Equity Research - Solidere

Transcription

1 Equity Research - Solidere Recommendation: MARKETWEIGHT Target Price: USD 8.50 Source: BSE, Company reports, FFA Private Bank estimates, Note: Solidere A shares are priced as of May 8, 2017 Real Estate SOLIDERE Equity Research May 8, Lower visibility on land sales going forward as contribution from backlog winds down while recent political progress has yet to translate into a significant rebound in land sales which would help cashflow, profitability and leverage levels Mixed real estate indicators in the first months of 2017 as the outlook for the sector remains contingent on political developments and economic reforms to be passed. Number of real estate transactions rose +14.0% YoY in Q1/17 to 17,081 from 14,985 in Q1/16 and value of total real estate tra nsactions was up +10.0% YoY to USD 2.3 billion from USD 2.1 billion in Q1/16. The number of real estate transactions by foreigners slightly increased to 1.7% in Q1/17 from 1.6% in Q1/16 while construction permits and cement deliveries declined in February 2017 by respective -18.5% YoY and -12.6% YoY. Mixed data in the first months of the year following a rebound in real estate indicators towards the end of 2016, partly reflecting an improvement in sentiment after presidential election and cabinet formation. While recent political developments and stabilization of oil prices in neighboring countries would benefit investments in the Lebanese real estate sector, the outlook for 2017 is still contingent on efforts to move forward with reforms and hold parliamentary elections. The state budget which was approved by the government in March and remains subject to parliament s ratification could negatively impact real estate sector through higher corporate and real estate transaction taxes. Real estate prices relatively resilient in 2016 despite oversupply specifically in the high-end segment while domestic demand for housing highly supported by BDL initiatives. Prices were relatively resilient and similar to 2015, yet below 2013 as contribution from foreign investors and Lebanese expa ts declined, resulting in an oversupply specifically in the high-end segment which prompted developers to grant greater discounts on starting prices of unsold properties. BDL extended its stimulus package in an effort to support housing demand through more affordable lending and implemented Circular 427 in June 2016 which allows lending to developers. Although commercial banks were able to grant additional subsidized housing loans in 2015 at a discounted rate, these measures are not expected to boost demand in the high-end market. We note significant banking sector exposure to real estate when including construction, housing loans and collaterals. In the BCD, the more expensive units are located in the waterfront where starting average prices are in the USD 6,000-7,500/ sqm range vs. USD 4,500-6,000/sqm in the traditional area including Saifi Village, Wadi Abou Jamil, Mina El Hosn and Martyr Square, below Higher revenues in 2016 helped by recognition of previously closed deals. Expect land sales to stabilize below 2016 levels on lower contribution from backlog and lesser visibility on new transactions. Land sales came in at USD million consisting of ~73,370 sqm with four transactions in the traditional area and seven transactions in the waterfront area with average selling prices at respective ~USD 3,100 and ~USD 3,000. Land sales in 2016 included eight deals completed in previous years with additional transactions in 2016 particularly in the waterfront area. While Solidere is expected to increase efforts at selling developed properties, revenues from land sales should remain the main driver of revenues with gross revenues expected to reach USD million in 2017e (vs. USD million in 2016). We expect Solidere to benefit from additional land sales should political progress which triggered some investor interest in the Lebanese real estate market materialize into a more favorable investment environment. Rental income roughly stable in 2016 at USD 56.4 million as higher revenue from North Souks (Cineplex, food court, entertainment center and L-Building) offset lower lease income in the pre-souks/ South Souks portfolio which we expect to continue in 2017e. We forecast rental income stable at USD 56.0 million in 2017e while completion of department store should help revenues in the medium term. Revenues from rendered services slightly lower at USD 6.5 million while revenues from hospitality stable below USD 0.5 million in 2016 both expected stable in 2017e. Net revenues at USD million and expected at USD 84.0 million in 2017e. Solidere maintains cost containment strategy particularly given lower visibility on future cashflow and contribution from associate/jv. Net profits for 2016 at USD 75.3 million (vs. FFA est. USD million), with EPS at 0.46 (vs. FFA est. USD 0.68) with higher land sales and lower provisions YoY. We forecast net profits at USD 17.9 in 2017e on weaker land sales as we expect smaller contribution from backlog sales going forward. Higher loss on rescheduled receivables at USD 16.7 million, as we note that expenses related to write-off and rescheduling of receivables amounted to an estimated 5%-10% of Solidere s revenue from land sales since We maintain our expectations of further losses related to rescheduling of receivables as tougher economic conditions persist and given Solidere s highly concentrated receivables within a small number of clients. Estimated core EBITDA margins at 58% in 2016 on core EBITDA at USD million in 2016, and expected at USD 47.6 million in 2017e at 36% margin. SG&A at 13% of gross revenues in 2016 on higher revenues and expected at 27% in 2017e while cost containment efforts should help cashflow in the medium term. Capex expected to be allocated for the eastern marina and department store while other development projects are deferred as part of Solidere s strategy to manage cash flows. We highlight the rescheduling of 50% of Solidere s short term overdraft facilities to costlier medium term debt with sizeable maturities over the medium term. Lower contribution from associate/jv at USD 9.6 million in 2016 weighed by losses from Beirut Waterfront Development (BWD). Marginal improvement in investor sentiment has yet to translate into a material rebound in Solidere land sales while weaker credit quality and higher financing costs also weigh on bottom line. We highlight marginal improvement in political/economic factors impacting the Lebanese property market although political progress has yet to translate into more stable environment for investors and tourism. As tougher operating environment continues to limit land sales and weighs on credit quality, and given required capex for land sales/investment properties and maturing term debt, expect provisions on rescheduled receivables and financing costs to trend higher and possible capital raise in the form of additional A/R securitization, term debt and/or equity. Longer term, we believe Solidere should benefit from renewed investor interest in the Lebanese high-end property market through rebound in land sales and as the company resumes completion of developed properties in the pipeline. We maintain our recommendation at Marketweight and revise our fair value estimate to USD 8.50 from USD 9.50 derived using a sum of the parts approach implying a P/B of 0.69x based on our 2017e estimated BVPS, below historical on account of lower profitability, cashflow generation and capitalization, and in line with MENA real estate peers despite less visibility on land sales, weaker credit quality and higher financing costs. SOL A 1 year Share Performance Share Price Information Key Financial Highlights Market cap. 1,487.4 Shares outstanding million Dividend yield 1.1% 1M 2.6% 3M -6.2% YTD -12.8% 12M -9.0% 52-Week range Sector: Real Estate Country: Lebanon In USD millions 2016a 2017e 2018e Revenues Core EBITDA Net income EPS (USD) P/E P/B EV/Core EBITDA

2 Real Estate SOLIDERE Equity Research 2 SOLIDERE Company Description The Lebanese Company for the Development and Reconstruction of Beirut Central District otherwise known as Solidere is the largest private real estate player in Lebanon in terms of assets with an asset base at USD 2.9 billion at the end of June 2016 and a 1.7 million sqm BUA land bank left in the BCD (of which ~75% in the waterfront and ~25% in traditional). Solidere was established in 1994 with the purpose to redevelop the BCD and its mandate was extended until The Company s business model is primarily based on revenues from land sales and the strategy is to strengthen revenues from recurring sources of which include rental income and rendered services. During , contribution of land sales to total revenues averaged ~50% compared to ~70%+ in the previous five-year period as a result of decelerating land sales activity. Solidere shares are listed and traded on the Beirut Stock Exchange (stock symbol: SOLA, SOLB) and its GDRs on the London Stock Exchange (stock symbol: SLED). Solidere Key Consolidated Financial Highlights in 2016 Net profit at USD 75.2 million in 2016 from higher land sales and lower provisioning Gross revenues increased +192% YoY to USD million in 2016 from: i) USD million in land sales ii) USD 56.4 million in rental income and iii) USD 6.9 million from rendered services and hospitality combined. Revenues from land sales amounted to USD million in 2016 with a total of ~73,000 sqm, helped by recognition of previously completed sales in the waterfront and traditional areas. Slight decrease in rental revenues at -1% YoY to USD 56.4 million with a contribution to gross revenues at 21%. SG&A cost increased +1% YoY to USD 35.4 million from USD 35.0 million in 2015 representing 13% of gross revenues down from 38% as Solidere maintains its cost reduction strategy. Contribution of JV/associates at USD 9.6 million from 27.9 million in 2016, on weaker results from activities of Beirut Waterfront Development and Solidere International. Net profit at USD 75.2 million in 2016 partly from materially lower provisions for impairment although we highlight higher loss on rescheduled receivables and provision for contingencies and note a strong concentration of notes and accounts receivables within a small number of clients (16 clients represent 90% of total exposure and 15 clients constitute the remaining 10%). Net debt levels declined to USD million in 2016 from USD million in 2015 largely from improvement in operating cash flows and as Solidere redeemed all Class A asset-backed securities (carrying amount USD 14.3 million end of 2015 at 5.5%) and ~USD 10.0 million Class B notes (carrying amount USD 45.0 million end of 2015 at 5.0%). The net debt to total capitalization was at 23%, net debt to equity at 25% while net debt to core EBITDA decreased to ~3.2x. Solidere Key Consolidated Financial Highlights in 2015 Net loss at USD million in 2015, largely on weaker land sales and higher YoY provisioning Gross revenues decreased -62% YoY to USD 91.3 million in 2015 from: i) USD 26.8 million in land sales ii) USD 57.0 million in rental income and iii) USD 7.5 million from rendered services and hospitality combined. Revenues from land sales at USD 26.8 million in 2015 from one contract concluded in the waterfront area, with contribution to gross revenues declining to 30% in 2015 from 71% in Solidere witnessed a decrease of -7.3% YoY in rental revenues to USD 57.0 million benefiting from parking spaces and North Souks development which includes the Cineplex, food court and entertainment center, mostly offset by waivers and lower rents from tenants, with a contribution to gross revenues at 62% up from 26% in SG&A cost slightly decreased YoY to USD 33.8 million, in line with Solidere s cost reduction strategy. Other expenses while not material as a percent of revenues, increased YoY to USD 1.3 million. Non-operating items including lower gain on sale of investment properties came in at USD 3.2 million down from USD 4.5 in 2014, weighing down on net profits. Solidere s net loss of USD million in 2015 is largely attributed to a substantial rise in provisions from USD 12.5 million in 2014 to USD million in 2015 mainly related to a loss from two previous sale contracts (other provisions included for other debit balances, contingencies and receivables). EPS was USD in 2015 down from USD 0.71 in Net debt levels at USD million in 2015 from USD million in The net debt to total capitalization was at 21%, net debt to equity at 28% while net debt to core EBITDA increased to ~4.9x.

3 Real Estate SOLIDERE Equity Research 3 Financial Highlights and FFA Model Assumptions We expect land sales to remain subdued in 2017e following stronger levels in 2016 as marginal improvement in sentiment has yet to translate into stronger demand for high-end real estate We have modelled 23,800 sqm worth of land sales for 2017e which mostly consist of new transactions in the traditional and waterfront area at an average selling price of ~USD 3,000. Based on these assumptions, we expect land sales to reach USD 70.5 million in 2017e vs. USD million in 2016 which was largely helped by backlog transactions from previous years. As tough economic conditions and weaker investor appetite persist, we expect Solidere to continue granting flexible payment terms with regards to grace periods and repayment durations to adapt to clients repayment capacity as we expect greater attention given to credit quality in light of issues faced and provisions taken. We expect land sales activity to remain subdued despite marginal improvement in investor sentiment beginning 2017 as recent political developments and improved macro environment have not yet materialized into stronger demand in the Lebanese high-end property market. Stable sales mix going forward with gross profit margins at around 63% in 2017e below 2016 level from lower expected land sales We expect stable land sales margin YoY at 79% in 2017e up from 76% in 2015 while down from 83% in 2014 with a ~USD 610/sqm BUA cost. Gross margin on rental income expected higher YoY at 42% from 44% in 2016 although below 2015 level of 55%, while gross margin on rendered services should remain stable YoY at 44%, higher than 20% in Overall, gross profit margin is expected to decrease to 63% below 2016 level of 71% and higher than 61% in 2015 on account of lower expected land sales in 2017e which typically command stronger margins. Medium term, we expect margins from land sales to stabilize around ~80% while margins from rental income trend at ~40%, implying an overall margin of ~62%. Forecast slightly higher SG&A from one-time personnel expenses as benefits from headcount reduction expected to materialize beyond 2017 We forecast higher SG&A costs YoY in 2017e despite Solidere efforts at reducing costs namely through headcount reduction which are expected to favorably impact results beyond this year. SG&A for the full year 2017e is expected at USD 36.4 million partly from expenses related to higher recognized land sales which include taxes, fees and stamps in addition to one-time personnel end of service indemnities. We expect SG&A as a percent of revenues to increase to 27% in 2017e compared to 13% in 2016 on lower gross revenues expected YoY. Estimated core EBITDA expected at USD 47.6 million in 2017e from USD million in 2016 with a core EBITDA margin expected at 36% compared to 58% in Expect revenue from land sales below 2016 and pre-crisis levels with less visibility on contribution from BWD and Sl We expect softer revenue from land sales YoY on lower contribution from backlog and as renewed sense of optimism in Lebanon has yet to translate into a rebound in demand for high-end real estate. Lower visibility on contribution from Beirut Waterfront JV and Solidere International should also weigh in 2017e bottom line on account of softer activity in the BCD from difficult macro/tourism situation reflected in losses for BWD in 2016 and as execution of Solidere International projects has not yet reached cash-flow generating stages amid challenging outlook for residential market in the GCC as well as land sales activity. Despite Solidere efforts with regards to cash flow management reflected in rescheduling of bank facilities from short to medium term and redemption of all Class A and part of Class B asset back securities, we expect cash and stock dividend program to weigh on liquidity positions and balance sheet given weaker cashflow generation in the past years. Cash dividend program of USD 0.10/share may not be justified given virtually 100% payout on 2017e EPS, capex/infrastructure requirements and lower visibility on land sales. Stock dividend program of 1/80 is unlikely to be renewed given the depletion of Solidere s treasury shares in Forecast lower profits YoY in 2017 as soft demand for high-end estate weighs on land sales in addition to provisions for rescheduled receivables and contingencies We expect net profit in 2017e at USD 17.9 million (vs. USD 75.3 million in 2016) and EPS of USD 0.11 (vs. USD 0.46 in 2016) on total revenues of USD million (vs. USD million in 2016), and lower recognized land sales at USD 70.5 million in 2017e (vs. USD million in 2016). We forecast flat to lower rental income, reaching USD 56.0 million in 2017e (vs. USD 56.4 million in 2016) as contribution from North Souks (Cineplex, entertainment center, food court and L-Building ) offsets decline from lease renewal at lower rates. Revenues from rendered services expected below ~USD 7.0 million, while revenues from hospitality forecasted below USD 0.5 million. We forecast higher provisioning levels for 2017e on expectations of further losses related to rescheduling of receivables and contingencies as tougher economic conditions persist. Table 1: Key Financial Highlights 2016a e Key Financial Highlights In USD 2016a 2017e 2018e Revenues from land sales 203,259,282 70,520,000 71,533,600 As % of total revenues 76.2% 52.8% 52.1% Revenues from rental portfolio 56,447,311 56,001,041 58,687,023 As % of total revenues 21.2% 41.9% 42.7% Revenues from rendered services 6,520,544 6,716,160 6,716,160 As % of total revenues 2.4% 5.0% 4.9% Revenues from hospitality 351, , ,312 As % of total revenues 0.1% 0.3% 0.3% Total revenues 266,578, ,588, ,288,096 Net revenues 188,911,586 84,008,620 84,186,033 Net revenues (Gross profit) margin 70.9% 62.9% 61.3% SG&A (35,373,470) (36,418,324) (37,494,524) As % of total revenues -13.3% -27.3% -27.3% Core EBITDA 153,538,116 47,590,296 46,691,509 As % of total revenues 57.6% 35.6% 34.0% Net income 75,255,450 17,931,810 15,550,310 As % of total revenues 28.2% 13.4% 11.3% EPS Source: Company reports, FFA Private Bank estimates

4 Real Estate SOLIDERE Equity Research 4 Table 2: Main Assumptions 2017e-2018e Main Assumptions Land sales (in USD/sqm BUA) Notes Average selling price of ~USD 3,000/sqm weighted to plots sold in both waterfront and traditional areas for 2017e and 2018e Land sales (in sqm BUA) Rental income Rendered services & hospitality Margins Expenses Dividend payout Land sales of 23,800 sqm in 2017e and 2018e Growth in rental income over the years as contribution from North Souks development offsets decline in revenue from pre-souks/south Souks portfolio Modest growth from rendered services in 2017e and 2018e. Income from hospitality to become insignificant Gross margins on land sales ~80% in 2017e and 2018e, assuming a ~USD 610/SQM BUA land cost SG&A as percent of revenues to increase to ~27% in 2017e and 2018e compared to 13% in 2016 on softer land sales and as benefits from headcount reduction expected to materialize beyond 2017 and 2018 Payment of cash dividend of USD 0.10 for each Solidere A or Solidere B share would represent virtually 100% payout on our 2017e EPS Financing Source: FFA Private Bank estimates Expect rising debt levels, higher financing costs as Solidere extends short-term overdrafts into medium-term debt as bank overdaft capacity was fully utilized in 2015 and 2016 Valuation We value Solidere shares at USD 8.50 per share using a sum of the parts approach under the following: We value the land bank at 1.7 million sqm of BUA with an average selling price of ~USD 3,000. We value the investment properties portfolio and property management services income using a discounted cash flow approach with a weighted average cost of capital of 16% and a terminal growth rate of 3%. We value Solidere International based on the value of its liquid assets, in light of the early stages of the underlying projects and proportional ownership in four KSA-focused real estate funds We derived ~USD 3,000/sqm as the weighted average selling price for the land bank of Solidere from an estimated end user property price of USD 6,100/sqm BUA in the waterfront area and USD 4,500/sqm BUA in the traditional area using the lower range of starting average prices based on third party sector reports and FFA Real Estate estimates. We also assumed a developer margin of 10% and average construction costs of USD 2,250/sqm BUA. We applied a discount of 65% to our estimated land bank NAV to reflect the uncertainty regarding the macro-political environment in Lebanon, the cyclical and sensitive nature of the real estate sector, and company specific risks including operational, credit, liquidity and transparency risks. The 65% discount falls within the higher end of range seen with MENA real estate peers. We update our opex forecasts to reflect a slowing trend in the depletion of Solidere s land bank. Our fair value derivation when including the investment properties and the investment in Solidere International in addition to the land bank and adjusted for certain assets and liabilities, results in a fair value estimate of USD We estimate that every 5% change in the discount to our land bank NAV impacts our value per share estimate by ~USD Our USD 8.50 fair value estimate implies a P/B of 0.69x based on our 2017e estimated BVPS, below its historical and current MENA markets real estate peers.

5 Real Estate SOLIDERE Equity Research 5 Table 3: Sum of the Parts Valuation Sum of the Parts Valuation Land Bank: In USD millions Per Share Notes Average selling price in BUA 3,000 Estimated end user prices less 10% margin and USD 2,250/sqm construction costs Land bank in million sqm BUA 1.7 Remaining land bank split 75% waterfront and 25% traditional Revenues 5,070.0 Infrastructure Underground works in the waterfront area (utility, telecommunications, water installation), marina and park Opex Assuming 20 years at USD 45 million/year EBIT 4,070.0 Taxes 15% Statutory tax rate in Lebanon Net Asset Value (NAV) 3,459.5 Premium (discount) (65.0%) Reflects liquidity, credit, cyclicality, market, transparency and political risks Land bank 1, Book value adjusted to estimated end user prices Investment properties DCF on current properties and those in pipeline, property management at 16% WACC Investment in associate Share of liquid assets and NAVs of four KSA-focused funds Add: Cash % book value Prepayments & other % book value Accounts and notes receivables % book value Fixed assets % book value Total other assets % book value Less: Total liabilities (862.3) (5.23) 100% book value Value 1, Shares outstanding (2017e) Value per share 8.58 Value per share (rounded) 8.50 Source: Company reports, FFA Private Bank estimates Target Price Revision and Recommendation We reiterate our recommendation at Marketweight and revise our fair value estimate on Solidere shares to USD 8.50 from USD 9.50 We assign a Marketweight recommendation on Solidere, as we remain cautious in the shorter term as recent political and macro developments have yet to translate into a material rebound in demand for high-end real estate. As tougher operating environment continues to limit land sales and weighs on credit quality, and given required capex for land sales/investment properties and maturing term debt, expect provisions on rescheduled receivables and financing costs to trend higher and possible capital raise in the form of additional A/R securitization, term debt and/or equity. Longer term, we believe Solidere should benefit from renewed investor interest in the Lebanese high -end property market through rebound in land sales and as the company resumes completion of developed properties in the pipeline. Upside risks include a reactivation of political institutions through parliamentary elections and budget ratification, and improved political tensions regarding Syrian crisis. Our fair value estimate is revised to USD 8.50 from USD 9.50 per share using a sum of the parts approach, which implies a P/B of 0.69x based on our 2017e estimated BVPS, below its historical valuation although in line with MENA real estate peers. Key Investment Risks Cyclical nature of the real estate sector and high sensitivity to macroeconomic conditions. Business model based on a finite land bank. High dependence on land sales in a limited geographic area with a large client concentration. Political instability and heightened security events in Lebanon impacting investor sentiment.

6 Real Estate SOLIDERE Equity Research 6 Contacts Head of Research: Nadim Kabbara, CFA n.kabbara@ffaprivatebank.com Analyst: Anna Maria Chaaraoui a.chaaraoui@ffaprivatebank.com Analyst: Nadine Mezher n.mezher@ffaprivatebank.com Sales and Trading, FFA Private Bank (Beirut) Sales and Trading, FFA Dubai Itd (DIFC) FFA Private Bank s.a.l. One FFA Gate - Marfaa Foch Street Beirut Central District PO Box Beirut - Lebanon Tel: Fax: FFA Dubai Ltd Building 5 Office 410 Gate Precinct Dubai International Financial Centre (DIFC) PO Box Dubai - UAE Tel: Fax: Disclaimer This document has been issued by FFA Private Bank ( FFA ) for informational purposes only. It does not constitute an offer or a solicitation to buy or sell the securities mentioned or to participate in any particular trading or investment strategy. Although the information herein is believed to be reliable and has been obtained from sources believed to be reliable, FFA makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned and accepts no responsibility or liability for damages incurred as a result of opinions formed and decisions made based on information or opinions presented in this document. FFA makes reasonable efforts to provide accurate information and projections. However, certain statements in this document may constitute forward-looking statements or statements which may be deemed or construed to be forward-looking statements. These forwardlooking statements involve, and are subject to known and unknown risks, uncertainties and other factors which could cause the actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Therefore, FFA accepts no responsibility or liability for damages incurred as a result of opinions formed and decisions made based on these forward-looking statements, estimates and projections. The financial instruments discussed in this document may not be suitable for all investors and this document does not take into account particular investment objectives, financial situation or specific needs. Therefore, investors must make their own informed investment decisions. Investment transactions can lead to losses as a result of price fluctuations and other factors. One should therefore consider the appropriateness of the information provided herein in light of his own objectives, financial situation or needs before acting on the information. Opinions, estimates and projections expressed herein constitute the current judgment of the author as of the date of this document. They are subject to change without prior notice. FFA has no obligation to update, modify or amend this document or to otherwise notify a recipient thereof if any opinion, forecast, projection or estimate contained herein changes or subsequently becomes inaccurate.