tmg - re initiation of coverage 26 nov 2014
TRANSCRIPT
Target Price Market Price Investment Grade
EGP12.90 EGP9.98 Value
Recommendation
Strong Buy
Upside Potential
29.3%
Financial Summary (Figures in EGP million) Source: TMG & Prime Please refer to disclaimer on last page
Prime Research 1
We set TMG’s FV at EGP12.90/share; 29.3% upside potential- reinitiate coverage with Strong Buy: Using the Sum of the Parts (SoTP) DCF valuation for launched projects, hotels and malls, we are re-initiating coverage on TMG with a “Strong Buy” recommendation, at a FV of EGP12.90/share, implying an upside potential of 29.3%. Negative outcomes from Madinaty’s land case are unlikely according to our judgment. Therefore, we forecast that TMG will main-tain the land without any further payments to the government. NAV stood at EGP11.4/share as of September 2014, implying P/NAV of 0.87x. Revenues from sold units dominate TMG's revenue mix, with recurring revenues set to rise: Revenues from sold units accounts for 82% of total reve-nues in 9M 2014 recording EGP2.7 billion. However, we forecast a rise in recur-ring revenues due to a recovery in TMG Hotels coupled with a large Commercial land. Recurring income could increase by a 5-year CAGR of 8.5% through FY13-FY18, representing 29% of consolidated revenues in FY17 versus 14% in FY13. Impressive pre-sales could secure top-line growth over the coming years: Pre-sales (Off-plan sales) ,which is the strongest indicator of customers’ confidence in the company, has been increasing steadily over the past 3 years, registering EGP6.6 billion in FY13, leading TMG's backlog to EGP21 billion as of September 2014, securing top-line growth over the coming four years. Declining cancelation rate assures strong performance as well. TMG's Hospitality Segment is to regain its normal performance in FY16 with tourism sector expected recovery: Egypt's tourism recovery is under-way on relative political stability and travel bans termination by many European countries. This is evidenced by Cairo hotel’s occupancy rate soaring to 62% in August 2014 versus 21% in August 2013. Accordingly, TMG's hotels revenues improved in 9M 2014 to record EGP370 million (+ 33.6% y-o-y). Hotels revenues are expected to converge to its normal averages in FY16. The legitimacy of new investment law, the shift toward Eastern Cairo and strong pre-sale are the main catalysts; however, land bank concen-tration and limited control over building material prices would remain a concern: The Supreme Constitutional Court (SCC) is currently studying the con-stitutionality of a new investment law. Implementing this law, which is expected at the end of 2014, would end Madinaty legal dispute. Furthermore, the new Suez Canal project would stimulate demand in Eastern Cairo. EGP devaluation and high inflation would push consumers towards real estate as a safe guard, enhancing demand for properties. Moreover, strong liquid balance sheet and adopting new strategy for the Malls Segment could maintain TMG's strong growth. On the other hand, applying properties tax, limited control over building materials costs, demand concentration in low-income housing, land concentration risk and Hotel's exposure to political unrest remain the key risks for TMG.
Stock Performance Chart (EGP/ Share)
+202 33005 726
Senior Analyst: Mahmoud Ibrahim
Share Data
Company Short Name TMG Holding
Ticker TMGH.CA - TMGH EY
Sector Real Estate
Report Date November 26, 2014
Report Reason Re-Initiation of Coverage
Exchange Rate EGP7.15/USD
Financial Year Ending December
Outstanding Shares (mn) 2,064
Par Value/Share (EGP) EGP10
Mkt. Cap (EGP bn) EGP20.7
Price Low – High (EGP) 5.43 - 11.52
Avg Daily Traded Volume (000) 3,357
Shareholders Ownership
TMG for RE & Tourism Inv. 44.61%
Free Float 49.73%
Alexandria Co. for Construction 5.66%
Talaat Mostafa Group Holding TMG (TMGH.CA) | Re-Initiation of Coverage
Promising Upside Potential on Land Settlement after the New Investment Law
Egypt | Real Estate
November 26, 2014
+202 33005 718
Junior Analyst: Nada Saad Zaghloul
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Volume (000) Last Price
FY ending Dec. FY12a FY13a FY14e FY15f FY16f Revenues (EGP mn) 4,636 4,858 5,289 6,505 6,581 Growth -9.1% 4.8% 8.9% 23.0% 1.2% EBITDA Margin 19.3% 18.9% 24.7% 22.7% 24.7% Net Income (EGP mn) 546 585 832 1,082 1,217 EPS (EGP) 0.26 0.28 0.40 0.52 0.59 BVPS (EGP) 12.30 12.59 12.85 13.16 13.48 PER x 37.7 35.2 24.7 19.0 16.9 P/BV x 0.81 0.79 0.78 0.76 0.74 Pre-Sales (EGP mn) 4,482 6,581 7,728 8,467 9,425 Backlog (EGP mn) 18,500 19,950 22,684 25,081 28,683 Cancelations (EGP mn) 1,009 678 528 582 582
Prime Research 2
Valuation Using the Sum of the Parts (SoTP) DCF valuation for launched projects, hotels and malls, we re-initiate coverage on TMG with a “Strong Buy” recommendation, culminating a FV of EGP12.90/share, implying an upside potential of 29.3%. We assumes that TMG will develop all phases of Madinaty without additional payments to the government for Madinaty’s unutilized land. Additionally, we used Net Asset Value (NAV) method for commercial land valuation. Enterprise value (EV) was dominated by residential developments in Madinaty, Al-Rehab and Al-Rabwa at EGP19.7 billion (EGP9.6/share), contributing to 66% of TMG’s EV. Commercial and Services land was evaluated with extreme caution, especially for Madinaty, which we val-ued using NAV and assuming that the services land sales or JV will be muted over the next two years. After that, we believe the land will be available to the company for utilization in 20 years – a more conser-vative estimate than TMG’s of 10 years until utilization. According to our valuation, commercial and ser-vices land’s value came at EGP3.5 billion (EGP1.7/share), representing 12% of TMG's EV.
Highly cautious valua-tion of commercial and services land, using NAV
Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014
TMG Segments’ Valuation
Segment EV (EGPmn) EV/sh % EV Valuation
Methodology Valuation Metrics & Assumptions
Residential - Madinaty 17,084 8.3 57.5% DCF
Residential - Al Rehab 2,255 1.1 7.6% DCF
Residential - Al Rabwa 374 0.2 1.3% DCF
Commercial and Services land 3,518 1.7 11.8% NAV
Real Estate 23,231 11 78%
Four Seasons Nile Plaza 1,928 0.9 6.5% DCFFour Seasons Sharm El Sheikh 1,275 0.6 4.3% DCFFour Seasons San Stefano 689 0.3 2.3% DCFKempinski Nile Hotel 497 0.2 1.7% DCFMarsa Al Sadeed (under construction) 391 0.2 1.3% DCF
Hotel Portfolio 4,779 2.3 16%
Hotel Residential Units * 1,164 0.6 4% DCF
San Stefano Mall 242 0.1 0.8% DCFRehab Mall 1 10 0.0 0.0% DCFRehab Mall 2 53 0.0 0.2% DCFRehab Food Court 5 0.0 0.0% DCFMadinaty Arabesque Mall 17 0.0 0.1% DCFMadinaty B1 District Center 6 0.0 0.0% DCFAl Rabwa Mall 20 0.0 0.1% DCF
Mall Portfolio 353 0.17 1%
Services Segment 173 0.08 1% DCF
Total SOTP value 29,700 14.4 100%Add: Excess Cash 509Add: Marketable Securities 1,082Add: Long-Term Investments ** 584
Less: Value of Debt 3,773Less: FV of Minority Interest 1,477
Shareholder Value 26,626No of OS shares (mn) 2,064FV/share (EGP/share) 12.90
- After-tax risk free rate: 10.7%, beta: 1.16, equity risk premium: 6%, and perpetual growth rate: 4%.- Considering only the currently-operating malls, while planned malls are considered in commercial land valuation using NAV.
- Regarding the expansion plan, we only account for Four Seasons Sharm Extension (Marsa Al Sadeed) hotel rooms in our valuation.- Hotels and resorts which are in the pipeline like Marsa Alam and Luxor are evaluated at its book valuein long term investments at the end of FY13.
- For Residential Development, we used DCF across the life of project without terminal value. We utilized a cost of equity of 17.6%, beta of 1.16, WACC of 16.8%.- Development of Madinaty's all phases, Al-Rehab, and Al-Rabwa.- We believe that the company could secure the land without additional payments for government.
- For Commercial and Services land valuation, we used Net Asset Value (NAV), applying a discount factor ranging from 62% to 67%. Madinaty's commercial and services land will be utilized over the coming 20 years (more conservative than TMG's estimate of 10 years ). Utilization will be muted over the next two years till resolving Madinaty land dispute. - Our implied fair value per sqm stands at EGP407/sqm, reflecting our high caution.
* Including the valuation of Sharm Extension (Marsa Al Sadeed) - Residential units
** Including the exit value of Saudi investment and book value of other hotels under construction
Source: Prime Estimates
Prime Research 3
NAV context
We calculate the 9M FY14 TMG's NAV at EGP 11.4/share, in which we used "net land area" for villas in Madinaty, Al-Rehab and Al-Rabwa. Albeit, we used "footprint" for the apartments in Madinaty and Al-Rehab. We applied discount factors for our land valuation model according to the period of residential pro-ject utilization. TMG currently trades at 0.87x P/NAV.
Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014
DCF Model (EGP mn) FY14e FY15f FY16f FY17f FY18f FY19-FY35fFree Cash Flow* 1,677 1,458 2,596 2,494 5,588 45,256Present Value of Cash Flows 1,608 1,177 1,934 1,573 2,976 12,394Continuing Value of Hotels, Malls and Services Segment 7,131Present Value Of Continuing Value 4,521Cumulative PV of Forecast Period* 21,662
Value Of Operations 26,183
Add: Excess Cash 509Add: Marketable Securities 1,082Add: Long-Term Investments ** 584Add: NAV of Commercial Land 3,518
Entity Value 31,876Less: Value of Debt 3,773Less: Minority Interest **** 1,477
Shareholder Value 26,626No of OS shares (mn) 2,064
DCF Value Per Share (EGP/share) 12.90Current Market Price (EGP/share) 9.98
Up-side Potential 29.3%
DCF Valuation Model
* Free cash flow after FY19 is related only to Residential segment and Hotel residential units Source: Prime ** Long term investment is adjusted by the exit value of Saudi investment *** We considered the fair value of minority (not book value)
TMG's Net Assets Value (NAV) EGP bn Equity (30 September 2014) 26.2 Less: Goodwill (BV of land) and Other Intangibles 15.0 Add: Prime valuation of land 12.5 NAV 23.6 No. of outstanding shares (billion shares) 2.1 NAV per share (EGP/share) 11.4 Market price (EGP/share) 9.98 Upside (downside) potential 15% P/NAV (X) 0.87
Project Available for sale land Available for sale Net land area (sqm)
price/sqm Gross Value of land (EGP mn)
Net Value after Cost&SG&A and taxes (EGP mn)
Discount factor
Net value (EGP mn)
Residential (Villas) 2,764,006 4,500 12,438 8,582 45% 4,728
Residential (Apartments) 1,212,940 7,910 9,594 6,620 54% 3,056
Commercial 442,100 18,630 8,236 2,509 63% 922
Services land 4,149,856 4,337 17,999 5,208 62% 1,979
Residential (Villas) 286,948 4,750 1,363 940 10% 850
Residential (Apartments) 58,295 8,170 476 329 13% 285
Commercial 331,020 10,853 3,592 1,847 67% 617
Residential (Villas) 21,611 4,750 103 71 16% 60
Total 9,266,776 53,802 26,107 12,496
Madinaty (All phases)
Al-Rehab
Al-Rabwa
Prime Land Valuation Model
Source: Prime
Prime Research 4
Synopsis Talaat Mostafa Group Holding (TMG) (TMGH.CA) is featured as the largest listed homebuilder in Egypt in terms of land bank with unutilized land of nearly 31 million sqm. The company’s business model includes 3 segments; Real Estate Development, Hotels and Resorts Operations, and Malls and Services. First, TMG focuses on developing mega real estate projects and integrated cities, primarily in the outskirts of Cairo, mainly targeting middle to upper-middle income segments. Madinaty, TMG’s largest development, is spread over 33.6 million sqm. The company has acquired Madinaty’s land plot from the government through bilateral negotiation at preferential terms in which TMG was to offer 7% of the BUA to the govern-ment in return for the land. Due to its unique nature that does not require any massive capital outlay, this contract has ever since been invalidated by the courts and a final verdict is yet to be reached. Second, TMG also owns 4 fully operational luxurious hotels (Four Seasons Nile Plaza, Four Seasons Sharm El Sheikh, Four Seasons San Stefano, and Kempinski Nile Hotel) with 875 "5-stars" hotel rooms. Third, the company also owns, operates, and rents 7 malls with leasing area of 28,281 sqm in its different com-plexes. The Business Model
TMG’s business model includes 3 segments: Real Estate Development, Hotels and Resorts Operations, and Malls and Services.
Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014
Corporate Structure
Source: TMG * Under Construction
Holding Company
75.1% (Indirect Stake)
9.38%
10.31%
61.62%
100% 100% 84.47% 100% 100% 100% 100% 100%
Four Seasons
Nile Plaza
Four Seasons Sharm El Sheikh
San Stefano Grand Plaza
TMG Office &
Hotel Building*
Nile Hotel Four
Seasons Luxor*
Four Seasons
Madinaty*
Arab Co. for Hotels & Tourism Inv. ("ICON")
100%
98.6%
100%
100%
Talaat Moustafa Group
San Stefano Complex
Al Rabwa I & II
May Fair
100%
100%
100%
Alexandria Co. For Urban Dev SAE
Alexandria Real Estate SAE
San Stefano Real Estate SAE
Arab Co. for Urban Dev & Projects SAE 100% 100% 100%
Al Rehab I Al Rehab II Madinaty Hotels Segment
Real Estate Segment
Marsa Alam*
Prime Research 5
1. The Real Estate Development Segment
The developer’s strategy focus on developing integrated communities supported by various facilities offer-ing education, healthcare, commercial and maintenance services. The company develops villas and/or apartments of different spaces in order to meet the demand of various tranches in its target segment. The rationale behind such a strategy is that if it is to be proven successful in initial stages, the value of such project’s nearby land increases, paving the road for further price increase of projects’ constructed on those land plots. TMG’s most notable developments in the Real Estate Segment are Madinaty, Al-Rehab II and Al-Rabwa II.
1.1. Property Development Model
TMG follows an “Off-Plan Sales” or “Pre-Sales” model; in which the company sells its planned units before starting the construction process. This strategy allows TMG not to heavily rely on external debt and miti-gates the risk of unsold finished inventory. Therefore, the property developer enjoys lower default risk thanks to its innovative financing methods; securitized pools with the same mechanism of mortgage. TMG’s clients pay 10% to 20% of the property value as down payment in cash, while the remaining bal-ance is to be paid, through post dated checks, over a period 4 to 17 years with cost of financing of 13% - 14% per annum. On delivery, TMG presents the post-dated checks pertaining to the unit to the bank and receives a cash equivalent to the NPV of the checks amount. Post-delivery, TMG becomes no longer part of money-collection process, but it turns to be a bank/customer relationship, and hence mitigating the default risk. This model allowed TMG to achieve a healthy sales backlog of EGP21 billion at the end of September 2014, assuring earnings for the next 4 years.
Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014
TMG Projects’ locations
Residential Projects Madinaty Al Rehab 2 Al Rabwa 2 Total
Total Land area (mn sqm) of residential project 33.6 3.8 0.8 38.2 Total BUA (including GoE's stake) (mn sqm) 20.9 2.6 0.3 23.8 Residential BUA ( mn sqm) 16.8 2.3 0.3 19.4 Government stake (BUA) (mn sqm) 2.7 0.4 - 3.1 No. of Apartments (including GoE's stake) (units) 106,375 12,732 - 119,107 No. of Villas 6,374 1,232 373 7,979 Unutilized land area of residential project (mn sqm) 25.68 1.26 0.06 27 % of sold residential BUA* 35.5% 75% 77% Location New Cairo New Cairo El Sheikh Zayed Commencement date 2006 2006 2006 Expected completion** 2035 2023 2020 * At the end of 2013
* Expected completion according to Prime estimates
Source: Prime
TMG’s projects in operations and developments
Prime Research 6
1.2. Land Bank
TMG's large unutilized land bank of 31 million sqm sets it ahead of its peers and acts as a strong competi-tive advantage given the notable current surge in land prices in addition to the limited number of land auctions by government. This reduces the developers’ ability to replenish their land bank at moderate price and increases the attractiveness of developers who has vast primarily-located land bank like TMG. TMG is the largest real estate developer in Egypt in terms of land bank; the company’s projects, both resi-dential and touristic, are spread over 43 million sqm, with an unutilized portion of nearly 31 million sqm, including 8.7 million sqm for commercial and services purposes. This is expected to increase the com-pany’s recurring income from 14% of consolidated revenues in 2013 to 35% after 10 years, based on the company’s guidance. Madinaty is TMG’s largest development, spanning over 33.6 million sqm land plot, with an unutilized por-tion of around 26 million sqm; accounting for 82% of the company’s total unutilized land bank (assuming a favorable court ruling in the legal dispute and successful development of Madinaty's all phases). The pro-ject is also the main contributor to TMG’s revenues in the long term. Additionally, TMG’s land bank includes 8.7 million sqm for commercial and services purposes; accounting for 25% of total unutilized land bank. TMG plans to focus on commercial and retail properties, which is positively perceived given the supply shortage in the Egyptian market. The development of the commercial and services land bank is expected to increase recurring income weight to 35% of consolidated revenues, putting TMG well ahead of its Egyptian peers. Expanding company's land bank is expected as the company has rich cash balance sheet, enabling it to acquire other land plots upon securing its legal position in Madi-naty land case.
1.3. Operating and Financial Performance
Revenues from sold units (handovers) dominates TMG’s total revenue, accounting for 86% in FY13 and 82% in 9M 2014, while recurring revenues rep-resented 14% and 18% in the same periods respec-tively. We foresee a rise in recurring revenues due to:
1. Large commercial and services land bank 2. Current recovery in the hospitality sector 3. TMG’s Hotel Segment expansion plans to
build 5,000 hotel rooms 4. Adopting new efficient strategy for the Malls
Segment 5. Accelerating handovers could enhance the
Services Segment revenues All of the above should increase the contribution of stable income to 35% of total revenues when all projects come on stream in 10 years, according to the
Residential sales domi-nates the revenues mix, but recurring revenues is set to rise on hospitality recovery and large commercial land bank
Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014
Madinaty25.7mn sqm
82.3%
Al Rehab1.3mn sqm
4.0%
Al Rabwa0.1mn sqm
0.2%
Marsa Alam land (Port
Venice(3.3mn sqm
10.4%
Sharm Extension (Marsa Al Sadeed(
1.0mn sqm3.1%
Unutilized land bank (31 million sqm) mainly concentrated in Madinaty project
Source: TMG
31.230.0
13.8
10.0 9.3
4.0 3.7
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
TMGH HELI PHDC MNHD AMER* EGTS** SODIC*
mn
sqm
TMG is the largest real estate listed developer in Egypt in terms of land bank
Source: TMG, Prime
90% 86% 86% 84% 84% 80%71%
77%
0%
20%
40%
60%
80%
100%
0
2,000
4,000
6,000
8,000
10,000
2011
2012
2013
2014
e 2015
e 2016
e 2017
e 2018
e
%
EGP
mn
Revenues from Sold Units (Handovers(Revenues from Hotel operations Services Reveneues Revenues from Sold Units/Total Revenues
Residential sales dominates the revenues mix
Source: TMG, Prime
Prime Research 7
company’s management, putting TMG well ahead of its local peers. Accordingly, we believe that recurring income could increase by a 5-year CAGR of 8.5% between FY13 to FY18, representing 29% from consoli-dated revenues in FY17 TMG’s pre-sales (new sales) witnessed an impressive 47% y-o-y growth to EGP6.6 billion in FY13. More-over, this trend continued in 9M 2014 as pre-sales increased by 24% y-o-y to EGP5.7 billion. This vast pre-sales growth could maintain top-line growth over the coming years as the company will have to accelerate its handovers and reduce the recently-emerged delays. According to our estimates, revenues from units sold (including handovers) could increase by a 5-year CAGR of 7.9% between FY13-FY18 to EGP6.1 billion in FY18. Accelerating deliveries is assured given TMG’s keenness on achieving a favorable position in Madi-naty court case. However, we are worried about the sustainability of pre-sales growth in the medium term due to:
Shrinking available-for-sale units in Al Rehab as TMG has already sold 75% of Al Rehab 2 at the end of FY13 and we believe that the project could be completely sold by the end of FY17, which could slow down pre-sales growth
Supply concentration in the high and upper-middle incomes housing segments could fuel the competition and risk pre-sales growth over the coming years
The recent reforms in Egypt which pressured disposable income led to a demand shifted towards cheaper units
However, TMG mitigates this concern through offer-ing smaller-sized units that are currently strongly demanded due to its affordability. Additionally, we believe that currency depreciation and high inflation push consumers to purchase properties as a store of value. Inflation is expected to continue rising, espe-cially after implementing fiscal reforms which could lead investors to the more-favorable inflation-hedging investments such as Real Estate. Moreover, if Madi-naty's legal case ends in favor of TMG, we believe that high utilization of commercial and services land could mitigate our concern of pre-sales growth. As the economic framework improves, the land allocated to commercial and retail projects should see a swift upward revision. Although current cooling off in handovers, we believe deliveries will bounce back over the coming period, enhancing top-line growth as well. It is worth noting that the pre-sales is dominated by Madinaty’s new sales that represented 52% of total pre-sale in FY13 with expectation to reach 75% in FY16 given Al Rehab 2 is expected to be completely sold during the next 3 years. TMG is operating in many segments, and thus has various profitability profiles. In the Property Develop-ment Segment, TMG usually achieve an impressive gross profit margin (GPM) above 70% for commercial and villas land sales, but use to recognize a normal margin of 25% for apartments delivery. Additionally, the company achieves stronger margins at around 50% in selling its hotel residential units. While Hotel operation sees a volatile margin due to seasonality and exposure to political unrest. Furthermore, Malls by nature enjoy high margins, while the Services segment usually could not achieve a double-digit GPM. Going forward, we forecast a 5-year CAGR of 10.6% for gross profit margin through FY13-FY15; the GPM will increase from 26% in FY13 to 44% in FY18, supported by reducing the delays in property handovers with high ability to pass on building material price increases to clients. Moreover, Hotels returning to its normal operations, adopting new strategy in Malls Segment, accelerating handovers, and potential pene-tration of new segments like second-home segment; all could improve margin profitability over the coming years. Overall, we believe that profitability margins will return to the pre-revolution levels for the Real Es-tate Segment in FY14 and for the Hospitality Segment in FY16.
Madinaty lead impres-sive pre-sales, secur-ing TMG's top line growth in the next 4 years
We are not concerned about the volatility of gross profit margins
Although building ma-terial costs increased significantly with the fiscal reforms, prices continue to outperform costs, which could enhance TMG's profit-ability margin
Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014
02,0004,0006,0008,000
10,00012,000
2011
2012
2013
2014
e 2015
e 2016
e 2017
e 2018
e
Pre
-Sal
es (
EGP
mn)
Madinaty Villas Madinaty Apartments
Madinaty Commercial Al Rehab Villas
Al Rehab Apartments Al Rehab Commercial
Al Rabwa Villas Hotel Residential units sales
Pre-sales is dominated by Madinaty
Source: TMG & Prime
Prime Research 8
We believe that TMG will incur higher SG&A expenses due to its remarkable pre-sales as the developer records its SG&A expenses in the same year. We foresee SG&A expenses’ 5-year CAGR of 14% during the period from FY13 to FY18. On the other hand, we forecast impressive investment income over the coming years as TMG has increased its marketable securities from EGP1.1 billion in FY13 to EGP1.6 billion in 9M FY14. Most of these increases are investments in fixed income securities that generate income at an an-nual rate ranging from 12% to 15%.
TMG’s backlog of sold units with unrecognized reve-nues stood at approximately EGP20 billion at the end of FY13 EGP21 billion as of 9M FY14, reflecting a backlog to pre-sales ratio of 3x in FY13, providing earning visibility for the next three to four years. In FY13, the value of cancelations came at EGP678 mil-lion compared to EGP1,009 million in FY12, showing -33% y-o-y growth. TMG's cancelation rate stood at around 4.3% in FY13 and we believe that this rate could decline once the legal dispute ends in favor of TMG. TMG has a healthy balance sheet with a moderate level of debt which could enable the company to exe-cute its investment plan and penetrate other segment or acquire other land plots. TMG’s net debt levels of EGP1.6 billion at the end of 9M FY14, declining from EGP3.3 billion at the end of FY12. Currently, TMG's net debt-to-equity stands at 5.9% as of 9M FY14. Going forward, we believe that TMG will reduce its reli-ance on debt as most of its current loans are related to the Hotels Segment which was severely hit with the political unrest during the last period. However, with current recovery in the Hotels Segment, we be-lieve that the company’s debt will decrease. Furthermore, it is worth noting that TMG's cash and equiva-lents and marketable securities stood at EGP3.16 billion at 9M FY14; indicating a strong liquidity position to meet its obligations and exploiting attractive investment opportunities in the future. 1.4. Real Estate Segment Valuation
We evaluated TMG residential segment in Madinaty, Al Rehab and Al Rabwa using DCF method across the life of this project without terminal value. Residential property development in Madinaty, Al-Rehab and Al-Rabwa contribute 66.4% of TMG’s EV and standing at EGP19.7 billion (EGP9.6/share) – excluding commer-cial and services land which valuated using NAV. We believe the development of the Al-Rehab and Al-Rabwa projects will be completed in all cases given Al Rabwa is a free-of-dispute land, and the govern-ment has already received most of its stake in Al Rehab. Accordingly, we have estimated the Enterprise Value (EV) of Al Rehab residential property development at EGP2.2 billion (EGP1.1/share) and the EV of Al Rabwa residential property development at EGP0.4 billion (EGP0.2/share).
Vast backlog as well as declining cancelation rates exhibit clients’ confidence and im-proved sentiment
TMG has a liquid bal-ance sheet with mod-erate leverage
Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014
0%5%10%15%20%25%30%35%
01,0002,0003,0004,0005,0006,0007,0008,000
2011 2012 2013 2014e 2015e 2016e
%
EGP
mn
Reveneus Gross Profit EBITDA Net Income
Gross Profit Margin % EBITDA Margin %Net Margin %
Higher profitability and margins improvement on large deliveries and Hotel Segment recovery
Source: TMG & Prime
35% 35%
29%
23%26% 26%
33%31%
33%
41%44%
15%
20%
25%
30%
35%
40%
45%
50%
2008
2009
2010
2011
2012
2013
2014
e 2015
e 2016
e 2017
e 2018
e
Gross profit Margin %
Gross profit margin to improve over the coming years
Source: TMG, Prime
20,0
00
18,5
00
19,9
50
22,6
84
25,0
81
28,6
83
3,01
2
4,48
2
6,58
1
7,72
8
8,46
7
9,42
5
1,00
3
1,00
9
678
528
582
582
-80%
-60%
-40%
-20%
0%
20%
40%
60%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2011 2012 2013 2014e 2015e 2016e
EGP
mn
Backlog Pre-Sale
Cancellation Pre-Sale growth YoY (RHS(
Large backlog to maintain top-line growth during the next 4 years
Source: TMG & Prime
Prime Research 9
Negative outcomes from Madinaty land case are unlikely in our view. Therefore, we did not incorporate this into our valuation, assuming that TMG will maintain the land without any other payments to the gov-ernment. Accordingly, we estimated the EV of Madinaty residential property development at EGP17 billion (EGP8.3/share), without considering the valuation of commercial and services land. Regarding Commercial and Services land valuation, we used Net Asset Value (NAV), applying a discount factor ranging from 62% to 67% as the company will utilize these commercial spaces over the long term. Furthermore, this land will be allocated for many activities. We believe that the Commercial and Services land will be utilized over the coming 20 years (more conservative than TMG’s estimate of 10 years). Our NAV for the Commercial and Services land stands at EGP3.5 billion, implying a fair value per sqm of EGP407/sqm, reflecting our high caution. It is worth mentioning that final settlement of Madinaty land case could accelerate the utilization rate of Madinaty's commercial and services land. 1.5. Legal disputes of residential segment
Madinaty embodies TMG’s flagship development, representing 78% of total land bank and performing as the main income generator over the medium term. Previously, TMG has acquired the land from the gov-ernment at favorable terms through bilateral negotiations. The company obtained 33.6 million sqm of land in Madinaty and 3.7 million sqm of land in Al Rehab II from the government, in return for what is esti-mated at 7% of the BUA (total 2.7 million sqm assuming all BUA is residential) after each finished phase of Madinaty and 12% of the BUA (total 420k of BUA) in Al Rehab II. This agreement is particularly unique as it does not require any upfront capital unlike other peers. However, as there is no specific price in this agreement, the contract was nullified multiple times by the courts. In an effort to avoid the legal dispute, a new deal was agreed upon on November 08, 2010 based on the recommendation of an independent legal committee, stating that a restructuring of the land through “sale by direct order” to TMG’s subsidiary, the Arab Company for Projects & Urban Development, is legally possi-ble, as there is a case of requirement authorized by public interest. This new contract stated that the gov-ernment would get 7% of BUA, achieving minimum proceeds of EGP9.9 billion, besides a revaluation of the remaining unutilized land. A court ruling was issued on November 22, 2011; keeping the contract valid. TMG had explained that most of Madinaty’s land is an already utilized land in the form of developments and infrastructure. The government, however, demanded that the unutilized area would stand at 56% of the project’s land (18.8 million sqm) and will be revalued according to inflation as of 2005 (not current prices). According to our projections, the current value of the government’s share in Madinaty stands at EGP17.3 billion and is likely to reach to EGP20 billion in the near future, according to TMG. However, the main setback lies in the dispute over the area of the unutilized land. In order to tackle this, an appeal was made by TMG demanding deleting "the unutilized land revaluation" from new the contract on the grounds that the quarrel relates to the allocation method and not the price of the land. Meanwhile, there happens to be another appeal introduced by a conspicuous Egyptian lawyer to invalidate the November 2011’s ver-dict. Therefore, there are two appeals related to Madinaty legal dispute, the first was introduced by TMG to cancel "Revaluation of Madinaty unutilized land" from 2011’s verdict, while the second appeal was intro-duced by Egyptian Lawyer, Hamdy El Fakhrany to invalidate 2011’s verdict and Madinaty’s new contract. In October 07, 2013, the court postponed the case till February 24, 2014, awaiting the Legitimacy of the New Investment Law. Investment law
A new investment law approved by the Egyptian cabinet in April 2014 includes a clause that prevents third parties from challenging contracts made between the government and investors. According to the amended law, only the government or the investor will have the right to challenge the contract. The law will be applicable to all current court cases except those on which a final ruling has been issued. Accord-ingly, the law effectively immunizes government contracts. The amendments are intended to reassure investors unnerved by previous legal challenges to such deals, which have left companies sold by the gov-ernment in legal limbo. Although the law was approved in April 2014, it has not been implemented yet as its constitutionality has been challenged. We believe that the new amendments, once implemented, will restore the appetite of local and foreign investors. Additionally, the real estate sector is set to be among the top beneficiaries from this law. Ac-cordingly, applying the new investment law will end Madinaty’s land dispute, fuel buyers’ confidence and companies’ performance over the coming years.
Despite of strong legal position, Madinaty’s legal dispute is the key risk
New investment law to eliminate legal risk once implemented
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Prime Research 10
We doubt that the group will lose Madinaty land case due to:
The Egyptian government has been focusing on settling and resolving developers' land disputes to restore confidence and attract new investments in the sector
The new Investment Law, once implemented, could mitigate Madinaty litigations risk
The project’s already-sizeable pre-sales backlog
The land’s transformation from raw to developed land However, in a worst case scenario, we believe TMG still has a chance of reaching a rational cash arrange-ment with NUCA even if it loses its appeal. NUCA is still considering the 18.8 million sqm land which, in its opinion, symbolizes the unutilized portion, and for which compensation is needed. We estimate this pay-ment at EGP7.7 billion (EGP3.72/share) putting the TMG’s valuation at EGP9.20/share in this case. But, if TMG wins the dispute without any compensation for unutilized land, the valuation will be still at our target price of EGP12.90/share (our base case scenario). It is worth noting that TMG will attempt to accelerate Madinaty development in order to secure a more promising position in its court case and protect itself from any harmful penalties in case of an unfavorable court verdict. Despite TMG’s strong legal position, we foresee three inferences with regards to land re-valuation: (1) The New Urban Communities Authority’s (NUCA) valuation for the unutilized land bank might end in likely cash payments to the GoE of c.EGP7.7 billion (EGP3.7/share), according to our estimates after con-sidering NUCA’s view. Accordingly, the valuation would drop to EGP9.20/share, as NUCA has previously identified that it had valuated 18.8 million sqm as the unutilized land and the required payment would be determined according to inflation since 2005. (2) The contract terms could be reconsidered by increasing the minimum value of BUA delivered to the GoE from EGP9.9 billion. While increasing this minimum value to EGP17.3 billion (the current market value of BUA delivered to GoE) would have no outcome on our valuation, each additional EGP1 billion beyond EGP17.3 billion would lower our value by EGP0.48/share. (3) The contract terms would be reconsidered by increasing the 7% BUA (2.7 million sqm) delivered to the GoE. We compute that each 1% (390k sqm) increase in BUA will increase the land cost by EGP1.1 billion and forgo net income of (EGP0.37 billion), depressing the valuation by EGP0.71/share.
Strong legal position and land withdrawal is highly unexpected
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Prime Research 11
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History of Madinaty Land case and potential outcomes
2014
Jan 28: The hearing was postponed to May 06, 2014.May 06: The hearing was further postponed to Oct 07, 2014. Oct 07: The hearing was postponed for a final verdict on Feb 24, 2015, after the Supreme Constitutional Court judges on the constitutionality of the new investment law (Expected by the end of Dec 2014).
2013Jan 16: The two appeals were technically accepted and referred to another court to be discussed on Apr 16, 2013.Apr 16: The hearing was postponed to Sep 24, 2013.Sep 24: The hearing was postponed again to Jan 28, 2014.
2012Nov 07: Two appeals were presented; responding to to the State Commissioner’s Authority (SCA). The case was adjourned to Jan 16, 2013.
Source: Prime
Prime Research 12
2. The Hotels and Resorts Operations Segment TMG owns and operates 875 hotel rooms in four operational luxurious hotels in Cairo, Alexandria, and Sharm El-Sheikh. TMG retains ownership in these hotels through its 75.13%-owned subsidiary, Arab Company for Hotels & Tourism Investment (ICON). Three of these hotels are managed by the Four Seasons while one is managed by Kempinski.
Four Seasons Nile Plaza: Located in Cairo with a number of 366 rooms and 128 units; 125 resi-
dential units of which are already sold. Using DCF, we have derived an EV of EGP1.9 billion (EGP0.9/share) for the Nile Plaza hotel.
Four Seasons Sharm El Sheikh: Located in Sharm El Sheikh with a total number of 200 rooms. Additionally, the hotel contains 146 total residential units; 144 units of which are already sold. We have concluded a DCF value for the Four Seasons Sharm El Sheikh at EGP1.3 billion (EGP0.6/share).
San Stefano Grand Plaza, Alexandria: The hotel was built on a total land area of 30k sqm with 170m frontage alongside the beach, and it started operations in July 2007. The hotel has 118 rooms, in addition to 945 residential units; 924 units of which are already sold. Our EV for San Ste-fano Grand Plaza stands at EGP0.69 billion (EGP0.3/share).
Kempinski Nile Hotel, Cairo: Kempinski Nile Hotel replaced an old hotel on the Nile River in one of Cairo’s most strategic downtown spots. The hotel has 191 rooms but does not include any resi-dential units. It is valued at EGP0.5 billion (EGP0.2/share).
Four Seasons Sharm Extension (Marsa Al Sadeed): Due to its being free-of-legal disputes and the serious steps by TMG towards developing this hotel, we consider Marsa Al Sadeed hotel in our valuation. The hotel is adjacent to Four Seasons Sharm El Sheikh. Its total Capex is estimated at USD219 million (excluding the land value). We forecast that the hotel will start operations in FY16 with 96 rooms. Furthermore, the hotel features 114 residential units (70 villas and 44 chalets), which are evaluated in the hotel residential units. Our EV for hotel rooms only stands at EGP0.39 billion (EGP0.2/share).
2.1. TMG's Hotel expansion plan
TMG is planning to expand its hotels and resorts portfolio through increasing the number of hotel rooms to 2,600 by FY16 (vs. 875 rooms currently), at an estimated capex of around EGP7 billion. Moreover, the company is targeting to increase the contribution of stable revenues from operating assets from 14% of total revenues in FY13 to 35% in FY 2025 through reaching 5,000 hotel rooms. However, we only ac-count for the Four Seasons Sharm Extension (Marsa Al Sadeed) in our valuation, because of its free-of-legal disputes nature as well as TMG’s actual steps towards its development. We believe TMG will not be able to fully execute its hotels expansion plan by FY16, especially after the June 30, 2013 revolution and the hit in the Egyptian tourism sector. We expect the planned increase in hotel rooms to 2,600 would extend to FY20 instead of FY16. This is particularly true due to the com-pany’s current focus on developing its real estate project to counter the negative consequences that might emerge as a result of any unfavorable court ruling.
In spite of expected execution delays, ho-tels expansion plan could increase recur-ring income
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Hotels Four Seasons Sharm El Sheikh
Four Seasons Nile Plaza
San Stefano Grand Plaza
Kempinski Nile Hotel
% owned * 100% 100% 84.47% 100% Location Sharm El Sheikh Cairo Alexandria Cairo Room/Keys 200 366 118 191 Operations Commencement Nov-98 Sep-97 Feb-99 Aug-03 Complete May-02 Aug-04 Jul-07 Jul-10 Star Rating 5 Star 5 Star 5 Star 5 Star
* % owned by ICON, which is 75.13% owned by TMG Source: TMG
TMG malls Valuation using DCF & Income Capitalization Method vs. its current market value
Prime Research 13
As the company does not have strong enthusiasm to proceed with its hotels expansion plan in Marsa Alam and Luxor, we believe that TMG will search about other investment opportunities in Egypt as the com-pany's cash balance and marketable securities stands at EGP3.16 billion as of 9M FY14. We believe that the company might penetrate the second-home segment which has attractive margins, through securing land plots in areas like Northern Coast. Furthermore, the company could complete its hotel expansion plan in other destinations like Al Ain El Sokhna.
2.2. Operating and Financial Performance
TMG's hospitality portfolio started to slowly regain momentum in 2014, as revenues from hotel operations increased by 33.6% y-o-y to EGP370 million in 9M 2014, reflecting marginal improvement in the tourism flow and tourist spending, even though the market is yet to catch up on relative political stability and travel ban lifts from many European countries. It is worth to mention that the average occupancy rate of Cairo’s hotels increased from 20.6% in August 2013 to 62% in August 2014 due to the absence of political unrest that prevailed in second half of 2013. Overall, we believe that TMG's hotel revenues are expected to converge to its normal averages and repre-sent 12.5% of total revenues in FY16, in addition to returning to profit in the same year as well. This recovery is expected to be led by the Nile Plaza and Sharm El Sheikh hotels. Gross profit margin of the hotel segment increased by a CAGR of 6.6% since Q1 FY13 to 32% in Q3 FY14. Most of company’s IBD (interest bearing debt) is attributed to the hospitality segment, which has been struggling against po-litical unrest during the last 3 years, recognizing a net loss in 2013. The interest of this debt depressed the hotel segment's profitability during the last 3year. However, the company is currently negotiating with its lenders for restructuring of loans. We believe the segment start achieving net income starting FY16 if po-litical arena stabilizes.
TMG could extend its expansion plan to other areas
Likely to benefit from current tourism recov-ery - hotels revenues can bounce back to its normal levels by FY16
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Hotel Expansion Marsa Al Sad-ded* Luxor Madinaty Tahrir St. Marsa
Alam** Total
Operator Four Seasons TBD Rooms/Key 96 201 240 200 750 1,487 Residential Property 114 0 100 0 2,250 2,464 Land Area (k sqm) 960 20 175 2 3,200 4,357 BUA (k sqm) 490 43 49 16 390 988 Cash Spent (USD mn) 33 13 0 0 24 69 Cost to Complete (USD mn) 186 107 190 140 287 910 Expected Completion 2016 2016 2017 2017 2017
Details of TMG’s hotel expansion plan
*Inv cost for Marsa Alam-phase 1 (1000 units) ** Capex of Marsa Al Sadeed Hotel doesn't include the value of land (EGP808 million) Capex is as of December 2013 - Note: TBD = To Be Determined
Source: TMG
348
421
373
465
574 82
2
1,01
5
1,14
26.8%
9.1%7.7%
8.8% 8.8%
12.5%
18.6%
14.4%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
0
300
600
900
1,200
1,500
1,800
2,100
2011
2012
2013
2014
e 2015
e 2016
e 2017
e 2018
e
Hot
el R
ev./
Tota
l R
ev. %
Hot
el R
even
ues
EGP
(m
n)
Hotel Revenues (EGP mn (
Hotel Revenues/Total Revenues (%)
Hotel revenues contribution to total revenues is to increase once political tensions are terminated
Source: TMG, Prime
Prime Research 14
2.3. Hotel Segment Legal Disputes
TMG is facing two legal disputes in the hospitality segment. The first legal dispute is “Marsa Alam” land allocation in which the State Commissioners, in February 2013, suggested the invalidation of the contract of the 3 million sqm land for TMG’s subsidiary, Port Venice Tourism Development, based on the fact that the land was directly awarded to the company, in violation of the Auctions and Tenders Law. How-ever, in September 03, 2014, the Administrative Court suspended the previous invalidation verdict of Porto Venice land until the Supreme Constitutional Court decides on the constitutionality of the New Invest-ment Law (law of state contracts immunization). The second dispute is related to the Four Seasons Luxor Hotel, where TMG was accused by the Egyptian General Company for Tourism & Hotels (EGOTH) of violating the scheduled date for the completion of a hotel on a 20k sqm land plot under the usufruct system in the Sultana Malak district, Luxor, claiming that the construction work has not yet started. There-fore, the contract of this land could be terminated. Any unfavorable outcomes on these disputes will not affect our valuation for TMG, given the small sizes of these hotels and its usufruct basis. Furthermore, we did not consider these project in our valuation due to its legal disputes added to TMG's weak mettle to implement its investment plan in these project soon as tourism in Marsa Alam and Luxor is still struggling. 2.4. Hotel Segment Valuation
We estimate the EV of TMG’s hotel segment at EGP4.8 billion (EGP2.3/share): Including only the Four Sea-sons Sharm Extension (Marsa Al Sadeed) in TMG’s expansion plan, we estimate EV of Hotel segment at EGP4.8 billion (EGP2.3/share). Regarding the other Hotels under construction, we evaluated TMG's invest-ment in these hotels at its book value as of December 2013.
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-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Jan-
13
Mar
-13
May
-13
Jul-
13
Sep-
13
Nov
-13
Jan-
14
Mar
-14
May
-14
Jul-
14
Sep-
14
No of Tourists No of Nights (RHS(
Tourism recovery is evidenced by the picking up of the number of tourists and nights since September 2013
Source: TMG & Prime
96
121
61
96 97
135
138
-15%-10%
-5%0%5%10%15%20%25%30%35%40%
0 20 40 60 80
100 120 140 160 180 200
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
GP
M %
(EG
P m
n)
Hotel Revenues (EGP mn( GPM (%)
TMG's hotel recovery took a "V-Shape" trend since Q3 FY13
Source: TMG & Prime
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
100
200
300
400
500
600
700
800
2011 2012 2013 2014e 2015e 2016e 2017e 2018e
Occ
upan
cy r
ate
%
Ave
rage
Dai
ly R
ate
(USD
)
ADR of Nile Plaza (USD( ADR of Sharm El Sheikh (USD(ADR of San Stefano (USD( ADR of Kempinski (USD(
OCC of Nile Plaza % OCC of Sharm El Sheikh %OCC of San Stefano % OCC of Kempinski %
Nile Plaza and Sharm El Sheikh are to lead the hotel seg-ment recovery
Source: TMG & Prime
42% 41% 43%
18%
26%
20%
27%
34%
42%
0%
10%
20%
30%
40%
50%
0
200
400
600
800
1000
2008
2009
2010
2011
2012
2013
2014
e 2015
e 2016
e
GP
M%
EG
P m
n
Revenues of Nile PlazaRevenues of Sharm El SheikhRevenues of San StefanoRevenues of KempinskiRevenues of Marsa Al Sadeed
Hotel margins are expected to improve backed by tourism recovery, regaining its normal level in FY16
Source: TMG & Prime
Prime Research 15
Revenues from hotel residential units declined significantly at a 5-year CAGR of 28% during the period from FY08 to FY13, registering EGP86 million in FY13. This weak performance is due to political unrest that prevailed from 2011 to 2013. Additionally, this type of investment targets high-net-worth individual (HNWI) investors who were risk averse during that period. Despite the weak performance of this segment during the last three years, we believe that revenues from hotel residential units will witness impressive growth in FY16 upon launching Marsa Al Sadeed residential units.
2.6. Hotel Residential Units Valuation
TMG's hotel residential units’ EV is estimated at EGP1.2 billion (EGP0.9/share) according to our valuation. Our EV is mainly concentrated in Marsa Al Sadeed residential units that represent 62% of total EV of the hotel residential units sub-segment. It is worth mentioning that TMG offers its unsold residential units for leasing till selling it, which enhances its hotel income, however, we did take this income into our valuation.
Revenues from hotel residential units is to achieve impressive volume beyond FY16 upon launching Marsa Al Sadeed
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0
200
400
600
800
1,000
1,200
2008
2009
2010
2011
2012
2013
2014
e 2015
e 2016
e 2017
e 2018
e
EGP
mn
Revenues of San Stefano Residential UnitsReveneus of Sharm El Sheikh Residential UnitsRevenues of Nile Plaze Residential units
Revenues of Sharm Extension Residential units *
Marsa Al Sadeed to boost revenue from hotel residential unites in 2016
Source: TMG & Prime
San Stefano - Residential
units185EGP mn
16%
Sharm El Sheikh -
Residential units
187EGP mn16%
Nile Plaze -Residential
units71EGP mn
6%
Marsa Al Sadeed -
Residential units*
721EGP mn62%
Marsa Al Sadeed residential unites represents 62% of TMG’s hotel total residential units value
Source: TMG
Prime Research 16
3. Malls and Services Segment The Malls and Services Segment is TMG’s small-est business are, generating 7% of total reve-nues in FY13. However, we believe that this segment's revenues will achieve an impressive growth over the coming years due to delivering other units in Madinaty and launching new malls. According to our estimates, this seg-ment's revenues could grow up to EGP2 billion at the completion of Madinaty. We forecast a 5-year CAGR of 17% during FY13-FY18 for the Malls and Services Segment. 3.1. Services Segment:
Services segment revenue is generated from the operation of infrastructure facilities and maintenance work in the Madinaty project. After consolidating Madinaty for Management Co in FY12, Mall and ser-vices revenues jumped from EGP144 million in FY11 to EGP215 million in FY12 and EGP311 million in FY13. This increase in services revenue is mainly driven by the increase of services provided within Madi-naty, as more families are moving in. But, this came at the expense of gross profit margins; which de-clined from 28% in FY11 to 15% in FY13 as Madinaty for Management Co does not target strong profit at present. However, we believe that operating performance could improve during the coming years due to: Obtaining water and electricity from the government at cut-off prices as TMG incurred the cost of in-
frastructure instead of the government. Planning to introduce value added services such as high speed internet and fiber optic broad band.
Recognizing strong Pre-Sales will accelerate deliveries during the coming years which could positively affect the services segment's revenues. Currently, TMG has sold 44,000 units, 19,000 of which are delivered with an occupancy rate of 42% (8,000 occupied units). We believe that the number of occu-pied apartments and villas will keep their growth momentum over the coming years.
3.1.1. Valuation of Services segment
Utilizing a WACC of 17.6%, TMG's Services segment EV came at EGP 173 million (EGP0.1/share). Being conservative, we consider the cash flow of this segment till 2019 only, applying perpetual rate of 4%. 3.2. Mall segment:
TMG has 7 operating malls at present. these malls span a leasing area of 28,281 sqm. Most of these spaces are located in San Stefano mall and Al Rehab mall (both represent 74% of total spaces) Although these malls have prime locations in upper-middle income communities and have low vacancy rates , their operating performance is weak due to: TMG's lack of experience in the Retail segment.
San Stefano Mall’s stiff competition from Carrefour City Center in Alexandria which is one of the strongest names in the retail sector in MENA.
The small size of Al Rabwa, the footfall of the area is confined to a smaller audience.
TMG’s adoption of an inefficient strategy by renting and selling retail spaces in the same malls. This affects its ability to control the spaces sold as some retailers change the activities of their purchased
Services revenues to keep its growth as more families are mov-ing in lower rental rate on lack of experience in the Retail segment
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0%
10%
20%
30%
40%
50%
60%
70%
0100200300400500600700800900
2007
2008
2009
2010
2011
2012
2013
2014
e 2015
e 2016
e 2017
e 2018
e 2019
e
GPM
%
(EGP
mn)
Services and Malls Revenues (EGP mn(
Gross Profit (EGP mn(
GPM%
Accelerating handovers and malls segment restructures would boost the revenues of malls and services
Source: TMG & Prime
San Stefano11,570
sqm41%
Rehab Mall 1
2,287sqm8%
Rehab Mall 2
6,370sqm23%
Rehab Food court
632sqm2%
Madinaty Arabesque2,316sqm
8%
Madinaty B1District Center566sqm
2%Al Rabwa4,540sqm
16%
74% of total spaces is dominated by San Stefano mall and Al Rehab malls
Source: TMG & Prime
Prime Research 17
spaces. Which in turn, reduces the footfall and rental rates in TMG's malls. Weak performance of TMG's malls evidenced by weak rental rates that came significantly lower than
average rental rate in Cairo and New Cairo.
However, it's worth mentioning that TMG is adopting a new strategy, aiming to sell the commercial spaces located between the dis-tricts in Madinaty, while leasing mega malls and commercial spaces located in the com-mercial and services land area (adjacent to Suez Cairo road) in Madinaty. Accordingly, the company could control its retailers and leasing its spaces at better rates. Further-more, the company aims to hire employees with strong experience in the retail field, which could enhance the performance of the Malls segment over the coming years.
3.2.1 Valuation of Mall segment
EV of TMG's mall segment stands at EGP353 million (EGP0.2/share) according to our estimates (Risk free rate of return of 10.7% after tax, risk premium of 6%, terminal rate of 4%) . We consider the company’s operational malls only, while other planned malls are considered in commercial land valuation using NAV. According to our valuation, the implied fair value of one sqm is EGP12,494/sqm which is significantly lower than average current market price of this retail area (EGP22,792/sqm), reflecting the weak performance of company's mall portfolio. The following graph describes the large discrepancy between current market price of TMG's mall spaces and the income valuation approach using DCF and income capitalization method, explaining the weak performance of this segment.
Adopting new strategy for Malls segment could improve its per-formance
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TMG malls Valuation using DCF & Income Capitalization Method vs. its current market value
Source: TMG & Prime
Week performance is proofed by low implied FV per sqm compared to current market price of commercial spaces
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
0
100
200
300
400
500
600
700
Discount FCFF Inocme Capitalization
Method
Current Market Value
Impl
ied v
alue
/sqm
(EGP
/sqm
)
EV (E
GP'0
00)
EV (EGP mn) Implied value/sqm (EGP/sqm)
Source: TMG, Prime & JLL
Rental rate of TMG malls is significantly lower than the average of the market
2,57
7
661 1,32
6
1,34
5
1,17
1
1,55
0
1,20
0
7,56
1
4,70
0
01,0002,0003,0004,0005,0006,0007,0008,0009,000
10,000
San
Stef
ano
Mal
l
Reha
b M
all
1
Reha
b M
all
2
Reha
b Fo
od c
ourt
Mad
inat
y Ar
abes
que
mal
l
Mad
inat
y B1
Dis
tric
t Ce
nter
Al R
abw
a M
all
Avg
Lin
e Sh
ops
in
Cairo
Avg
rent
in N
ew C
ario
(EG
P/s
qm/a
nn
um
)
Mall Leasing Area (sqm)
Discount FCFF Inocme Capitalization Method Current Market Value
EV (EGP mn) Implied value/sqm
(EGP/sqm)
EV (EGP mn) Implied value/sqm (EGP/sqm)
EV (EGP mn) Current Value/
sqm (EGP/sqm)
San Stefano Mall 11,570 242 20,904 249 21,518 173 14,955 Rehab Mall 1 2,287 10 4,179 10 4,395 62 27,325 Rehab Mall 2 6,370 53 8,388 56 8,821 174 27,325 Rehab Food court 632 5 8,507 6 8,946 17 27,325 Madinaty Arabesque mall 2,316 17 7,402 18 7,785 75 32,500 Madinaty B1 District Center 566 6 9,802 6 10,308 18 32,500 Al Rabwa Mall 4,540 20 4,498 19 4,194 124 27,325 Total 28,281 353 12,494 364 12,862 645 22,792
Prime Research 18
SWOT Analysis
Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014
STRENGTHS WEAKNESSES
• Healthy backlog of EGP21 billion with low cancella-tion rate of 4.2% by the end of 9M FY14 • Huge land bank in prime location, with unutilized portion of around 31 million sqm • Access to commercial land of 8.6 mn sqm • Diversified income portfolio with increasing contri-bution from recurring revenues from Hospitality, and Malls and Services Segments. • Liquid balance sheet with moderate leverage; creat-ing room for further growth • Smart financing techniques that minimize default risk
• The land bank mainly located in “Madinaty” exposes the company to concentration risk • Delayed expansion plan of the Hospitality Segment
OPPORTUNITIES THREATS
• Egyptian properties sector has many strengths such as attractive demographics, lower prices versus re-gional peers, low penetration rate in commercial spaces as well as the Egyptian culture of preferring ownership over leasing. • New investment law is to end Madinaty legal dis-pute • Currency depreciation and rising inflation are to push consumers to properties investment • The Governmental mortgage initiative of lowering mortgage rates could stimulate demand • Demand shift favoring modern properties in safer suburbs like “New Cairo and the 6th of October Cities” • TMG to benefit from recovery in the tourism sector • Legal conditions for investment has notably im-proved during the recent period • The new Suez Canal project should encourage the development of the land located in Eastern Cairo
• Limited control over the cost of building material would remain a concern • Although supply/demand gap could sustain, most of the demand is concentrated in the low-income hous-ing segment which is different from TMG’s business scope • Applying property taxes and higher interest rates could hinder demand • Selling only c34% of the government’s stake in “Al Rehab” in cash in the last auction, may indicate liquid-ity conundrum in the Real Estate sector • Acquiring land with moderate costs has become a challenge. • Mortgage loans do not have an important role due to the current high mortgage rate • The Egyptian hospitality segment is still suffering from the effect of the recent political unrest
Prime Research 19
FINANCIAL SUMMARY
(Figures in EGP million))
Source: TMG & Prime Estimates
Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014
Income Statement (EGP mn) FY12a FY13a FY14e FY15f FY16f Revenues 4,636 4,858 5,289 6,505 6,581 Growth -9.1% 4.8% 8.9% 23.0% 1.2% Cost of Operations 3,408 3,574 3,528 4,519 4,399 SG&Admin. Expenses 302 322 416 463 490 Provisions and Other Operating Expenses 32 44 40 49 70 EBITDA 894 918 1,305 1,475 1,623 Growth 4.0% 2.7% 42.2% 13.0% 10.1% EBITDA Margin 19.3% 18.9% 24.7% 22.7% 24.7%
Depreciation & Amortization 131 124 127 123 120 Reported EBIT 763 794 1,179 1,352 1,503 Interest Income 19 19 30 51 54 Investment Income 38 35 35 159 170 Interest Expense 158 131 176 158 140 Non-Operating Income 36 45 59 67 75 Non-Operating Expense 0 0 0 0 0 Extra-Ordinary Items (6) (47) (2) (32) (4) Net Profit Before Tax 691 716 1,125 1,439 1,658 Income Tax 181 176 335 384 443 Effective Tax Rate 26% 23% 30% 26% 27% NPAT 510 540 790 1,055 1,215 Minority Interest (35) (45) (42) (27) (2) Net Income 546 585 832 1,082 1,217 Non-Appropriation Items 0 0 4 6 8 Net Attributable Income 546 585 828 1,076 1,210 EPS 0.3 0.3 0.4 0.5 0.6 Growth -5.5% 7.2% 42.2% 30.0% 12.5% Balance Sheet (EGP mn) FY12a FY13a FY14e FY15f FY16f Cash & Marketable Securities 1,411 1,763 2,616 2,768 4,058 Trade Receivables-Net 12,944 13,880 16,075 18,406 20,103 Inventory 30 41 36 41 50 Other Current Assets 19,703 18,778 18,673 16,778 17,533 Total Current Assets 34,088 34,462 37,400 37,993 41,744 Net Fixed Assets 4,122 4,028 3,915 3,809 4,053 Other LT Assets 16,754 16,806 16,963 17,578 15,208 Non-Current Assets 20,876 20,834 20,878 21,387 19,261 Total Assets 54,964 55,296 58,278 59,380 61,005 Short Term Bank Debt & CPLTD 1,779 1,554 1,160 1,171 1,216 Account Payable 2,465 2,707 2,427 2,395 1,844 Customer Advance Payment 15,756 16,789 19,234 21,309 24,553 Other Current Liabilities 2,455 3,022 4,298 3,722 2,912 Total Current Liabilities 22,454 24,072 27,119 28,597 30,526 Long-Term Debt & Bonds 1,856 2,219 1,929 1,478 905 Other LT Liabilities 4,307 2,108 1,848 1,301 917 Non-Current Liabilities 6,163 4,328 3,777 2,779 1,822 Net Paid in Capital 20,636 20,636 20,636 20,636 20,636 Legal & Other Reserves 278 280 281 389 511 Retained Earnings 4,475 5,068 5,595 6,136 6,670 Minority Interest 958 912 870 843 841 Total Shareholders' Equity 26,347 26,896 27,382 28,004 28,657 Free Cash Flow FY12a FY13a FY14e FY15f FY16f NOPLAT 577 583 811 941 1,048 Non-Cash Items 131 124 127 123 120 Gross Cash Flow 708 707 937 1,063 1,167 Change in Operating Working Capital (518) 1,761 1,356 1,026 (578) Capital Expenditure (964) (85) (616) (632) 2,007 Operating Free Cash Flow Excluding Intangibles (774) 2,383 1,677 1,458 2,596 Investment in Goodwill & Intangibles (12) 3 351 0 0 Operating Free Cash Flow Including Intangibles (786) 2,386 2,028 1,458 2,596
Prime Research 20
Recommendation Target-to-Market Price (x)
Strong Buy x > 25%
Buy 15% < x <25%
Accumulate 5%< x <15%
Hold -5% < x < 5%
Reduce -15% < x < -5%
Strong Sell x < -25%
Stock Recommendation Guidelines
Sell -25% < x < -15%
Investment Grade Explanation
Growth 3 Yr. Earnings CAGR > 20%
Value Equity Positioned Within Maturity Stage of Cycle
Income Upcoming Dividend Yield > Average LCY IBOR
Speculative Quality Earnings Reflect Above Normal Risk Factor
Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014
Prime Research 21
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Talaat Mostafa Group Holding
Re-Initiation of Coverage
Egypt | Real Estate
November 26, 2014