Palm Hills Developments Company

Transcription

1 بلوم مصر لتداول الا وراق المالية BLOMINVEST BLOM EGYPT SECURITIES BANK Alert on Q Earnings Share Price (EGP): 2.60 Sector: Real Estate Fair Value (EGP): 2.80 Country: Egypt Upside: 7.7% Date: June 20, 2011 Recommendation: HOLD Updating coverage with a HOLD Recommendation and a Fair Value of EGP 2.80 per share based on the analysis below Cancellations and declining new sales result in quarterly loss Palm Hills reported a loss of EGP 36 million for Q driven by a surge in cancellations and a considerable decline in new sales. Revenues are reported on par with Q at EGP 198 million but less than half those reported during the preceding two quarters. Cost of Goods Sold exceeded revenues as cancellations surpassed new business for the first time due to the political uncertainty and buyers following a wait-and-see approach. High leverage and a challenging environment weigh on 2011 cash flows With liabilities constituting two thirds of assets at Palm Hills and a market outlook that continues to be grim for 2011, the source of funds that will be used to pay its debt holders comes into question. The company is proposing the return of land plots to the government, including those in legal dispute in order to generate some much needed cash. On the construction front, the company has reduced its 2011 budget to EGP 1 billion, lower than its previous plan but enough to ensure the completed construction and timely delivery of its commitments. Share Data Bloomberg Symbol PHDC EC Reuters Symbol PHDC.CA Market Cap (EGP) 2,620,800,000 Number of Shares 1,048,320,000 Free Float 35.00% Price-to-Earnings TTM 6.75 Price-to-Book 0.56 Share Performance Handling of legal disputes over land key to restoring investor confidence Stocks of Egyptian real estate developers recently responded positively to how the government settled a dispute over land bought by Saudi Arabia s Kingdom Holding. The government concluded the dispute over a land plot in Southern Egypt by signing a new contract. This indicated it may follow a similar approach with Egyptian developers which would help restore investor confidence in the sector and the Egyptian economy as a whole. Share price reflects negative investor sentiment and tight liquidity We estimate the fair value of Palm Hills at EGP 2.80 per share using a Discounted Cash Flow methodology with a discount rate of 17%. For projects in construction, we ve expanded the period in which the company expects to report sales and recognize revenues. We ve also taken into account the possibility that land plots on the North Coast and Sixth of October area may be returned to the government. The current price fairly reflects the negative sentiment in the sector along with the liquidity risks for Palm Hills specifically, allowing us to issue a HOLD recommendation. Some upside potential may result as disputes over illegal allocations of land come to a close and a new Egyptian president is elected. Of course the key indicators that would reflect a tangible improvement are the quarterly new sales and cancellations. Source: Reuters 1 Month Return 3 Month Return 6 Month Return 12 Month Return 52 Week Range 51.50% % % % Contact Information: Senior Equity Analyst: Issa Frangieh issa.frangieh@blominvestbank.com Research Analyst: Nader Ali Khedr nakhedr@blomsecurities.com Head of Research: Marwan Mikhael marwan.mikhael@blominvestbank.com Performance and Forecasts In EGP millions Q1 11 Q4 10 Q3 10 Q2 10 Q1 10 Revenues Net Income (36) New Reservations 229 1,122 1,781 1, New Contracts 159 1,481 1,046 1, New Cancellations Source: Company Historicals and Blominvest Estimates Subject to Disclaimer on Last Page

2 New reservations and contracts decline while cancellations surge as per expectations New cancellations for Q exceeded both new reservations and contracts combined, due to the magnified effect of the political upheaval on investor sentiment during the first quarter. As seen below, new cancellations reached EGP 653 million growing by 189% over Q and by 252% over the same quarter last year (Q1 2010). On the other hand, new reservations registered EGP 229 million declining by 70% from Q with new contracts reaching EGP 159 million, also 70% less than Q The graph below containing the ratio of cancellations to reservations and contracts shows the magnanimous spike caused by the surge in cancellations coupled with a plunge in reservations and contracts. Source: Palm Hills, Blominvest Additional risk due to higher leverage and less liquidity than peers Palm Hills has considerably higher leverage than its peers with a Debt-to-Equity ratio of 95% compared to 57% for comparable companies. On the other hand, it appears less liquid than its peers with a quick and current ratio almost a third of the industry average. Source: Reuters, Blominvest Survival of Palm Hills tied to speed of investor confidence recovery in the real estate sector With the business model of Palm Hills mainly targeting high net worth individuals and upper-middle income buyers who are seeking high end units as a secondary home outside the city, it is obvious that the main driver of its business is investor confidence. This may need some time to fully recover, however real estate prices have already declined considerably which may attract interest especially after the presidential elections and once legal disputes over land allocation are resolved. The question that arises however is the ability of Palm Hills to generate cash in order to stay afloat in We see two possible scenarios occurring with the most likely being the reduction of its land bank while generating cash flows in the process. The second scenario may still be a stretch in liquidity but serves as a short-term remedy amidst this challenging environment and consists of a new round of equity funding.

3 Quarterly Income Statement (in EGP million) Q Q Q Q Q Sales COGS (204) (246) (135) (124) (91) Gross Profit (6) Gross Margin -3.0% 47.8% 70.1% 62.7% 54.0% SG&A (46) (82) (119) (79) (41) EBITDA (52) EBITDA % -26.3% 30.4% 43.7% 38.9% 33.3% Depreciation (12) (3) (8) (5) (4) Operating Profit (EBIT) (64) Other Income Finance Costs (6) 16 (2) (6) (12) Amortization of Discount 23 (11) (15) (15) 10 Income Tax Expense 0 17 (31) (37) 1 Net Income (34) Minority Interest (2) 7 5 (21) 0 Net Profit (36) Net Profit % -18.2% 39.3% 34.1% 25.6% 54.5%

4 Balance Sheet In Million EGP Q1 Current Assets Bank balances and cash Accounts receivable and prepayments ,035 1,175 Notes receivable ,585 1,750 Development properties 4,940 5,474 5,354 5,361 Financial assets at fair value Total Current Assets 6,425 7,251 8,458 8,582 Non-Current Assets Investment property Property and equipment Advance payments for investment acquisitions Invesment in an associate Intangible assets Notes receivable 1,658 2,501 3,512 3,071 Total Non-Current Assets 2,720 3,281 4,754 4,299 Total Assets 9,145 10,532 13,212 12,881 Current Liabilities Bank overdrafts Current portion of term loans Current portion of land purchase liabilities Accounts payable and accruals Notes payable Advances from customers Billings in excess of costs 1,237 1,970 2,824 2,409 Income tax payable Total Current Liabilities 2,942 3,691 5,061 5,464 Non-Current Liabilities Term loans Land purchase liabilities 1, Notes payable 1,172 1,948 1,798 1,542 Other non-current liabilities Deferrred tax liability Total Non-Current Liabilities 3,372 3,430 3,283 2,712 Total Liabilities 6,314 7,121 8,344 8,176 Equity Share capital 932 1,398 2,097 2,097 Share premium 891 Statutory reserve Retained earnings 851 1,249 1,750 1,598 Equity holders of the parent 2,688 3,163 4,388 4,251 Non-controlling interests Total Equity 2,832 3,411 4,869 4,705 Total Liabilities & Equity 9,145 10,532 13,212 12,881

5 BLOMINVEST BANK s.a.l. Research Department Verdun, Rashid Karameh Str. POBOX Riad El Soloh Beirut Lebanon Tel: Fax: research@blominvestbank.com For your Queries: Marwan Mikhael, Head of Research marwan.mikhael@blominvestbank.com Ext: 360 Issa Frangieh, Senior Equity Analyst issa.frangieh@blominvestbank.com Ext: 361 Equity Rating Key Buy: A recommendation with a potential return greater than 10% based on our current 12-month view of total shareholder return*. Hold: A recommendation with a potential return between -10% and 10% based on our current 12- month view of total shareholder return. Sell: A recommendation with a potential return of less than -10% based on our current 12-month view of total shareholder return. * Total Shareholder Return is calculated by the potential price growth over a 12-month period along with the expected dividend yield. Nader Ali Khedr, Research Analyst nakhedr@blomsecurities.com IMPORTANT DISCLAIMER This research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. Blom Bank SAL or Blom Invest SAL can have investment banking and other business relationships with the companies covered by our research. We may seek investment banking or other business from the covered companies referred to in this research. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees, excluding equity analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives (including options and warrants) thereof of covered companies referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Copyright 2011 Blom Invest SAL. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of Blom Invest SAL.