HC Stated That TMGH Comes on Top of The Egyptian Real-Estate Companies
December 7th, 2009
HC preferred exposure is Cairo as it is best placed to benefit from underway sector transformation.
Further structural reforms key to unlock long-term potential of the sector.
TMG is HC’s top pick on EGP28bn backlog, exposure to Cairo, and hospitality business.
Egyptian property sector is undergoing a transformation driven by new integrated communities and an evolving mortgage market. HC believes that Cairo is the best placed to benefit from these trends, and hence prefer it over second home destinations (e.g. North Coast and Red Sea). Overall, the sectors dynamics remain robust characterized by favorable demographic trends and an expanding middle class. Also, considering that the high end market is saturating, HC believes that the low-to mid income market (c45% of population) is likely to drive demand going forward.
Affordability remains restrained, but further potential lies in structural and regulatory reform to address low mortgage penetration. The affordability ratio (housing prices/annual income) in Cairo ranges between 3.9x for mid-income apartments to 5.3x for high-income villas. While, an affordability ratio of 5x is typically considered reasonable, given the high mortgage rates the effective debt service ratio is high, well above 50% in some cases. Accordingly, HC feels that interest rate reform, as well as easing up home financing, should unlock further potential demand.
In current market conditions HC looks for high sales backlog, central land bank, and exposure to the hospitality sector, which based on, HC preferred play is TMG. TMG has the largest backlog among its peers standing at EGP28bn to be realized over the next three to four years, hence providing strong cash flows and earnings visibility. Also, c90% of the company’s land bank is located in Cairo which has the strongest fundamentals driven by huge pent-up demand and urban migration. Additionally, HC likes the company’s exposure to expanding middle-income segment. The company also has exposure to the luxury hospitality sector (780 rooms), which HC feels puts a floor under its valuation. While potential upside is comparable, HC prefers SODIC to PHD given its exposure to Cairo rather than second home markets.
HC initiate on TMG and SODIC with a Buy and TPs of EGP9.1 and EGP105.2, and PHD and ODH with a Hold rating and TPs of EGP9.5 and CHF95. HC values real estate companies using a combination of DCF and land valuation. HC also applies a 50% discount to its land bank valuation based on residual and comparable valuation depending on the location of the plot. HC values the Egyptian real estate sector at a c30% discount to NAV versus UAE at an average of 50%, highlighting the real domestic demand story in Egypt. That said HC believes that land bank rerating will likely drive valuations going forward.