June 4, 2020

HC maintains the Overweight rating of Orascom Development Egypt (ORHD)

Norway
  • In light of the coronavirus outbreak, the stock takes a hit due to its tourism sector exposure, despite impressive real estate operations 

  • We cut hospitality occupancy rates to a 2020e–2021e average of c62% in Gouna, c36% in Taba Heights and c26% in Fayoum, and we account for a gradual recovery in 2H20e

  • We reduce our TP by c33% and maintain our Overweight rating on the steep drop in share price

In a recent report, HC Brokerage issued an update note about Orascom Development – Egypt (ORHD) in light of the coronavirus outbreak stating that they maintain their Overweight rating on the steep drop in share price

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “Tourism exposure takes a toll on the company’s operations and share performance: The company’s tourism exposure (c32% of 2019 revenues and c30% of 2019 EBITDA) has led to a steep decline in its share price (down c50% y-t-d vs only c26% for the EGX30) as investors perceive it to be amongst the most badly hit by the coronavirus and the restrictive measures taken to combat it. Across our coverage, ORHD is the company with the highest tourism exposure, which warrants a significant downward revision in 2020e earnings, in our view. Accordingly, we expect 2020e hospitality revenues and town management to drop by c56% y-o-y and c68% y-o-y, respectively. Despite the government’s announcement of the reopening of hotels and resorts on 15 May for domestic tourism, we are still conservative in our assumptions for 2020e, as hotels will only be permitted to operate at a maximum capacity of 25% for the remaining months of 2Q20 and at only at 50% by July, which justifies the downward revision in our 2020 estimates. For the real estate segment, we expect the sector to suffer further from weak presales due to the coronavirus outbreak, however we believe the risk of a steep increase in cancellations is low. We expect demand for the second homes segment to suffer the most, in our view, which affects the real estate operations of ORHD’s destinations, Gouna, Makadi and Fayoum. We perceive O West as a successful project as it captured EGP5.31bn in sales since its launch and up to 1Q20, however, we believe the company’s execution capacity on such a large scale project will be tested in 2020e. We believe O West can capture a decent market share because of the developer’s strong name and superior West Cairo location. Despite our general positive outlook for O West, we expect ORHD’s total real estate sales to drop c33% y-o-y in 2020e on the back of lower volumes. It is worth noting that construction work for O West had already begun in January 2020 and the measures taken to combat the coronavirus so far do not pose a risk to delay deliveries, which are set to begin in 2023e, according to management.”

“ We cut recurring income stream on the expected decline in tourist arrivals due to the coronavirus outbreak: We reduce hospitality occupancy rates, room revenue and margins across the company’s destinations portfolio. Our estimates for 2020e-2021e occupancy rates average c62% in Gouna (c82% in 2019), c36% in Taba Heights (c48% in 2019) and c27% in Fayoum (c29% in 2019) as we account for a gradual recovery in occupancy rates, following a steep drop in 1H20e, on the back of the government’s decision to promote local tourism. This reduces our total hospitality revenues by c56% y-o-y in 2020e, and increase it by c63% y-o-y in 2021e, mainly on base effect. We maintain room rates, in line with 1Q20 KPIs reported by management, while apply lower margins as we expect hospitality EBITDA margin to drop 8 pp y-o-y in 2020e to c25% and increase by 2 pp y-o-y in 2021e to c27%. It is worth noting that the company is optimistic that local tourism will partially replace foreign tourism starting 3Q20, according to management’s best case scenario, which would be an upside to our numbers. For real estate operations, we forecast a slowdown in 2020e sales with some EGP4.66bn in contracted sales, c33% lower y-o-y while we expect total 2020e–2026e contracted sales of EGP58.3.4bn, mostly attributable to O West. Our forecasts point to total collections of EGP84.0bn over 2020e–2034e (adjusted for ORHD’s share of O West collections) against CAPEX of EGP47.6bn (including NUCA’s in-kind stake of O West). We expect total 2020e–2023e revenues of EGP29.2bn against costs of EGP21.3bn, implying an average gross profit margin of c27%. We forecast the company’s 2020e net debt-to-equity (including land liabilities) to drop to 1.89x (liabilities mostly related to O West) from 2.38x in 2019. We expect the company’s cost efficiency efforts to reflect positively on its SG&A expenses, additionally, a drop in LIBOR rates and local interest rates should reduce financing expenses.” El Saadany added

The real estate analyst concluded her update on ORHD stating that “We reduce our TP by c33% despite accounting for O West in our valuation and maintain our OW rating: We reduce our target price mainly on the back of lower hospitality and town management estimates. This comes despite including O West in our numbers since the project was launched in 2019, and lower risk free rates on the back of the Central Bank of Egypt’s (CBE) decision to cut interest rate by 300 bps in March. Despite this, our WACC increased to an average of 14.3% from 14.0% previously, as the drop in interest rates was offset by a sharp increase in the stock beta to 1.38 from 0.87 previously, which also partly explains the c33% downward revision of our TP. Of our TP of EGP9.44/share, DCF contributes c43% (from c46% previously) and our land valuation contributes c57% (from c54% previously). Our DCF component includes EGP3.50/share from launched real estate projects (EGP3.72/share previously), EGP2.64/share from hospitality operations (EGP4.19/share previously), EGP0.47/share from town management operations (EGP1.12/share previously), while a net debt position of EGP1.89/share and minority interest of EGP0.60/share shave off a total of EGP2.50/share, which yielded a total DCF value of EGP4.12/share. Our TP of EGP9.44/share puts the company at a P/NAV of 0.61x, and implies a potential return of c175% over the 19 May closing price of EGP3.44/share. We therefore maintain our Overweight rating. We estimate the stock is trading at a 2020e P/NAV of 0.22x, slightly higher than the peer average of 0.20x. On our numbers, the market is assigning a negative value of EGP26/sqm to the company’s undeveloped land compared to our valuation of EGP264/sqm, which represents a c68% discount to market prices.”