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

5 July 2010 Real Estate, Construction and Building Materials Egypt Real EstateStrong growth in residential presales with minimal cancellations (2% of backlog)As of 1Q10, SODIC has a backlog of EGP3.5bn, which provides earnings visibility for the nextthree years. Of the backlog, Allegria accounts for 90%, while 40West and Polygon accountfor 6% and 4%, respectively. The demand for SODIC’s product can be gauged from the factthat the backlog has continuously grown since 2008 with EGP 793m of new presales in 2009(+42% y/y) (at the peak of financial crisis) and a further EGP752m of new sales in 1Q10(+24% over 2009 end). Finally, the customer base of SODIC seems to be solid with minimaldelinquent payments, which according to the company never exceeded 1% of receivables,and cancellations from 3Q08 to 1Q10 amounted to only c. EGP60m (c.2% of total backlog).Figure 96: Backlog split – EGPm – 1Q10Figure 97: Backlog evolution - EGPmPolygonForth West 4%6%3,5003,0002,5002,0001,500Allegria90%1,0002008 2009 Q12010Allegria Forty West PolygonSource: SODICSource: SODICSmall size makes SODIC adaptable to changeA flexible model…Since SODIC’s landbank is small, it tries to optimize the utilization of the landbank. This isdone by developing scalable small sub phases in the master development and bycustomizing product offerings to a particular segment of customers. Typically, SODIC’sproduct offerings are premium and limited, so it can to some extent choose a narrow rangeof low-risk young and affluent customers for its products. The flexibility of customizingprojects/choosing customers has been granted by its small size; if the real estate marketslows down or there is a change in demand pattern, the company would stop launching newprojects or customize the product offering to match market requirements. As a result, capexcommitments and unsold inventory should be at minimum, in our view. Note that SODIC’sflagship Allegria project consists of four phases whereas each of Eastown and Westown hasthree phases. On the other hand, if the market environment remains buoyant, the companycan quickly launch projects and harness the growth opportunity. A working example ofSODIC’s flexibility lies in successful launches in 2009 at the peak of the financial crisis whereSODIC reduced the size of the units without lowering sales prices. Below we havehighlighted SODIC’s development plan for the next 18 months in Eastown and Westown.…already tested in tough 2009 yearSODIC is an early-stage company with only one major project (Allegria) under construction;most other big-ticket projects are on the drawing board. Management followed a prudentstrategy in 2009 in holding back massive project launches in its Eastown and Westowndevelopments, which led to cash preservation. Instead, the company decided to phaseprojects and launch smaller projects (such as Polygon and 40 West in Westown), whichproved to be successful.Deutsche Bank AG/London Page 49