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EFG Sodic
EFG Sodic
EFG Sodic
Fair Value & Estimates Change Real Estate & Hospitality | Egypt Mai Attia
+20 2 35356434
Set our new FV on 0.8x 2016e NAV, in line with five-year average maiattia@efg-hermes.com
discount to NAV
Our new fair value for SODIC of EGP14.5/share offers 86% upside, and thus
we maintain our Buy rating. Despite 30% cut in our fair value, we highlight
that we have lowered our NAV by 12% only, albeit assigning a 20% discount
to 2016e NAV to arrive at our new fair value. The assigned discount is in line
with the stocks five-year average discount to its forward NAVs. We opt to
apply the average cycle discount rather than assume that the full value
would be realised to account for what we think are currently more stable
market conditions rather than expectations for further exponential growth
in the sector activity, with selling prices growing at annual double digit rates
and contracted sales exponentially increasing annually. SODIC continues to
lead local peers, in terms of the pace of land bank monetisation, in our view,
and thus we believe it should be assigned the lowest discount to NAV Stock Data
amongst our coverage universe. Rating Buy
Price (11 Nov 2015) EGP7.79
Stock price assumes no new project launches; unjustifiable in our view Fair Value EGP14.50
The stock has underperformed the general market index YTD, in line with Last Div. / Ex. Date EGP4.00 on 10 May 2011
Mkt. Cap / Shares (mn) EGP2,640 / 338.9
the real estate stocks. Despite no major operational changes, in our view, the
Av. Monthly Liquidity (mn) EGP277.3
stock is currently trading at a steep 57% discount to 2016e NAV, which we 52-Week High / Low EGP16.3 / EGP7.8
believe is unjustifiable. Should we assume the net present value of the Bloomberg / Reuters OCDI EY / OCDI.CA
accounts receivables (as of 2014) discounted at 13% and assuming 35% Est. Free Float 46.0%
developer margin and the value of SODICs commercial land; this would yield
EGP10.2/share, offering c30% upside. Thus, the market price is assuming that Share Price Performance Relative
To EFGI (VWAP)
the company would not launch any new projects on its existing land bank,
which we believe is largely unjustifiable and a fairly unrealistic scenario,
Price (EGP)
especially given the companys strong brand name in the market.
EFGI (VWAP)
Sales remain strong, however assume slower sales pace versus our 18
previous estimates 16
14
We expect SODIC to exceed its sales target for the year of EGP4.0 billion. We
12
estimate contracted sales of EGP4.1 billion in 2015e and 2016e and EGP3.1 10
billion in 2017e. Slower sales pace is primarily driven by less inventory rather 8
than slower market activity. SODIC has also recently announced the 6
11 Nov 14
11 May 15
11 Nov 15
11 Aug 15
11 Feb 15
acquisition of 126,000 sqm of land in 6th of October city. We still await the
announcement of further details regarding the projects development plan.
Key Financial Highlights
CONTENTS
Dec Year End (EGP mn) 2014a 2015e 2016e 2017e I. SET OUR NEW FV ON 0.8X 2016E 3
Revenue 1,366 1,303 1,799 2,255 NAV; REITERATE OUR BUY RATING
EBITDA 246.8 306.0 478.7 670.5 II. PROJECT HIGHLIGHTS AND 8
Net Attributable Income 142.4 214.8 309.9 463.7 ASSUMPTIONS
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SODIC 12 November 2015
I. Set our new FV on 0.8x 2016e NAV; reiterate our Buy rating
Fair value EGP14.5 per share is based on 0.8x 2016e NAV; our previous fair
value assumed no discount to our calculated NAV. New assigned discount of 20% is
in line with the stocks average five-year trading discount to its forward NAV
2016e NAV is cut by 12%; implying yet stable operating environment,
with impressive contracted sales recorded; however, we assume slower sales
pace compared to our previous forecast
Current market price assumes no further project launches; a largely
unjustifiable scenario, in our view
Assuming bear market conditions, cash flow position would be constraint
in 2016-17, given mounting land liability obligations
Our new fair value of EGP14.5/share offers 86% upside; hence, we maintain our Buy rating.
We opt to set our fair value based on the average cycle discount, where the stock has been
trading at an average 20% discount to its forward NAV over the past five years. Thus, our new
fair value is based on 0.8x 2016e NAV, compared to our previous value that was set at par to
the calculated NAV. Our calculated NAV is cut by 12% to EGP18.2 per share, down from
EGP20.6 per share. We believe the current operating environment would entail assuming an
average cycle discount rate, in light of what we think are currently more stable market
conditions rather than expectations for further improvement in the operating environment
with selling prices growing at annual double-digit rate and contracted sales exponentially
increasing annually. We assign SODIC the lowest discount to our calculated 2016e NAV
amongst peers, given the companys relatively faster ability to monetise its land bank, proven
in the last two land acquisitions. Both projects were launched within six months from
acquisition.
Fig. 1. SODIC trading at a 20% discount, on average, to its forward NAV during the past five
years
-20
-40
-60
-80
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
3 / 14 pages
SODIC 12 November 2015
0.1
It is worth noting that 2014 was a remarkable year for property stocks in Egypt, especially
given the inflating land costs and higher-priced auctions concluded; thus, investors were
rewarding companies for securing land bank. This was witnessed in the stocks performance,
following its acquisition of 1.2 million sqm land plot in the East of Cairo (Villete). However,
starting 2015, this positive trend has reversed, with the stock trading at a widening discount to
its NAV despite continued strong operational performance and contracted sales numbers
recorded. We highlight that we have not seen any signs of a slowdown in the companys pre-
sales numbers, where we expect strong 3Q2015 contracted sales to solidify such view, and the
company would exceed its 2015 sales target of EGP4 billion, on our numbers. Moreover, SODIC
has recently acquired a new land plot in the West side of Cairo, indicating managements
positive outlook on the overall market and future sales.
We attribute the stocks underperformance YTD, which hit property stocks, in general, to
investors concerns over the sectors operating environment, along with a number of company
specific issues including:
1. Ability to secure land bank at prices that would be value-accretive, especially large-sized
land plots that would ensure long-term visibility and growth potential
2. The companys ability to fulfil its fixed obligations in less favourable market condition,
especially in face of the mounting land liability obligations
4 / 14 pages
SODIC 12 November 2015
Fig. 3. SODIC is committed to pay an annual average of EGP1 billion in 2016-17 as land
liabilities
In EGP million
1,200
1,000
800
600
400
200
0
2015e 2016e 2017e 2018e 2019e 2020e 2021e
Fig. 4. Accounts receivable collection schedule -as of Fig. 5. Receivable collection on previous sales contributes
December 2014 around one-third of 2016-17e inflows
In EGP million In EGP million
2015e
2015 1328
2016e
2016 1173
2017e
2017 1034
2018e
Total 2021e
5 / 14 pages
SODIC 12 November 2015
NPV of 2014 accounts receivables - @13% discount and 35% developer margin
plus value of commercial land
minus net debt (2015e)
We believe the current steep discount to our calculated NAV is unjustifiable and real estate
stocks in general would re-rate, in our opinion, albeit awaiting potential strong triggers.
SODICs current stock price assumes no value for the companys 3.1 million sqm of residual land
bank designated for residential use, which we believe is largely unjustifiable and a fairly
unrealistic scenario, especially given the companys planned pipeline of future launches
leveraging on its strong brand name. We estimate total contracted sales of EGP11.2 billion
(2016-20) in the companys current projects.
In bear market conditions, the negative impact on property stocks is usually magnified. Despite
the negative impact on companies operations with a slash in contracted sales, potentially high
cancellation rates that are usually coupled by companies commitment to fixed obligations
including land liabilities, interest expense etc.; the negative impact on stocks is magnified
further by investors assigning higher discounts to NAV, where increased uncertainties would
overweigh its impact and reflects on stocks trading bands. SODIC was trading at 40-60%
discount to its NAV in the bear market conditions years (2011).
6 / 14 pages
SODIC 12 November 2015
Fig. 7. We assume a slump in 2016-17e contracted sales Fig. 8. Lower sales numbers would be driven by less volumes
under our bear case scenario, forecasting around one-third rather than prices, assuming a bear case scenario
of our base case assumptions
In EGP million In sqm
1,000 100,000
500 50,000
0 0
2015e 2016e 2017e 2018e 2019e 2015e 2016e 2017e 2018e 2019e
Fig. 9. Our base case sales scenario assumes a comfortable Fig. 10. while our bear case scenario assumes constraint
cash flow position liquidity position in 2016-17
In EGP million In EGP million
2,500 1,500
2,000
1,000
1,500
1,000
500
500
0 0
2015e 2016e 2017e 2018e 2019e 2020e 2015e 2016e 2017e 2018e 2019e 2020e
7 / 14 pages
SODIC 12 November 2015
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SODIC 12 November 2015
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SODIC 12 November 2015
10 / 14 pages
RATING AND FAIR VALUE CHART
SODIC (OCDI.CA)
EGP 7.79 (11-Nov-2015)
PRICE (EGP) 12-Nov-2014 to 11-Nov-2015
22
4/15/2015
20
18
16
11/18/2014
14
12
10
6
11/12/2014 2/12/2015 5/12/2015 8/12/2015
Closing Price Fair Value Postive Chg Fair Value Negative Chg Recommendation Chg
RATING DISTRIBUTION
Buy 53%
Neutral 43%
Sell 4%
N/R U/R 0%
11 / 14 pages
ANALYST CERTIFICATION
I, Mai Attia, hereby certify that the views expressed in this document accurately reflect my personal views about the securities and companies that are the subject of this report. I also
certify that neither I or my spouse[s] or dependants (if relevant) hold a beneficial interest in the securities that are subject of this report. I also certify that no part of my respective
compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
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12 / 14 pages
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