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

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5 July 2010 Real Estate, Construction and Building Materials Egypt Real EstateExecutive summaryOutlookThe Egyptian real estate market offers attractive long-term prospects in an acutelyundersupply environment, supported by solid fundamentals such as a large and growingpopulation (the largest in MENA), a high proportion of young people and increasingdisposable income. The capital, Cairo, is benefiting immensely from the urbanization anddevelopment of satellites (East/West Cairo), where the population density is lower and qualityof life higher. Our analysis suggests that Cairo’s residential market will witness a widershortfall from 264k units (5% of demand) in 2009E to 730k (11%) by 2014E, of which c.35%stems from the mid to high income segments where our developers under coverageoperate.At first glance, by comparing price to income ratios for select cities in the world, it seemsthat a mid income apartment is still affordable. However, Egypt’s case is unique as it isprimarily a cash market with no access to mortgage for off plan properties. Our analysissuggests stretched affordability for the mid-income segment after sharp property priceincreases (c.50-60% between 2007-Q1 2010). As a result we only see limited property priceappreciation in 2010-11. Furthermore, we see short-term challenges for Egyptian developerswith increasing risks, especially on the regulatory side. We believe the sector is exposed topotential negative outcome/news flow on the land acquisition process which could affectinvestor confidence on the Egyptian story. While we do not expect major cancellations ofland agreements as such a scenario would negatively impact the government’s credibility andput off foreign investors, we see uncertainties dominating the Egyptian story. Investorsshould closely monitor the upcoming events, especially the hearing of the Madinaty case onJuly 17 th 2010. The election period could also trigger a ‘wait and see attitude’ among futurehomebuyers in their purchasing decisions. Overall we see a risk that ST challenges distractinvestors from the LT growth story.Our analysis shows that investors are valuing Egyptian developers without differentiatingrisks and quality/location of the landbank. With minimal land liabilities, differentiated/flexibledevelopment model, strongest balance sheet (EGP1.2bn net cash,40% of market cap.) and aquality/cheap landbank highly discounted by the market, SODIC is our best play. PHD is themost leveraged play on the property market with the highest outstanding land liabilities (1.2x2009 equity) and limited potential for property price increases, in our view. TMG offers thebest exposure to the mid income segment. However, the potential outcome of litigation onits Madinaty land remains difficult to predict and adds risk to the investment case. We initiatewith a Buy on SODIC, Hold on TMG and PHD.ValuationWe value Egyptian developers on a SOTP basis. We value development properties usingDCF, while we limit our presales to 2012E. Investment properties are taken at 2009 BV whenthe property is immature; otherwise, we use comparative industry multiples to gross profit.Landbank is valued by benchmarking to 2007 auction prices in Cairo or taking appropriatediscounts (based on the quality/location of landbank) on our estimated NAV.RisksEgyptian developers are exposed to: (1) regulatory risk on land agreements; (2) executionrisk; (3) availability of financing; (4) backlog cancellation/presales slowdown; (5) stretchedaffordability; (6) economic conditions; and (7) consumer confidence.Deutsche Bank AG/London Page 3
5 July 2010 Real Estate, Construction and Building Materials Egypt Real EstateInvestment strategyEgyptian developers outperformed the CASE index in 2009Since their peaks in 2008, Egyptian developers’ share prices have plunged significantly in linewith global trends and have underperformed the respective stock indices. However, since2009, the trend has reversed and the real estate index has outperformed the CASE. This isprimarily due to the resilient profile of the real estate developers (solid backlog, low customerdefaults and low gearing), as physical demand for real estate remained strong on the back ofa growing economy and acute undersupply.Figure 1: Egyptian real estate vs. CASE, beginning 2008(base 100)Figure 2: Egyptian real estate vs. CASE, beginning 2009(base 100)12010080604020-30025020015010050-Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10RE IndexCASERE IndexCASESource: Reuters, Deutsche BankSource: Reuters, Deutsche BankAfter selling off the sector as a whole in 2008, investors have been selective in their stockpicking in 2009, with TMG outperforming the sector. We believe TMG’s outperformance canbe attributed to 2 factors: (1) its positioning in the right segment (mid- to mid-upper income)where demand remains solid; and (2) its strong financial profile, coupled with no outstandingliabilities (payment for Madinaty land to be made in kind, which is currently under litigation).PHD’s underperformance can be attributed to its outstanding land liabilities (1.2x 2009equity). SODIC’s underperformance can be attributed to the immature nature of its assets(mostly prime land) and high-end positioning (despite strong sales momentum and minimumcancellations in 2009).Figure 3: Egypt real estate equity performances, sinceMay 2008 (base 100)Figure 4: Egypt real estate equity performances,beginning 2009 (base 100)120300100250802006015040200May-08 Jul-08 Sep-08 Nov-08PHD TMG OCDI CASESource: Reuters, Deutsche Bank100500Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10PHD TMG OCDI CASESource: Reuters, Deutsche BankPage 4Deutsche Bank AG/London
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Deutsche Bank - Egypt Real Estate - (6th of July 2010) - SODIC

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