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

5 July 2010 Real Estate, Construction and Building Materials Egypt Real EstateInvestment thesisOutlookWe see SODIC as a company led by a strong management team and under transformationfrom a mono-project (Allegria) residential developer to a developer of downtowns inEast/West Cairo. Its differentiated development concept is about focusing on developing amix of residential, commercial, retail and entertainment assets with emphasis on nonresidential and investment properties accounting for 57% and 30%, respectively, of theplanned BUA (excluding Allegria). We like the strategy as, due to acute undersupply, yieldsremain high in the non residential space. Additionally, the company’s development model islow risk, scalable and flexible with the master development plan divided into many subphases (again with a mix of retail, commercial, residential) resulting in minimum outstandingcommitments. The benefit of this strategy is if the real estate market slows down, SODICmay not launch new projects and customize the product offerings to match marketrequirements. This was visible during the market slowdown in 2009 when SODIC achievedpositive sales momentum by reducing the unit sizes to make products more affordable.Going forward, with its differentiated products, we believe SODIC will be able to gain tractionin its planned new launches (in the next 18 months).SODIC also boasts a solid balance sheet with net cash of EGP1.2bn (end 1Q10, -55%gearing) after a rights issue (EGP550m in 1Q10) and cash management in its Allegria project.Nevertheless, as the company transforms itself to a developer with investment propertyassets, we estimate that it needs to raise c.EGP1bn. We see successful debt rising as thekey catalyst for SODIC as this would secure future investment property growth. However,should market conditions weaken and funds cannot be raised, SODIC can decide to holdback projects without weakening its financial profile as the projects will still be at the drawingboard stage.The intrinsic value of SODIC comes also from its small but prime landbank. The West Cairolandbank is adjacent to Smart Village, a successful business park, whereas East Cairolandbank is near the fast growing Kattameya/New Cairo area. Our analysis suggests that thecurrent share price implies land bank at EGP299/sqm vs. the 2007 average auction price ofc.EGP833/sqm (66% discount). Additionally, the market is not assigning any premium toplanned future projects (in the next 18 months). We believe this is unjustified as SODIC wasable to successfully launch projects during the crisis and improved its backlog fromEGP1.9bn in 2008 to 2.7bn in 2009 and EGP3.4bn in 1Q10.ValuationWe derive our target price by using SOTP valuation. For development properties, we useDCF with WACC of 14.6%. We conservatively value the landbank at EGP750/sqm inEastown, EGP850/sqm in Westown, in line with the 2007 auction prices. Further Al Yosr landwhich was acquired in 2008 is valued at cost (BV, EGP230/sqm).RisksEgyptian real estate developers are exposed to risks such as availability of financing,economic conditions and consumer confidence. The key downside risks for SODIC include:1. lack of affordability in SODIC’s projects (high-end segment), 2. inability to replenish thelandbank in the future at competitive prices, 3. execution-related risk (early stage company),4. inability to raise debt for future projects.Deutsche Bank AG/London Page 37