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Heliopolis Housing’s five-year strategy supports a kick-starting monetization

HC Brokerage issued their update about Egypt’s real estate sector shedding the light on Heliopolis Housing’s performance and upgrading the rating to Overweight

  • The five-year strategy and the successful sale of a 270-feddan land plot are the new management’s first steps; we await more such efforts to turn around the company

  • A new revenue-share agreement with a private developer in the 7.1m sqm Heliopark plot could provide some EGP100bn in revenue stream over 15 years; according to management

  • We reduce our target price c24% to EGP8.41/share but upgrade our rating to Overweight from Neutral on the share price dip

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: We expect an operational turnaround following several weak quarters: Heliopolis Housing has reported net losses from 4Q19/20 to 2Q20/21 due to a slowdown in the Egyptian real estate market, impacting its unit sales. In October 2020, management outlined a 2020–25e strategy that addressed its plans for its 18.0m sqm of undeveloped land following the resignation of its previous board and management team. The strategy outlines the company’s land plots to develop independently and other plots it intends to develop under revenue-sharing terms in its two projects New Heliopolis City and Heliopark. Since this announcement, the company successfully sold a 270-feddan plot for EGP2.57bn (an average price of EGP2,263/sqm given the prime nature of the plot). The company has not yet agreed on a payment method with the buyer; however, payment over installments would increase the value to EGP4.00bn. For Heliopark, the company’s prime 7.12m sqm land plot, management seeks to assign an international company to design a new general master plan for the project during 2021. Management is also open for negotiations with major real estate developers to develop 1,000–1,200 feddans of the project under a revenue-sharing scheme and is planning to develop 200 feddans of the project on its own. Some ten real estate developers have bought the bidding terms for Heliopark, including SODIC (OCDI EY, Overweight, TP EGP30.0), Majid Al Futtaim (MAF), Mountain View, Madinet Nasr Housing (MNHD EY, Overweight, TP EGP7.05), Al Marasem Development, and Tiba Real Estate. The company is working on finalizing a deal in 3Q21. We expect Heliopolis Housing’s 5-year strategy to impact its financials and operations substantially, especially after it signs a revenue-sharing agreement for Heliopark, securing some EGP100bn in steady revenue stream over the coming 15 years, according to management.”

“Heliopark revenue-sharing agreement should be favorable to HELI: Although the company did not receive any bids yet for Heliopark, it has clarified that the terms could be advantageous to HELI and include a minimum cash guarantee. We do not include such a deal in our target price; however, using SODIC East’s NPV/sqm of EGP1,219/sqm for the entire 7.11m sqm of Heliopark yields a total valuation of EGP9.48bn or EGP7.10/share. This value implies a c2.1x premium to our valuation of EGP3.37/share for the plot using its current master plan as part of our land valuation. Additionally, the company plans to sell all of its finished inventory during 2021, which should reflect positively on its FY20/21 and FY21/22 financials as the 270-feddan land sale should boost FY20/21 profitability. As for financing, the company plans to borrow some EGP681m of bank debt to finance the necessary infrastructure in New Heliopolis City, after it borrowed a total of EGP2.77bn from FY17/18 to 2Q20/21 to finance infrastructure spending. Also, the company will implement a capital increase in 2022 as part of its five-year strategy. With a net debt-to-equity of 2.54x as of 2Q20/21, a capital increase should improve the company’s balance sheet. Management has guided the capital increase would be worth around EGP1.00bn, which would decrease net debt-to-equity to 0.40x, on our calculations. The increased future profitability should sustain the company’s dividend distribution policy, in our view, as the company will undertake the bulk of its infrastructure spending during 2021.” Mariam El Saadany added

The real estate analyst at HC concluded her update on HELI stating that: “We decrease our target price by c24% to EGP8.41/share but upgrade our recommendation to Overweight from Neutral: We reduce our target price for Heliopolis Housing by c24% to EGP8.41/share. We exclude future land sales from our forecasts in line with the company’s new strategy, which does not account for future land sales beyond the 270 feddans in New Heliopolis. Our target price implies a potential return of c83% on the 10 May 2021 closing price of EGP4.59/share; therefore, we upgrade our recommendation to Overweight from Neutral on the sharp share price decline. The sale of the 270-feddan plot decreases the company’s net debt balance to EGP175m from EGP1.34bn previously. In our previous target price, we had included EGP2.44/share of land sale proceeds for a total of 290 feddans worth of land sales which contributed c22% of our previous target price. Of our new target price, land valuation contributes c94% of the value with only c6% from our DCF, which is still higher than the negative DCF contribution to our previous target price due to the improved liquidity position. We do not account for new revenue-sharing agreements in our valuation as the company did not announce such deals yet. Our land valuation for the Heliopark plot implies total sales proceeds of EGP100bn. Still, a revenue-share deal with a reputable developer will serve as an upside to our numbers and will reflect positively on investor confidence, in our view. We use a DCF‐based sum-of-the-parts (SOTP) valuation model for the company with a 5-year average moving WACC of 17.32%. Our target price includes (1) EGP6.42/share for the company’s 18.0m sqm undeveloped land bank, (2) EGP2.59/share for its undeveloped residential and commercial phases of SODIC East, (3) EGP0.56/share for the units the company sells independently, and (4) EGP0.04/share for leased assets. We deduct a 4Q20/21e net debt position of EGP175m, which reduces our target price by a negligible EGP0.13/share, and the repurchase of the 0.71m sqm in New Heliopolis City reduces our target price by another EGP1.06/share (using an average repurchase price of EGP2,000 per sqm). Our target price of EGP8.41/share puts the company on an FY21/22e P/NAV of 0.22x, with the stock currently trading at an FY21/22e P/NAV of 0.12x, a c53% discount to peers’ trading average of 0.25x, which is no longer justified given (1) a new management team, (2) the sale of the 270-feddan plot for a lucrative value of EGP2.66bn, (3) the company expecting to finalize a revenue-share deal in 1Q21/22. We estimate the market is valuing the company’s proportionate land bank at EGP306/sqm, a c48% discount to our implied value of EGP590/sqm, which is significantly higher than the c12% discount in our previous valuation.”

HC: Madinet Nasr Housing is further challenged. However, we maintain our OW rating

HC Brokerage issued their update about Egypt’s real estate sector assuring that sector conditions continuing to be difficult due to Coronavirus outbreak and they maintain the OW rating on Madinet Nasr Housing.

  • Sector conditions continuing to be difficult have pushed Madinet Nasr Housing to resort to one-off sales and cash sale discounts to overcome liquidity shortage

  • This has also impacted deliveries which are expected to pick up in 2021e. We forecast revenue to grow at 3-year CAGR of c21% and pre-sales to grow modestly at c3%

  • We maintain our OW rating on Madinet Nasr Housing, while lower our TP c44% to EGP7.05/share; implying a 2020e TP/NAV of 0.35x, while it is trading at half of that

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “Coronavirus worsens already difficult sector conditions impacting deliveries and pre-sales: Weak affordability has impacted the real estate sector pre-sales in 2019 leading to a muted c7% y-o-y growth, while the coronavirus has further worsened pre-sales and deliveries. Madinet Nasr Housing was no exception especially that it was facing fierce East Cairo competition, in addition to delivery delays. Despite its relatively strong balance sheet (net debt to equity stood at 0.39x in 2Q20), we believe the company has been facing some liquidity shortfall, triggered by the infrastructure spending needs mainly in Sarai, as well as the relaxed payment plans it introduced to the market during the launch of Sarai in late 2016. To resolve this, the company opted to: (1) offer more of its inventory on cash basis after slashing unit prices by up to c50% on some EGP500m worth of inventory, prioritizing cash flows over profitability, (2) resorting to bank debt by signing a EGP2.19bn syndicated loan with a consortium of banks (although management expects to only withdraw some EGP1.40–EGP1.50bn of the facility in 2020), (3) engaging in one-off commercial land plot sales, and (4) launching some EGP1bn of Sarai Mansions, selling residential land to individuals, which offers a different product to the company’s portfolio. It is worth mentioning that the company has delayed its delivery time for new sales currently to 4 years from 3 years previously to accommodate the delays in delivery. The company has been steadily growing its backlog, which grew at a 3-year CAGR of c28%, standing at EGP8.53bn in 2Q20 with 2020 expected to be a strong year for its deliveries as it had targeted to handover some 2,500 units, implying 14.1x y-o-y growth. With the economic implications of the coronavirus affecting all sectors indiscriminately, we believe the company may not be able to meet this target, further affecting the pace of its execution cycle.”

“We expect total pre-sales of EGP14.6bn over 202022e implying a 3-year CAGR of c3%: We expect collections of EGP21.8bn over 2020–30e and CAPEX of EGP9.22bn over 2020–25e. Our estimates take into account the launched phases of Taj City (including Tag Sultan, T-Zone, Shalya, Lake Park Studios, and Cobalt) and Sarai (including Taval, Croons Condos, S2, Cavana Lakes, while we exclude future sales from MNHD’s 36% stake in its JV with Palm Hills Developments (PHDC EY, Overweight, TP EGP3.75) Capital Gardens and only accounting for the project’s existing backlog). We expect the company’s backlog to be maintained at current levels as it delivers S1 in Sarai that it launched in 4Q16. Our collection period across the company’s project portfolio is also extended to capture the company’s relaxed payment plans approach in sales as the 7-year and 8-year plan are currently the most prevalent. We exclude the company’s Nasr Gardens from our forecasts and value the project’s inventory at book value. Despite our expectation for delays in deliveries, we expect 2020–25e revenue of EGP19.7bn, with an average gross profit of EGP10.1bn, implying a margin of c51% as the company delivers its backlog. We expect the company’s cash offers to have little impact on its receivables portfolio average collection period and margins, as units sold on cash basis were only around EGP500m, c5% of its receivables portfolio’s balance.” Mariam El Saadany added

The real estate analyst at HC concluded her update on MNHD stating that: “We lower our TP c44% to EGP7.05/share but maintain our OW rating: We use a DCF valuation to value MNHD’s launched real estate phases in its 2 projects, Taj City and Sarai and value the company’s undeveloped land bank by accounting for the present value of the potential cash flows from developing this land in the future, using the master plan for each plot. We exclude future sales from Capital Gardens from our valuation due to lack of visibility on future launches and on the slow sales pace, while only account for the project’s existing backlog. Our 5-year average moving WACC stands at 16.6%. Of our TP, c27% is from DCF and c73% is from land valuation, with the DCF value of launched real estate project at EGP2.90/share, undeveloped land value at EGP5.14/share, while a net debt position of EGP1.42bn shaves off a total of EGP0.99/share and yields a DCF value of EGP7.05/share. Our TP puts the company at a P/NAV of 0.35x, and implies a potential return of c107% over the 25 August closing price of EGP3.41/share, leading us to maintain our Overweight rating. We estimate the stock is trading at a 2020e P/NAV of 0.17x, lower than the peer average of 0.28x. On our numbers, the market is assigning a value of EGP406/sqm to the company’s undeveloped land compared to our valuation of EGP1,395/sqm (c33% lower than our previous value of EGP2,076/sqm), and representing a c71% discount to market prices.”