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TMGH EY | Mega-scale land plot potentially adds c50% to TP

Agreement signed for c21mn sqm land plot with NUCA. The plot is located at the opposite side of the New Administrative Capital, on Suez Road, in a city named Capital Gardens, in proximity to the company’s existing projects, Rehab, Madinaty, and Celia, in East Cairo. The company estimates a residential sales value of project at cEGP826bn, non-residential sales at cEGP58bn, and investment costs at cEGP500bn. The project is planned to comprise 140k residential units, in addition to commercial, retail, medical, and educational spaces, a sports club and a five-star hotel, all in a smart city platform. The land payment is on a combination of cash and in-kind components (total consideration: cEGP44bn). The project’s launch is set for this year.

Acquisition adds 20+ years to TMG’s land bank, at favourable terms. This plot fulfils TMG’s communicated land acquisition criteria, namely: i) scale (large enough to accommodate a full integrated city), ii) location (East Cairo, which is arguably more ripe for growth), and iii) payment terms (mostly in-kind, for better cash flow dynamics, risk management). The in-kind payment is set at c9.5% of the project’s allowable residential BuA, implying cEGP40bn in value, in addition to a cash payment of cEGP4bn, to be paid over four equal annual instalments, starting 2021. This implies an undiscounted cEGP2.1k/sqm and discounted figures of cEGP1.3k/sqm in management estimates or cEGP444/sqm, on our numbers - a good bargain, in our view, only possible, given: i) TMG’s solid track record in establishing integrated cities in nascent areas, and ii) the plot’s mega size (10x size of Celia, land price: EGP2.1k).    

Project potentially adds cEGP7.50/share (c50%) to our TP; Await confirmation on time of launch to include in our numbers. We estimate residential sales (c88% of land area) to record cEGP787bn, potentially adding cEGP3.65/share to our TP. c8% is earmarked for non-residential space for sale (total: cEGP110bn) and rent, adding a combined cEGP3.85/share to our TP. The remaining c4% is reserved for services. The successful launch of the project in 2021, as planned, would put it in the growth driver’s seat, boosting contracted sales by c50%, p.a. over the coming five years and >70% thereafter. Operating cash flows from the project are expected to be in the red over the first six years of operations, albeit relatively minimal, and mainly attributed to the EGP4bn cash payment for the land. Before factoring in any contribution from the project, we see upside north of 100%, on the current market price.

Project not without risks/concerns. These include: i) potential cannibalisation risk, given the company’s heavy project concentration in East Cairo, and ii) increased competition, as more plots are offered by the government. We understand that the project is set to differentiate by offering: i) high technology platform, and ii) extended payment terms (reaching 13-15 years vs. the current maximum of 10 years). A third concern would be the potential need for financing to fund the initial phases of the project. That said, the company’s current leverage position (debt-to-equity: c0.20x, net cash: cEGP3.14bn in Sep-20) allows room for expansion.