Egypt Real Estate Sector - Talaat Moustafa Group

05 October 2011 

EEMEA/Egypt 

Equity Research 

Real Estate (Emerging EMEA) 

Research Analysts 

Ahmed Badr 

971 4 362 0223 

ahmed.badr@credit-suisse.com 

Vincent Resillot 

44 20 7883 5550 

vincent.resillot@credit-suisse.com 

Egypt Real Estate Sector 

SECTOR REVIEW 

TMG becomes our only differentiated story 

Figure 1: TMG QoQ net sales vs PHD and SODIC (in EGP m) 

2,000 

1,500 

1,000 

500 

- 

(5 0 0 ) 

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 

(1,0 00 ) 

TM G PHD SODIC 

Source: Company data 

We re-iterate our cautious view on Egypt real estate sector owing to 

■ 

continued weakness in property transactions as a result of land disputes. 

However, we upgrade TMG to Outperform on the back of sales recovery 

which breaks the current market trend and makes it a differentiated story 

with significant upside that is not priced in by the market, in our view. 

TMG becomes our only differentiated story: 1) The market seems to be 

■ 

missing that TMG was still able to generate relatively strong sales during H1 

2011 and maintain a low level of cancellations compared to PHD and SODIC 

on the back of continued focus on middle-income properties. TMG’s net 

sales reached EGP 734 m in H2 2011 compared to net negative sales of 

EGP (1.04) bn and EGP (36) m for PHD and SODIC, respectively; 2) TMG 

maintains a strong property sales backlog of EGP 21 bn with a cancellation 

rate still below normalized levels of 4.5% of total backlog vs more than 11% 

for PHD ytd; 3) We think the market is pricing in a worst case scenario for 

TMG’s Madinaty project whereby TMG’s in-kind payment to the government 

for the land could potentially go up to 30% of BUA from the current 7% as a 

resolution for the ongoing legal dispute, which we believe is highly unlikely. 

We expect the stock to rerate significantly on resolution of this dispute given 

TMG’s current depressed valuations of 0.3x P/B 2011E. 

Resolving land disputes should be a strong catalyst: As we believe that 

■ 

the government needs to restore private sector confidence which undertakes 

90% of real estate investments, while real estate & construction sector 

represents 14% of workforce in Egypt. 

Stock Calls: 1) We upgrade TMG to Outperform and increase our TP to 

■ 

EGP 5.67 from EGP 5.13; 2) We cut our TP for SODIC to EGP 15.7 from 

EGP 38.3 and maintain Neutral rating; 3) We maintain our Underperform 

rating for PHD but materially cut our TP to EGP 1.32, from EGP 3.08. 

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. 

Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, 

investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors 

should consider this report as only a single factor in making their investment decision.


Weak outlook; but TMG becomes 

our only differentiated story 

Short term threats to demand and developers’ sales 

due to land title disputes… 

Although we believe that strong fundamental demand in the housing market remains intact, 

especially in Middle and Lower income housing segments, we expect most developers 

sales volume to continue to remain under pressure in the near term as a result of ongoing 

land title legal disputes which may continue to push buyers to put their purchases on hold. 

Moreover, we also expect developers to continue to experience rising cancellations given 

the concerns regarding ownership of land, which could lead to significant delays in project 

completion for some developers such as PHD and SODIC. 

…but TMG’s sales still outperform on middle-income 

demand 

On the other hand, we believe that the market is missing the fact that TMG was still able to 

generate relatively strong sales during H1 2011 and maintain a low level of cancellations 

compared to PHD and SODIC on the back of continued focus on middle-income 

properties. TMG’s gross property sales reached EGP 1.17 bn in H2 2011 (EGP 734 m net 

of cancellations) compared to net negative sales of EGP (1.04) bn and EGP (36) m for 

PHD and SODIC, respectively. We believe this is a result of continued execution and 

property delivery in Madinaty project which helped restore buyers’ confidence in the 

project, despite the outstanding legal dispute with regards to TMG’s ownership of the land. 

TMG’s cancellation rate normalizing but less so for 

PHD 

Moreover, TMG still maintains a strong property sales backlog of EGP 21 bn and a total 

cancellations’ rate which remains below normalized levels of 4.5% of total backlog vs a 

cancellation rate of more than 11% of total backlog for PHD ytd. 

Figure 2: TMG: Gross and net sales QoQ 

in millions, unless otherwise stated 

Figure 3: PHD: Gross and net sales QoQ 

in millions, unless otherwise stated 

1,400 

2,000 

1,200 

1,000 

800 

600 

1,500 

1,000 

500 

400 

200 

- 

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 

- 

(500) 

(1,000) 

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 

Gross Sales 

Net Sales 

Gross Sales 

Net Sales 



Egypt Real Estate Sector 2


Madinaty project too big to fail 

We believe that the Madinaty land legal dispute continues to be the main overhang 

risk on the stock despite the Egyptian State Judicial Council recommending the court to 

dismiss the legal case against TMG’s land title back in June. Putting the legal outcome 

aside, we believe that it remains in the Egyptian Government’s interest to keep such a 

mega development going due to its significant economic benefits to housing and 

employment (Project is expected to house some 600k people upon completion). However, 

we don’t rule out the possibility of TMG having to pay a higher in-kind price to the 

government (currently 7% of total BUA) as a resolution for this civil dispute. 

Accordingly we undertake the below sensitivity analysis which implies that the market 

is pricing in that TMG could end-up paying as much as 30% of BUA (In-kind payment) 

compared to the current contractual in-kind payment of 7% of total BUA in the form of 

apartments to the government. We think that TMG potentially paying 30% represents a 

worst case scenario which we believe is highly unlikely and hence we think the stock looks 

very attractive at these levels. 

Figure 4: TMG: TP sensitivity to potential increase in government portion in Madinaty 

Government portion of total BUA 

Effective Government portion of TP (EGP per share) 

Apartment BUA 

Base Case - 7% 20% 5.67 

10% 28% 5.4 

15% 42% 5.0 

20% 56% 4.6 

25% 70% 4.2 

30% 84% 3.8 

Source: Company data, Credit Suisse estimates 

Significant valuation upside potential; TMG to 

outperform, in our view 

TMG trades at depressed valuation of 0.3x P/B 2011E, in line with PHD. We believe the 

stock should rerate significantly on the back of sales recovery and resolution of land 

dispute over the next 12 months, which makes it deserves. However, this would not be the 

case for SODIC and PHD due to our expectations of continued weakness in new sales 

and deteriorating working capital for PHD as a result of above average cancellations which 

negatively affected the company’s cash flow. 

Figure 5: One Year Forward Price to Book (FY 2012E) 

Figure 6: TMG: SOTP Breakdown 

1.8 

1.6 

1.4 

1.2 

1.0 

0.8 

0.6 

0.4 

0.2 

0.0 

Aug 

10 

Sep 

10 

Oct 

10 

Nov 

10 

Dec 

10 

Jan 

11 

Feb 

11 

Mar 

11 

Apr 

11 

May 

11 

TMG SODIC PHD 

Jun 

11 

Jul 

11 

Aug 

11 

7 

6 

5 

4 

3 

2 

1 

0 

4.9 

Madinaty 

0.1 

Al Rehab 1(Phase 6) 

0.5 

Al Rehab 2 

0.1 0.3 

Al Rabwa 2 

Nasamat El Riyadh 

1.7 

Net Debt, Minorities and 

Book Value 

0.2 

Investment properties 

1.3 

Hotels 

5.7 

TMG 

Source: the BLOOMBERG PROFESSIONAL service 

Source: Credit Suisse estimates 



Selling prices to remain stable on supply cut; A 

potentially similar scenario to 2009… 1 

We believe that real estate prices will continue to remain stable (similar to 

2008/2009A) primarily owing to 1) Cash nature of Egyptian housing market, with limited 

mortgage penetration (0.33% of GDP in 2010A), which would not force buyers to sell their 

property in order to settle the mortgage; and 2) Delay in project completion due to land 

disputes and developers slowing construction activity has already resulted in cutting the 

expected supply for 2011E and 2012E. 

Figure 7: Average selling prices per Sq m for Villas and apartments in East and west 

Cairo 

In EGP 

14,000 

12,000 

10,000 

Prices held up due to 

tight supply & market 

being cash dominated 

8,000 

6,000 

4,000 

2,000 

- 

2006 2007 2008 2009 2010 

Apartments 

Villas 

Source: Egyptian real estate companies, Credit Suisse research 

Figure 8: Cairo: Expected Supply Pipeline (2011E) 

Residential (Units in New Cairo Offices (Sqm of Grade A) Retail (Sqm) Hotels (No. of Rooms) 

and 6 th Oct) 

Current Stock (2010) 46,000 688,000 741,000 13,600 

Pre Crisis- Supply 17,000 117,000 445,000 237 

Post Crisis- Supply 12,750 87,000 325,000 - 

% Change -25.0% -25.6% -27.0% -100.0% 

Source: JLL, Credit Suisse research 

1 The authors of this report wish to acknowledge the contribution made by Rahul Kaul, an employee of 

CRISIL Global Research and Analytics, a business division of CRISIL Limited, a third-party provider of 

research services to Credit Suisse 


` 


Why the government needs to 

revive the sector 

Private sector undertakes more than 90% of real 

estate investments 

The private sector has been the dominant player in the real estate sector in Egypt 

over the past 3 years and we believe it is key for the government to restore investor 

confidence in the sector through a swift resolution for current land ownership disputes. 

Note that the private sector remains fundamental for the development of the sector 

contributing more than 90% of real estate investments over the past 3 years on average. 

Moreover, as long as an uncertain legal and political climate prevails, real estate 

and construction sectors are unlikely to attract as much FDI as they have in the past 

(c. USD 610Mn during 2010). We believe, that while trying to revive Foreign Investment in 

Egypt, real estate and construction would remain government’s priorities, especially in light 

of the fact that they together formed 18% of FDI (Excl. Petroleum) during 2010A. 

We highlight that The Supreme Military Council has recently asked the government 

to honour previous land contracts which we believe is a positive step in resolving these 

disputes and should act as a catalyst for the real estate market. 

Figure 9: Private sector contribution to total Real estate & construction investments in 

Egypt (9M 2010/11A) 

10 0% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

83 % 

Construction and Building 

92% 

Real Estate 

Govt Sector Economic Authorities Public Companies Private Sector 

Source: Central Bank of Egypt 

Figure 10: Egypt FDI breakdown by sector (Ex. Petroleum) 

in US$ millions, unless otherwise stated 

Figure 11: Real estate & construction represented 18% of 

Egypt FDI’s in 2010A (Ex. Petroleum) 

in % 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

395 

424 

138.4 

225.5 

305.3 

2007/2008 2008/2009 2009/2010 

Finance Undistributed Manufacturing 

Services Real estate Construction 

303.8 

Agriculture Tourism Communications and IT 


Agriculture 

8% 

Construction 

9% 

Communication 

Tourism s and IT 

7% 2% 

Real estate 

9% Services 

11% Manufacturing 

13% 


Finance 

25% 

Undistributed 

16% 



What is the land worth in a “No-Demand’’ market 

Developers such as PHD have already returned about 10 million sq m of land and 

will return further land to avoid any further legal disputes and offset pressure on 

working capital resulting from land payments. If the stand still in the sector continues, we 

believe that the government will struggle to auction any potential recovered land at 

reasonable rates as investors/developers are likely to continue to shy away till political as 

well as legal uncertainty ends. 

Sector standstill could severely affect employment 

Following the crisis, unemployment rates have severely shot up to 11.8% during Q2 

2011 from 8.9% at the end of Q4 2010. It remains extremely important for the present 

government to contain the current high employment rate in Egypt by creating new job 

opportunities (and restoring jobs lost during the crisis esp. in Real estate and tourism), in 

order to avoid further protest/unrest. Real estate construction and other supplementary 

activities have provided a significant c. 14% of total employment opportunities in the past, 

which makes it all the more important for the govt. to revive the sector, in our view. 

Figure 12: Egypt: Employment Breakdown by Industry 

(Private) 

in % 

Figure 13: Egypt: Quarterly Unemployment Rate 

in % 

T&C 

5% 

Real estate 

activities : 

4% 

Edu., health,& 

Others 

9% 

Construction & 

building 

10% 

Internal trade 

13% 

Restaurants & 

hotels 

3% 

Others 

1% 

Manufacturing 

17% 

Agricultural 

activities 

38% 

13% 

12% 

11% 

10% 

9% 

8% 

7% 

6% 

Mar03 

Sep 03 

Mar04 

Sep 04 

Mar05 

Sep 05 

Mar06 

Sep 06 

Mar07 

Sep 07 

Mar08 

Sep 08 

Mar09 

Sep 09 

Mar10 

Sep 10 

Mar11 

Source: Ministry of Planning 

Source: CAPMAS 

The “Off-Plan’’ model needs to remain intact 

Real estate buyers in Egypt are primarily cash buyers since mortgage penetration is very 

low and house purchase is financed through savings and income, thereby making “Off 

plan” sales model crucial to provide affordability as developers provide flexible payment 

terms to facilitate house purchases. However, current land ownership disputes represent a 

significant threat to this model, resulting in buyers putting their purchases on hold, despite 

the genuine need for housing. 

Figure 14: Egypt: Mortgage lending evolution 

in EGP millions, unless otherwise stated 

Figure 15: Egypt: Mortgage lending as % of GDP 

in %, unless otherwise stated 

4,500 

4,000 

3,500 

3,000 

2,500 

2,000 

1,500 

1,000 

500 

- 

1,882 

1,314 

821 

2,089 

1,596 

355 

1,094 

16 

214 

90 231 

467 

2005 2006 2007 2008 2009 2010 

0.35% 

0.30% 

0.25% 

0.20% 

0.15% 

0.10% 

0.05% 

0.00% 

0.33% 

0.28% 

0.21% 

0.11% 

0.07% 

0.02% 

2005 2006 2007 2008 2009 2010 

Banks 

Mortgage Finance Companies 

Mortgage Lending as % of GDP 

Source: Egyptian Financial Supervisory authority, Ministry of Finance 

Source: Egyptian Financial Supervisory authority, Ministry of Finance 



Europe / Egypt 

Real Estate Management & Development 

Rating (from Neutral) OUTPERFORM* 

Price (03 Oct 11, £E) 3.60 

Target price (£E) (from 5.01) 5.67¹ 

Market cap. (£E m) 7,428.82 

Enterprise value (£E m) 11,582.5 

*Stock ratings are relative to the relevant country benchmark. 

¹Target price is for 12 months. 


Ahmed Badr 

971 4 362 0223 



44 20 7883 5550 


Talaat Moustafa Group (TMGH.CA) 

Significant upside on Madinaty resolution 

Action: We upgrade TMG to Outperform (from Neutral) and increase our TP 

■ 

to EGP 5.67 per share (from 5.13) on the back of relatively strong sales in 

H1 2011 and attractive valuation. However, we cut our cumulative earnings 

estimates (2011-2013E) by 20.6% to reflect a more stretched property 

delivery schedule. 

Why do we upgrade TMG: 1) We believe that the market is missing the 

■ 

fact that TMG was still able to generate relatively strong sales during H1 

2011 and maintain a low level of cancellations compared to PHD and SODIC 

on the back of continued focus on middle-income properties. TMG’s gross 

property sales reached EGP 1.17 bn in H2 2011 (EGP 734 m net of 

cancellations) compared to net negative sales of EGP (1.04) bn and EGP 

(36) m for PHD and SODIC, respectively. We believe this is a result of 

continued execution and property delivery in Madinaty project which helped 

restore buyers’ confidence in the project, despite the outstanding legal 

dispute with regards to TMG’s ownership of the land; 2) The market seems 

to be pricing in that TMG could end-up paying as much as 30% of BUA (Inkind 

payment) compared to the current contractual in-kind payment of 7% of 

total BUA in the form of apartments to the government in order to resolve the 

Madinaty land legal dispute. We think that TMG potentially paying 30% 

represents a worst case scenario which we believe is highly unlikely and 

hence we think the stock looks very attractive at these levels; 3) we remain 

comfortable with TMG’s debt position as BS continues to be underleveraged 

with Net debt/Equity of about 10% in 2011E. 

Catalysts: Resolution of the Madinaty project land dispute and continued 

■ 

property sales recovery in Q3 are the main positive catalysts. 

Valuation: TMG trades at depressed valuation of 0.3x P/B 2011E. We 

■ 

believe the stock should rerate significantly on the back of sales recovery 

and resolution of land dispute over the next 12 months. 

Share price performance 

9 

7 

5 

3 

Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 

Price 

Price relative 

The price relative chart measures performance against the 

Egypt Financial Group Index index which closed at 213.3 on 

03/10/11 

On 03/10/11 the spot exchange rate was £E7.96/Eu 1. - 

Eu .76/US$1 

Performance Over 1M 3M 12M 

Absolute (%) -7.9 -26.7 -47.4 

Relative (%) 1.7 -7.0 -23.0 

Financial and valuation metrics 

Year 12/10A 12/11E 12/12E 12/13E 

Revenue (£E m) 5,339.4 5,318.4 7,070.4 7,529.0 

EBITDA (£E m) 1,213.39 1,157.17 1,978.85 2,148.03 

Net Income (£E m) 940.0 783.0 1,360.3 1,480.5 

CS adj. EPS (£E) 0.47 0.39 0.68 0.74 

Prev. EPS (£E) — 0.53 0.92 — 

ROIC (%) 3.45 3.19 5.21 5.46 

P/E (adj., x) 7.71 9.26 5.33 4.90 

P/E rel. (%) 90.5 143.5 121.1 140.3 

EV/EBITDA 9.3 10.0 5.8 4.4 

Dividend (12/11E, £E) — IC (12/11E, £E m) 27,635.1 

Dividend yield (%) — EV/IC 0.42 

Net debt (12/11E, £E m) 2,495.0 Current WACC 14.6 

Net debt/equity (12/11E, %) 9.9 Free float (%) 24.4 

BV/share (12/11E, £E) 12.5 Number of shares (m) 2,063.56 

Source: Company data, Thomson Reuters, Credit Suisse estimates. 



Valuation and Forecasts 

Figure 16: TMG: SOTP Valuation Summary 


Project Valuation methodology Valuation % Ownership 

Property sales 

Madinaty DCF analysis 9,925 100% 

Al Rehab 1(Phase 6) DCF analysis 295 100% 

Al Rehab 2 DCF analysis 1,021 100% 

Al Rabwa 2 DCF analysis 191 99% 

Nasamat El Riyadh DCF analysis 516 50% 

Total Property sales 11,948 

Investment properties 

Rehab Mall 2 7% Cap rate 52 100% 

Rehab open food court 7% Cap rate 7 100% 

Rehab Workshops 7% Cap rate 17 100% 

San Stefano Mall 7% Cap rate 255 100% 

Beymen 7% Cap rate 71 100% 

Total Investment properties 403 

Hotels 

Four Seasons Sharm El Sheikh DCF analysis 550 100% 

Four Seasons Nile Plaza DCF analysis 1,208 100% 

San Stefano Grand Plaza DCF analysis 134 85% 

Nile Hotel DCF analysis 263 100% 

Four Seasons Sharm El Sheikh extension DCF analysis 185 100% 

Marsa Alam DCF analysis 378 100% 

Total Hotels 2,717 

Total EV 15,068 

less: net debt (9M10A) (2,227) 

less: minorities (9M10A) (1,328) 

Plus: Investments at BV (9M10A) 4.5 

Equity value 11,518 

Number of shares 2,030 

Equity value per share 5.67 

Current share price 3.60 

Potential Upside/(Downside) 57.5% 


Figure 17: TMG: New vs. Old Estimates 


2011E 2012E 2013E Cumulative 

New 

Old Change 

(%) 

New 

Old Change 

(%) 

New 

Old Change 

(%) 

New 

(2011- 

13E) 

Old 

(2011- 

13E) 

Change 

(%) 

Revenue 5,318 6,039 -11.9% 7,070 8,125 -13.0% 7,529 6,349 18.6% 19,918 20,512 -2.9% 

EBITDA 1,157 1,354 -14.5% 1,979 2,320 -14.7% 2,148 1,936 10.9% 5,284 5,610 -5.8% 

EBITDA Margin % 21.8% 22.4% 28.0% 28.5% 28.5% 30.5% 26.5% 27.3% 

Net Income 783 1,101 -28.9% 1,360 1,887 -27.9% 1,481 1,576 -6.0% 3,624 4,564 -20.6% 






Rating 

NEUTRAL* 

Price (03 Oct 11, £E) 12.88 

Target price (£E) 15.66¹ 

Market cap. (£E m) 1,167.91 

Enterprise value (£E m) 275.3 




Ahmed Badr 

971 4 362 0223 



44 20 7883 5550 


Six of October Development 

and Investment Company (OCDI.CA) 

Weak medium-term outlook for property sales; 

Maintain Neutral and cut TP 

Action: We significantly cut our cumulative estimates (2011-2013E) by 68% 

■ 

and our TP to EGP 15.7 (from EGP 38.3) on the back of rising cancellations 

which has been wiping out previously recorded sales and potential 

significant delays in execution of SODIC’s two main projects, Westown and 

Eastown, (together contribute 58% of valuation) on the back of continued 

land ownership disputes and defensive behaviour for high-end property 

buyers. We maintain our Neutral rating for SODIC. 

Why are we cautious on SODIC over the next 12 months: We expect 

■ 

SODIC to continue to experience a rising level of cancellation for previously 

purchased properties on the back of targeting the high-end residential and 

commercial segments, which have been most affected by the current 

standstill in the real estate market. This would in turn negatively affect 

SODIC’s earnings in 2011-2013E. SODIC’s cancellations reached EGP 91 

m and EGP 293 m in Q1 and Q2 2011A, respectively thus resulting in net 

sales turning negative in Q2 2011A. On the other hand, we are comfortable 

with SODIC’s working capital position as the net cash position on the BS 

should help the company compensate for lost cash flows resulting from 

cancellations and ease pressure on working capital. 

Catalysts: Potential further cancellations for previously sold properties 

■ 

would be the main negative catalyst over the next 12 months. 

■ Valuation: SODIC trades at 0.5x P/B 2011E vs 0.3x for both TMG and PHD. 


43 

33 

23 

13 


Price 




03/10/11 


Eu .76/US$1 


Absolute (%) -24.9 -47.3 -65.0 

Relative (%) -17.1 -33.1 -48.8 


Year 12/10A 12/11E 12/12E 12/13E 

Revenue (£E m) 519.5 1,323.7 1,034.7 611.7 

EBITDA (£E m) 109.60 -80.61 294.06 142.54 

Net Income (£E m) 114.6 -33.7 246.4 104.0 

CS adj. EPS (£E) 3.28 -0.37 2.72 1.15 

Prev. EPS (£E) — 3.94 3.59 — 

ROIC (%) 3.87 -5.17 9.81 3.66 

P/E (adj., x) 3.93 -34.69 4.74 11.23 

P/E rel. (%) 46.1 -537.8 107.7 322.0 

EV/EBITDA 4.0 -3.4 2.5 5.7 



Net debt (12/11E, £E m) -892.6 Current WACC 16.0 

Net debt/equity (12/11E, %) -37.6 Free float (%) 63.0 

BV/share (12/11E, £E) 25.8 Number of shares (m) 90.68 





Figure 18: SODIC: SOTP valuation summary 


Project Valuation methodology Valuation SODIC stake (%) Value to SODIC 

Project 

Allegria DCF analysis 426 100% 426 

Westown DCF analysis 392 100% 392 

Eastown DCF analysis 319 100% 319 

Autoville DCF analysis 80 50% 40 

Kattameya Plaza DCF analysis 36 100% 36 

Total EV of launched projects (EGP Mn) 1,214 

Cash (H1 11) 574 

Equity investments (H1 11) 4.8 

Outstanding debt (H1 11) (276) 

Minority interest (H1 11) (96) 


Number of shares (Mn) 90.7 

Target price 15.66 

Current Price 12.88 

Premium or (Discount) 21.6% 


Figure 19: SODIC: New vs. old estimates 


2011 E 2012 E 2013 E Cumulative 

New Old Change 

(%) 


(%) 


(%) 


(%) 

Revenue 1,324 1,433 -8% 1,035 1,195 -13% 612 991 -38% 2,970 3,620 -18% 

EBITDA (81) 443 -118.2% 294 402 -26.8% 143 421 -66.1% 356 1,265 -71.9% 

EBITDA Margin % -6% 31% 28% 34% 23% 42% 12% 35% 

Net Income (34) 357 -109.4% 246 325 -24.3% 104 338 -69.23% 316 1,020 -69.01% 


Figure 20: SODIC: QoQ sales turned negative in Q2 2011A 


Figure 21: SODIC: TP contribution by project 

in EGP per share 

80 0 

70 0 

60 0 

5.0 

4.5 

4.0 

3.5 

4.7 

4.3 

3.5 

50 0 

40 0 

30 0 

3.0 

2.5 

2.0 

1.5 

20 0 

10 0 

0 

-10 0 

-20 0 

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 

2008 2008 2008 2008 2009 2009 2009 20092010 

2010 2010 2010 201 1 2011 

1.0 

0.5 

0.0 

0.4 0.4 

Allegria Autoville Kattameya Plaza Westown Eastown 







Rating 

UNDERPERFORM* [V] 

Price (03 Oct 11, £E) 1.22 

Target price (£E) (from 3.08) 1.32¹ 

Market cap. (£E m) 1,278.95 

Enterprise value (£E m) 2,793.2 



[V] = Stock considered volatile (see Disclosure Appendix). 


7 

5 

3 

1 


Price 


Ahmed Badr 

971 4 362 0223 



44 20 7883 5550 





03/10/11 


Eu .76/US$1 


Absolute (%) -29.9 -47.4 -78.9 

Relative (%) -22.6 -33.3 -69.1 

Palm Hills Development 

Company (PHDC.CA) 

Funding gap remains the main concern 

Action: We reiterate our Underperform rating for PHD and materially cut our 

■ 

TP to EGP 1.32 (down from EGP 3.08) on the back of rising pressure on 

working capital as a result of significant cancellations. We also remove the 

Ain Sokhna project which has been shelved by the company and previously 

contributed 8.5% of our valuation for PHD. 

Investment Case: We believe that PHD will continue to underperform other 

■ 

Egyptian real estate names on the back of: 1) PHD has been hit harder than 

its peers on cancellations which reached EGP 1.54 bn (11% of total sales 

backlog) in H1 2011A due to concerns over land ownership and ability to 

deliver presold properties. This has also been reflected in minor gross sales 

for H2 2011 which reached EGP 492 m, down 80% yoy; 2) PHD has 

experienced significant delays in buyers’ instalment payments which has 

negatively affected its cash flows during H1 2011A; 3) Although PHD has 

been able to reduce its land liabilities by about 45% to EGP 2.5 bn as of end 

of Q2 2011A through returning about 10 mn square meters to the 

government, outstanding land liability is still significant (1.9x market cap) and 

would still put further pressure on the company’s working capital over the 

coming 12 months. Taking all the above factors into account, we estimate 

that PHD has a funding gap of about EGP 600-800 m between H2 2011- 

2012E, which we believe will be difficult to finance in the current environment 

and hence the current distressed valuation is justified, in our view. 

Catalysts: Potential further cancellations, weak property sales and a 

■ 

widening funding gap are the main negative catalysts. 

Valuation: PHD trades at a P/B of 0.3x and 0.27x for 2011E and 2012E, 

■ 

respectively. 


Year 12/10A 12/11E 12/12E 12/13E 

Revenue (£E m) 1,831.0 798.7 1,724.5 2,334.8 

EBITDA (£E m) 645.39 7.58 693.48 1,055.72 

Net Income (£E m) 526.4 -57.0 509.7 810.4 

CS adj. EPS (£E) 0.50 -0.05 0.49 0.77 

Prev. EPS (£E) — 0.71 1.05 — 

ROIC (%) 8.09 -0.50 7.95 11.62 

P/E (adj., x) 2.43 -22.43 2.51 1.58 

P/E rel. (%) 28.5 -347.7 57.0 45.2 

EV/EBITDA 4.4 368.4 4.1 2.2 



Net debt (12/11E, £E m) 1,514.3 Current WACC 14.6 

Net debt/equity (12/11E, %) 31.5 Free float (%) 35.0 

BV/share (12/11E, £E) 4.1 Number of shares (m) 1,048.32 





Figure 22: Palm Hills: Adjusted SOTP valuation summary 


Project Valuation methodology Valuation PHD stake (%) Value to PHD 

Launched projects 

Golf Views DCF 360 100% 360 

Golf ext DCF 758 100% 758 

Katamya DCF 355 100% 355 

Bambo Ext DCF 35 100% 35 

Hacienda Bay DCF 981 100% 981 

Casa DCF 103 51% 53 

The Village DCF 72 100% 72 

Palm Parks DCF 319 100% 319 

Village ext (Gate) DCF 272 51% 139 

Botanica - Forty Nine DCF 64 100% 64 

Village Garden (6 October) DCF 55 51% 28 

Village Garden (New Cairo) DCF 203 89% 181 

Park View DCF 128 51% 65 

Hacienda White 1 & 2 DCF 496 88% 436 

Total Launched Projects 4,201 3,846 

Macor - Hotels DCF 272 60% 163 

Rental Portfolio DCF 479 100% 479 

Total EV (EGP Mn) 4,487 

Cash (2010A) 148 

Equity investments (2010A) 0.2 

Outstanding debt (2010A) (922) 

Outstanding land liability 

(1,846) 

(Discounted) 

Minority interest (2010A) (481) 


Number of shares (m) 1,048 

TP 1.32 

Current Price 1.22 

Premium or (Discount) 8.2% 


Figure 23: Palm hills: Old vs. New Estimates 


2011E 2012E 2013E Cumulative 

New 

Old Change 

(%) 

New 

Old Change 

(%) 

New 

Old Change 

(%) 

New 

(2011- 

13E) 

Old 

(2011- 

13E) 

Change 

(%) 

Revenue 799 1,837 -56.5% 1,725 2,282 -24.4% 2,335 2,225 5.0% 4,858 6,343 -23.4% 

EBITDA 8 810 -99.1% 693 1,171 -40.8% 1,056 1,149 -8.2% 1,757 3,131 -43.9% 

EBITDA Margin % 0.9% 44.1% 40.2% 51.3% 45.2% 51.7% 36% 49% 

Net Income -57 668 -108.5% 510 911 -44.1% 810 896 -9.6% 1,263 2,475 -49.0% 


Companies Mentioned (Price as of 03 Oct 11) 

Palm Hills Development Company (PHDC.CA, £E1.26, UNDERPERFORM [V], TP £E1.32) 

Six of October Development and Investment Company (OCDI.CA, £E12.88, NEUTRAL, TP £E15.66) 

Talaat Moustafa Group (TMGH.CA, £E3.60, OUTPERFORM, TP £E5.67) 



Important Global Disclosures 

Disclosure Appendix 

The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views 

expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her 

compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 

See the Companies Mentioned section for full company names. 

3-Year Price, Target Price and Rating Change History Chart for PHDC.CA 

PHDC.CA Closing Target 

Price Price Initiation/ 

Date (£E) (£E) Rating Assumption 

31-Mar-09 4.718 6.429 O X 

15-Oct-09 6.877 6.778 N 

26-Jan-10 6.298 R 

12-Jul-10 4.35 6.062 O 

21-Oct-10 5.79 7.63 

11-Mar-11 4.87 3.077 U 

£E 

9 

8 

7 

6 

5 

4 

3 

2 

1 

6 

31-Mar-09 

O 

7 

N 

R 

6 

O 

8 

4-Oct-08 

4-Dec-08 

4-Feb-09 

4-Apr-09 

4-Jun-09 

4-Aug-09 

4-Oct-09 

4-Dec-09 

4-Feb-10 

4-Apr-10 

4-Jun-10 

4-Aug-10 

4-Oct-10 

4-Dec-10 

4-Feb-11 

4-Apr-11 

4-Jun-11 

4-Aug-1 1 

Closing Price Target Price Initiation/Assumption Rating 

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered 

3 

U 

3-Year Price, Target Price and Rating Change History Chart for OCDI.CA 

OCDI.CA Closing Target 

Price Price Initiation/ 45 

Date (£E) (£E) Rating Assumption 40 

31-Mar-09 14.18 14.336 U X 

15-Oct-09 35.968 45.6 O 

35 

03-Jun-10 32.468 43.651 

30 

11-Mar-11 32.252 38.315 N 

25 

46 

O 

44 

38 

N 

20 

15 

£E 

10 

4-Oct-08 

4-Dec-08 

14 U 

31-Mar-09 

4-Feb-09 

4-Apr-09 

4-Jun-09 

4-Aug-09 

4-Oct-09 

4-Dec-09 

4-Feb-10 

4-Apr-10 

4-Jun-10 

4-Aug-10 

4-Oct-10 

4-Dec-10 

4-Feb-11 

4-Apr-11 

4-Jun-11 

4-Aug-1 1 



3-Year Price, Target Price and Rating Change History Chart for TMGH.CA 

TMGH.CA Closing Target 

Price Price Initiation/ 

Date (£E) (£E) Rating Assumption 

01-Mar-10 7.454 10.129 O X 

21-Oct-10 7.337 10.13 

11-Mar-11 6.371 5 N 

£E 

12 

11 

10 

9 

8 

7 

6 

5 

4 

3 

2 

1-Mar-10 

10 10 

O 

4-Oct-08 

4-Dec-08 

4-Feb-09 

4-Apr-09 

4-Jun-09 

4-Aug-09 

4-Oct-09 

4-Dec-09 

4-Feb-10 

4-Apr-10 

4-Jun-10 

4-Aug-10 

4-Oct-10 

4-Dec-10 

4-Feb-11 

4-Apr-11 

4-Jun-11 

4-Aug-1 1 



The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total 

revenues, a portion of which are generated by Credit Suisse's investment banking activities. 

5 

N 



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Price Target: (12 months) for (PHDC.CA) 

Method: Our TP is derived from a SOTP valuation whereby we do a DCF for all projects underconstruction using our average WACC of 14.6%. Our 

WACC of 14.6% is derived from a cost of equity of 15.3% and cost of debt of 12%. 

Risks: 1) Recent land disputes in Egypt might negatively affect investor sentiment and may represent a short-term overhang on real estate stocks in 

Egypt; 2) : Lower than expected sales performance would represent further downside risk; 3) An increase in the rate of cancellations, especially on 

the holiday homes front would have further negative impact on our valuation. 

Price Target: (12 months) for (OCDI.CA) 

Method: Our TP of EGP 15.66 per share is derived from a SOTP valuation whereby we do a DCF for each individual project. We use an average 

WACC of 16% in our DCF. 

Risks: Risks include political risks in the Middle East, cancellation of sold properties, property sales not materialising and 

cancellation of projects amongst others. 

Price Target: (12 months) for (TMGH.CA) 

Method: Our TP is derived from a SOTP valuation whereby we value each business segment separately; 1) We value TMG's real estate projects 

(property sales) and hotels via a DCF approach using our average WACC of 14.4%. We use a terminal growth rate of 3% for hotels; 2) we value 

TMG's investment properties by applying a 7% cap rate to 2015E discounted FCF. 



Risks: We see the following risks: A slowdown in new sales in H2 2011E will result in further backlog deterioration and could put pressure on the 

share price; and TMG's selling prices in the Madinaty and Al Rehab projects more than doubled from 2006 to date. We are concerned that continued 

price increases may result in houses becoming too expensive and put pressure on affordability and demand. 

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As of the end of the preceding month, Credit Suisse beneficially owned 1% or more of a class of common equity securities of (PHDC.CA, OCDI.CA). 

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