Egypt Property Addressing housing shortages in a recovering market

Transcription

1 Egypt Property Addressing housing shortages in a recovering market Sector and Company Report September 18th 2014

2 S e c t o r C o v e r a g e S e p t e m b e r Mohammad Kamal mohammad.kamal@arqaamcapital.com Mohamad Haidar, CFA Arqaam Capital Research Offshore s.a.l Heba Khalil Egypt property Addressing housing shortages in a recovering market Egypt s property sector holds a USD 200bn+ long term development opportunity: Egypt s existing residential stock is largely informally built (90%) and lacking in quality. The endemic housing shortage stands at 1.5mn units today, and will widen by c.100k units every year. The country s political system has found its feet, and has prioritized the rehabilitation and expansion of the country s stock of residential units. We believe that publicly administered housing schemes and resumed private sector involvement will deliver 150k units/annum, leaving the gap potentially unclosed for the next 10 years. Property is perceived as a hedge against currency risk, and this adds another leg to demand. Egypt s expatriate population across MENA stands at c.5mn nationals, who are likely to route capital towards homes in Cairo s new districts. We see an existing shortage of 3mn units overall (10% of which in urban districts). Egypt s young population base (86mn individuals, 50% below the age of 24) will in our view generate demand for c.30k additional units per annum going forward, in urban cities. This assumes no improvement in real wages. When factored in, improving disposable income levels and access to mortgage financing should produce an incremental 8% in residential property demand, widening the supply gap by 12%. We therefore estimate that total demand holds potential to grow at 10%/annum in the coming 4 years, reaching 374k units by FY 15e. Mid-range and affordable housing will in our view drive the bulk of demand for residential space in Egypt, which we calculate accounts for 90% of property demand overall (inclusive of ownership and rentals). Value for money: At USD 94/sqft, average residential prices in Cairo are a fraction of prices in Dubai and Abu Dhabi (-75%), and roughly in-line with offered prices in Jeddah (USD 109/sqft, 15% discount) but above than those observed in Riyadh (USD 67/sqft, +40%). In the context of wages, average salaries in Egypt remain the lowest in MENA at USD 315/month, far behind lower-end comparable wages in KSA (USD 720) and UAE (USD 1k), and remain prone to inflation. Valuation is cheap: Egyptian property names trade at 0.66x CMP/NAV, rendering them the cheapest among peer sets in the UAE (0.71x) and KSA (0.76x), and hold the largest upside potential to NAV (20%+), largely in the form of undeveloped quality land assets held on their books. Picks: We favor TMG (Buy, EGP 14.7, 32% upside) as the cheapest property play within our coverage universe, exhibiting one of the largest discounts to NAV (0.46x CMP/NAV vs. 0.74x MENA average) and SODIC (Buy, EGP 57, 21%) which holds 5.2mn sqm of land assets, now free of all legal disputes, and generates massively superior margins, RoE and ROIC vs. the sector (10.2% vs. 3.7% for TMG in FY 16e). We stand neutral on MNHD (Hold, EGP 41, -6%) which exhibits full value at 0.88x CMP/NAV, while we see downside risk at ERC (Sell, EGP 1.2, -18%). Risks: The pace of macroeconomic recovery and currency movements. Summary of recommendations Bloomberg code TMGH EY Company name Talaat Moustafa Price target EGP 14.7, Upside +32% Rating Buy Bloomberg code OCDI EY Company name Six of October Price target EGP 57 Upside +21% Rating Buy Bloomberg code MNHD EY Company name Medinet Nasr Housing Price target EGP 41.0 Upside -6% Rating Hold Bloomberg code EGTS EY Company name Egyptian Resorts Company Price target EGP 1.20 Upside -18% Rating Sell Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

3 Real Estate Table of Contents MENA property coverage universe... 3 Summary of recommendations... 4 Market fundamentals: Macroeconomic drivers... 6 The property market in Egypt Legal precedents set by the settlement of land disputes Property plays in Egypt: land assets and NAV sensitivity Comparative charts Valuation Talaat Moustafa Group: Cheapest in MENA Six of October: Hugely cash generative Medinet Nasr Housing: The right product for a price sensitive market Egyptian Resorts Company: Downside risks outweigh growth potential Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 2

4 Real Estate Exhibit 1: MENA property coverage universe MENA property coverage universe Company FVE (in LC) Rating Upside/Downside ADTV (USD mn) Index Free float NAV (USD mn) Egypt property TMG 14.7 Buy 34% 4.69 EGX 50% 7,075 SODIC 57.2 Buy 21% 3.73 EGX 73% 874 ERC 1.2 Sell (18%) 3.75 EGX 52% 352 MNHD 40.5 Hold (7%) 1.38 EGX 47% 1,073 MENA property Emaar 14.0 Buy 27% DFM 71% 24,023 Aldar 5.4 Buy 33% ADX 68% 13,185 Damac 25.0 Buy 24% LSE NA 5,418 UP 3.0 Buy 41% DFM 86% 3,464 Eshraq 2.0 Buy 54% ADX 80% 1,121 Emirates REIT 1.5 Hold 8% Nasdaq DXB 100% 464 Dar AlArkan 14.0 Hold (5%) SASEIDX 93% 6,718 SRECO 36.0 Hold (29%) 5.66 SASEIDX 34% 1,858 Company EV (USD mn) EV/EBITDA FY 14e P/E FY 14e P/B FY 14e RoE FY 14e Dividend yield FY 14e CMP/NAV Egypt property TMG 3, x 28.25x 0.86x 3.0% 1% 0.46 SODIC x 28.84x 1.45x 5.0% 0% 0.70 ERC 218 nm nm 1.71x (2.5%) 0% 0.61 MNHD x 42.17x 8.84x 24.3% 0% x 33.08x 3.22x MENA property Emaar 20, x 22.53x 2.09x 9.3% 1% 0.68 Aldar 10, x 15.65x 1.76x 11.2% 2% 0.66 Damac 3, x 5.99x 3.65x 60.9% 4% 0.80 UP 2, x 16.04x 1.23x 9.2% 0% 0.59 Eshraq x 7.31x 1.04x 14.2% 3% 0.65 Emirates REIT x 14.06x 1.02x 7.2% 3% 0.93 Dar AlArkan 5, x 19.49x 0.90x 4.6% 0% 0.63 SRECO 1, x 31.76x 1.80x 5.7% 2% 0.87 Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 3

5 Real Estate Exhibit 2: Summary of recommendations Summary of recommendations Company Rating FVE (EGP) Key thesis elements TMG Buy 14.7 Largest discount to NAV within our real estate coverage universe (0.46x CMP/NAV vs. 0.74x sector average) SODIC Buy 57 SODIC is poised to monetise its dispute-free raw land bank in the next 5 years (5.2mn sqm) MNHD Hold 41 Turnaround story with long-term growth elements, fully focused on undersupplied mid-income segment ERC Sell 1.2 Growth potential overshadowed by medium-term challenges to the secondary/vacation home market in Egypt Exhibit 3: CMP/NAV vs. up/downside potential Exhibit 4: YTD performance vs. up/downside potential Upside remaining % 60.0% Eshraq UH YTD performance 60.0% 50.0% 40.0% 30.0% 20.0% TMGH EY UPP UH ALDAR UH EMAAR UH OCDI EY DMC LI Eshraq UH 50.0% 40.0% 30.0% 20.0% MABANEE KK DMC LI UPP UH ALDAR UH EMAAR UH TMGH EY OCDI EY 10.0% REIT DU 10.0% REIT DU 0.0% % MNHD EY EGTS EY -20.0% 0.0% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140% -10.0% EGTS EY -20.0% -30.0% SRECO AB -30.0% SRECO AB -40.0% -40.0% CMP/NAV Remaining upside Talaat Mustafa Group- TMG (Buy, EGP 14.7, 32% upside) is the cheapest property play within our coverage universe, exhibiting one of the largest discounts to NAV (0.46x CMP/NAV vs. 0.74x MENA average). Current market price/nav appears to reflect the value of developed land in Madinaty (1+2) but excludes value in free, infrastructure-installed, idle land. TMG s presold pipeline consists of c.21k residential units to be delivered in FY 14-17e, out of a total inventory of 47k units currently being developed (c.26k units yet to be sold). Its recurring income capacity is due 17% CAGR over the next 5 years, through growth in service fees and retail revenues. Despite strong recent price performance (+25% 3M return), we believe the market has yet to fairly acknowledged the value inherent in TMG s sizable property portfolio, and is not fully pricing-in the true value of land assets in current share price. We initiate with a Buy recommendation and EGP 14.7 FVE. Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 4

6 Real Estate Six of October Development- SODIC (Buy, EGP 57, 21% upside) is a play on the high-end real estate market in Egypt, as it offers community services to 400k+ residents in the Six of October and New Cairo districts through 9 major developments and complexes. The business holds 5.2mn sqm of land assets, now free of all legal disputes, and generates massively superior margins, RoE and ROIC vs. the sector (10.2% vs. 3.7% for TMG in FY 16e). SODIC is set to deliver c.4k units in the coming 5 years against a total sales backlog of EGP 8bn. The business is further planning the launch of a recurring income portfolio, via the release of c.110k sqm of retail and commercial space and a 150-key hotel asset by FY 15-16e. We believe SODIC can further monetize the remaining 3.9mn sqm of raw land at its disposal, and another 1.26mn sqm of prime land recently acquired in New Cairo, through the development of new mixed-use projects. SODIC trades at 0.71x p/nav, 29x P/E, 13.6x EV/EBITDA vs. sector multiples of 0.65x p/nav, 30.4x P/E and 18.9x EV/EBITDA. We initiate with a Buy rating and EGP 57 FVE. Medinet Nasr Housing and Development- MNHD (Hold, EGP 41, 6% downside) is a middleincome home builder with turnaround potential. We see a long-term EPS growth story as the business develops c.100mn sqft of ready-for-development land into affordable housing solutions, and delivers >2.5k residential units by FY 18e. MNHD has successfully launched 2 residential projects, Hayy Al Waha (916 units) and Tag Sultan (1,700 units), still under development, yielding a 5-yr revenue visibility of c.egp 2bn. The business further sits on c.100mn sqft of undeveloped land that may be monetised via the activation of latent projects in KM 45 (59.3mn sqft) in FY 14e, and Teegan (35.5mn sqft) in the next 2-3 years. We believe the business can generate massively stronger shareholder returns by transitioning into midincome property development and sales, and away from land resale. Valuation is however rich, compelling us to initiate coverage with a Hold recommendation and EGP 41 FVE. Egyptian Resorts Company- ERC (Sell, EGP 1.2, 18% downside) is a developer of secondary/vacation homes along the Red Sea coast. We do not see convincing demand drivers for high-end secondary home ownership in Egypt over the next 5 years. The business owns c.441mn sq ft of land in Sahl Hasheesh, out of which only 20.1mn sq ft (4.5%) have been converted into land plots and properties ready for sale. We see material downside risks to sales guidance numbers, and consequently view current valuation multiples (0.5x p/tnav, 17.1x FY 15e P/E) as overly generous, given ERC s high degree of reliance on land sales for cash generation ( x of operating cash flows in FY 15e/16e generated by land sales). We initiate coverage of ERC with a Sell rating and EGP 1.2 FVE. Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 5

7 Egypt Iran Algeria Iraq Sudan Morocco KSA Tunisia UAE Jordan Libya Lebanon Kuwait Oman Qatar Bahrain Sudan Iraq Jordan Egypt Oman Algeria KSA Libya Morocco Kuwait Lebanon Iran Tunisia UAE Bahrain Qatar September Real Estate Market fundamentals Demographics: household formation is highest in MENA Exhibit 5: Population base in Egypt to grow at c.2% p.a. Population (mn persons) 100 Exhibit 6: 1/3 of Egypt s population is <15 years old Population breakdown by age group 100% 7% 4% 4% 7% 4% 6% 8% 5% 7% 5% 7% 6% 16% 4% 6% 4% % 60% 40% 20% 52% 59% 60% 61% 66% 65% 65% 68% 66% 70% 68% 70% 61% 75% 75% 83% 41% 37% 36% 32% 30% 28% 28% 27% 27% 25% 25% 24% 23% 21% 20% 13% 70 FY 12A FY 13A FY 14e FY 15e FY 16e FY 17e FY 18e FY 19e < 15 years years > 65 years Source: IMF, World Economic Outlook Database, Arqaam Capital Research Source: IMF, World Economic Outlook Database, Arqaam Capital Research Population growth has averaged 1.9%/annum in the last 3 years. Egypt s birth rate of 24.2 births/1000 residents is high in relative terms (+19% vs. MENA average (20.2 births/1000)), and absolute terms (4.79 deaths/1000 residents, +18% vs. MENA). Egypt s population is young: 50% of the Egyptian population is below the age of 24, while the median age is 24.8 years (compared to 44% below the age of 24 and a median age of 27 years in MENA). This suggests massive incoming pressure on housing supply, as we estimate the formation of 600k households/annum on average over the next 5 years (at a 6% 5-yr CAGR). Urbanisation potential is huge: We expect the Egyptian population to grow at 2% CAGR in FY 14-18e. Rising urbanization (0.5% pa to 46% FY15e from a base of 44.5% today) should accelerate as employment opportunities and real wages improve going forward. Exhibit 7: MENA population and household sizes Exhibit 8: GDP CAGR in real terms (3.7%) due to outpace growth in population (2%) FY 13A-18e population CAGR 7.0% 6.0% Qatar 5.0% 4.0% Oman Iraq 3.0% Kuwait UAE Sudan 2.0% Egypt Algeria KSA 1.0% Jordan Iran Bahrain Tunisia Lebanon Morocco Libya 0.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Population FY 14e (mn) Average household size (RHS) FY 13A-18e GDP CAGR Source: IMF, World Economic Outlook Database, Arqaam Capital Research Source: IMF, World Economic Outlook Database, Arqaam Capital Research Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 6

8 Real Estate Wages: per capital income lowest in MENA Wage reform raises minimum household earnings by 70%: 87% of the workforce in Egypt currently earns a monthly salary below USD 1k. 1/4 of this wage bracket survives below a poverty line of USD 1.65/day. In 2013, the Egyptian government approved a 70% increase in minimum wages earned by public sector employees, to EGP 1.2k per month (up from EGP 700/month), affecting 4.9mn workers in the public sector in Egypt. This was implemented in Q1 14A. In a regional context, GDP/capita in Egypt currently ranks lowest in MENA at USD 3.75k in FY 13A, c.85% below the MENA average of USD 20.2k/capita. Furthermore, the lowestpaid employees within a corporate entity will not have to pay income taxes on their wages, as the lowest income bracket was raised from EGP 5k/year to EGP 12k/year. Exhibit 9: Income distribution: Egypt suffers from significant income inequity Range % of population Range 1 <$1,000 per month 87% Range 2 $1,000-2,000 per month 10% Range 3 >$2,000 per month 3% Source: UNDP Human Development, Company Data, Arqaam Capital Research Affordability 65% of residential demand emanates from low-mid income wage brackets, and this places home ownership out of reach for the average Cairo resident. We run our calculations on the maximum mortgage financing available (0.55x LTV) and derived the range of monthly mortgage installment payments required towards property ownership in Egypt: Exhibit 10: Average apartment prices in Egypt Apartment Average selling price (EGP/sqft) Average 1BR size (sqft)apartment value (EGP mn) Low-end Mid-end High-end 1,115 1, Source: JLL, Arqaam Capital Research Exhibit 11: Average monthly mortgage installments on apartments in Egypt Apartment Loan/value (x) Loan value (EGP mn)monthly mortgage payment (EGP) Low-end Mid-end ,272 High-end ,729 Source: JLL, Arqaam Capital Research Assuming an instalment-to-salary ratio of 30%, the annual implied salary that allows for mortgage-financed ownership of low-end apartments should be no less than USD 4k/annum, while customers desiring mortgages on mid-end and high-end apartments should at least earn USD 13k/annum and USD 27k/annum, respectively. Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 7

9 Real Estate Exhibit 12: Mortgage-eligible salary range in Egypt Apartment Minimum required monthly salary (EGP) Implied annual salary (EGP)Implied annual salary (USD) Low-end 2,364 28,371 4,053 Mid-end 7,572 90,868 12,981 High-end 15, ,155 27,022 Source: JLL, Arqaam Capital Research Our estimates of salaries in Egypt show that (i) 29% of the working population (largely workers in the public sector) cannot afford to buy any type of apartments on mortgage and require employer-guaranteed housing or informal/alternative accommodation. (ii) 58% of the addressable population can secure mortgage financing towards low-end apartments, (iii) 10% of total workers can afford to buy mid-end apartments while (iv) only 3% of the workforce can afford to mortgage all types of apartments in Egypt. As a result, demand for affordable lowend residential units has been extremely high in Egypt over the past 5 years, leading to a widening in the supply-demand gap (and the current shortage of c.200k units in urban cities), compared to an abundance of high-end units potentially desired by less than 3% of property buyers in Egypt. Exhibit 13: Residential affordability in Egypt: 29% of total labour force requires employer-guaranteed housing, while only 3% (c. 800k individuals) can afford to buy all types of apartments on offer Egypt labor force Annual salary range in Egypt (USD) % of population Workers (mn)affordable apartments Agriculture 2,000-4,000 29% 7.66 None Industry 4,000-8,000 24% 6.34 Low Services 8,000-12,000 34% 8.98 Low Industry 12,000-24,000 10% 2.64 Low, mid Services above 24,000 3% 0.79 All Source: CIA, Arqaam Capital Research But affordability has improved at the lower end of the spectrum: Average residential apartment selling price in Egypt have remained unchanged over the past 2 years in New Cairo and Six of October (average USD 1.1k/sqm), but minimum wages have increased by 70% in Q1 14A, up from a minimum wage of EGP 700/month first set in This has brought c.20% more potential buyers within reach of home ownership, by our estimates. Cash vs. mortgage buyers: We estimate that more than 50% of property buyers in Egypt purchase homes without mortgage finance, i.e. in cash, while the remaining finance their homes through one of the 11 available mortgage finance providers in Egypt. Their collective home loan book currently stands at c.egp 4.3bn, and experienced a loan delinquency rate of 5.1% in FY 13A. The Central Bank of Egypt has allocated c.egp 10bn in the next 3 years towards financing mortgages for individuals earning low-middle income paychecks. It intends to stimulate home ownership by (i) offering extended loan terms at attractive prices (long-term loans over a 20-year period priced at 7% to low-income residents vs. a maximum loan tenure of 15 years and a lending rate of c.12.5% currently offered at banks) and (ii) growing the available cash funds assigned for mortgage financing at banks (aggregate mortgage loans due to quadruple in the coming 3 years). On the other hand, mid-to-high wage residents have demonstrated an increased appetite for cash-based home purchases, where buyers are now deliberately paying 20-30% of home values via cash down payments, while required to only commit 10% at signing by developers. Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 8

10 Real Estate The evolution of mortgage laws in Egypt A larger segment of low-wage residents now qualifies for home financing given a revised mortgage law: The mortgage finance market in Egypt is governed by law No. 140, issued in 2001, supervised by the Egyptian Financial Services Authority. The law has over the last 10 years been adjusted for a series of amendments that have resulted in the formation of: (i) An adjusted real estate registration system, which reduced registration fees to EGP 2k (at maximum), and exempts the mortgage finance contracts from the proportional stamp tax (ii) A new protocol with NUCA to facilitate real estate registration procedures applied to new urban communities, allowing for transformation of allocation letters into recordable legal documents and permitting partial registration of projects, (iii) A larger beneficiary base by raising the average size of an entitlement from the Mortgage Finance Subsidy and Guarantee Fund to EGP 15k (vs. EGP 10k) and raising the limits of monthly income and level of financing to the below: Exhibit 14: Mortgage rules on wage brackets Low-income Total monthly limit Individuals EGP 1,750 Families EGP 2,500 Maximum level of financing Residential apartment EGP 95,000 Maximum level of financing (mid-income) Residential apartment EGP 300,000 Source: EFSA, Arqaam Capital Research (iv) The Egyptian Mortgage Refinance Company (EMRC), which provides long-term funding to mortgage finance companies and commercial banks that lend into home ownership. The ECB has allocated EGP 10bn to finance mortgages for people on low and middle incomes. Maximum allowed mortgages imply a x loan-to-value ratio, by our estimates: Lowincome workers are permitted by regulation to raise a maximum housing loan of EGP 95k (the fund finances individuals earning less than EGP 1.75k/month and families earning a maximum of EGP 2.5k/month), while middle-income earners can undertake mortgages worth up to EGP 300k on an absolute basis. When compared to our estimates of average apartment prices (EGP 180k for low-end apartments, and EGP 580k for mid-end apartments), available mortgage limits x the average price of an addressable apartment, implying that buyers on average pay c.50% of their homes in the form of down payments and quarterly instalments, prior to receiving their keys. Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 9

11 Q1 10A Q2 10A Q3 10A Q4 10A Q1 11A Q2 11A Q3 11A Q4 11A Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13A Q4 13A Q1 10A Q2 10A Q3 10A Q4 10A Q1 11A Q2 11A Q3 11A Q4 11A Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13A Q4 13A Iran Morocco Iraq Egypt Lebanon Jordan Bahrain Algeria KSA Qatar Oman Kuwait UAE September Real Estate Exhibit 15: Lending rates in Egypt fell by c.100bps in the last 5 years, but remain at 15% above the MENA average Exhibit 16: Lending rates in Egypt hover between 12% and 12.5% in the last 4 years Lending rates 18% 16% 14% 12% 10% 8% 6% 4% 2% Average Interest Rate 12.60% 12.50% 12.40% 12.49% 12.49% 12.50% 12.30% 12.35% 12.20% 12.10% 12.00% 11.90% 12.40% 12.37% 12.31% 12.30% 12.21% 12.18% 12.19% 12.20% 12.12% 12.09% 12.11% 12.05% 11.80% FY 09A FY 14e Source: EFSA, Arqaam Capital Research Source: EFSA, Arqaam Capital Research Mortgage lending in Egypt has grown at 25%/annum over the last 4 years- 4x faster than growth in aggregate combined loans: The Central Bank of Egypt is planning to expand the mortgage lending base to c.egp 10bn in the next 3 years for individuals earning low-mid income (vs. c. EGP 4bn in FY 13A), in an effort to boost the availability and uptake of housing finance. More than 40% of property buyers in Egypt currently use mortgages in financing their residences. We expect the ratio to gradually grow as further government subsidies are released, thereby benefiting low-income employees that earn a maximum monthly salary of EGP 20k (the Egyptian government subsidized 10k units in FY 10A, 65k units in FY 12A, an expected 50k units in FY 14e, and a further 90k units in FY 15e). Debt finance has been extended to low-income families through the Guarantee and Subsidy Fund (GSF), providing up to 15% of the value of a residence. Lending rates in Egypt stood at 12.1% in FY 13A, and are expected to remain fixed throughout FY 14e. Exhibit 17: Mortgage lending in Egypt grew at a 25% 4-yr CAGR in FY 09-13A Exhibit 18: 4x faster than growth in aggregate loans (of all types) in Egypt (which grew at 6% 4-yr CAGR) Total Value of Mortgage Loans (LE million) 4,500 4,000 Jan. 25 revolution 3,500 3,000 2,500 2,000 1,500 1, Total loans in Egypt (EGP bn) FY 08A FY 09A FY 10A FY 11A FY 12A FY 13A 15.0% 10.0% 5.0% 0% -5.0% -10.0% -15.0% Total loans Loan growth q/q Source: IMF, Arqaam Capital Research Source: ECB, Arqaam Capital Research Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 10

12 Supply Demand Supply Demand Supply Demand Supply Demand Supply Demand Supply Demand Supply Demand Supply Demand Supply Demand Supply Demand September Real Estate The property market in Egypt- structurally underdeveloped, but with huge growth potential In volume terms, Egypt is home to the largest population base in MENA, constituting one of the fastest growing property markets in the region. The property market in Egypt suffers from an endemic shortage in housing units, which has been exacerbated during the last 3 years of political and economic instability. The period resulted in a slowdown in construction activity and project award momentum, despite growing demand (we estimate an annual increment of c.30k housing units over an existing shortage of c.300k units). Recent political stability has however has generated positive growth catalysts for the property sector in Egypt, as several key government initiatives has been geared towards (i) filling the existing supply shortage (via delivering 50k affordable residential units in FY 14e and another 90k units in FY 15e, which brings the gap down to 92k units in FY 15e from c.200k units currently, by our estimates) and (ii) reviving tourism, suggesting improved hotel yields going forward (current ADRs in Q1 14A at USD 101 (+60% q/q, +2x y/y) at 35% average occupancy). Residential Exhibit 19: Only 10% of the housing market is built formally in Egypt- Cairo s housing shortages stand at c.200k units in 2015 Exhibit 20: The supply gap falls to 92k units when accounting for government social housing (140k affordable units in FY 14-15e) Official housing units(000) Official housing units(000) Gap of c. 200k FY 11A FY 12A FY 13A FY 14e FY 15e Existing New Gap FY 11A FY 12A FY 13A FY 14e FY 15e Existing New- private New- Government Gaop Source: JLL, Arqaam Capital Research Source: JLL, Arqaam Capital Research The residential property sector is characterized by a huge demand-supply gap that currently exists due to rapidly expanding housing needs (c.30k units/annum largely emanating from expanding urban cities), and the shortage of formal housing solutions (we estimate by c.100k units). Formal housing has not been sufficient, neither in volume nor in location, to absorb demand for 350k units within new cities. The supply shortage is largely concentrated in the low-income segment, which reflects a shortage of about 40k units per year. 90% of demand is informally addressed, while only 10% is supplied by professional property developers. By 1994, 70% of housing construction projects were managed by the public sector, while 30% were privately developed. That proportion, however, was reversed by 2010, directly impacting the development of low-income housing units, as private developers tended to prioritise the construction of high-margin luxury residential product, in pursuit of stronger margins. Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 11

13 Real Estate Supply: 55% of opportunity in the low-end segment Exhibit 21: Existing residential stock (86k units): 60% of total available units are in the mid-end category Housing stock occupancy by type Low-end, 10% Exhibit 22: While 55% of the supply/demand gap falls in the low-end range Supply/demand gap ('000 units) High-end, 5 High-end, 30% Mid-end, 60% Mid-end, 50 Low-end, 70 Source: Arqaam Capital Research Source: TMG, Arqaam Capital Research Public-private partnerships (PPP) should receive new incentives going forward: The Egyptian government has announced its first tangible steps towards tackling the supply gap, via a major USD40bn affordable housing project that engages UAE-based developer Arabtec to build 1 mn housing units over the next 6 years (The project will be built across 13 governorates within Egypt, at a total built-up area of 5mn+ sqm spread across 160mn sqm of land, 93% of which to be built in the capital- Cairo). Though widely regarded as a political statement, the initiative remains likely to materialize to some proportion of its announced size and scope, due to the involvement of regional governments in its funding, and the assignment of large, experienced regional contractors to the task. The project is by design intended to address the shortage in affordable housing in Egypt, and is likely to create a substantial number of new jobs in the country. Exhibit 23: Residential stock (in gated communities) set to rise 1.7x in the next 2 years Gated communities residential stock ('000s) Source: JLL, Arqaam Capital Research FY 11A FY 12A FY 13A FY 14A FY 15A Units ('000) Future supply ('000) Exhibit 24: Owners and tenants occupy 80% of the total residential stock in Egypt Housing population by accomodation type in Egypt 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 44% 36% Source: Global Property Guide, Arqaam Capital Research 14% Owners Rents Gifts and privileges Public housing 6% Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 12

14 Real Estate Demand: we expect an annual demand increment of c.30k (+8%) units in new cities We see an existing shortage of 3mn units overall (10% of which in urban districts). Egypt s young population base (86mn individuals, 50% below the age of 24) will in our view generate demand for c.30k additional units per annum going forward, in urban cities. This assumes no improvement in real wages. When factored in, improving disposable income levels and access to mortgage financing should produce an incremental 8% in residential property demand, widening the supply gap by 12%. We therefore estimate that total demand holds potential to grow at 10%/annum in the coming 4 years, reaching 374k units by FY 15e. Mid-range and affordable housing will in our view drive the bulk of demand for residential space in Egypt, which we calculate accounts for 90% of property demand overall (inclusive of ownership and rentals). Exhibit 25: Existing demand of c.320k units to grow at 10%/annum in the coming 4 years, by our estimates Demand ('000 units) % % % % % 50 FY 11A FY 12A FY 13A FY 14e FY 15e 47.0% 46.5% 46.0% 45.5% 45.0% 44.5% 44.0% 43.5% 43.0% 42.5% Existing demand Increment Urbanisation ratio Value for money: prices are cheap in regional context Prices of high end product have moved substantially, given replacement demand and expatriate home purchases: The average sales price for apartments in New Cairo has remained stable in Q1 14A (USD 1,125/sqm) while the average price of a villa has only marginally increased by 2% (USD 1,732/sqm). Similarly, in Six of October, a new Cairo City, apartment and villa prices remained flat q/q, at USD 897/sqm and USD 1,111/sqm, respectively. On a y/y basis, apartment prices in Six of October have retraced by c.15% y/y, while villas registered a 5% decline in prices during the period. In New Cairo however, apartment prices have remained unchanged at USD 1,125/sqm (-4% y/y), while villa prices declined 16% y/y. Prices in some luxury urban communities have however risen 30% y/y in Q1 14A, (e.g. Eastown and Westown offered by SODIC). We believe that prices of high-end product have performed well as a result of (i) replacement demand emanating from the upper quartile of income earning households, and (ii) expatriate residents in the GCC, whose income profiles also diverge from average wage levels within Egypt. Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 13

15 Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13A Q4 13A Q1 14A Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13A Q4 13A Q1 14A September Real Estate Exhibit 26: Residential prices in Six of October: flat q/q, -10% y/y 6th of October residential prices performance (USD/sqm) 1,400 1,200 1, ,250 1, ,190 1, ,173 1,071 1,111 1,111 1,111 1, Exhibit 27: Similar trends in New Cairo: flat q/q, -10% y/y New Cairo residential prices performance (USD/sqm) 2,500 2,000 1,500 1, ,780 1,780 1,609 1,198 1,050 1,050 1,813 1,136 1,974 1,741 1,659 1,700 1,732 1,180 1,125 1,125 1,100 1,125 Apartment Villa Apartment Villa Source: JLL, Arqaam Capital Research Source: JLL, Arqaam Capital Research Average residential prices are well behind current levels in broader MENA, particularly employment centers such as the UAE, but are in-line with prices of comparable product in KSA: At USD 94/sqft, average residential prices in Cairo are a fraction of prices in Dubai and Abu Dhabi (75% cheaper), but are roughly in-line with offered prices in Jeddah (USD 109/sqft, 15% discount) but above than those observed in Riyadh (USD 67/sqft, +40%). Exhibit 28: Residential prices in context: Prices in Egypt sit at a huge discount to UAE prices (-75%) but in-line with KSA on average Average selling prices (USD/sqft) Dubai % Abu Dhabi % Jeddah % Riyah % Cairo Low-end % % 70 5% 43-36% 66 Mid-end % % % 67-29% 94 High-end % % 154-7% 94-43% 166 Source: JLL, Arqaam Capital Research Rents largely move in tandem with prices Market competition is increasing, rents likely to remain at current levels: Demand for residential rentals in the past 2 quarters has began to shift away from villas towards apartments (which are smaller and more affordable, and situated closer to business centres in urban cities), which resulted in a decline in villa rents of 17% in New Cairo (USD 3,367/month, 3BR) and by 8% in Six of October (USD 2,900/month, 3BR). Apartment rents, despite stronger demand drivers, have remained relatively fixed over the past 3 years (and even so in nominal terms), due to increasingly competitive market, averaging around USD 1,162/month in New Cairo (for a 2BR unit) and USD 868/month in Six of October (2BR). Occupancy rates in the residential leasing sector remain very strong at 95% on average. Prices and rents imply a net residential yield of 7% in Cairo, compared to a gross yield of 10%. Commercial rents on average have remained fixed over the past 3 quarters in New and West Cairo, having declined by 20% over the past 3 years in Central Cairo (USD 35/sqm/month). Average occupancy levels in grade A assets stood at 79% in Q1 14A, implying a net average yield of 8.8%. Annual retail rents however continue to soften in regional malls (USD 720/sqm, -22% y/y) and super regional malls (USD 1,320/sqm, -6% y/y) and reflect an average 75% occupancy rate across assets. Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 14

16 Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13A Q4 13A Q1 14A September Real Estate Exhibit 29: Residential rents: Unchanged y/y in apartments, but declining in villas (-10%) Exhibit 30: Hotel occupancy rates fall to 35% in Q1 14A on weak tourist arrivals Residential rents performance (USD/unit/month) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, % 49% 53% 56% 51% 49% 56% 48% 35% 60% 50% 40% 30% 20% 10% 6th of October- Apartment 6th of October- Villa - Q1 12A Q2 12A Q3 12A Q4 12A Q1 13A Q2 13A Q3 13A Q4 13A Q1 14A 0% New Cairo- Apartment New Cairo- Villa YTD ADR (USD) YTD RevPar (USD) YTD Occupancy (RHS) Source: JLL, Arqaam Capital Research Source: JLL, Arqaam Capital Research Hospitality and hotels Tourist activity is highly sensitive to political stability: 27.7k guest rooms are currently supplied by 161 hotels in Cairo, 55% of which are classified as 5-star assets. The hospitality sector in Egypt was significantly impacted in FY 11A by political headwind (occupancy declined to 44% from 65% in FY 10A, while ADRs decreased 40% to USD 53), but partially recovered in FY 12A (+9pp in occupancy) on a slight improvement in tourism numbers (+18% in terms of arrivals vs. 9.7mn tourists in FY 11A). Occupancy remained fairly constant throughout FY 13A (c.50% on average), but significantly dropped to 35% in Q1 14A on the back of a 40% decrease in the volume of tourist arrivals (642k tourists) and tourist nights (10mn nights, -17% y/y). ADRs nonetheless surprisingly rose to USD 101 (+100% y/y, +70% q/q), whereas RevPARs only increased by 30-40% over the period, due to the drop in occupancy rates. Exhibit 31: 27.7k guest rooms available in Cairo, 55% of which in 5-star hotels Exhibit 32: Tourist arrivals in FY 14 (Jan YTD) down 40% y/y, driving hotel occupancy to 35% from 51% y/y Current hotel supply 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, stars 4 stars 3 stars 2 stars 1 star Unclassified Current hotel demand YTD 2013 YTD 2014 YTD Rooms Hotels (RHS) Number of nights (mn) Number of tourists (RHS, mn) Source: JLL, Arqaam Capital Research Source: JLL, Arqaam Capital Research Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 15

17 Real Estate Land disputes as they currently stand Exhibit 33: SODIC land is free of dispute, while final court rulings on TMG and ERC land are yet to be made Company Land Area subject to dispute (mn sqm) % of total land Status Settlement type Settlement value TMG Madinty % Pending Unit handovers 7% of BUA TMG Marsa Alam 3.2 7% Pending In-progress In-progress SODIC Eastown % Settled Cash EGP 900mn SODIC Westown-Solidere % Settled Cash EGP 247mn ERC Sahl Hasheesh % Pending NA NA SODIC fully closes its land disputes in cash settlements: in Q4 13A, SODIC reached an agreement with NUCA on the settlement of disputes over land assets in Eastown (0.86mn sqm), requiring SODIC to make a total cash payment of EGP 900mn to NUCA, payable over a period of 7 years (semi-annual payments), EGP 100mn of which were paid as a down payment. Furthermore in Q1 14A, SODIC finalised its dispute with Solidere International regarding land assets in Westown (250k sqm) and agreed to pay EGP 247mn in a cash settlement, which SODIC has fully settled and paid as of August Government share of Madinty land likely to remain at 7% of BUA: TMG previously acquired Madinty land (33.6mn sqm) from the government (NUCA) through a direct order rather than going through an auction bidding process, and as a result, has agreed to deliver 7% of the total BUA of each phase to the government (via finished units/apartments) upon construction completion. The total value of the delivered BUA (7% of total, 2.7mn sqm) should not be less than EGP 9.9bn (as per November 2010 agreement with NUCA), on the 6 phases of Madinty. TMG has already delivered a portfolio worth EGP 6.5bn (1mn sqm) to the Government from constructed land in phase 1 of Madinty, leaving 1.7mn sqm of BUA (via complete units valued at EGP 11bn) to be delivered from future developments in phases 3-6. Legal cases may affect >70% of ERC s land bank. ERC faces 2 legal cases regarding its land assets: (i) The government withdrew land plots from ERC after the 2011 revolution, claiming that the Tourism Development Authority- TDA breached laws by allocating the land to developers via direct order. Management contends that the law does not apply to ERC, as the business is only mandated with the development of infrastructure, and not the actual end-user properties. (ii) The TDA withdrew plots behind Phase III (305mn sq ft) of Sahl Hasheesh from ERC, due to delays in submitting master plans, without prior notice. Litigation has been in process since MNHD s land bank free of any disputes: The Company sits on c.9mn sqm of undeveloped land, free of disputes as land was acquired via a presidential decree. MNHD nevertheless has a further 28 plots (3.9mn sqm) under legal disputes with 3 rd parties, which we exclude from our land bank math. Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 16

18 Real Estate Property plays in Egypt: land assets and NAV sensitivity Exhibit 34: Proximity lo urban districts: TMG, SODIC and MNHD land is largely concentrated around developed urban districts in New Cairo and Six of October * Circle size denotes land area available Exhibit 35: Land banks remain largely undeveloped and hold NAV upside potential Company Land bank size % utilized % dispute free % assigned to development Residual land value (EGP mn) % of FVE Upside risk in NAV TMG % 90% 90% 22,326 70% 73% SODIC % 100% 75% 6,353 42% 13% MNHD 8.9 4% 100% 98% 11,193 82% 16% ERC 3.3 9% 0% 31% 2,571 96% 79% Developers in Egypt hold quality land assets in urban districts, in which the potential for growth in prices is strong: Over 54mn sqm of dispute-free land assets across New Cairo and Six of October are currently owned by TMG (33.6mn sqm), MNHD (8.9mn sqm) and SODIC (11.3mn sqm), of which c.35mn sqm stands raw, with master-planned projects intended for development over the next 10 years. New developments in urban cities are centered within gated communities, which offer owners and tenants community services and leisure facilities. As a result, product uptake has been strong, as reflected in pre-sales figures: 95% sales uptake in Westown, 94% in Eastown, and 90% in Allegria. Land assets in Central Cairo, on average, constitute the bulk of our NAV valuations (70%+ on average), and hold substantial valuation upside not fully reflected on our price targets. Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 17

19 Real Estate Comparative charts Exhibit 36: TMG holds the strongest track record Number of units delivered 70,000 60,000 60,000 50,000 50,000 40,000 30,000 20,000 10,000 1, Talaat Mostafa Medinet Nasr SODIC Egyptian Resorts Exhibit 37: and is due to hand over a further 38k units Development pipeline (units) 45,000 40,000 38,400 35,000 30,000 25,000 20,000 15,000 10,000 3,600 5,000 2, TMG SODIC MNHD ERC Exhibit 38: Annual residential units handed over Expected handovers (units) 5,000 4,300 4,500 4,000 3,300 3,500 3,000 2,500 2,000 1,500 1, Exhibit 40: Most developers are highly exposed to residential cycles TMG SODIC MNHD ERC Recurring income/total revenue 100% 80% 60% 78.9% FY 14e FY 15e 8 36 Exhibit 39: Operational hotel keys Operational hotel rooms 2,900 3,000 2,500 2,000 1,500 1, ERC TMG SODIC MNHD Exhibit 41: Residual land bank by company: TMG holds greatest degree of land optionality Total residual land (mn sqm) NA NA 40% 20% 25.8% 14.1% 14.8% 2.1% 4.1% 0.7% 0.7% ERC TMG SODIC MNHD FY 13A FY 16e TMG MNHD SODIC ERC Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 18

20 SRECO AB Mabanee KK Aldar UH Eshraq UH UPP UH Emaar UH AlArkan AB MNHD EY TMGH EY OCDI EY EGTS EY REIT DU SRECO AB Mabanee KK Emaar UH Eshraq UH MNHD EY AlArkan AB Aldar UH OCDI EY TMGH EY UPP UH EGTS EY September Real Estate Exhibit 42: Outstanding sales backlog by company Cumulative outstanding backlog of sales (EGP bn) Exhibit 43: Development pipeline % sold Sold units/total developemnt pipeline % 93% % % 40% 49% 43% % 13% TMG SODIC MNHD ERC SODIC TMG MNHD ERC Exhibit 44: Revenues Exhibit 45: Gross margin % Revenues (EGP mn) Gross margin FY 14e (%) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 6,061 4,976 1,559 1, % 70% 60% 50% 40% 30% 20% 10% 76% 71% 68% 55% 45% 44% 43% 35% 38% 31% 22% 22% TMGH EY OCDI EY MNHD EY EGTS EY FY 13A FY 14e Exhibit 46: Net margin % Exhibit 47: Leverage is low across all developers in Egypt 47% Net margin FY 14e (%) 80% 68% 60% 58% 40% 44% 37% 20% 33% 27% 23% 16% 12% Debt/Equity 25% 23% 20% 15% 14% 10% (20%) (40%) (34%) 5% 0% 4% 1% OCDI EY TMGH EY MNHD EY EGTS EY Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 19

21 Real Estate Exhibit 48: MENA coverage universe Key performance indicators Talaat Mostafa MENA coverage universe Key performance indicators SODIC Medinet Nasr Egypt UAE KSA Egyptian Union Emirates Saudi Real Emaar Aldar Eshraq Damac AlArkan Resorts Properties REIT Estate Land assets (mn sqm) Land assets (mn USD) 4, ,884 6, ,082 3, Historical developed units 60,000 1,700 50, ,500 7,000 na 9,895 na NA 15,000 Upcoming units 38,400 3,600 2, ,500 2, ,000 1,951 NA 250 Current GLA ('000 sqm) , Current hotel keys 875 2,900 1,780 2, Implied cap rate 5% 9% NA 8.2% 5.5% 5.7% 7.2% NA 8.3% 5.4% 7.0% 9.2% D/E FY 14e 19% 19% 2% 33% 47% 1% 54% 20% 30% 33% EPS FY 14e (0.02) DPS FY 14e 15% 8% 7% 4% 89% 5% 119% FY 14-17e Revenue CAGR 18.1% 18.0% 14.1% 100.2% 22.7% 14.9% 35.7% 26.8% 54.0% 22.7% 4.6% 7.9% FY 14-17e EPS CAGR 30.8% 30.7% 23.3% (317.5%) 42.0% 2.6% 28.4% 29.5% 46.3% 21.3% 14.6% 8.3% Dividend yield 1.3% 0.8% 1.7% 3.3% 4.4% 3.5% 2.4% ROE FY 14e 3.0% 5.0% 24.3% (2.6%) 9.3% 11.2% 14.2% 60.9% 9.2% 7.2% 4.6% 5.7% RoA FY 14e 1.5% 1.5% 9.4% (1.6%) 4.7% 5.4% 10.5% 12.1% 5.6% 5.4% 3.3% 5.4% RoIC FY 14e 2.7% 4.5% 23.9% (2.6%) 6.8% 8.3% 14.2% 39.4% 3.5% 5.7% 4.9% 4.8% NAV FY 14e (USD) 7, , ,023 13,185 1,121 5,418 3, ,718 1,858 NAV/share (USD) Current P/NAV Target P/NAV (As per AC) Current market price (USD) Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 20

22 Real Estate NAV sensitivity to land values Exhibit 49: EV sensitivity to TMG land assumptions DCF sensitivity- Land prices (EGP/sqft) Madinaty Commercial land ,000 14,500 15,000 15,500 16, Exhibit 50: EV sensitivity to SODIC land assumptions DCF sensitivity- Land price (EGP/sqft) Westow n Eastow n 57 1,700 1,800 1,900 2,000 2,100 1, , , , , Exhibit 51: EV sensitivity to MNHD land assumptions Exhibit 52: EV sensitivity to ERC land assumptions Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 21

23 MNHD EY Mabanee KK EGTS EY Emaar UH Aldar UH SRECO AB UPP UH Eshraq UH OCDI EY REIT DU AlArkan AB TMGH EY MNHD EY Mabanee KK Eshraq UH Aldar UH UPP UH Emaar UH SRECO AB AlArkan AB TMGH EY REIT DU OCDI EY EGTS EY OCDI EY REIT DU SRECO AB MNHD EY TMGH EY Emaar UH AlArkan AB Aldar UH UPP UH Mabanee KK Eshraq UH UPP UH Aldar UH REIT DU TMGH EY SRECO AB Emaar UH MNHD EY AlArkan AB Mabanee KK OCDI EY Eshraq UH Emaar DAMAC REIT SODIC Aldar Eshraq MNHD UP SRECO TMG Alarkan Egyptian Resorts REIT MNHD Emaar SRECO DAMAC SODIC Aldar Alarkan Egyptian Resorts UP Eshraq TMG September Real Estate Valuation Exhibit 53: TMG trades at the deepest discount (40%) to our target P/NAV range in MENA tp/nav Exhibit 54: TMG- cheapest developer in our coverage universe on current market price/nav CMP/NAV Exhibit 55: P/E Exhibit 56: EV/EBITDA P/E FY 14e Current EV/EBITDA FY 14e Exhibit 57: P/B Exhibit 58: ROE P/B FY14e % Return on equity FY 14e (%) 30% 25% 25% 20% 18% 15% 15% 10% 10% 8% 5% (5%) 6% 5% 3% 3% 2% -1% Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 22

24 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Eshraq UH Mabanee KK MNHD EY UPP UH Aldar UH SRECO AB Emaar UH AlArkan AB REIT DU TMGH EY OCDI EY EGTS EY MNHD EY Eshraq UH Mabanee KK Aldar UH Emaar UH AlArkan AB SRECO AB UPP UH TMGH EY REIT DU OCDI EY EGTS EY September Real Estate Exhibit 59: RoA Exhibit 60: RoIC Return on assets FY 14e (%) 14% 12% 12% 11% 10% 8% 8% 6% 6% 4% 2% (2%) 5% 5% 4% 3% 2% 2% 1% (1%) RoIC FY 14e (%) 25% 22% 20% 15% 15% 10% 5% 13% 8% 6% 5% 5% 4% 3% 2% 2% (1%) (5%) Exhibit 61: TMG price performance Exhibit 62: SODIC price performance TMGH EY Equity HERMES INDEX OCDI EY Equity HERMES INDEX Source: Bloomberg, Arqaam Capital Research Source: Bloomberg, Arqaam Capital Research Exhibit 63: MNHD price performance Exhibit 64: ERC price performance MNHD EY Equity HERMES INDEX EGTS EY Equity HERMES INDEX Source: Bloomberg, Arqaam Capital Research Source: Bloomberg, Arqaam Capital Research Real Estate Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 23

25 I n i t i a t i o n R e p o r t S e p t e m b e r Mohammad Kamal mohammad.kamal@arqaamcapital.com Mohamad Haidar, CFA Arqaam Capital Research Offshore s.a.l Egypt Real Estate Talaat Moustafa Group: Cheapest in MENA A deep value play on the prime property space in Egypt: TMG is the owner of the largest residential pipeline in Egypt, and holder of significant, quality land assets Extremely attractive entry point at 0.46x CMP/NAV. Initiate with Buy and EGP 14.7 FVE Talaat Moustafa Group (TMG) is a leading property developer in Egypt, and the owner of the largest gated community in its vicinity (Madinty). The business controls land assets of 50mn sqm, of which 8.5mn sqm is developed and on which 9.9mn sqm of BUA is pre-sold. We initiate with a Buy rating and EGP 14.7 FVE as TMG reflects the cheapest valuation profile under coverage at 0.46 CMP/NAV, vs. a regional sector that currently trades at 0.70x. TMG s development pipeline is the largest among peers, by far: With over 60k units handed over or under contract, TMG holds the strongest track record of handovers in Cairo. The business has scheduled handovers for a further c.17k residential units in FY 14-17e, leaving 21k of units of inventory available for future sale, at strengthening prices. In addition to property sales, TMG manages a hospitality portfolio of 875 operating rooms in 4 hotels. TMG is due to add 1,750 new keys by FY 20e, through 5 new hotels and resorts, and provides community management services to a pool of retail, commercial, and leisure assets across its developments. The business still holds c.27mn sqm of undeveloped land (88% in Madinty, 12% in Marsa Alam) allocated for future project expansions, inclusive of c.6mn sqm of commercial land currently available for sale. We model for 12% 3-yr revenue CAGR in FY 14-16e: We expect property sales to continue to drive the bulk of FY 14-18e revenues (85%+ of total) on the handover of 24k units (17k contracted, 7k new unit sales) against a total sellable value of EGP 29bn, and model for recurring income expansion of 15% per annum over the coming 5 years. Valuation is attractive in regional context, despite steep earnings multiples: Despite the stock s strong price performance (+25% 3M return), we believe the market has not fully acknowledged the value inherent in TMG s sizable property portfolio, nor land assets in Madinty and Al Rehab at current P/NAV. Our price target implies 37.8x/37.3x FY 14/15e EPS and 1.11x/1.09x FY 14/15e BV, a 20% premium to local peers. With over 20mn sqm of idle land available, our NAV valuation captures the assets at a 70%+ discount to prevailing market prices. This still results in a CMP/NAV ratio of 0.46x vs. a sector average of 0.7x, which in our view is extremely attractive. Risk: Macroeconomics, FX losses, TDA dispute affecting 10% of land assets. BUY Real Estate / Egypt EGP 14.7 Bloomberg code TMGH EY Market index EGX Price target (local) 14.7 Upside (%) 32.6 Market data 16/09/2014 Last closing price Week range Market cap (EGPmn) 22,844 Market cap (USDmn) 3,195 Average daily traded value (EGPmn) 33.4 Average daily traded value (USDmn) 4.7 Year-end (local mn) e 2015e 2016e Revenues 4, , , ,891.9 EBITDA , , ,598.3 EPS P/E (target price) Net debt 3, , , ,848.7 BVPS P/B (target price) EV/EBITDA (target price) Div. yield (%) FCF margin (%) 4.3 (20.6) Net debt/ebitda (x) Net debt/capital (%) Interest cover (x) RoAA (%) RoAE (%) RoIC (%) Price Performance TMGH EY EGX Jan-14 Apr-14 Jul-14 Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

26 Abacus Arqaam Capital Fundamental Data Profitability 40% 20% 0% e 2015e 2016e 2017e EBITDA Margin Net Margin Talaat Moustafa Group Financial summary Reported EPS Diluted EPS DPS BVPS Weighted average shares 2, , , , , , Average market cap 10, , , , , , Growth 30% 20% 10% 0% -10% e 2015e 2016e 2017e Revenues Assets Valuation metrics P/E (x) (current price) P/E (x) (target price) P/BV (x) (target price) EV/EBITDA (x) EV/FCF (x) (112.6) (31.7) EV/Invested capital (x) Dividend yield (%) Gearing % % 0.0 0% e 2015e 2016e 2017e Net Debt/Capital Net Debt/EBITDA Valuation Growth (%) Revenues (9.1) EBITDA EBIT Net income (5.5) Margins (%) EBITDA EBIT Net e 2015e 2016e 2017e P/E P/E Sector Returns (%) RoAA RoAE RoIC FCF margin (6.4) 4.3 (20.6) Gearing (%) Net debt/capital Net debt/equity Interest cover (x) Net debt/ebitda (x) Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 25

27 Abacus Company profile Arqaam Capital Fundamental Data Talaat Moustafa Group (TMG) is a leading property developer in Egypt and the owner of the largest all-inclusive city complex (Madinty) in the region. The company controls a land bank of 50mn sqm of which 8.5mn sqm is developed and 9.9mn sqm of BUA is sold. TMG transferred ownership of its first development in 1990 upon the completion of Al Rawda Al Khadra, after which it launched sales in Virginia Beach Village, May Fair, Al Rabwa I and Al Rehab I complexes consecutively. In FY 06, TMG released its flagship development Madinty which occupies 67% of the company s total land bank and is planned to host 600k residents over 6 phases of construction. Ownership and management Shareholders TMG for Touristic and Real Estate Investment 47.1% Public 45.3% Other 7.6% Source: Zawya Board of Directors Mr Tarek Talaat Moustafa Mr Hani Talaat Moustafa Mr Akbar Mohammed Ali Mw ala Mr Ali Abdullah Ali Mr Yehia Mohammed Aw ad Binladin Dr Jamal Salaheddine Aw ad Mr Houssameddine Mohammed Abdullah Hilal Mr Mohammed Hesham Al Sharif Source: Zawya Chairman Director Director Director Director Director Director Director Talaat Moustafa Group Income statement (EGP mn) Sales revenue 4, , , , , ,392.1 Gross profit 1, , , , , ,016.2 SG&A (333.2) (366.0) (337.2) (381.9) (456.6) (556.1) EBITDA , , , ,460.2 Depreciation & Amortisation EBIT , , , ,335.7 Net interest income(expense) (158.0) (130.9) (153.8) (175.3) (163.4) (132.7) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax , , , ,377.3 Income tax expense (181.2) (175.6) (335.5) (347.9) (432.6) (583.4) Minorities Other post-tax income/(expense) Net profit , ,793.9 Arqaam adjustments (including dilution) Arqaam Net profit , ,793.9 Balance sheet (EGP mn) Cash and equivalents ,498.9 Receivables 15, , , , , ,391.8 Tangible fixed assets 4, , , , , ,749.4 Development/Investment properties 18, , , , , ,090.7 Other assets including goodwill 16, , , , , ,611.2 Total assets 54, , , , , ,342.1 Payables 4, , , , , ,189.2 Interest bearing debt 3, , , , , ,240.5 Other liabilities 20, , , , , ,919.0 Total liabilities 28, , , , , ,348.7 Shareholders equity 25, , , , , ,035.4 Minorities Total liabilities & shareholders equity 54, , , , , ,342.1 Cash flow (EGP mn) Cashflow from operations (97.2) (810.3) , ,696.1 Net capex (197.8) (146.8) (239.2) (196.8) (207.8) (153.9) Free cash flow (295.0) (1,049.5) ,542.2 Equity raised/(bought back) Dividends paid - - (299.2) (299.2) (330.2) (350.8) Net inc/(dec) in borrowings , (722.8) (1,011.0) Other investing/financing cash flows Net cash flow (284.1) (354.8) 2,096.1 Change in working capital (576.2) (478.4) (1,841.7) (86.2) (227.4) 1,693.4 Mohammad Kamal mohammad.kamal@arqaamcapital.com Mohamad Haidar, CFA Arqaam Capital Research Offshore s.a.l Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 26

28 We initiate coverage of TMG with a Buy rating and EGP 14.7 FVE A great play on Egypt property: 17k contracted units to bring in EGP 22bn in revenues in FY 14-17e, leaving 21k units in inventory Market price largely disregards value in land assets at 0.85x/0.84x FY 14/15e BVPS, 0.46x CMP/NAV. Initiate with Buy and EGP 14.7 FVE Talaat Moustafa Group (TMG) is a leading property developer in Egypt, and the owner of the largest gated community in its region (Madinty). The company controls an aggregate land bank of 50mn sqm, of which 8.5mn sqm is developed and on which 9.9mn sqm of BUA is sold. TMG transferred ownership of its first development in 1990 upon the completion of Al Rawda Al Khadra, after which it launched sales in Virginia Beach Village, May Fair, Al Rabwa I and Al Rehab I, consecutively. In 2006, TMG released its flagship development- Madinty, which occupies 67% of the business s overall land bank. Madinty is intended to host 600k residents over 6 phases of construction. TMG s development pipeline is the largest among peers, by far: With over 60k units handed over or under contract, TMG holds the strongest track record of handovers in Cairo among peers. TMG is scheduled to hand over a further c.17k residential keys in the Madinty I and II, Al Rabwa I and II and Al Rehab II developments in FY 14-17e, leaving a pipeline of 21k of inventory in its development portfolio, held for future growth. In terms of recurring income assets, TMG manages a hospitality portfolio of 875 operating rooms in 4 hotels. TMG is due to add 1,750 new keys by FY 20e, through 5 new hotels and resorts, and provides community management services to a pool of retail, commercial, and leisure assets across its developments. The business still holds c.27mn sqm of undeveloped land (88% in Madinaty, 12% in Marsa Alam) allocated for future project expansions, inclusive of c.6mn sqm of commercial land currently available for sale. We model for 12% 3-yr revenue CAGR in FY 14-16e: We expect property sales to continue to drive the bulk of FY 14-18e revenues (85%+ of total) on the handover of 24k units (17k contracted, 7k new unit sales), against a total sales value of EGP 29bn, and model for recurring income expansion of 15% per annum over the coming 5 years. Current P/NAV discount is attractive: Despite the stock s strong price performance (+25% 3M return), we believe the market has not yet fairly acknowledged the value inherent in TMG s sizable property portfolio, nor value behind land assets in Madinty and Al Rehab, in CMP/NAV. Our FVE implies 37.8x/37.3x FY 14/15e EPS and 1.11x/1.09x FY 14/15e BV, a 20% premium to local peers. Our NAV exercise discounts land values on 20mn sqm of idle prime land by 70%, and still suggests that CMP/NAV stands at 0.46x, vs. a sector average of 0.7x. This in our view constitutes an extremely attractive entry point. Rich near term earnings multiples, in our view, are warranted given massive EPS growth (>25% FY 16e, >75% FY 17e) in the pipeline. Risk: Disputes with TDA affecting 10% of land assets. Politics and macroeconomics in Egypt could result in project delays and a slowdown in sales, limiting TMG s ability to cover its cash liabilities on time. We also remain cautious of further devaluation in the EGP, which could impact margins on residential sales. Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 27

29 Valuation: ultra cheap on p/nav- earnings multiples irrelevant in context of 35% EPS CAGR in FY 14e-17e TMG exhibits the largest discount to NAV among regional peers under coverage at 0.46x CMP/NAV (vs. 0.70x sector). Initiate with Buy and EGP 14.7 FVE Our FVE implies a tp/nav of 0.61x: We value TMG at EGP 14.7/share using an SOTP model. We apply a 10-yr DCF treatment to TMG s sales pipeline (14.6% WACC) and value its recurring income portfolio on a 10-yr DCF basis at a 10% cap rate, while we value residual land at a blended market price of EGP 820/sqm. Our FVE implies 37.8x/37.3x FY 14/15e EPS and 1.11x/1.09x FY 14/15e BV, at a 20% premium to local peers. We find a premium warranted given the strong market positioning of TMG, and the stronger EPS growth potential present via its development portfolios, compared to local rivals. With more than 50% of land assets currently idle and carried well-below market value, TMG offers an extremely cheap entry level at 0.46x CMP/NAV. Exhibit 1: SoTP summary SOTP valuation Fair value (EGP mn) Per share (EGP) % of EV Property portfolio 8, % Residual land 22, % Investment portfolio 2, % Enterprise value 33, % Less: Net debt (3,076) (1.5) Less: NCI (912) (0.4) Add: JV and other assets 1, Equity value 30, NOSH 2,064 Equity value per share (EGP) 14.7 Our DCF-based SOTP valuation is composed of: NPV- Development properties: We value the development portfolio at EGP 4.1/share (26% of EV estimate) on a 10-yr DCF basis using a WACC of 14.6%. Fair value is derived from total unit sales in Madinty (EGP 2.88/share), Al Rehab (EGP 0.77/share), and other developments (EGP 0.45/share), inclusive of unsold units in the residential portfolio, which we assume will experience 100% uptake in the long run (7-10 years). NPV- Investment properties: We apply a 10-yr DCF exercise on income from rental assets (hospitality and services income) using a cap rate of 10% (14.0% WACC, 4.0% TGR), which results in a total fair value estimate on the recurring income portfolio of EGP 1.2/share (7% of our total EV estimate). Fair value of land: We value TMG s residual land bank at EGP 10.8/share, using a 73% discount to current market prices (blended at EGP 820/sqm), on a pre-tax basis. Total raw land currently stands at 27mn sqm. Gross debt: Overall borrowings in H1 14A stand at EGP 3.75bn. Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 28

30 NPV- Madinaty NPV- Al Rehab NPV- Al Rabwa NPV- Other assets NPV- Land NPV- Rental assets Cash Debt Fair value per share September Exhibit 2: We value TMG at EGP 14.7/share, at an implied 0.60x tp/nav EGP mn except where stated BV, FY AC 13A valuation Methodology Property assets 12,997 18,597 27k contracted/afs units at EGP 1.2mn/unit Land assets 4,679 22,326 Market-to-market, after-tax EGP 820/sqm blended Rental assets 2,998 2,384 DCF, cap rate 10% PPE 1,030 1,030 At BV Receivables 16,286 16,286 At BV Goodwill 15,394 15,394 At BV Cash At BV Other assets 1,232 1,232 At BV Total assets 55,296 77,928 Debt 3,756 3,756 At BV Payables and advances 22,291 22,291 At BV Other liabilities 2,352 2,352 At BV Total liabilites 28,400 28,400 Equity (implied) 26,896 49,528 NOSH 2,064 2,064 BVPS/NAVPS (AED) SoTP-based Fair Value Estimates (EGP) 14.7 Discount to FY 14e NAV (39%) CMP (EGP) 11.0 Discount to target NAV (54%) Exhibit 3: SoTP breakdown: We see 67% of EV from land assets Valuation waterfall (EGP) Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 29

31 Exhibit 4: TMG Valuation summary DCF summary EGPmn unless otherwise stated FY 14e FY 15e FY 16e FY 17e FY 18e EBIT (1-τ) ,119 1,856 1,937 Depreciation & Amortization EBITDA 1,005 1,031 1,243 1,981 2,083 Working Capital Changes (1,842) (86) (227) 1,693 5,291 Operating Cash Flow (837) 944 1,015 3,674 7,374 Purchase of PPE (239) (197) (208) (154) (119) Free Cash Flow to Firm (1,076) ,520 7,255 Discount Factor PV of Visible FCFF (939) ,042 3,671 Terminal Value 5,097 Equity Valuation WACC parameters PV of Visible FCFF 9,694 Rf 12.0% PV of Terminal Value 1,206 EMRP 5.0% Fair value of land 22,326 Adjusted Beta 1.20 Enterprise Value 33,225 Cost of Equity 18.0% Cash & Cash Equivalents 1,737 Marginal tax rate 25.0% Less: Net (Debt) Funds (4,668) Cost of Debt 11.3% D/C (market) 50.0% Equity Value 30,294 WACC 14.6% NOSH 2,064 WACC IP 14.0% Equity Value per Share 14.7 Perpetual grow th 4.0% Implied multiples EV/EBITDA P/E P/B Exhibit 5: DCF sensitivity to property sales WACC DCF sensitivity- Cost components Rf Beta % % % % % Exhibit 6: DCF sensitivity to recurring income WACC DCF sensitivity- recurring income WACC WACC TGR % 3.50% 4.00% 4.50% 5.00% 16.0% % % % % Risk: Politics and macroeconomics in Egypt could result in project delays and a slowdown in sales, limiting TMG s ability to cover its cash liabilities on time. We also remain cautious of further devaluation in the EGP, which could impact margins on residential sales. Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 30

32 Appendix 1: Portfolio details We expect 24k unit handovers in FY 14-18e, 73% of which are pre-sold Further leverage beyond 25% D/E could pressure debt service Property portfolio (26% of EV) Sales portfolio: TMG is due to deliver c.17k contracted units in the coming 4 years through 3 main flagship developments, Madinty (51k units, 36% pre-sold), Al Rehab (14.5k units, 78% pre-sold) and Al Rabwa (1k units, 95% pre-sold), in addition to an expected 7k units from new sales over the same period. Its combined sales backlog (contracted and new) aggregates to EGP 28.7bn, by our estimates, of which we expect 38% to be recognised in FY 15-16e upon the delivery of units in Madinty and Al Rehab. TMG sells its residential product at an average price of EGP 6k-8k/sqm for apartments and EGP 11k-14k/sqm for villas, and aims to raise its selling prices by 6%/annum going forward. We expect handovers to constitute 85%+ of total revenues in FY 14-18e and to continue to drive future sales (beyond FY 17e) via 21k unsold units, which TMG can sell at strengthening prices. Exhibit 7: 60% of total handovers are Made in Madinty Exhibit 8: 19k units to be released in the coming 4 years FY 14-17e handovers 12,000 10,884 10,262 10,000 8,000 7,967 7,428 6,000 4,000 2, Madinaty Al Rehab Al Rabwa Units Value (EGP mn) Unit handovers 6,000 5,660 5,271 5,000 4,299 4,000 3,341 3,000 2,000 1,000 FY 14e FY 15e FY 16e FY 17e 76% of TMG s EV rests in Madinty: Over 60% of the currently contracted sales at TMG are signed in Madinty (51k units, 35% sold, completion FY 17e), which along with developed land held for sale (6mn sqm) constitute 54% of our total EV estimate, while the remaining 4 phases of the project (c.64k planned units) are assumed to remain undeveloped in our base case scenario, and account for 22% of our EV estimate as part of our residual land valuation. Exhibit 9: c.75% of our total EV estimate emanates from Madinty SOTP valuation Fair value (EGP mn) Per share (EGP) % of EV Madinaty 25, % Al Rehab 4, % Al Rabwa % Other Properties % Marsa Alam % Hospitality and other 2, % Enterprise value 33, % Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 31

33 Rental portfolio (7% of EV) Income from service revenues to grow 2x in 3 years: TMG administers community services across its portfolio of retail, commercial and leisure facilities. Service revenues have grown at a 3-yr CAGR (FY 10-13A) of 35%, and are further projected to grow at 3-yr CAGR (FY 14-17e) of 20%, on growth in retail capacity and the expansion of school and healthcare facilities, driving higher footfall activity in TMG s complexes. Hotel assets, on the contrary, are struggling: TMG operates 875 keys in 4 operating hotels and plans to add 1.7k keys via 5 new facilities by FY 18e. We solely account for the addition of 96 keys (Four Seasons Sharm Extension, completion FY 17e) in our base case model, given the continued weakness in the tourism sector in Egypt. Weak tourist numbers have resulted in delays in the launch of construction works within the sector, in general. The hotel industry was significantly impacted in FY 11A by the political unrest in the region, and within Egypt (-43% y/y in revenues), but partially recovered in FY 12A (+20% y/y) on a slight improvement in tourist numbers. Occupancy rates consequently rose from 35% in FY 11A to 43% in FY 12A). We model for further recovery in occupancy rates in FY 14e (to an average of 46% vs. 40% in FY 13A), and expect continued gradual improvement in FY 15-17e (+3%/annum). We however hold our hotel ADR assumptions fixed (at an average EGP 1,420/night) in the next 2 years. Total recurring income constitutes c.15% of FY 14-15e revenues and account for 7% of our overall EV estimate. Exhibit 10: Hotels/hospitality income drives c.3% of our EV estimate of TMG Hotel Keys Status Completion Occupancy % FY 14e ADR (EGP) Revenues (EGP mn) % of EV Scenario applied Four Seasons Sharm 255 Operational 50% 1, % Base case Nile Plaza 366 Operational 40% 1, % Base case San Stefano 118 Operational 60% 1, % Base case Kepminski Nile 191 Operational 40% % Base case Four Seasons Sharm Extension 96 WIP FY 17e % 0.37% Base case Four Seasons Luxor 201 Planned FY 17e % % Bull case Marsa Alam 1,000 Planned FY 18e % % Bull case TMG Building Hotel 200 Planned FY 19e % % Bull case Four Seasons Madinty 240 Planned FY 19e % % Bull case Total 2,667 21% % Exhibit 11: Recurring income evenly split in FY 14e Recurring income (EGP mn) 1, FY 12A FY 13A FY 14e FY 15e Hospitality income Services revenues Recurring income growth (RHS) 35% 30% 25% 20% 15% 10% 5% % Exhibit 12: Property sales are expected to drive P&L in the coming 5 years (85%+ of total revenues) Revenue breakdown by segment 100% 4.6% 6.4% 7.6% 8.1% 95% 90% 85% 80% 75% 9.1% 7.7% 86.3% 85.9% 7.8% 7.0% 84.5% 84.9% FY 12A FY 13A FY 14e FY 15e Property sales Hotel income Other income Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 32

34 Land portfolio (67% of EV) Available land remains largely undeveloped. We estimate 10% of which is at risk of impairment due to ongoing disputes with the Tousirsm Development Authority: TMG owns and manages 47mn sqm of land, of which c.50% is utilised and on which 9.6mn sqm of BUA is sold (+60k units). Madinty (33.6mn sqm) is TMG s largest development, planned to host 600k residents in +115k residential units within 6 gated communities. Within Madinty, only phases 1 and 2 are currently under development. Remaining undeveloped land in Madinaty (16.8mn sqm) constitutes 62% of TMG s total residual land assets, followed by (i) developed land held for sale in Madinty 1+2 (6mn sqm), (ii) Marsa Alam Resort (750 hospitality keys, 2.25k residential units, 3.2mn sqm) and (iii) remaining land in Al Rehab (1 mn sqm). The government s share of Madinty land likely to remain at 7% of BUA: TMG previously acquired land at Madinty (33.6mn sqm) from the government (NUCA) through a direct order rather than a formal auction/bidding process. As a result, TMG has agreed to deliver 7% of the total BUA within each phase (via finished units/apartments) upon completion, back to the government. The total value of delivered BUA (7% of total, 2.7mn sqm) should not equate to less than EGP 9.9bn (as per the November 2010 agreement with NUCA), from the 6 phases of Madinty. TMG has so far delivered a total of EGP 6.5bn in units (1mn sqm in total) to the government, from constructed land in phase 1 of Madinty. This leaves 1.7mn sqm of BUA (via complete units valued at EGP 11bn) to be delivered through future handovers in phases 3-6. We value land at an implied c.70% discount to market: We value residual land at a blended EGP 820/sqm, accounting for (i) a 10% discount on Madinty (EGP 600/sqm), (ii) an 80% discount on regional services land in Madinty 1+2 and Al Rehab, priced at EGP 10k/sqm in the market, and (iii) a full discount assigned to Marsa Alam land (3.2mn sqm), given unresolved disputes with the government. This exercise combines into an overall 73% pre-tax discount to mark-to-market value, which results in a fair value estimate of land of EGP 22.3bn (67% of our total EV estimate). Exhibit 13: We value residual land in TMG at EGP 22.3bn, constituting 67% of our EV estimate Land bank Area sqmmarket price (EGP/sqm) Market value (EGP mn) (Discount)/premium %Fair value (EGP mn) Madinaty 3 6,986, ,541 (10%) 4,087 Madinaty 4 5,125, ,332 (10%) 2,999 Madinaty 5 2,525, ,641 (10%) 1,477 Madinaty 6 2,152, ,399 (10%) 1,259 Al Rehab 924,225 1,400 1,294 (10%) 1,165 Marsa Alam 3,256,285 1,400 4,559 (100%) Land for Mega development 6,200,000 15,000 93,000 (80%) 18,600 Total 27,169, ,766 (73%) 29,586 Discount on land (73%) Tax rate 25% Fair value of land- pre dispute resolution (EGP mn) 22,326 % of EV 67% Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 33

35 Exhibit 14: We value raw land in Madinaty at EGP 3.59/share (22% of EV) SOTP valuation Fair value (EGP mn) Per share (EGP) % of EV Madinaty Phase , % Madinaty Phase 3 3, % Madinaty Phase 4 2, % Madinaty Phase 5 1, % Madinaty Phase % Al Rehab 4, % Al Rabwa % Other Properties % Marsa Alam % Hospitality and other 2, % Enterprise value 33, % P&L We see margins strengthening in the next 2 years: Gross margins on villa sales hover between 35%-40% while apartment sales yield a gross margin of 22%, on average. Villas are expected to constitute c.15% and 10% of FY 14e and FY 15e handovers, and to drive a significant margin improvement in FY 14e and FY 15e as compared to FY 13A ( bps). Margins in FY 14e are also supported by the sale of a land plot in Saudi Arabia (SAR 500mn, 33% NPM). TMG s hotel assets, on the other hand, have been operating at a gross margin of 26% in FY 12A and 20% in FY 13A. We expect 20-25% in hotel GPM in FY 14-15e, as margins are capped by low occupancy rates in the segment (45%), as a result of an overall weakening in the tourism sector in Egypt. We expect gross margins on service revenues to gradually rise in the coming years on an expanding resident population in TMG s complexes, and to reach 30% in FY 16e (15% in FY 13A). Blended gross margins are likely to arrive at 31.4% and 29.1% in FY 14e and FY 15e, whereas net margins are projected to come in at 15.7% and 13.4% over the period. Exhibit 15: Property sales dominate the margin mix. Service revenues hold strongest margin growth potential Exhibit 16: Blended gross margins across segments to gradually converge to 30% in 3 years 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% % 31.4% 29.1% 26.5% 26.4% 22.3% 20.3% 16.5% 16.4% 15.8% 11.8% 12.0% 13.4% FY 12A FY 13A FY 14e FY 15e Gross margin EBIT margin Net margin Gross margin by business type 35.0% 29.8% 30.0% 27.8% 25.0% 25.0% 25.0% 20.3% 20.0% 15.4% 15.0% 10.0% 5.0% % FY 13A FY 15e FY 13A FY 15e FY 13A FY 15e Property sales Hospitality Services revenues Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 34

36 Balance sheet We expect TMG to internally fund its development CAPEX via customer advances and installments on sold property: We calculate c.egp 14bn in remaining CAPEX on existing (but incomplete) flagship developments (Madinty 1+2, Al Rehab 1+2 and Al Rabwa) over the coming 4 years, which in our view will be largely funded through internal cash flow generation from property/land sales and rentals. TMG is also due to put an additional EGP 1.5bn towards expanding its hotel keys (Sharm El Sheikh Four Seasons, 96 keys) and ongoing maintenance. Leverage stands at 14% D/E in FY 13A, with total outstanding borrowings of c.egp 3.75bn. We believe that TMG will require minor additional capital (c.egp 1bn in debt) to fully cover its CAPEX commitments in the coming 4 years, after which we expect the business to repay all of its dues by FY 17e, as cash accumulates through collections on properties handed over. Exhibit 17: Cash flows Exhibit 18: Balance sheet levered at 14% D/E EGP mn Total borrowings (EGP mn) 8,000 6,000 4,000 2,000 (2,000) (4,000) (6,000) FY 14e FY 15e FY 16e FY 16e 50.0% 40.0% 30.0% 20.0% 10.0% % (10.0%) (20.0%) 6,000 5,000 4,000 3,000 2,000 1,000 FY 12A FY 13A FY 14e FY 15e FY 16e 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% % CFO CAPEX CFO/sales (RHS) Total borrowings D/E (RHS) Talaat Moustafa Group Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 35

37 I n i t i a t i o n R e p o r t S e p t e m b e r Mohammad Kamal mohammad.kamal@arqaamcapital.com Mohamad Haidar, CFA Arqaam Capital Research Offshore s.a.l Egypt Real Estate Six of October: Hugely cash generative High-margin, cash generative developer (45% FCF/sales), and owner of significant brand equity (project pipeline 95% presold). Land is dispute-free and on course to unbolt value via new developments (42% of EV). Initiate with Buy and EGP 57 FVE SODIC is a leading high-end developer in Egypt, and has built communities that house 400k+ residents in the Six of October and New Cairo districts. Strong EPS visibility in FY 14-17e: SODIC s development pipeline is 95% sold, while recurring income is due for 55% CAGR in the next 3 years. SODIC sits on an 11.3mn sqm land bank (55% utilised) and is set to deliver c.3.6k units in the coming 5 years against a total sales backlog of EGP 8bn. In parallel with unit handovers, SODIC is due to launch a recurring income portfolio via the release of c.110k sqm of retail and commercial space and a 56-key hotel in FY 15-17e. The market in our view has overlooked the potential development upside behind raw land assets, and has not fully grasped the potential for EPS growth through the utilisation of SODIC s rental assets at current market multiples. We initiate with Buy and EGP 57 FVE, suggesting >20% in potential upside. Raw land holds development value not reflected in share price: we believe SODIC can monetize the 3.9mn sqm of raw land at its disposal, and another 1.26mn sqm of prime land recently acquired in New Cairo, through the development of new mixed-use projects. SODIC holds an aggregate land bank of 11.3mn sqm, of which 6.1mn sqm is utilised, while 3.6mn sqm stands raw across Six of October (1.87mn sqm), Eastown (0.5mn sqm), and New Cairo (1.26mn sqm). We value residual land at a blended pre-tax market prices of EGP 1.2k/sqm, which results in a total after-tax fair value of EGP 2.1bn (42% of total EV estimate), net of all land-related liabilities. Margins due to improve on strong rental income growth: The Strip (64% GPM) and WTR (41% GPM) enjoy the highest margins within SODIC s sales portfolio, and can potentially dominate the EPS mix in FY 14-16e. We see rental income contribution in FY 15e+, which we model at 70% GPM. We expect blended gross margins to arrive at c.40%, and net margins to settle at >12% in FY 15e onwards. Potential revaluation of land assets brings our target p/nav to 0.85x from current 0.70x: We value SODIC at EGP 57/share using SOTP. We apply a 5-yr DCF model on both the sales portfolio (14.6% WACC) and recurring income portfolio (9.5% cap rate), while we value residual land at market prices. Our price target implies 34.9x/35.8x FY 14/15e EPS and 1.73x/1.65x FY 14/15e BV, at a 20% premium to local peers. Risk: Macroeconomic instability, FX losses and concentration risk. BUY Real Estate / Egypt EGP 57 Bloomberg code OCDI EY Market index EGX Price target (local) 57 Upside (%) 21.3 Market data 16/09/2014 Last closing price Week range Market cap (EGPmn) 4,279 Market cap (USDmn) 598 Average daily traded value (EGPmn) 26.5 Average daily traded value (USDmn) 3.7 Year-end (local mn) e 2015e 2016e Revenues 1, , , ,522.3 EBITDA (120.2) EPS (4.9) P/E (target price) (11.7) Net debt (34.6) (24.0) (395.2) (460.6) BVPS P/B (target price) EV/EBITDA (target price) (42.5) Div. yield (%) FCF margin (%) (4.3) (133.3) Net debt/ebitda (x) 0.3 (0.1) (1.3) (0.8) Net debt/capital (%) (1.6) (0.7) (10.0) (10.4) Interest cover (x) (0.5) RoAA (%) (6.1) RoAE (%) (22.6) RoIC (%) (23.4) Price Performance OCDI EY EGX Jan-14 Apr-14 Jul-14 Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice.

38 Abacus Arqaam Capital Fundamental Data Profitability 50% 0% e 2015e 2016e 2017e -50% EBITDA Margin Net Margin Six of October Financial summary Reported EPS 2.84 (4.88) Diluted EPS 2.84 (4.88) DPS BVPS Weighted average shares Average market cap 1, , , , , , Growth 100% 50% 0% -50% e 2015e 2016e 2017e Revenues Assets Valuation metrics P/E (x) (current price) 16.8 (9.8) P/E (x) (target price) 20.2 (11.7) P/BV (x) (target price) EV/EBITDA (x) 16.3 (42.5) EV/FCF (x) (25.6) (89.3) (3.1) EV/Invested capital (x) Dividend yield (%) Gearing e 2015e 2016e 2017e 0% -5% -10% Growth (%) Revenues (7.1) (6.9) (19.7) EBITDA (288.7) (138.3) (331.9) (13.4) EBIT (252.0) (149.4) (285.6) (15.1) % Net income (233.3) (271.8) (133.6) (2.5) (5.4) Net Debt/Capital Net Debt/EBITDA Valuation e 2015e 2016e 2017e P/E P/E Sector Margins (%) EBITDA 22.0 (9.1) EBIT 20.2 (10.7) Net 18.1 (33.4) Returns (%) RoAA 3.9 (6.1) RoAE 12.8 (22.6) RoIC 10.9 (23.4) FCF margin (14.0) (4.3) (133.3) Gearing (%) Net debt/capital 4.5 (1.6) (0.7) (10.0) (10.4) (9.7) Net debt/equity 5.4 (1.9) (0.8) (12.8) (13.4) (11.8) Interest cover (x) 4.8 (0.5) Net debt/ebitda (x) (0.1) (1.3) (0.8) (0.9) Six of October Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 37

39 Abacus Company profile Arqaam Capital Fundamental Data SODIC offers community services to residents in the Six of October and New Cairo districts through 9 major developments and complexes. The company primarily engages in developing and selling residential units in addition to managing an investment properties portfolio (retail, commercial, hospitality and leisure services) across its projects. Two years after its foundation, SODIC launched its first project- Beverly Hills (fully sold and operational) in 1997, and later added to its development portfolio through a series of product launches, after completing a management restructuring process and raising an EGP 1.1bn capital injection in The business introduced its largest project, Allegria (1.25k units), in 2006, and recently released several phases of Eastown Residences (6 phases, fully sold) in H1 14A. Ownership and management Shareholders Public 44% Olayan Group 12% Ripplew ood 9% EFG Hermes 4% Abanumay Family 13% Other 17% Source: Company Data Six of October Income statement (EGP mn) Sales revenue 1, , , , , ,024.3 Gross profit , SG&A (209.4) (497.5) (203.9) (240.4) (454.0) (354.2) EBITDA (120.2) Depreciation & Amortisation EBIT (142.3) Net interest income(expense) (60.0) (310.3) (68.9) (100.3) (129.7) (125.5) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax (417.7) Income tax expense (10.6) (24.5) (78.2) (85.9) (166.6) (118.0) Minorities Other post-tax income/(expense) Net profit (442.3) Arqaam adjustments (including dilution) Arqaam Net profit (442.3) Balance sheet (EGP mn) Cash and equivalents , , ,251.5 Receivables 1, , , , , Tangible fixed assets Development/Investment properties 4, , , , , ,144.5 Other assets including goodwill Total assets 6, , , , , ,972.7 Payables , ,022.9 Interest bearing debt Other liabilities 3, , , , , Total liabilities 4, , , , , ,146.0 Shareholders equity 2, , , , , ,775.0 Minorities Total liabilities & shareholders equity 6, , , , , ,972.7 Board of Directors Dr. Hani Sarieldin Mr Ahmed Badraw i Eng Safw an Thabet Mr Shafik El Baghdady Dr Walid Abanumay Mr Sabah Barakat Mr Omar El Hamaw y Eng Shehab El Orabi Mr Basil Ramzy Source: Company Data Chairman Managing Director Director Director Director Director Director Director Director Cash flow (EGP mn) Cashflow from operations (182.8) (47.6) (1,634.2) 1, , Net capex (16.7) (9.6) (8.9) (9.7) (12.6) (20.2) Free cash flow (199.5) (57.2) (1,643.1) 1, , Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings (180.0) Other investing/financing cash flows Net cash flow (181.5) (862.7) (195.6) Change in working capital (549.3) (66.7) (1,834.8) 1, Mohammad Kamal mohammad.kamal@arqaamcapital.com Mohamad Haidar, CFA Arqaam Capital Research Offshore s.a.l Six of October Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 38

40 Raw land assets hold substantial development value not reflected in share price: initiating with Buy and EGP 57 FVE Land assets acquired free of cost and continually replenished, project pipeline is 95% pre-sold. Cash generation is huge as a result (45%+ FCF margin) Revaluation of Idle land assets suggests NAV upside (target p/nav at 0.85x vs. 0.70x CMP/NAV). Initiate with Buy and EGP 57 FVE SODIC is a leading real estate developer in Egypt, as it offers community services to 400k+ residents in the Six of October and New Cairo districts through 9 major developments and complexes. The company primarily engages in developing and selling residential units, in addition to managing an investment properties portfolio (retail, commercial, hospitality and leisure) across its projects. The company introduced its largest project Allegria (1.25k units) in FY 06 and recently released several phases of its newest product, Eastown Residences (EGP 1.7bn launched, fully sold), in H1 14A. Strong EPS visibility in FY 14-17e: SODIC sits on 11.3mn sqm of land, of which 55% is utilized, and is set to deliver c.3.6k units in the coming 5 years against a total sales backlog of EGP 8bn. In parallel with residential handovers, SODIC is due to launch a recurring income portfolio via the release of c.125k sqm of retail and commercial spaces, and a 56-key hotel by FY 15-16e. We expect its property portfolio to deliver strong sales growth in FY 14-15e, on the delivery of 1k units in Allegria, Kattameya Plaza, Forty West and The Polygon, and another c.2.6k units in Westown and Eastown Residences in FY 16-18e. In parallel, recurring income holds potential to grow at a 3-yr CAGR of 55% in FY 14-16e, as retail and commercial units in The Polygon, The Strip, Forty West and WT Hub are leased out. We believe SODIC can further monetize the 3.9mn sqm of raw land at its disposal, and another 1.26mn sqm of prime land recently acquired in New Cairo, through the development of new mixed-use projects. With a project pipeline that is 95% pre-sold, we believe the market is not pricing in the impact of upcoming unit handovers on EPS and growth, and is not adequately rewarding SODIC for its huge cash generation at current multiples. We initiate with a Buy rating and EGP 57 FVE. Valuable land assets compel us to assign a target p/nav of 0.85x, in-line with broader MENA: We value SODIC at EGP 57/share using an SOTP model. We apply a 5-yr DCF treatment to both the sales (14.6% WACC) and recurring income portfolios (9.5% cap rate). We mark residual land up to 90% of prevailing average prices. Our fair value estimate implies 34.9x/35.8x FY 14/15e EPS and 1.73x/1.65x FY 14/15e BV, a 20% premium to local peers. The premium in our view is warranted due to superior near term revenue and EPS growth (22% and 12% 3-yr CAGR) over peers (13% and 11% for TMG, though TMG holds substantial medium term growth potential in FY 16e+). The market in our view is overlooking the impact of the potential development of raw land on EPS and valuation, and is not fully reflecting the upside risk that could emanate from the utilisation of SODIC s rental assets in current multiples. We see a fair target P/NAV of 0.85x, in-line with leading MENA developers under coverage as a result, and this suggests 20%+ in potential upside from current market price. We initiate with a Buy rating and EGP 57 FVE. Six of October Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 39

41 Valuation: Upside risk to NAV largely rests in 5.2mn sqm of available land. Recurring income assets add 23% to FVE. We initiate with a Buy rating and EGP 57 FVE We value SODIC at EGP 57/share using an SOTP model. We apply a 5-yr DCF treatment to both the sales (14.6% WACC) and recurring income portfolios (9.5% cap rate). We value residual land assets by marking them up to 90% of the prevailing market price today (pre-tax). Our FVE implies 34.9x/35.8x FY 14/15e EPS and 1.73x/1.65x FY 14/15e BV, a 20% premium to local peers. We believe the market has not priced in SODIC s recurring income portfolio, and is not fully factoring in its property and land assets at current multiples. Exhibit 1: SOTP summary SOTP valuation % of EV Per share (EGP) Development properties 34.8% 19.6 Investment properties 24.4% 13.7 Fair value of residual bank 40.8% 23.0 Cash & Equivalents 15.5% 8.7 Gross debt (13.8%) (7.8) Fair value per share 57 Equity value (EGP mn) 5,190 EV (EGP mn) 5,107 Implied multiples FY 14e FY 15e FY 16e EV/EBITDA P/E P/B Our DCF-based SOTP valuation is composed of: NPV- Development properties: We value the development portfolio at EGP 19.6/share on a 5-yr DCF basis using a WACC of 14.6%. Fair value includes total current sales backlog (EGP 5.6bn) and remaining inventory of unsold units (EGP 2.4bn). NPV- Investment properties: Our investment properties portfolio valuation captures free cash flows from recurring income in the next 5 years. We value the segment at EGP 13.7/share, using a capitalisaiton rate of 9.5% (13.5% WACC, 4.0% TGR). This component constitutes 24% of our EV estimate. NPV- residual land: We value residual land at EGP 23/share using current market prices (EGP 1,900/sqm for Eastown, EGP 1,500/sqm for Westown, EGP 700/sqm for Al Yosr Land and EGP 2,896/sqm for New Cairo Land), and apply a 10% discount to market values. Total raw land currently stands at 5.2mn sqm. Gross debt: Total borrowings in FY 13A stood at EGP 419mn. Six of October Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 40

42 NPV- Development portfolio NPV- Recurring income NPV- Land Cash Debt Fair value per share September Exhibit 2: At 0.70x p/nav, we believe current market valuation overlooks significant NAV upside EGP mn except where stated BV, FY 13AAC valuation Methodology Property assets 2,230 3, k undelivered units at EGP 2mn/unit, 40% GPM Land assets 650 2,478 Market-to-market, after-tax EGP 1,231/sqm blended Rental assets 85 1,246 DCF, cap rate 10% PPE At BV Receivables 3,604 3,604 At BV Cash At BV Other assets At BV Total assets 7,586 11,713 Debt At BV Payables and advances 4,484 4,484 At BV Other liabilities At BV Total liabilites 5,596 5,596 Equity (implied) 1,851 6,117 NOSH BVPS/NAVPS (AED) SoTP-based Fair Value Estimates (EGP) 57 Discount to FY 14e NAV (15.1%) CMP (EGP) 47 Discount to target NAV (30.0%) Exhibit 3: Valuation components: Our EV estimate is driven by land (41%), developments (35%) and rental assets (24%) Valuation waterfall (USD) (7.8) Six of October Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 41

43 Exhibit 4: SODIC Valuation summary DCF summary EGP mn unless otherwise stated FY 14e FY 15e FY 16e FY 17e FY 18e EBIT (1-τ) Depreciation & Amortization EBITDA Working Capital Changes (1,767) 1, ,098 Operating Cash Flow (1,579) 1,681 1, ,516 Purchase of PPE (9) (10) (13) (20) (32) Free Cash Flow to Firm (1,588) 1,672 1, ,484 Discount Factor PV of Visible FCFF (1,445) 1, Terminal Value 2,175 Equity Valuation WACC parameters PV of Visible FCFF 1,868 Rf 12.0% PV of Terminal Value 1,154 EMRP 5.0% Fair value of land 2,084 Adjusted Beta 1.20 Enterprise Value 5,107 Cost of Equity 18.0% Cash & Cash Equivalents 789 Marginal tax rate 25.0% Less: Net (Debt) Funds (706) Cost of Debt 11.3% D/C (market) 50.0% Equity Value 5,190 WACC 14.6% NOSH 91 WACC IP 13.5% Equity Value per Share 57 Perpetual grow th 4.0% Implied multiples EV/EBITDA P/E P/B Exhibit 5: DCF sensitivity to property sales WACC DCF sensitivity- Cost components Rf Beta % % % % % Exhibit 6: DCF sensitivity to recurring income cap rate DCF sensitivity- recurring income WACC WACC TGR % 3.5% 4.0% 4.5% 5.0% 15.5% % % % % The pace of macroeconomic recovery and currency movements remain key downside risks. Delays to macroeconomic recovery could result in a weakened home ownership sentiment and sales activity. Further devaluation/depreciation of the EGP could also potentially impact margins on sales (though exposure to FX (Euro, USD) is minor). Six of October Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 42

44 Exhibit 7: Appendix 1: Portfolio details We see 24% 3-yr revenue CAGR (FY 14-16e) driven by property handovers (2.5k units) EGP 1.25bn in new debt and EGP 1bn in new equity, earmarked for land acquisitions. D/E in FY 14e grows to 30.7% (vs. 25% in FY 13A) Property portfolio Delivery pipeline of 4k units via 7 projects in the coming 5 years against EGP 8bn in aggregate sales value: We see 1k units handed over in FY 14-15e on the full completion of Allegria, Forty West, Polygon, The Strip and Kattameya Plaza, while 2.3k units are due to be handed over in FY 16-17e via Westown and Eastown Residences. All in, we model for EGP 2.45bn in sales recognitions in FY 14-15e (EGP 1.2bn FY 14e and EGP 1.25bn in FY 15e), and EGP 2.42bn in FY 16e. SODIC sells its units at an average price of EGP 2.4mn/unit, implying a market price of EGP 1.14k/sqft (Min: EGP 556/sqft, Max: EGP 1,800/sqft). The variability in market prices is likely to have minimal impact on our pricing assumptions going forward, given that 90%+ of SODIC s sales pipeline is already pre-sold. We however model for an average 10% nominal increase in prices of unsold units in FY 14e and FY 15e, to account for medium term inflation (11.3%/11.5% in FY 14/15e). SODIC s total property portfolio constitutes 35% of our EV estimate. Portfolio summary: 90%+ of total inventory is sold, 30% delivered Deliveries (units) Projects Total units Sales/Lease ratio % sold % delivered Project value Gross margin % (EGP mn) FY 14e FY 15e FY 16e FY 17e Allegria 1, % 94% 85% 4,379 40% 194 Westown* 1, % 90% % 3,081 41% Eastown* 1, % 100% % 3,645 38% Kattameya Plaza % 100% 67% % 152 Polygon % 71% 33% % Forty West % 66% 23% % The Strip 69 82% 80% 32% % Total 5,572 93% 27% 13, , *Including AC estimate of new product launches Exhibit 8: Demand for SODIC s products is strong: Project pipeline is 90%+ pre-sold Exhibit 9: Deliveries/handovers equally spread in FY 14-15e, peak in FY 16e Total launched units 1,600 1,400 1,200 1, % 90% 94% 100% Westown Allegria Eastown Kattameya Plaza Sold Unsold 55% 57% 50% Polygon Forty West The Strip Total unit deliveries 1,600 1,400 1,200 1, , FY 14e FY 15e FY 16e FY 17e Six of October Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 43

45 Recurring income assets (highly profitable at 70% GPM) add c.egp 140mn in top-line by FY 17e, driving 24% of our EV estimate Land is acquired free of charge on books, carries substantial revaluation upside from potential new developments (+90%) Rental portfolio We expect recurring income to grow at a 3-yr CAGR of 55% on the addition of c.125k sqm of commercial and retail space coming on-stream in the next 3 years via 4 projects (20k sqm commercial in The Polygon, 12k sqm mix-use in Forty West, 8k sqm retail in The Strip and 15k sqm retail in WT Hub, 70k sqm Eastown retail). The projects are slated for completion by the end of FY 14e, and we model for them to be operational in FY 15e at an average occupancy rate of 50%+ in FY 15e, 70%+ in FY 15e and 80%+ in FY 16e. SODIC is further planning the introduction of a 56-key hotel (50%+ of construction is complete) in FY 16e, which we expect to commence operations in FY 17e at a 40% occupancy rate, out of conservatism. We see rental income touching EGP 40mn+ in FY 15e (currently nil), supported by a further EGP 39mn via community services management in Beverly Hills, Allegria and other communities, which we expect to break even in FY 16e (currently loss making), on growth in service fees and an expanding resident population. Total recurring income can potentially constitute 6% of total revenues in FY 15e, and drives c.20% of our EV estimate, on the full utilization of leasable units in our terminal year. Exhibit 10: Rental portfolio drives 6% of total revenues in FY 15e, 24% of our EV estimate Project GLA (sqm) Type Completion FY 16e revenues (EGP mn) % of total recurring % of total revenues % of EV The Polygon 20,028 Mixed use FY 14e 21 35% 0.8% 6.8% Forty West 12,205 Mixed use FY 14e 11 19% 0.5% 3.7% The Strip 8,125 Retail FY 14e 8 14% 0.3% 2.5% Westown Retail Hub 15,576 Retail FY 14e 19 31% 0.7% 6.0% Eastown retail 70,544 Retail FY 17e Forty West Hotel 56 keys Hospitality FY 16e % % 5.4% Total 126, % 2.3% 24.4% Exhibit 11: Recurring income portfolio turns fully operational in FY 17e: +56k sqm in FY 14e end, +70k sqm in FY 17e Total GLA (sqm) FY 14e FY 15e FY 16e FY 17e Exhibit 12: Property sales to remain the largest contributor to revenues: 95%+ of total Revenue breakdown by segment 100% 99% 98% 97% 96% 95% 94% 93% 92% 91% 90% 2% 2% 98% 97% 3% 3% 2% 97% 3% 94% 2% 96% FY 12A FY 13A FY 14e FY 15e FY 16e Property sales Rental income Other income Six of October Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 44

46 Land Land sits entirely free on books: SODIC holds an aggregate land bank of 11.3mn sqm, of which 6.1mn sqm is utilised via 9 standalone developments, while 5.2mn sqm stands raw across Six of October (1.87mn sqm), Eastown (0.5mn sqm, net of new assumed launches), Syria (1.56mn sqm), and New Cairo (1.26mn sqm). We value residual land at market prices of EGP 1,900/sqm for Eastown, EGP 1,500/sqm for Westown and EGP 700/sqm for Al Yosr Land (1.26mn sqm in Six of October). We value the newly-acquired plot in New Cairo at EGP 2,896/sqm, which results in a total after-tax fair value of EGP 2.1bn (42% of total EV estimate), net of all required cash payments on acquired/settled land (at NPV). Our fair value estimate of land excludes plots in Syria, as we currently find it unlikely for any development/sales scenario to take place given the ongoing and protracted political turmoil in the country. Exhibit 13: Land assets capture 42% of our EV estimate Land plot Area (mn sqm) Price (EGP/sqm) Market value (EGP mn) Al Yosr Lands Westown , Eastown , New Cairo land ,896 3,649 Syria Total ,109 Discount/premium (11%) Tax rate 25% Less: PV of cash settlements/acquisition (2,663) Fair value (EGP mn) 2,084 SODIC fully addressed its land disputes via cash settlements: in Q4 13A, SODIC reached an agreement with NUCA on the settlement of disputes over land assets in Eastown (0.86mn sqm), requiring SODIC to make a total cash payment of EGP 900mn to NUCA, payable over a period of 7 years (semi-annualy), EGP 100mn of which was paid as a down payment. Furthermore in Q1 14A, SODIC finalised its dispute with Solidere International regarding land assets in Westown (250k sqm), and agreed to pay EGP 247mn in a cash settlement, which it has fully settled and paid as of August 2014, capitalising the cost of land on its books. SODIC secured an EGP 950mn loan with AAIB (EGP 255mn withdrawn), and is planning an EGP 1bn capital raise this year, to help fund maturing land liabilities in the coming 3 years in addition to development costs on the new 301 acres of land. SODIC has acquired new land through auction: At EGP 1,915/sqm, SODIC purchased a new land plot in New Cairo (1.26mn sqm) at a total cost of EGP 2.4bn, having submitted the highest bid among competing bidders. As per management guidance, the land asset could potentially result in total sales proceeds of EGP 10bn+ (at 35% GPM and 21% NPM) upon development. We model for plots to be sold over the course of the next 5 years, starting in FY 15e. Assuming a handover plan of 3 years in FY 19-21e, we value the New Cairo land assets at EGP 2,896/sqm (+51% to BV). Six of October Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 45

47 Margins We see maergins widening on strong rental income contribution: The Strip (64% GPM) and WTR (41% GPM) enjoy the highest margins within SODIC s sales portfolio, and are expected to dominate the EPS mix in FY 14-16e. Going forward, EPS is likely to see rental income contribution in FY 15e onwards, which we model at 70% GPM, as per management guidance. We expect blended gross margins to arrive at 38% and 40% and net margins to settle at 12% and 11% in FY 14e and FY 15e, respectively. Exhibit 14: Margins likely to remain flat in the coming 3 years Margins 50.0% 40.0% 34.9% 38.0% 39.7% 40.1% 26.8% 30.0% 20.2% 21.4% 21.7% 22.1% 20.0% 18.1% 12.1% 10.8% 13.9% 10.0% % (10.0%) FY 12A FY 13A FY 14e FY 15e FY 16e (20.0%) (10.7%) (30.0%) (40.0%) (33.8%) Gross margin EBIT margin Net margin Exhibit 15: Margins on sales range between 25% to 40% GPM Gross margin by product type 45% 41% 40% 40% 38% 35% 34% 31% 30% 27% 25% 20% 15% 10% 5% % Allegria Westown Eastown Polygon KP Forty West Balance sheet Cash inflows in FY 14-15e sufficient to cover 3 years of CAPEX. SODIC expects EGP 3.5bn of cash inflows in FY 14-15e from receivables due on pre-sold units, and awaits a further EGP 1.4bn of collections in FY 16-17e. SODIC is due to deploy EGP 3.5bn of CAPEX on its incomplete developments and land acquisitions, which it is planning to fund through (i) cash collections, (ii) new debt facilities (EGP 1.25bn), in addition to (iii) an EGP 1bn capital raise, due to be closed in Q4 14e. Exhibit 16: Blended cash generation/outflow Cash inflows and outflows 2,000 1,500 1, (500) FY 13A FY 14e FY 15e FY 16e (1,000) (1,500) (2,000) (2,500) Exhibit 17: Leverage: D/E ~30% in FY 15e Total borrowings (EGP mn) 1, FY 11A FY 12A FY 13A FY 14e FY 15e 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% % WC CAPEX Total borrowings D/E (RHS) Six of October Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 46

48 I n i t i a t i o n R e p o r t S e p t e m b e r Mohammad Kamal mohammad.kamal@arqaamcapital.com Heba Khalil Arqaam Capital Research Offshore s.a.l Egypt Real Estate Medinet Nasr Housing: The right product for a price sensitive market MNHD targets an undersupplied middle-income market But current market valuation full at 0.84x tp/nav Potential upside catalysts via launch of KM 45 and Teegan in FY 14-16e. Initiate coverage with Hold and EGP 41 FVE Medinet Nasr Housing Development- MNHD is among the oldest developers in Egypt, focused on the middle-income segment of the market. MNHD developed the majority of the Nasr City district in Cairo (430mn sqft). Since its restructuring in 2006, the business has resumed property sales with the launch of 2 residential projects, Hayy Al Waha and Tag Sultan, both of which are still under development. It further owns c.100mn sqft of undeveloped land, which it may begin monetising through new product, namely KM 45 (59.3mn sqft) in FY 14e, and Teegan (35.5mn sqft) in the next 2-3 years. We believe the business is successfully transitioning back into property development, away from land sales, and is building product that is very well suited for Egypt s underpenetrated mid and low-income home owner markets. We initiate coverage with a Hold rating and EGP 41 FVE, as current market price appears to fully reflect our target P/NAV of 0.84x. Solid sales momentum at high margins. MNHD holds a track record of high-margin sales (revenue 3-yr CAGR 24%, GPM average of 66%), generated largely by lad sales. As of FY 13A, the business resumed property development, and we expect to see gross development margins averaging c.55% in the next 5 years. This should continue to generate massively superior RoEs (~30%), despite some mild dilution due to the long term change in revenue mix. We expect the handover of 2.7k units in Hayy Al Waha and Tag Sultan by FY 18e, at an aggregate sales potential of EGP 1.5bn (50%+ of revenues in FY 14-18e). Market valuation implies strong confidence in sales projections, but leaves little potential upside (but early-stage upside catalysts exist): Current market price fully reflects MNHD s (i) land bank (EGP 33.5/share) at MV, (ii) remaining NPV of Hayy Al Waha and Tag Sultan (c.egp 5.5/share), (iii) contracting business (EGP 2.3/share), and (iv) other assets and net debt (EGP 4.7/share). MNHD currently trades at x FY 14-15e P/E, at 40% premium to peers, which we find rich. Risks: Lack of recurring income assets, customer payment defaults. HOLD Real Estate / Egypt EGP 41 Bloomberg code MNHD EY Market index EGX Price target (local) 41 tp/nav (x) 0.84 Upside (%) -6.5 Market data 16/09/2014 Last closing price Week range Market cap (EGP mn) 6,704 Market cap (USD mn) 938 Average Daily Traded Value (EGP mn) 9.7 Average Daily Traded Value (USD mn) 1.4 Year-end (local mn) e 2015e 2016e Revenues , ,225.7 EBITDA EPS P/E (current price) Net debt (101.6) (255.6) (503.3) (362.9) BVPS P/B (current price) EV/EBITDA (target price) Div. yield (%) FCF margin (%) Net debt/ebitda (x) (0.4) (1.0) (1.2) (0.7) Net debt/capital (%) (16.9) (32.7) (47.0) (25.5) Interest cover (x) (128.8) (32.7) (19.5) (11.3) RoAA (%) RoAE (%) RoIC (%) Price Performance MNHD EY Sep-13 Dec-13 Mar-14 Jun-14 MNHD EY Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. EGX EGX

49 Abacus Arqaam Capital Fundamental Data Profitability 60% 40% 20% 0% e 2015e 2016e 2017e EBITDA Margin Net Margin Medinet Nasr Housing Financial summary Reported EPS Diluted EPS DPS BVPS Weighted average shares Average market cap 1,521 2,455 5,121 5,121 5,121 5,121 Growth 60% 40% 20% 0% -20% e 2015e 2016e 2017e Revenues Assets Valuation metrics P/E (x) (current price) P/E (x) (target price) P/BV (x) (target price) EV/EBITDA (x) EV/FCF (x) (19,282.6) , EV/Invested capital (x) Dividend yield (%) Gearing e 2015e 2016e 2017e 0% -20% -40% Growth (%) Revenues (2.3) EBITDA (6.7) EBIT (6.6) % Net income (1.4) Net Debt/Capital Net Debt/EBITDA Valuation Margins (%) EBITDA EBIT Net e 2015e 2016e 2017e P/E P/E Sector Returns (%) RoAA RoAE RoIC FCF margin Gearing (%) Net debt/capital (15.9) (16.9) (32.7) (47.0) (25.5) (16.6) Net debt/equity (16.6) (17.5) (33.3) (47.6) (25.7) (16.6) Interest cover (x) (820.1) (128.8) (32.7) (19.5) (11.3) (14.3) Net debt/ebitda (x) (0.5) (0.4) (1.0) (1.2) (0.7) (0.6) Medinet Nasr Housing Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 48

50 Abacus Company profile Arqaam Capital Fundamental Data Medinet Nasr Housing Development is one of the oldest property businesses in Egypt, focused on urban development. MNHD developed the majority of the Nasr City district in Cairo (430mn sqft). MNHD mainly caters for the mid-income market and offers budget housing. The company is one of the few suppliers of raw land plots (c. 100mn sqft), free of any legal disputes, in Egypt. MNHD has been engaged in a comprehensive restructuring exercise after Beltone Private Equity acquired 30.88% in the company in Current activity: MNHD has two ongoing projects: Tag Sultan (part of the Teegan deevlopment), which is now in the design phase, and Hayy Al Waha. It also owns 2 contacting subsidiaries, Nasr Civil Works (51% owned) and Nasr Utilities and Installations (98%), which currently operate at a combined backlog of EGP 700mn. 12-month potential catalyst: (i) KM 45 Development (50.4mn sqft BUA) master plan approved by the government in Q2 13A and (ii) Teegan (35.5mn sqft). Ownership and management Medinet Nasr Housing Income statement (EGP mn) Sales revenue , , ,197.1 Gross profit SG&A (56.9) (84.3) (84.2) (105.8) (118.9) (116.8) EBITDA Depreciation & Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense (37.8) (60.2) (86.0) (134.6) (163.6) (125.4) Minorities (6.3) (10.9) (14.4) (22.5) (27.3) (26.9) Other post-tax income/(expense) Net profit Arqaam adjustments (including dilution) Arqaam Net profit Balance sheet (EGP mn) Cash and equivalents Receivables , , ,758.5 Development work in progress Investment properties Other assets including goodwill Total assets 1, , , , , ,611.7 Payables Interest bearing debt Other liabilities , , , Total liabilities , , , , Shareholders equity , , ,726.8 Minorities Total liabilities & shareholders equity 1, , , , , ,611.7 Cash flow (EGP mn) Cashflow from operations Net capex (7.7) (5.4) (5.6) (7.1) (7.5) (7.5) Free cash flow (0.3) Equity raised/(bought back) Dividends paid (10.3) (13.4) (34.9) Net inc/(dec) in borrowings (3.0) (3.1) (3.1) (3.1) Other investing/financing cash flows Net cash flow (143.5) (78.5) Change in working capital (65.9) (108.4) (274.6) (333.2) (496.0) (267.5) Mohammad Kamal mohammad.kamal@arqaamcapital.com Heba Khalil Arqaam Capital Research Offshore s.a.l Medinet Nasr Housing Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 49

51 We initiate coverage with a Hold rating and EGP 41 FVE We see strong demand for Tag Sultan and Hayy Al Waha units (which drive 45% of revenues in FY 14-18e) Potential upside catalyst in new product (Teegan and KM 45), which can add 20-25% to FVE MNHD is an urban developer targeting the middle income segment of home ownership demand in Egypt. MNHD is among the oldest real estate developers in Egypt, having developed the majority of the Nasr City district in Cairo (430mn sqft) and built >50k units since its inception. The company was established in 1959 by the Egyptian government, which later reduced its stake to 15% in Beltone Private Equity has since taken a 31% stake in the business, and is engaged in its day-to-day management and medium term strategic stewardship. MNHD owns c.9mn sqm of raw land, free of disputes with the government, as land was acquired through a presidential decree at the time of the company s establishment. MNHD sells semi-complete units, as opposed to fully-fitted units sold by other developers. This has resulted in product that is more accessible in terms of affordability, and one that is not necessarily purchased by eventual occupants. The economic downturn that ensued in in Egypt, due to political transition, resulted in a substantial increase in demand for property, which continues to be perceived as a hedge against currency devaluation risk. Shell and core and semi-complete units have consequently received substantial demand. Exhibit 1: >90% of MNHD s land bank is raw/undeveloped Exhibit 2: MNHD halted sales of land plots in FY 13A Land bank (mn sqft) KM 45 Teegan Nasr Gardens Land plots Hayy Al Waha Revenues (in EGP mn) FY 10A FY 11A FY 12A FY 13A FY 14e FY 15e FY 16e Residential units Land MNHD s land bank, which represents 93% of our NAV, is largely un-developed (90%). This suggests far greater scope for new residential product launches going forward. The company sits on c.100mn sqft of land held at a BV of EGP 240mn, or EGP 2.4/sq ft, well-behind prevailing land values today. The monetization of land assets into residential units will drive revenue growth in the next 5 years. Medinet Nasr Housing Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 50

52 We see strong revenue visibility, as the c.egp 2.2bn in development value behind Hayy Al Waha and Tag Sultan drives 50%+ of our aggregate sales forecasts in 14-18e. In the next 1-2 years, we believe MNHD will deliver products that will enjoy strong uptake. Furthermore, the business has reduced the average construction period behind a project to months, from 3 years previously, largely be streamlining design and execution functions. We believe this would positively impact short-term profitability as the business more readily hedges costs against inflation. Furthermore, we see CAPEX requirements met largely through internally generated funds, as the business introduced off-plan sales as a substitute to sales upon completion, allowing it access to the majority of a unit s sellable value ahead of its handover. Exhibit 3: MNHD trades at a 7% premium to our target P/NAV Current market price includes MV of land assets (93% of NAV) Q1 14A AC estimates Methodology Net debt Long-term loans Trade payables Deferred profits & interests on outstanding installments Customer advances Others Total 1,060 1,060 At BV Cash and bank balances (170) (170) Net debt At BV Receivables and other debit balances At BV Investment properties 6 6 Land bank Teegan (35.5mn sqft) 3,718 At 15% discount to MV - EGP 186/sqft Less infrastructure cost (EGP 1bn) KM 45 (59.2mn sqft) 2,992 At 15% discount to MV - EGP 74/sqft Legacy land (0.368mn sqft) 260 At MV - EGP 478/sqft Total 223 6,970 Construction in progress At BV Housing & development projects -WIP % margin Housing & development projects -Finished % margin Other assets Fixed assets (Net) At BV Inventory At BV Others At BV Total shareholders' equity 608 Minorities interest 56 NAV 7,501 NAV/share 48.4 CMP 43.3 CMP/NAV 0.89x FVE/NAV 0.84x Medinet Nasr Housing Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 51

53 We initiate coverage of MNHD with a Hold rating and EGP 41 FVE, at 0.84x tp/nav. In our NAV assessment, we mark land values up to market prices (to a range of 3x-20x BV), and apply a 15% illiquidity discount, to arrive at EGP 45/share (93% of NAV). We value projects in progress and finished unit sales at 40% and 55% margins, respectively (in total contributing EGP 1.83/share, 3.7% of NAV). The BV of other assets and net debt constitutes the remaining EGP 1.44/share. MNHD is currently trading at a 7% premium to our target NAV, which offers limited upside potential until new growth catalysts (launch of KM 45 and Teegan) become quantifiable and visible. Exhibit 4: MNHD sits on c.100mn sqft ready-for-development land Medinet Nasr Housing Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 52

54 Initiate with Hold and EGP 41 FVE: CMP reflects land assets at market rates, and fully captures development potential. More value to be unlocked through eventual launch of new product Property sales: MNHD has 3 main projects in the pipeline, of which 2 are under development, constituting of 12.9k sellable units. Nasr Gardens (9.1k units) is currently on hold, on its association with the previous ruling party. The company currently has >2.5k units under development in Hayy Al Waha (916), and Tag Sultan (1.7k). We expect MNHD to report full product uptake, and generate EGP 2.2bn in related sales revenues until FY 18e. Exhibit 5: Project Name >2.5k units under development Location # of # of units units sold % of finished units % of units delivered Status Nasr Gardens Six of October 9, On hold Hayy Al Waha - Phase I Hayy Al Waha - Phase II Nasr City Hayy Al Waha - Phase III On going Hayy Al Waha - Block Tag Sultan Nasr City 1, On going Land bank: MNHD sits on c.100mn sqft of ready-for-development land. The company halted land sales, and will instead develop the plots into sellable units, which we believe generates far greater value. Recurring income: MNHD s rental portfolio is currently minor in size (<EGP 5mn). The units are leased under outdated rental laws, and can only be re-leased at current rental rates after the departure of the second generation tenants. Contracting business: MNHD operates 2 contracting subsidiaries, Nasr Civil Works (51% owned) and Nasr Utilities and Installations (98%), which operate at a combined backlog of EGP 700mn. NUI has been restructured, after a period of losses. It currently breaks even at the gross level. We believe current share price fully reflects our target P/NAV of 0.84x. The market appears to fully reward the business for turnaround potential, and RoE recovery. CMP further implies that land assets are reflected at market prices, suggesting limited further NAV upside. We currently estimate that new product, to be released in FY 15e+, can potentially add 20-25% to our FVE. Medinet Nasr Housing Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 53

55 NPV - Hayy Al Waha NPV - Tag Sultan DCF - Subsidiaries DCF - other operating items MV of Land Net debt Non-controlling interest FVE September Exhibit 6: AED/share % of FVE emanates from MNHD s land bank SOTP constituents: Development properties: We assume the full sale and delivery of Hayy Al Waha and Tag Sultan by FY 18e. We forecast cash flows of AED 1.7bn from the 2 projects to be spread over FY 14-33e, given the current payment term structure (avg. 12 yrs for Hayy Al Waha and 9 yrs for Tag Sultan). We value the NPV of Hayy Al Waha and Tag Sultan at EGP 1.63/share and EGP 3.84/share, respectively. Residual land: Management plans to begin developing KM 45 (59.3mn sqft) in H2 14e and the remaining 35.5mn sqft of Teegan in the next 2-3 years. We refrain from modeling the projects on lack of details, and instead mark the land to market and apply a 25% illiquidity discount. We estimate a value of EGP EGP/share on undeveloped land, driving 82% of SOTP value valuation. Contracting subsidiaries: We value MNHD s contracting business using a 5-yr DCF (16.6% WACC, 4% g) at 2.31/share at 14.7x implied FY 15e EV/EBITDA. Exhibit 7: We model for Hayy Al Waha and Tag Sultan to be fully sold by FY 18e per share % Property sales (NPV) % Add: MV of residual land % Add: Subsidiaries & other items 1.4 3% Less: Net debt (0.9) 2% Less: NCI 0.4 (1%) Fair value per share % Exhibit 8: MNHD valuation exercise highly sensitive to the discount applied on the undeveloped 9mn sqm Medinet Nasr Housing Copyright 2014, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 54