HC Securities & Investment expected that SODIC would see a better performance in 2020 after the launch of its residential project SODIC West, and estimated future revenues to reach EGP 23.0bn on 2020-2022e, according to HC report on 11 February.
The report further expected EGP 109bn in revenues from its under-construction projects, as part of its land valuation, totalling EGP 132bn with a blended margin of 48%.
HC forecasts point to future cash collections of EGP 18.0bn over 2020–27e from launched projects, of which EGP 10.9bn are related to outstanding receivables.
The report noted, “In March 2019, SODIC secured a 2.1m sqm plot of land in Sheikh Zayed extension through a revenue sharing agreement with Egypt’s New Urban Communities Authority (NUCA) with expected proceeds of EGP 43bn, where NUCA is entitled to a maximum total payment of EGP 15.3bn over 11 years, of which EGP 8.9bn are fixed payments, in addition to c15% in annual collections and the project is expected to have a development cost of EGP 13.3bn, and was launched by the end of December 2019, generating EGP 1bn in presales.”
The report also cited Egypt’s worsened real estate sector fundamentals for pulling valuations downwards indiscriminately; recovery more likely towards the year end.
The report stated, “Egyptian real estate developers faced significant challenges over the past couple of years, with 2019 proving to be tougher, in our view. The rising gap, starting in 2016, between cumulative real estate price appreciation and cumulative growth in Egyptians’ disposable income has significantly weakened affordability and sector demand, making it difficult for most sector players to meet their yearly sales targets in 2019, and saw some developers backlog drop or hardly grow, for the first time in years, despite relaxing their payment terms offering 0%–5% down payments and up to 8–10 year instalments. Also, unit deliveries of our coverage universe dropped c24% year over year (YoY) and c7% YoY in 2018 and nine months of 2019, respectively, indicating project cost overrun and cash shortfall for some developers.
In light of this, and the sector’s abundant land supply, we continue to favour developers with strong balance sheets, recurring income streams, exposure to the recovered tourism sector, strong cash collections, and clear earnings visibility, the report elaborated.
“Accordingly, we prefer developers who have a higher value contribution from discounted cash flows rather than from land valuation,” the report said.
“Having said that, we believe the negative sentiment on the Egyptian real estate sector has over penalised some strong industry players who meet these criteria, despite benefiting from the consolidation of the client base towards them. Going into 2020, we expect inflation moderation and an economic pickup, helped by a total 450 bps interest rate cuts by the Central Bank of Egypt in 2019, and as we expect further 200 bps rate cuts in the first half of 2020, to have a positive impact on real estate affordability, however the recovery is expected to take time, possibly towards year end, in order for personal savings to reach a level that can stimulate real and investment demand again,” the report read.
The Estates and Vye projects combined make some 2.73m sqm of land available for development in West Cairo for SODIC, with expected proceeds of EGP 50bn over the coming 10 years.
Moreover, SODIC’s undeveloped 6.74m sqm (a proportionate of 4.99m sqm) land bank is now well diversified with c42% of it in West Cairo, c41% in East Cairo, and c16% in the North Coast.
