- Post the recent rally, land is likely to become the valuation driver for Egyptian real estate names as hotels and backlog are already priced in
Cairo land bank, which caters to primary homes, is likely to rerate ahead of second-home geared plays; based on that, HC prefers TMG and Medinet Nasr Housing considering their Cairo based land bank
Land bank to drive valuations for the sector going forward as hotels and backlog are now fully reflected in the current share price. The stocks under HC’s coverage now derive 50% of valuation from hotels and backlog, compared to 65% a quarter ago and almost 100% a year ago. Clearly this shows little upside from projects under construction and recurring investment income. As such, HC believes the next leg up for the real estate names will come from the inclusion of the land bank.
Since the primary home market better directly captures the Egyptian domestic demand story, HC continues to prefer exposure to companies with a larger Cairo-oriented land bank. Cairo land is likely to be the first beneficiary of any further upside as primary home land is more liquid, less dependent on the developer’s ability to create and execute a master plan, and offers usage flexibility (i.e. varied purposes rather the almost exclusively residential as in the case of second home designate land). HC especially expects the emerging commercial segment to provide an immediate boost, with TMG and SODIC being the two main beneficiaries.
HC expects new project launches to pickup only gradually but for deliveries to gain traction starting 2H10. HC believes project deliveries will benefit developers through improved customer confidence and the timely realization of cash flows. Deliveries will also lead to an upward revaluation of adjacent land. However, HC expects new sales over the medium term to remain at much lower levels relative to the current combined backlog of companies under HC’s coverage (EGP45 billion worth of sales over the 2007-2008 peak period). Following that assumption brings HC to their premise that land is likely to be the key valuation driver for the sector.
In the report HC conducts an in-depth land bank valuation analysis by adopting a relative approach, which they label the “sister land approach”. This allows them to evaluate the market-implied land valuation’s deviation from its fair value, identifying the most undervalued land portfolios. Accordingly, HC estimates that TMG’s market price implies a discount of 85% to their fair land valuation—the highest in the peer group—while PHD’s discount is the lowest at only 25%. On a per sqm basis TMG’s market implied land valuation is the lowest at EGP37/sqm and Medinet Nasr Housing (MNHD) is the highest at EGP284/sqm.
TMG remains HC’s preferred play on the sector given its exposure to mid-income housing demand in Cairo. HC also likes MNHD given the potential for land bank value unlocking as the company commences project launches. Despite HC’s preference for primary land, HC recognizes that ERC and ODH offer a good arbitrage opportunity on the underlying land banks, considering the stocks’ depressed valuations.
HC values real estate companies using a combination of DCF and land valuation. To value the land HC uses their “sister land approach” and then applies a uniform 50% discount. Their price targets imply a lower discount to NAV for more mature players. The sector drivers include indigenous demand and low gearing, which should sustain the current momentum. Risks largely relate to rising interest rate environment and inflation which could limit sector growth.