Equity Research Update - Solidere

Transcription

1 Aug-14 Sep-14 Sep-14 Sep-14 Oct-14 Oct-14 Nov-14 Nov-14 Dec-14 Dec-14 Jan-15 Jan-15 Feb-15 Feb-15 Mar-15 Mar-15 Apr-15 Apr-15 Apr-15 May-15 May-15 Jun-15 Jun-15 Jul-15 Jul-15 Aug-15 Aug-15 Equity Research Update - Solidere Recommendation: MARKETWEIGHT Target Price: USD RESEARCH UPDATE REAL ESTATE August SOLIDERE 20, Sector: Real Estate Country: Lebanon Despite improved results in 2014, we remain cautious in the short-term as weaker operations and investor sentiment should continue to weigh on shares, although we see inherent value for long term patient investors. We revise our recommendation from Overweight to Marketweight and reduce our fair value estimate on Solidere shares to USD from USD previously The first half of 2015 saw a steep decrease in real estate sales pointing to continued deceleration in the sector In H1/15, number of real estate transactions shrank by -16% YoY to 28,722 transactions from 34,109 transactions, along with a -20% drop YoY in the value of real estate transactions to USD 3.6 billion from USD 4.5 billion. New construction permits for H1/15 dropped to 7,391 from 8,780 in H1/14 (-16% YoY), whereas area of construction permits for the period January-May 2015 reached 4,846,746 sqm, a drop of -20% from the same period last year. Real estate activity remained subdued on a national level and more specifically in the high-end market entailing big transactions as GCC nationals and wealthy Lebanese expatriates with strong purchasing power have shied away from the market. Supply indicators for 2014 started to reflect some softness compared to previous years, likely suggesting that developers are starting to adapt to demand deceleration with the area of issued construction permits increasing by just +5% YoY and cement deliveries declining by -5% YoY on a YTD basis. The month of May 2015 reflects steep YoY declines in the aforementioned supply indicators by -25% YoY and -12% YoY respectively. Property prices subject to downward pressures specifically in the high-end segment, with discounts granted in negotiations Current weak market conditions did not considerably alter developers enthusiasm for construction projects, resulting in an oversupply in some market segments which, in turn, creates room for downward pressures on property prices. As a result, more discounts are being granted in later stages of negotiations, specifically in the sluggish high-end market. According to market reports, discounts during negotiations are ranging between 10% and 20%. In the BCD, the most expensive units are located in the waterfront where starting prices are in the USD 7,000-8,000/sqm range vs. USD 4,500-6,000/sqm in the traditional area including Saifi Village, Wadi Abou Jamil, Mina El Hosn and Martyr Square, down from higher levels previously. We expect Solidere s land sales to still be the main driver of cash flows and earnings, despite challenges in the domestic real estate market Solidere s land sales are expected to remain the main driver of cash flows and earnings, despite some challenges in the domestic real estate market, as the Company continues introducing flexibility in payments in terms of repayment duration. We estimate Solidere to witness lower net profits in 2015e to an estimated USD 89 million and EPS of USD 0.55 (vs. USD 114 million and USD 0.71 respectively in 2014) on total revenues of USD 200 million (vs. USD 239 million in 2014), on lower land sales of USD 137 million in 2015e (vs. USD 169 million in 2014). In H1/15, the Company realized one transaction but is expecting to book more contracts by year-end. We expect rental income to slow, reaching USD 57 million in 2015e vs. USD 61 million in 2014 as rental rates for Souks and the BCD area are negotiated with most rental agreements to be renewed at lower rates. Revenues from rendered services should remain flat at USD 6 million, while hospitality should continue to wind down to less than USD 1 million in 2015e from USD 2 million last year. For 2015e, gross profit margins should be around ~73%, slightly lower than ~76% in We expect continued efforts at opex containment and slowdown in capex, facing weaker operating conditions to help cash flows We expect SG&A as percent of revenues to increase slightly to 17% in 2015e compared to 15% in 2014 despite Solidere s efforts at opex containment. Capex in 2015e should remain limited and allocated to the completion of the waterfront s utilities network and the department store s first phase (concrete work) and second phase (envelope design). Other infrastructure including the Eastern Marina, the Park, as well as other properties in the pipeline are delayed as part of the strategy to help manage cash flows. Solidere International, in which Solidere has a 39.05% stake, aims at creating growth potential for Solidere by potentially increasing rendered services and future dividends. The Company approved a dividend distribution for the year 2014 of USD 0.10 for each Solidere A or Solidere B share as well as one Solidere A or Solidere B share for every fifty shares. Ex-dividend date: July 29, 2015; record date: July 31, 2015; payment date: October 12, We remain cautious on Solidere for the short term given the uncertain backdrop yet still see inherent value for longer term investors. We revise our recommendation from Overweight to Marketweight and reduce our target price to USD from USD previously We remain cautious on Solidere shares as we are concerned that the short to medium term will remain challenging for Solidere, given the impact of the difficult operating environment on land sales, which remain the key revenue and cash flow driver. We also note disappointing results in attempts at revenue diversification to offset the depletion of the land bank, partly from slower than expected rental income expansion and recent wind down of hospitality business. Longer term, we still recognize unlocked value in Solidere for patient investors from a rebound in land sales, the completion of the real estate pipeline and the waterfront infrastructure providing additional value to the BCD. Solidere shares represent a vote of confidence on Lebanon and as such are subject to sentiment swings from the reaction to political/security concerns materializing into slower operations and weakened investor sentiment. We assign a Marketweight recommendation from Overweight and revise our fair value estimate to USD from USD previously, derived using a sum of the parts approach implying a P/B of 1.0x based on our 2015e estimated BVPS. SOL A 1 year Share Performance Share Price Information Market cap. 1,818.8 million Shares outstanding million Dividend yield 0.9% 1M -6.9% 3M -3.1% YTD -2.0% 12M -12.8% 52-Week range USD Key Financial Highlights In USD millions 2013a 2014a 2015e 2016e Revenues EBITDA Net income EPS (USD) P/E P/B EV/EBITDA Source: BSE, Company reports, FFA Private Bank estimates, Note: Solidere A shares are priced as of August 20, 2015

2 RESEARCH UPDATE REAL ESTATE SOLIDERE 2 SOLIDERE Investment Opinion We remain cautious for the short term given that the uncertain economic and political backdrop has materialized into slower operations and weakened investor sentiment, yet still see inherent value in the land bank for patient longer term investors We are cautious on Solidere shares as the uncertain economic and political backdrop has materialized into slower operations and weakened investor sentiment. We are concerned that the short to medium term will remain challenging for Solidere given the impact of the difficult operating environment on the property market and land sales, which remain the key driver for revenues and cash flows generation. We also note disappointing results in attempts at revenue diversification to offset the depletion of the land bank, partly from slower than expected rental income expansion and recent wind down in hospitality business. Longer term, we still recognize unlocked value in Solidere for patient investors that could result from a rebound in land sales, the completion of the real estate pipeline and the waterfront infrastructure providing additional value to the BCD. Ultimately, we note that Solidere shares represent a vote of confidence on Lebanon and as such are subject to sentiment swings from the reaction to political/security concerns. We expect lower net profits in 2015e, mostly on lower land sales revenues. We rate Solidere shares at Marketweight from Overweight previously, although recognize upside potential for the shares in the longer term upon any sustainable improvement in the economic and political backdrop that could favorably impact operations as well as investors appetite. Still unlocked value in land bank as unfavorable backdrop weighs on land sales activity Since Solidere relies heavily on its land bank for revenue and cash flow generation, difficult market conditions have been weighing on land sales which remain the key business driver. As land selling price are generally sticky in Lebanon and more specifically in Beirut and the BCD, investors have shied away from big ticket land transactions in prime locations. More generally, we expect Solidere s land sales to remain moderate in the short term reflecting persistent softness in the real estate market, given macroeconomic and political/security conditions, including risk of spillovers from regional tensions. Diversification from land sales towards more stable revenue streams lagging Solidere s rental income did not see any significant improvement over the last three years as a result of credit facilities to existing tenants and delay in most of the pipeline developments except for some parts of the North Souk including the Cineplex and most recently the food court. While revenues from rendered services have witnessed gradual improvement, revenues from hospitality have been downsized on disappointing operations. Going forward, Solidere s strategy execution in terms of diversification away from land sales is likely to remain dependent on the completion of the development pipeline including the North Souk and other developments spread across the BCD as well as on market conditions given their impact on rental yields. Economic and political impasses impacting Lebanese real estate sector and Solidere s underlying business The Lebanese real estate market has been impacted by unfavorable economic and political backdrop given its cyclical nature and high sensitivity to overall sentiment. We have been seeing the negative impact of political and economic uncertainties materializing into slower operations for Solidere. Economic developments in Lebanon sharply decelerated as GDP growth rate dropped to an average of 2% between 2011 and 2014 down from a 9% average in the previous four-year period. A return to healthier economic growth will remain strongly dependent on the improvement in the domestic political/security situation, that is in turn highly correlated to regional developments. Expect Solidere to see lower net profits in 2015e pressured by lower land sales revenues We expect lower net profits in 2015e to an estimated USD 89 million (vs. USD 114 million in 2014) and EPS of USD 0.55 (vs. USD 0.71 in 2014) for total revenues of USD 200 million (vs. USD 239 million in 2014), on lower land sales revenues of USD 137 million in 2015e (vs. USD 169 million in 2014). We forecast rental income to slow, reaching USD 57 million in 2015e (vs. USD 61 million in 2014) as rental rates for Souks and the BCD area are negotiated with most rental agreements renewed at lower rates. Revenues from rendered services should remain flat at USD 6 million, while hospitality should continue to wind down to less than USD 1 million in 2015e (vs. USD 2 million in 2014). We expect income from associates to continue contributing favorably as in 2014, as well as potentially increase rendered services and future dividends. We revise our recommendation from Overweight to Marketweight and reduce our target price to USD from USD previously Solidere shares represent a vote of confidence on Lebanon and as such are subject to sentiment swings from the reaction to political/security concerns materializing into slower operations and weakened investor sentiment. We assign a Marketweight recommendation from Overweight and revise our fair value estimate to USD from USD previously, derived using a sum of the parts approach implying a P/B of 1.0x based on our 2015e estimated BVPS.

3 RESEARCH UPDATE REAL ESTATE SOLIDERE 3 Company Description The Lebanese Company for the Development and Reconstruction of Beirut Central District known as Solidere is a key real estate player in Lebanon in terms of assets with an asset base at USD 3.0 billion at the end of 2014 and a 1.8 million sqm BUA land bank left in the BCD (of which ~75% in the waterfront and ~25% in traditional). The Company s business model is primarily based on revenues from land sales and the strategy is to continue growing land sales revenues while containing overall company costs. The last three years showed an average contribution of land sales to total revenues at 71% for 2014, 58% for 2013 and 42% for 2012 compared to 85%+ in the previous five-year period. Solidere International was founded in 2007 in order to expand operations largely outside Lebanon, notably in the region. Solidere owns 39.05% of Solidere International whereby projects are currently focused in KSA, UAE and Lebanon (outside BCD). Solidere shares are listed and traded on the Beirut Stock Exchange (tickers: SOLA, SOLB) and its GDRs on the London Stock Exchange. Solidere Consolidated Financial Highlights in 2014 Net profits were USD million in 2014 largely driven by revenues from land sales and rented properties Gross revenues came at USD million (+47% YoY), above our estimate of USD million, driven by i) USD million in land sales in the waterfront and traditional areas ii) USD 61.5 million in rental income and iii) USD 8.1 million from rendered services and hospitality combined. Revenues from land sales amounted to USD million from seven contracts concluded in both waterfront (35,000 BUA at USD 3,926/sqm) and traditional (11,861 BUA at USD 3,148/sqm) areas. The remaining land bank is split between 1.33 million sqm in the waterfront area and 0.45 million sqm in the traditional area representing 75% and 25% of the 1.8 million land bank respectively. Rendered services and hospitality came in at USD 8.1 million, lower than our estimate of USD 11.1 million as Solidere continues its strategy to wind down an unprofitable line of business. Significant contribution from Solidere s subsidiaries, joint ventures and associates which came in higher than our estimates. Improving EBITDA margins and gross margins at 56%/76% up from 32%/70% respectively from favorable revenue mix with higher share of land sales in total revenues which have better margins. Operating income improved driven by higher gross profits and earnings from Solidere International, despite higher SG&A costs. Despite higher profits YoY, cash from operations were negatively impacted by a significant use of cash in working capital, namely accounts & notes receivable, driving lower free cash flow year on year although slightly helped improve indebtedness with net debt levels at USD million in 2014 (from USD million in 2013). Strategy Update The Company s business model is primarily focused on land sales in the BCD area by introducing more flexibility in payments in terms of repayment duration, focusing as well on rental income with revised agreements with tenants at reduced rates and developing its rendered services activities while continuing the wind down of its hospitality services. The Company is concentrating efforts at cost cutting in terms of achieving less operating expenses from its investment property portfolio, decreasing overhead counts as well as other SG&A expenses and improving cash flow management. Solidere also targets to decrease and manage its debt levels, which already started in The Company approved a dividend distribution for the year 2014 of USD 0.10 for each Solidere A or Solidere B share as well as one Solidere A or Solidere B share for every fifty shares and aims at maintaining its dividend policy for the coming years, which should be well received by its retail investor base. Despite generally difficult operating conditions from persistent softness in the real estate market and given macroeconomic and political/security conditions, Solidere still remains mostly focused on revenue generation from land sales activity by introducing more flexibility in payment facilities, in terms of repayment duration, while remaining tighter on pricing. Revenues from land sales benefit from high margins (~84% range) in contrast to rental income (~58% range). The remaining land bank is split between 1.33 million sqm in the waterfront area and 0.45 million sqm in the traditional area representing 75% and 25% of the 1.8 million land bank respectively, where waterfront commands premium prices. By end-2015, Solidere will renew most of its rental agreements with existing tenants at reduced rents, after it proposed waivers and flexibility in rents on a case by case basis in the previous year. This decline in rental revenues will be partially offset by revenues from parking spaces (~ USD 9 million) and Cineplex rental revenues (~ USD 1 million as well as profits shared with the management company owned by Solidere at 40%). Solidere may also benefit from rental and profit sharing from upcoming projects including i) the entertainment complex which will comprise an electronic gaming space and ii) the L-building which will house various types of restaurants. Solidere is focused on gradually increasing its rendered services as the completion of the development portfolio adds to leasable space, while revenues from hospitality should continue to decrease in line with the Company s strategy to wind down an unprofitable line of business.

4 RESEARCH UPDATE REAL ESTATE SOLIDERE 4 On the property development side, Solidere s focus is on the Souks with projects such as the new department store with construction in progress. The Company has ceased property developments in the traditional area and is concentrating on infrastructure projects with underground works in the waterfront area (utility, telecommunications, water installation...). Eastern Marina and the Park projects are delayed in line with its strategy to focus primarily on necessary development projects. The Company s strategy will also focus on cost tightening with a decrease in overheads and other SG&A expenses combined with improved cash flow management. Solidere will also aim at lowering its debt levels and improving debt management with measures such as converting one year renewable facilities to medium term facilities. Solidere International Limited owned at 39.05% by Solidere, will aim to generate additional income for Solidere by increasing rendered services and possibly future dividends. During its last AGM on July 13 th 2015, Solidere approved a dividend distribution for the year 2014 of USD 0.10 for each Solidere A or Solidere B share as well as one Solidere A or Solidere B share for every fifty shares. Ex-dividend date: July 29, 2015; record date: July 31, 2015; payment date: October 12, Financial Highlights and FFA Model Assumptions While Solidere saw higher revenues from land sales in 2014, we expect land sales activity for 2015e to slow but remain the main revenue driver with any substantial acceleration to be tied to the investment climate Gross revenues amounted to USD 239 million in 2014 generated mainly from USD 169 million in land sales in the waterfront and traditional areas. Solidere has seen one transaction recognized in H1/15, as the firm typically closes transactions in the back half of the year. Solidere now carries an unsold land bank of 1.78 million sqm BUA split nearly 75%/25% between waterfront and traditional areas, respectively. We have modeled 38,000 sqm worth of land sales for 2015e from contracts that should be signed in the back half of the year, equivalent to plots in both waterfront and traditional areas at an average selling price of ~USD 3,600/sqm. Based on these assumptions, we expect land sales to reach USD 137 million in 2015e vs. USD 169 million in We note that Solidere has been granting payment facilities in terms of repayment duration, while remaining tighter on pricing. We expect land sales to remain moderate in the short term reflecting softer real estate market given difficult macroeconomic and political/security conditions, including risk of increased spillovers from neighboring Syria. The slowdown in the real estate market that began in 2011 and carried into is compounded by the high ticket transactions that land sales entail given prime locations in the BCD at above average land sizes. Gross profit margins should trend slightly lower for the full year 2015e In 2015e, we expect land sales margins to be around ~83% up from 80% in 2013 and unchanged from Gross margins on rental income should decline towards ~55% from 61% in 2013 and 59% in 2014, while gross margins on rendered services should be around ~14%, down from 20% in 2013 and unchanged from Overall, gross profit margins should see a slight decline to ~73% in 2015e vs. 76% in 2014, but still an improvement from 70% in Longer term, we forecast gross margins from land sales to move towards ~85% and gross margins from rental income should continue to trend around ~55%. Although SG&A came in higher in 2014 (+ 11% YoY), we expect continued efforts at cost tightening SG&A costs came in higher in 2014 at USD 34 million up from USD 31 million in 2013 (+11% YoY), but were outpaced by growth in gross profits at +60% YoY. We expect to see lower SG&A costs in 2015e compared to 2014 as the Company continues to reduce its overheads, in line with its cost tightening strategy. Based on our assumptions, SG&A for the full year 2015e are expected to trend slightly lower than previous year to reach USD 33 million vs. USD 34 million in We expect SG&A as a percent of revenues to increase slightly to 17% in 2015e compared to 15% in 2014 despite Solidere s efforts at opex containment. We expect operating margins to also benefit from Solidere International which contributed USD 25 million in EBITDA should reach USD 110 million in 2015e from USD 134 million in 2014 with an EBITDA margin at ~55% in 2015e compared to 56% in Expect Solidere to see lower net profits in 2015e pressured by lower land sales We expect lower net profits in 2015e to an estimated USD 89 million (vs. USD 114 million in 2014) and EPS of USD 0.55 (vs. USD 0.71 in 2014) on total revenues of USD 200 million (vs. USD 239 million in 2014), on lower land sales of USD 137 million in 2015e (vs. USD 169 million in 2014). We forecast rental income to slow, reaching USD 57 million in 2015e (vs. USD 61 million in 2014) as rental rates for Souks and the BCD area are negotiated with most rental agreements renewed at lower rates. Revenues from rendered services should remain flat at USD 6 million, while hospitality should continue to wind down to less than USD 1 million in 2015e (vs. USD 2 million in 2014). We expect income from Solidere International to continue contributing favorably as in 2014, as well as aiming to generate additional income for Solidere by increasing rendered services and possibly future dividends.

5 RESEARCH UPDATE REAL ESTATE SOLIDERE 5 Table 1: Main Assumptions 2015e-2016e Main Assumptions Land sales (in USD/sqm BUA) Land sales (in sqm BUA) Rental income Rendered services & hospitality Margins Expenses Dividend payout Financing Notes Average selling price of ~USD 3,600/sqm weighted to plots sold in both waterfront and traditional areas for 2015e, with slight inflation for 2016e Land sales of 38,000 sqm in 2015e and 2016e Decrease in rental income over the short term as rental agreements with tenants are negotiated with lower rental prices Flat income from rendered services in 2015e, moving gradually higher in 2016e Income from hospitality to continue to wind down Gross margins on land sales ~83% in 2015e/2016e Gross margins on rental income ~55%/~54% in 2015e/2016e Gross margins on rendered services ~14% in 2015e/2016e SG&A as percent of revenues to increase slightly to 17% in 2015e and 2016e compared to 15% in 2014 despite Solidere s efforts at opex containment Payment of cash dividend of USD 0.10 for each Solidere A or Solidere B share as well as one Solidere A or Solidere B share for every fifty shares. Ex-dividend date: July 29, 2015; record date: July 31, 2015; payment date: October 12, 2015 Lower debt levels and debt management with measures such as converting one year renewable facilities to medium term facilities Source: FFA Private Bank estimates Table 2: Key Financial Highlights 2013a e Key Financial Highlights USD millions 2013a 2014a 2015e 2016e Revenues from land sales As % of total revenues 58% 71% 68% 68% Revenues from rental portfolio As % of total revenues 34% 26% 28% 28% Revenues from rendered services As % of total revenues 5% 3% 3% 3% Revenues from hospitality As % of total revenues 3% 1% 0% 0% Total gross revenues EBITDA EBITDA margin 32% 56% 55% 56% Net income Net income margin 26% 48% 45% 45% EPS (USD) P/E P/B EV/EBITDA Source: Company reports, FFA Private Bank estimates Recent Performance of Solidere Shares We continue to believe that Solidere shares reflect investors sentiment which has been impacted by rising political/security uncertainties and softer market conditions After the new cabinet formation in February 2014, Solidere shares traded in the USD 12-USD 14 range, before decreasing to the USD 11-USD 12 range starting September 2014, on rising political and security fears. Clashes at the Syrian borders between rivals in Qalamoun, coupled with the Lebanese hostage crisis, trash collection issues as well as failure to elect a new President for Lebanon likely added pressures to the shares. Solidere A and B shares closed at USD and USD respectively, which represents a -2.0% and -3.7% performance YTD respectively and likely reflects cautious buyer sentiment influencing the real estate market and materializing into difficult operating conditions.

6 RESEARCH UPDATE REAL ESTATE SOLIDERE 6 At current share price levels, Solidere A shares trade roughly in line with peers on a P/E basis, despite a less diversified revenue stream dependent on land sales, unfavorable operating leverage, increased provisions, heightened political/security risks and less liquid capital markets. On a P/B basis, Solidere s shares also trade in line with Mena average at 0.9x, although recognize a lower than average BVPS given the land for share swap at the beginning of operations. Figure 1: Solidere A Share Performance and Selected Political and Security Events $14.5 $14.0 $13.5 $13.0 August 2013: Syrian crisis spillovers into Lebanon through clashes in major cities and bordering towns to Syria February 15, 2014: National unity cabinet formed after 10 months of talks May ongoing: No agreement reached on Presidential election August 2, 2014: Beginning of Arsal battle October 24, 2014: Northern Lebanon clashes between the Lebanese Army and Islamist militants March 2015: Talks between rival political parties falter following initial positive initiatives $12.5 $12.0 $11.5 $11.0 $10.5 $10.0 August Dec 2013: Violence escalates in Tripoli and Beirut southern suburbs January 2014: Signs of a possible agreement on a new government formation December 27, 2013: Assassination of Former Finance Minister Mohammad Chatah August ongoing: Lebanese Army hostages crisis July 2015: Solidere AGM July ongoing: Trash crisis in greater Beirut May 2015 July 2015: Clashes at the Syrian borders between rivals in Qalamoun Source: BSE, Media Reports Despite Solidere distributing dividends for the year 2014 after a three-year halt, we are concerned in the short term as we expect earnings to remain dependent on market conditions. Ultimately, Solidere shares represent a vote of confidence on Lebanon and as such are subject to sentiment swings from the reaction to political/security concerns materializing into slower operations and weakened investor sentiment. While we believe that Solidere shares hold potential for long-term patient investors, we note a cost of opportunity in comparison to other Mena real estate players. Solidere shares have underperformed peers over the past years although exhibiting less market volatility. Table 3: Comparable Valuation Name Ticker Market Cap Div. Yield Sales Growth EPS Growth EBITDA Margin Debt/ Cap % ROA % ROE % EV/ EBITDA P/E P/B Solidere A SOLA LB 1, Emaar Properties PJSC EMAAR UH 13, Dar Al Arkan Real Estate ALARKAN AB 2,130.7 n/a Emaar Economic City EMAAR AB 2,560.7 n/a n/a 42.7 n/a n/a n/a Aldar Properties PJSC ALDAR UH 4, Deyaar Dev. PJSC DEYAAR UH 1,151.5 n/a n/a n/a Union Properties PJSC UPP UH 1,010.6 n/a n/a n/a Palm Hills Dev. SAE PHDC EY n/a 74.2 n/a n/a Six of October Dev. OCDI EY n/a 5.7 n/a n/a n/a 1.1 RAK Properties RAKPROP UH Mena Average 2, Source: Bloomberg priced as of August 20, 2015, Company reports

7 RESEARCH UPDATE REAL ESTATE SOLIDERE 7 Valuation We value Solidere shares at USD per share down from USD per share previously using a sum of the parts approach under the following: We value the land bank at 1.8 million sqm of BUA with an average selling price of ~USD 3,550. We value the investment properties and property management services income using a discounted cash flow approach with a weighted average cost of capital of 15% and a terminal growth rate of 3%. We value Solidere International based on the value of its liquid assets, in light of the early stages of the underlying projects and proportional ownership in two KSA-focused real estate funds (Al Malga Development and Rayat Obhur) We derived ~USD 3,550 per sqm as the weighted average selling price for the land bank of Solidere from an estimated end user property price of USD 7,000 per sqm BUA in the waterfront area and USD 4,500 per sqm BUA in the traditional area using the low range of starting prices based on FFA Real Estate s estimates. We also assumed a developer margin of 10% and average construction costs of USD 2,250 per sqm BUA. We applied a discount of 60% to our estimated land bank NAV to reflect the uncertainty regarding the macro-political environment in Lebanon, the cyclical and sensitive nature of the real estate sector, and company specific risks including operational, credit, and liquidity risks. The 60% discount falls within the range seen with Mena real estate peers. Our fair value derivation when including the investment properties and the investment in Solidere International in addition to the land bank and adjusted for certain assets and liabilities, results in a fair value estimate of USD down from USD previously. We estimate that every 5% change in the discount to our land bank NAV impacts our value per share estimate by USD Our USD fair value estimate implies a P/B of 1.0x based on our 2015e estimated BVPS. Table 4: Sum of the Parts Valuation Sum of the Parts Valuation Land Bank: In USD millions Per Share Notes Average selling price in BUA USD 3,545 Estimated end-user prices less 10% margin and USD 2,250/sqm construction costs Land bank in sqm BUA 1.78 Remaining land bank split 75% waterfront and 25% traditional Revenues 6,310.9 Infrastructure Underground works in the waterfront area (utility, telecommunications, water installation...) Opex EBIT 5,655.9 Taxes 15% Net Asset Value (NAV) 4,807.5 Premium (discount) (60.0%) Reflects liquidity, credit, cyclicality, market and political risks Land bank 1, Book value adjusted to estimated end user prices Investment properties DCF on current properties and those in pipeline, property management at 15% WACC Investment in associate Share of liquid assets and NAVs of two KSA-focused funds Add: Cash % book value Prepayments & other % book value Accounts and notes receivables % book value Fixed assets % book value Total other assets % book value Less: Total liabilities (899.5) (5.50) 100% book value Value 2, # of shares (net of treasury) m Net of stock dividends of one for every fifty shares held in treasury Value per share USD Value per share (rounded) USD Source: Company reports, FFA Private Bank estimates

8 RESEARCH UPDATE REAL ESTATE SOLIDERE 8 Target Price Revision and Recommendation We revise our recommendation to Marketweight from Overweight and reduce our fair value estimate on Solidere shares to USD from USD previously We assign a Marketweight recommendation on Solidere, as we remain cautious in the shorter term against an uncertain political and economic backdrop impacting the property market and investor sentiment, although still recognizing value for long term investors. Upside risks include a favorable outcome for the political milestones including Presidential elections and improved tensions regarding Syrian crisis. Our fair value estimate is revised to USD per share from USD per share previously using a sum of the parts approach, which implies a P/B of 1.0x based on our 2015e estimated BVPS. Key Investment Risks Cyclical nature of the real estate sector and high sensitivity to macroeconomic conditions. Business model based on a finite land bank. High dependence on land sales in a limited geographic area with a large client concentration. Political instability and heightened security events in Lebanon. Contacts Head of Research: Nadim Kabbara, CFA n.kabbara@ffaprivatebank.com Analyst: Racha Saadeh Chehab r.chehab@ffaprivatebank.com FFA Private Bank s.a.l. One FFA Gate - Marfaa Foch Street Beirut Central District PO Box Beirut - Lebanon Tel: Fax: FFA Dubai Ltd Building No 7 - Level 1 Gate Village Dubai International Financial Center (DIFC) PO Box Dubai - UAE Tel: Fax: Disclaimer This document has been issued by FFA Private Bank for informational purposes only. This document is not an offer or a solicitation to buy or sell the securities mentioned. This document was prepared by FFA Private Bank from sources it believes to be reliable. FFA Private Bank makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned, and accepts no responsibility or liability for damages incurred as a result of opinions formed and decisions made based on information presented in this document. All opinions expressed herein are subject to change without prior notice.