Deutsche Bank - Egypt Real Estate - (6th of July 2010) - SODIC

5 July 2010 Real Estate, Construction and Building Materials Egypt Real EstateMiddle East EgyptReal Estate, Construction and Building Materials Real Estate4 July 2010SODICReuters: OCDI.CABloomberg: OCDI ECA differentiated play; initiatewith BuyA company under transformation; initiate with Buy and EGP112 target priceStrong management is transforming SODIC from a mono project developer to abuilder of downtowns in West/East Cairo with a focus on undersupplied retail andcommercial space. The concept is unique, and lucrative due to high yields. SODIChas a low-risk profile due to a strong BS (net cash EGP1.2bn, 40% of market cap),and a low outstanding land liability. The current share price implies no newlaunches and landbank at slight premium to historical cost. This is unjustifiedgiven the recent strong sales trend and high quality land. Buy with an EGP112 TP.Unique concept of building downtowns with focus on non residentialSODIC’s development concept is differentiated, with a focus on building two newdowntowns in East and West Cairo. Non residential should account for 57% ofplanned BUA, while the company intends to retain 30% of BUA as investmentproperty. These segments are significantly undersupplied in Cairo and providehigh yields. Further, the development model is low risk and flexible, leading tominimum outstanding commitments at any given time. Admittedly, SODIC needsto raise EGP1bn (our estimate) in 2011E-2012E to build the investment portfolio.However, SODIC’s financial profile would not weaken materially if the funds couldnot be raised as the projects would still be on the drawing board stage.Market mispricing SODIC’s prime landbank and future projectsThe intrinsic value of SODIC comes from its small but prime landbank entirely inCairo that carries only EGP165m outstanding liability. West Cairo landbank islocated adjacent to Smart Village, a successful business park, whereas East Cairolandbank is located near the fast-growing Kattameya/New Cairo area. Our analysissuggests that the current share price implies landbank at EGP299/sqm vs. a 2007average auction price of c.EGP833/sqm (66% discount). Note that in 1Q10,SODIC was able to sell land at c.EGP4,000/sqm. Additionally, the market is notassigning any value to the planned projects (next 18 months). This is unjustified asSODIC has successfully launched projects during the crisis and increased itsbacklog from EGP1.9bn in 2008 to EGP2.7bn in 2009 and EGP3.4bn in 1Q10.Target price of EGP112; initiate with BuyWe derive our target price using SOTP. For development properties, we use DCFwith WACC of 14.6%. We conservatively value the landbank at EGP750/sqm inEastown and EGP850/sqm in Westown, in line with 2007 auction prices. FurtherAl Yosr land which was acquired in 2008 is valued at cost (BV, EGP230/sqm).Egyptian developers are exposed to risks such as availability of financing,economic conditions and consumer confidence. Key downside risks for SODICinclude 1) lack of affordability in the high-end segment, 2) inability to replenish thelandbank in the future at competitive prices, 3) execution risk (early-stagecompany), 4) and inability to raise debt for future growth.BuyPrice at 4 Jul 2010 (EGP) 80.17Price Target (EGP) 112.0052-week range (EGP) 99.52 - 57.42Price/price relative160120804007/08 1/09 7/09 1/10SODICHermes Egypt Stock M (Rebased)Performance (%) 1m 3m 12mAbsolute -1.2 -17.3 18.6Stock dataMarket cap (EGP)(m) 2,907.8Shares outstanding (m) 36Free float (%) 58Hermes Egypt Stock Market Index 718.3Key indicators (FY1)ROE (%) 10.2Net debt/equity (%) -18.6Book value/share (EGP) 68.9Price/book (x) 1.2Net interest cover (x) –EBIT margin (%) 23.0Forecasts and ratiosYear End Dec 31 2009A 2010E 2011E 2012ERevenue (EGPm) 31 937 1,336 1,017DB EPS (EGP) -4.03 6.01 8.59 5.32P/BV 1.3 1.2 1.0 1.0Source: Deutsche Bank estimates, company dataDeutsche Bank AG/London Page 35