), the external position deteriorated in the first half of 2011 as indicated by a balance of payments deficit of USD 479 million over the first 6 months of 2011 (compared with a surplus of USD 2,101 million and USD 1,314 million for the corresponding period in 2009 and 2010, respectively). Commercial banks witnessed a deposit growth of 4% over the first 6 months of 2011 which declined slightly compared to 5% during the same period of the previous year. Dollar deposit conversions characterized the first six months of 2011 and resulted in an increase in the dollarization of deposits to 66.8% at the end of June 2011, well above the de-dollarization historical record of 63% reached in 2010. Tourism activity soured in 2011 as the number of airport passengers (arrivals) for the first half of 2011 reached 1.25 million, relatively unchanged from the same period of 2010, while number of tourists decreased 25% yoy to 0.93 million in the first seven months in 2011. As for the real estate market, it saw softer conditions following strong growth in recent years. Property sales in value terms were 18% lower in the five half of 2011 compared to the corresponding period of the previous year, reflecting sluggish demand while indicators from the supply side were slightly up in the first half of 2011. Figure 12: Trade balance deficits Figure 13: Capital accounts surpluses Source: Banque du Liban Source: Banque du Liban

7,1158,999

12,658 12,757 13,711

6,467 7,111

0

5,000

10,000

15,000

2006 2007 2008 2009 2010 6M-10 6M-11

USD

Mill

ions

9,910 11,036

16,120

20,65617,035

7,7816,632

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 6M-10 6M-11

USD

Mill

ions


15

FINANCIAL HIGHLIGHTS AND FORECASTS

In 2010, revenues reflected a draw on the sales backlog as no new sales contract signings since 2009 Gross revenues increased 14% yoy to USD 382 million in 2010 with the majority stemming from land sales (USD 337 million up 11% from 2009) with the remainder from property rentals and property management at USD 41 million and USD 4 million respectively. Solidere realized land sales from previous years, drawing on its sales backlog as no transactions were made in 2010. The size of the built up area that was sold represented 132,000 square meters. Land bank sales continued to represent the bulk of gross revenues contributing 88%, while property rentals contributed 11% and property management and services 1%. Solidere carries an unsold real estate inventory of 1.9 million square meters split nearly 80%/20% between waterfront and traditional districts, respectively.

Figure 14: Total revenues Figure 15: Revenues breakdown Source: Solidere reports and FFA Private Bank estimates Source: Solidere reports and FFA Private Bank estimates

We expect revenues to be softer in the next couple of years before land sales benefit from an improvement in market conditions and rental income increases with the completion of developments in the pipeline

We expect Solidere’s total revenues to total USD 258 million in 2011e representing a decrease of 32% relative to 2010 as softer market conditions results in fewer deals and the sales backlog from previous years unwinds (at nearly USD 78 million in 2010 and down from USD 429 million in 2009). Going forward, revenue momentum should accelerate as market conditions improve towards the end of our 2011e-2013e forecasted period. In 2013e, we expect revenues to reach USD 492 million with a contribution from land sales at 89%, while revenues from rental properties and property management and services should contribute 10% and 1%, respectively. On the longer term, we expect contribution from land sales to stabilize in the 80%-85% range. Rental income is anticipated to reach USD 50 million by 2013e from USD 41 million in 2010, growing at a double digit growth rate per year while revenues from property management and services including hospitality and broadband are anticipated to grow from USD 4 million in 2010 to USD 6 million by 2013e. Beyond 2015e, we expect real estate developments in the pipeline to be completed which would grow rental income. We have projected an additional 105,000 sqm of BUA to be developed which would add around USD 50 million in revenues, from the completion of the North Souks and additional properties in the BCD. While margins on land sales improved Solidere revalues land costs upwards from inflationary

environment

In 2010, gross profits were USD 273 million while our calculated EBITDA was USD 226 million, with gross margins increasing 173 bps while EBITDA margins declined 327 bps to 71.3% and 59.0%, respectively on account of higher SG&A costs. Solidere’s margins from land sales improved to 76.7% from 73.6% in 2009, despite a higher estimate of remaining land development costs which led to an upward cost revaluation in 2010 to USD 587/sqm from 505/sqm previously. Net profits were USD 196 million and compared to USD 189

336 382

258 189

492

-

200

400

600

2009a 2010a 2011e 2012e 2013e

USD

Mill

ions

Total revenues

91% 88% 80% 72%89%

8% 11% 18% 26%10%

1% 1% 2% 3% 1%

0%

50%

100%

2009a 2010a 2011e 2012e 2013e

Revenues from land salesRevenues from property rentalsRevenues from property management


16

million in 2009. EPS for 2010 amounted to USD 1.28, representing a 4% increase from USD 1.23 in 2009. ROE improved to 10.7% in 2010 from 10.3% in 2009.

Figure 16: EBITDA and EBITDA margins Figure 17: EPS (in USD)

Source: Solidere reports and FFA Private Bank estimates Source: Solidere reports and FFA Private Bank estimates

We like Solidere’s high EBITDA margins but expect margin pressures in the short term

Following a drop from 62.3% in 2009 to 59.0% in 2010, we expect the Company’s high EBITDA margins to see pressures until 2013e as a result of fewer, higher margin land bank sales and high fixed cost base. Solidere is seeking to protect margins holding tight on land sales prices, targeting USD 3,000 per sqm BUA in the traditional and USD 4,500 to 5,000 in the waterfront, while showing flexibility in repayment terms. The benefit in margins from the resumption in land sales and favorable operating leverage should be partially offset over time by an unfavorable revenue mix away from land sales to rental income and property management.

Relatively clean balance sheet although expect investments to drive financing costs higher

Net debt levels swelled to USD 311 million in 2010 from 78 million in 2009 and net cash of USD 112 million in 2008. Despite the higher levels from bank overdrafts needed to bridge cash flow requirements, net debt to EBITDA was 1.4x in 2010 while net debt to total capitalization was 13.4%, which represents a relatively clean balance sheet in our view.

Figure 18: ROE and ROIC Figure 19: Cash from operations and Capex

Source: Solidere reports and FFA Private Bank estimates Source: Solidere reports and FFA Private Bank estimates

Between 2011e and 2015e, the Company plans to invest around USD 500 million of which USD 200 million to complete the infrastructure mainly those related to the Waterfront District (including the underground network of the infrastructure, the Eastern Marina, the landscaping of the marinas and the park), and USD 300 million to develop its real estate portfolio of 105,000 sqm BUA.

These capital-intensive years will likely drive Solidere to increase its borrowings to bridge shortfalls and to finance its working capital requirements and dividend program. Solidere paid a dividend of USD 0.40 in cash and a bonus of 1 share for every 30 shares held in 2011 (for the 2010 year). Net debt to EBITDA ratio, which stood at 1.4x at the end of 2010, is expected to increase to reach 3.2x by 2013e. The deficit in free cash flows at USD 70 million in 2010, should further increase to USD 219 million in 2011e and 143 million in 2012e. Going forward, the deficit is expected to narrow to around USD 29 million in 2013e.

209 226

146 97

356

0%

20%

40%

60%

80%

-

100

200

300

400

2009a 2010a 2011e 2012e 2013e

USD

Mill

ions

Operating EBITDA (lhs) EBITDA margins (rhs)

10.3% 10.7%

7.0%4.6%

16.5%

8.4% 8.4%

4.8% 2.9%

9.7%

0%

5%

10%

15%

20%

2009a 2010a 2011e 2012e 2013e

ROE ROIC

1.23 1.280.84

0.54

1.98

0.00

0.50

1.00

1.50

2.00

2.50

2009a 2010a 2011e 2012e 2013e

EPS

60

-40

-211

-135

-21-10 -30 -8 -8 -8

-300

-200

-100

0

100

2009a 2010a 2011e 2012e 2013e

USD

Mill

ions

Cash flow from operations CAPEX


17

Table 4: Main assumptions

Source: FFA Private Bank estimates

The table below depicts Solidere’s financial highlights and forecasts.

Table 5: Financial highlights and forecasts

INCOME STATEMENT 2009a 2010a 2011e 2012e 2013e Revenues From land Sales 305 337 207 135 437 as % of total revenues 91% 88% 80% 72% 89% Revenues From Property Rentals 27 41 47 49 50 as % of total revenues 8% 11% 18% 26% 10% Revenues From Property Management 4 4 4 5 6 as % of total revenues 1% 1% 2% 3% 1% Total Revenues 336 382 258 189 492 Gross Profits 234 273 195 149 411 Gross profit margins 69.6% 71.3% 75.7% 78.9% 83.5% SG&A (26) (43) (45) (47) (49) EBITDA 209 226 146 97 356 EBITDA margins 62.3% 59.0% 56.5% 51.3% 72.4% Net Profits 189 196 128 82 301 Net profit margins 56.3% 51.1% 49.4% 43.2% 61.1% EPS (basic and diluted) 1.23 1.28 0.84 0.54 1.98 EPS growth 5% 4% -35% -36% 268% Return On Equity (ROE) 10.3% 10.7% 7.0% 4.6% 16.5% Return On Invested Capital (ROIC) 8.4% 8.4% 4.8% 2.9% 9.7%

Source: Solidere reports, FFA Private Bank estimates

BALANCE SHEET 2009a 2010a 2011e 2012e 2013e Cash and bank balances 178 170 170 170 170 Accounts and notes receivables 346 487 642 705 968 Inventory of land and projects 1,125 1,084 1,178 1,303 1,429 Investment properties 366 443 440 436 433 Other assets 384 417 417 416 416 Total Assets 2,399 2,600 2,845 3,030 3,415 Total liabilities excluding debt 333 281 180 141 197 Total debt 256 481 844 1139 1327 Shareholders’ equity 1,810 1,838 1,821 1,751 1,892 Total Liabilities And Shareholders’ Equity 2,399 2,600 2,845 3,030 3,415 Current ratio 1.28 0.99 0.84 0.72 0.78 Net debt/EBITDA 0.4 1.4 4.6 10.0 3.2 Net debt/total capitalization 3.8% 13.4% 25.3% 33.5% 35.9%


CASH FLOW 2009a 2010a 2011e 2012e 2013e Cash Flow From Operations 60 (40) (211) (135) (21) CAPEX (10) (30) (8) (8) (8) Free Cash Flow 50 (70) (219) (143) (29) Dividends paid 169 159 145 152 159 Cash flow from operations/net debt 0.77 (0.13) (0.31) (0.14) (0.02)


Main assumptions Notes

Land sales (in USD/sqm) Selling prices of USD 2,600 (per sqm of BUA) in the traditional area and 4,300 in the waterfront area, with a weighted average price of USD 3,900; increasing at the rate of inflation of 5%.

Land sales (in sqm) Land sales of 30,000 sqm between 2011e and 2012e and 100,000 sqm in 2013e onwards until 2030e. Rental income Full year impact of additional rental income in 2016e. Property management & services Steady improvement in market share in property management and services. Margins Rising gross margins in land sales, stable gross margins across rental and management segments. Expenses Higher operating and financial expenses. Dividend payout Dividend increases with a constant payout on earnings.

Financing Potential to raise more debt from short-term sources to finance operations, investments, and maturing debt payments at favorable terms.


18

VALUATION AND RECOMMENDATION

We value Solidere shares at USD 22.00 per share using a sum of the parts approach under the following:

• We value the land bank of 1.9 million square meters of BUA with a selling price of USD 3,900.

• We value the investment properties and property management services income using a discounted cash flow approach with a weighted average cost of capital of 14% and a terminal growth rate of 5%.

• We value Solidere International based on the value of its liquid assets, in light of the early stages of the underlying projects.

We derived an USD 8,100 average selling price per sqm for the land bank, using the low end of the range of an independent real estate advisory firm’s estimates of end user prices in the downtown area, split between the traditional sector at USD 6,000 and the waterfront at USD 9,000 per sqm BUA. We also assumed a developer margin of 30% and construction costs of USD 2,000 per sqm BUA, arriving at a weighted average selling price of USD 3,900 to Solidere. We applied a discount of 50% to our estimated land bank NPV to reflect the uncertainty regarding the macro-political environment in Lebanon, the cyclical and sensitive nature of the real estate sector, and its inherent risks including operational, credit, and liquidity risks. Our fair value derivation when including the investment properties and the investment in Solidere International in addition to the land bank and adjusted for certain assets and liabilities results in a fair value estimate of USD 22.00.

We estimate every 5% change in the discount to our land bank NPV impacts our value per share estimate by USD 2.00. This USD 22.00 estimate implies a P/E and P/B of 17.1x and 1.8x on our 2011e EPS and BVPS estimates, ahead of Solidere’s three year historical trading range of 15.9x and 1.6x. While Solidere shares have traded at a premium to MENA peers particularly between the recent global financial crisis until late 2010 on a P/E basis, we highlight the firm’s cleaner balance sheet and slightly higher five-year ROE. Table 6: Sum of the parts valuation

Sum of the Parts Valuation in USD millions

Per share

Notes

Land Bank:

Average selling price in BUA USD 3,900

Estimated on end-user selling less 30% margin and USD 2,000/sqm construction costs Land bank in sqm BUA 1.9 m

Remaining land bank split 1.5 million in waterfront, 0.4 million in traditional

Revenues 7,410.0

Infrastructure 200.0

Remaining infrastructure to complete land bank, mainly utilities, marina, landscaping Contingencies 741.0

10% of revenues

EBIT 6,469.0

Taxes 15% 970.4

Net Asset Value (NAV) 5,498.7

Premium (discount) (50.0%)

Reflect macroeconomic, political, cyclical, operational, credit, and liquidity risks Land Bank 2,749.3 18.05 Book value adjusted to estimated end user prices Investment Properties 469.4 3.08 DCF on current properties and those in pipeline, property management at 14% WACC

Investment in Associate 126.7 0.83 Solidere share of liquid assets (cash and investments)

Add:

Cash 169.6 1.11 100% book value Prepayments & other debit 43.7 0.29 100% book value Accounts and notes receivables 486.8 3.20 100% book value Fixed assets 59.3 0.39 100% book value Total Other Assets 759.3 4.99 100% book value Less:

Total Liabilities (762.2) (5.01) 100% book value

Value 3,342.5 21.95

# of shares (net of treasury) 152.3 m

Value per share USD 21.95

Value Per Share (rounded) USD 22.00 22.00


We accordingly assign an Overweight recommendation given that the current price is at a discount of more than 10% to our fair value estimate.


19

KEY INVESTMENT RISKS

Sector risks

The real estate sector is inherently cyclical and depends on the state of the economy and the supply / demand characteristics for housing. A significant deterioration in the economy and/or unfavorable demand / supply dynamics would require us to revisit our earnings estimates.

Political risks

The Lebanese economy is dependent on the socio-political and security conditions, and Solidere shares given their sizeable representation on the Beirut Stock Exchange, represent in our view in addition to company fundamental factors, a reflection of investor sentiment regarding the country. A significant worsening in investor sentiment would require us to revisit our valuation assumptions.

Operational risks

Solidere’s revenues are concentrated on land sales in the Beirut Central District given its sizeable land bank of 1.9 million square meters of built up area. Difficulties in executing the sale and securing its cash flows of the remaining land bank over its remaining lifespan at stable margins could impair future operating performance.

Liquidity risks

Solidere’s assets are largely made up of land which is typically illiquid, and more difficult to realize at a fair selling price during real estate market downturns which could span several years.

Credit risks

Solidere’s revenues are concentrated on big ticket land sales to a few clients as approximately 80% of revenues are spread across 5 clients. A marked deterioration in the capacity to repay by one of Solidere’s largest clients may require the Company to increase provisions.


20

APPENDIX

Comparable Valuation

Name Ticker Mkt. Cap

P/E P/B EV/

EBITDA Div. Yield

5 yr ROE

Debt/ Cap

Rev. 1yr %

EPS 1yr %

Solidere A* SOLA LB 2,522.9 12.9 1.3 12.9 2.6 9.2 20.7 13.7 4.0

Emaar Properties PJSC EMAAR UH 4,626.8 11.2 0.5 7.4 3.6 8.1 25.1 40.3 n/a

Palm Hills Dev. SAE PHDC EY 254.9 5.2 0.4 5.3 0.0 12.0 18.4 53.4 13.3

Dar Al Arkan Real Estate ALARKAN AB 1,799.6 5.0 0.5 9.3 0.0 10.8 33.4 -24.1 -23.9

Emaar Economic City EMAAR AB 1,461.7 n/a 0.8 n/a 0.0 n/a 0.0 -65.9 -91.7

Aldar Properties PJSC ALDAR UH 941.4 n/a 0.7 n/a 0.0 -74.1 88.1 -14.1 n/a

Sorouh Real Estate SOROUH UH 807.6 n/a 0.5 10.7 0.0 3.5 20.8 -59.7 -98.3

Deyaar Dev. PJSC DEYAAR UH 410.6 n/a 0.3 n/a 0.0 -20.2 18.4 35.4 n/a

Union Properties PJSC UPP UH 319.0 n/a 0.3 12.1 0.0 -20.0 61.5 -34.2 -200

Six Of October Dev. OCDI EY 204.6 43.6 0.5 2.8 11.9 -1.4 6.1 623.9 n/a * Solidere priced as of market close September 23rd 2011 Source: Bloomberg priced as of market close September 22nd

2011


21

Financial Statements

Income Statement

In USD millions 2009a 2010a 2011e 2012e 2013e 2014e 2015e

Revenues from land sales 305.1 337.2 206.5 135.5 436.6 458.4 481.3

Revenues from rented properties 27.3 41.2 47.5 48.7 49.9 51.1 74.7

Revenues from rendered services 4.0 4.0 4.0 4.7 5.5 6.4 7.3

Gross Revenues 336.3 382.4 257.9 188.9 492.0 515.9 563.3

Provision for previously recognized sales (7.0) - - - - - -

Cost of land sales (80.6) (78.7) (40.6) (17.6) (58.7) (58.7) (58.7)

Charges on rented properties (9.5) (27.0) (18.3) (18.4) (18.4) (18.5) (24.6)

Cost of rendered services (4.7) (4.0) (4.0) (4.0) (4.0) (4.0) (5.1)

Loss on sale of investment properties (0.4) - - - - - -

Net Revenues 234.1 272.8 195.1 148.9 410.9 434.7 474.8

Share result from an associate 7.9 2.7 2.7 2.7 2.7 2.7 2.7

General and administrative expenses (26.2) (42.7) (44.9) (47.1) (49.4) (51.9) (54.5)

Depreciation of fixed assets (5.1) (3.9) (4.2) (4.2) (4.2) (4.2) (4.2)

Provision against land and real estate development cost (2.6) - - - - - -

Provision for impairment on accounts receivable (9.0) - - - - - -

Other expenses (4.7) (2.8) (3.0) (3.0) (3.0) (3.0) (3.0)

Other income 0.4 0.2 - - - - -

Taxes, fees and stamps / write back 1.5 (4.5) (4.7) (4.9) (5.2) (5.4) (5.7)

Interest income 37.0 21.6 29.4 33.7 40.2 49.5 56.0

Interest expense from banks (11.4) (12.6) (19.9) (29.7) (37.0) (42.3) (43.7)

Profit Before Tax 222.0 230.8 150.6 96.4 355.1 380.1 422.4

Income tax expense (32.8) (35.3) (23.0) (14.7) (54.3) (58.1) (64.6)

Profit For The Year 189.2 195.5 127.5 81.6 300.8 322.0 357.8

Basic/diluted EPS (in USD) 1.23 1.28 0.84 0.54 1.98 2.11 2.35

Attributable to:

Equity owners of the parent 189.2 195.6 127.5 81.6 300.8 322.0 357.8

Non-controlling interest - (0.1) - - - - -

Profit For The Year 189.2 195.5 127.5 81.6 300.8 322.0 357.8

Source: Solidere reports and FFA Private Bank estimates


22

Balance Sheet


ASSETS

Cash and bank balances 177.6 169.6 169.6 169.6 169.6 169.6 169.6

Prepayments and other debit balances 36.6 43.7 43.7 43.7 43.7 43.7 43.7

Accounts and notes receivable, net 346.5 486.8 641.7 704.5 967.9 1,165.7 1,294.8

Inventory of land and projects in progress 1,124.6 1,084.2 1,177.6 1,303.2 1,428.8 1,554.3 1,424.1

Investment properties, net 366.1 443.0 439.6 436.1 432.7 429.3 553.9

Investment in an associate 311.4 313.9 313.9 313.9 313.9 313.9 313.9

Fixed assets, net 36.2 59.3 59.1 58.9 58.7 58.6 58.4

Total Assets 2,399.0 2,600.4 2,845.1 3,029.9 3,415.2 3,735.1 3,858.4

LIABILITIES

Bank overdrafts and short term facilities 253.7 472.5 835.7 1,130.3 1,318.3 1,483.5 1,415.0

Accounts payable and other liabilities 112.6 148.9 93.7 54.3 110.2 110.3 120.2

Dividends payable 70.5 86.3 86.3 86.3 86.3 86.3 86.3

Deferred revenues and other credit balances 150.3 46.2 - - - - -

Loans from banks and financial institutions 2.0 8.2 8.2 8.2 8.2 8.2 8.2

Total Liabilities 589.0 762.2 1,024.0 1,279.1 1,523.1 1,688.5 1,629.8

EQUITY

Issued capital at par value USD 10 per share:

100,000,000 class (A) shares 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0

65,000,000 class (B) shares 650.0 650.0 650.0 650.0 650.0 650.0 650.0

Issued capital at par value US$10 per share 1,650.0 1,650.0 1,650.0 1,650.0 1,650.0 1,650.0 1,650.0

Legal reserve 112.3 132.0 144.7 152.9 182.9 215.1 250.9

Retained earnings 266.5 267.2 237.4 158.9 270.1 392.4 538.6

Cumulative foreign currency translation reserve 0.1 (0.2) (0.2) (0.2) (0.2) (0.2) (0.2)

Surplus on treasury shares' activity 11.7 13.8 13.8 13.8 13.8 13.8 13.8

Less: Treasury shares (230.7) (224.5) (224.5) (224.5) (224.5) (224.5) (224.5)

Total Equity attributable to the owners of the parent 1,810.0 1,838.3 1,821.2 1,750.9 1,892.2 2,046.7 2,228.7

Non-controlling interest - (0.1) (0.1) (0.1) (0.1) (0.1) (0.1)

Total Equity 1,810.0 1,838.2 1,821.1 1,750.8 1,892.1 2,046.6 2,228.6

Total Liabilities And Shareholders’ Equity 2,399.0 2,600.4 2,845.1 3,029.9 3,415.2 3,735.1 3,858.4



23

Cash flow Statement


CASH FLOWS FROM OPERATING ACTIVITIES

Profit for the year before income tax 222 231 151 96 355 380 422

Adjustments to reconcile income to net cash (used in) / provided by:

Operating activities (7) 2 12 12 12 12 14

Changes in working capital (155) (272) (373) (243) (387) (381) (184)

Net Cash From Operating Activities 60 (40) (211) (135) (21) 10 252

CASH FLOWS FROM INVESTING ACTIVITIES

Short term deposit (43) 42 - - - - -

Pledged term deposits with banks 5 0 - - - - -

Receivable from recuperated properties 1 0 - - - - -

Acquisition of fixed assets (4) (26) (4) (4) (4) (4) (4)

Acquisition of investment properties (5) (3) (4) (4) (4) (4) (4)

Proceeds from sale of fixed assets 0 - - - - - -

Proceeds from sale of investment properties 1 - - - - - -

Proceeds from sale of securities 6 - - - - - -

Proceeds from sale of treasury shares - 10 - - - - -

Investment in an associate (7) (0) - - - - -

Net Cash From Investing Activities (47) 22 (8) (8) (8) (8) (8)

CASH FLOWS FROM FINANCING ACTIVITIES

Net bank loans (0) 6 363 295 188 165 (69)

Dividends paid (169) (159) (145) (152) (159) (167) (176)

Treasury shares (62) (1) - - - - -

Interest paid (10) (13) - - - - -

Net Cash From Financing Activities (242) (167) 219 143 29 (2) (244)

Net Change In Cash And Cash Equivalents (228) (185) - - - - -



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SOLIDERE Current Price: Equity Research September 23 · starting 2013e we expect the cash position...

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