Egypt Real Estate Sector - Talaat Moustafa Group

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05 October 2011 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 Source: Company data Source: Company data Egypt Real Estate Sector 2
05 October 2011 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 Egypt Real Estate Sector 3
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Egypt Real Estate Sector - Talaat Moustafa Group

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