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Egypt real estate | Sector undervalued; Strong disconnect between fundamentals and stock valuations

Real estate trading at a steep discount. Egypt realty stocks under coverage currently trade on an average EV of EGP900/sqm, a c25% discount to the 3-year historical average, and a c45% discount to the fair value implied from current land prices and payment plans by NUCA (EGP1.6k/sqm). Operational metrics were on the rise in 2018 (aggregate sales +20% y-o-y, receivables +50%), boding well for future cash flows, earnings (2019-21e EPS CAGR of 30%), and profitability (GPM to widen 4pp by 2021e), with post-floatation inflationary pressures expected to be fully absorbed over the coming two years. However, several cities (North Coast, Alex Road) are under planning by the government, adding a layer of registration approvals, possibly delaying construction by 1-2 years, but we see no risk to names under our coverage, given they have approvals secured for 2-3 years.

Further rate cuts, land expansions to drive sectorial rerate. Following the derating of the sector since Apr-18 to end-2018 (-55% on average), we believe there is significant upside in most of the real estate stocks (95% of market cap under coverage). This value, in our view, will be largely realised, on the back of: i) further monetary easing, following the 100bps cut in Feb-19 (200bps expected during 2Q-4Q19), ii) land bank expansions, iii) continued strong presales and earnings, and iv) the imminent launch of commercial components.

Real estate cycle normalisation to start in 2019. Following 3 years of strong sales momentum (2015-17), the real estate sector started to show signs of a more mature, stable market in 2018, and we expect 2019 to follow suit. We look for aggregate sales to remain flat y-o-y in 2019, with price hikes contained (13-15%), maintaining margins going forward. We do not view this negatively, coming from a strong base, but more a sign of a maturing market reaching normalised levels. However, the improvement in LCY liquidity, in line with the declining interest rate environment, should lend support to real estate sales in 2019-20e. We believe the focus in the coming period will be on deliveries (2019-21e revenue CAGR of 18%), cash flow generation (cEGP80bn of aggregate receivables collectable over 5-6 years), and cost control (margins around 40%).

Key Overweight calls. We like SODIC (on valuation, being the cheapest stock within our coverage, trading at a 60% discount to peers in terms of EV/sqm), TMG (provides long-term value and stability, with the largest backlog within our coverage of EGP41bn, backed by a strong recurring income portfolio at 25% of top line), and ODE (provides exposure to the recovering tourism sector – arrivals up 36% y-o-y in 2018 – with several catalysts on the horizon, including results of the newly launched O-West project). We also flag PHD as a key beneficiary from lower interest rates, with its leveraged balance sheet (D/E of 62% and interest cost at c38% of EBITDA).