EUR 21.58 For Business Accounts Only

Sales, OCF, margin recovery in 2020; Overweight

Cut TP on slower sales uptake going forward, still implying upside of 80%. We cut our target price by 11% to EGP25.0/share, still warranting an Overweight call, primarily on: i) slower sales uptake (EGP40bn in the next five years vs. EGP52bn previously), with SODIC set to miss out on its set target for the second consecutive year (EGP5bn expected vs. initial target EGP7.2bn), largely due to regulatory issues rather than lower demand, ii) extended payment plans by one year (eight years) starting 2019, following the theme seen across the market during the year, and iii) lower price growth going forward (average of 10% p.a. vs. 13% previously), on revised inflation estimates. This, however, was partly offset by a 7% upward adjustment to current prices, with projects selling at higher levels than previously anticipated (avg. of EGP26k/sqm in 2019). SODIC trades on an EV of EGP340/sqm, at a 25% discount to peers and 50% discount to its historical average. 

Sales outlook geographically diversified. SODIC recently launched two new projects in West Cairo, namely The Estates and Vye, a community within the newly acquired 500-feddan plot. We expect sales from the former at EGP1bn in 4Q19 and EGP1.1bn in 2020, but anticipate the latter will only impact 2020 sales (EGP1bn). These projects should comprise 40% of the company’s presales (cEGP14bn) over the coming five years, on our estimate. We foresee a strong pick-up in SODIC East’s sales in 2020 (EGP1.3bn, +5.4x y-o-y), following the launch of Azailya, the new apartments phase, in 4Q19, with East Cairo set to comprise 50% of sales (EGP20bn) until 2024e, as per our estimates. Sales in the North Coast should resume in 2021e, we believe, with the required approvals not yet obtained.

Margins and OCF set to recover in 2020. Margins were pressured by the delivery of early phases in Villette in 2019, with the GPM dropping by 4pp during 9M19. With deliveries in the project progressing (wider margins), coupled with increased deliveries in other projects, we expect margins to edge towards the mid-30% mark over the coming two years. This, along with significant post-delivery collections and improving WC conditions, is set to improve the OCF outlook.      

Risks. The primary downside risk for SODIC in 2020 is any further delays in approvals for the 500-feddan project and Malaaz, in our view. The main upside to our valuation would be shortened payment plans, improving the cash flow outlook.