Equity Analysis /

Egypt: Real estate 2020 valuation update – Diversification is key

    Al Ahly Pharos Securities Brokerage
    22 October 2019

    An uneventful year comes to a close...

    As opposed to previous years that were riddled with big project launches and land acquisitions, 2019 was a quiet year with limited project launches and virtually no land replenishment. Indeed, as we had mentioned in our Real Estate 2019 Valuation Update Report last year, 2019 really did turn out to be a “calmer year.” This calmness is portrayed by a set of different factors: 10-15% increase in selling prices compared to the 30-40% increases during years prior to 2018, no extension in installment schedules (with developers having already milked this option), limited project launches, and modest land bank replenishment.

    A similar year ahead

    We believe real estate sales in 2020 will remain subdued, with our 2020 sales projections lower than real estate developers’ 2019 targets. We keep our price and cost assumptions unchanged with 5.0% increase in selling prices and 10.0% increase in costs in 2020. Similar to our expectation going into 2019, we still believe installment schedules will not be extended in 2020. We use a discount rate of 24.0% in 2020, 22.0% in 2021, and 21.0% across the rest of the forecast horizon.

    Diversification is key: TMGH and ORHD remain our top picks

    TMGH and ORHD remain our top picks in the sector due to their notable non-residential operations that support their already robust residential sales performance. These non-residential operations encompass commercial sellable and leasable space and hotel offerings. This diversification is also seen in these two companies’ revenue breakdown, whereby ORHD’s recurring revenue constitutes c58.7% of total revenue and TMGH’s recurring revenue constitutes c31.4% of total revenue compared to their peers’ average of only 5.0%.

    We tackle the question of why real estate stocks are trading at a big discount on Page 3 of this report. Please refer to the attached report for more details.