HC cuts target price of Madinet Nasr Housing by 44%

HC: Madinet Nasr Housing is further challenged

However, we maintain our OW rating

Sector conditions continuing to be difficult have pushed MNHD to resort to one-off sales and cash sale discounts to overcome liquidity shortage

This has also impacted deliveries which are expected to pick up in 2021e. We forecast revenue to grow at 3-year CAGR of c21% and pre-sales to grow modestly at c3%

We maintain our OW rating on MNHD, while lower our TP c44% to EGP7.05/share; implying a 2020e TP/NAV of 0.35x, while it is trading at half of that.

HC Brokerage issued their update about Egypt’s real estate sector assuring that sector conditions continuing to be difficult due to Coronavirus outbreak and they maintain the OW rating on MNHD.

Mariam Elsaadany, real estate analyst at HC Brokerage commented that: “Coronavirus worsens already difficult sector conditions impacting deliveries and pre-sales: Weak affordability has impacted the real estate sector pre-sales in 2019 leading to a muted c7% y-o-y growth, while the coronavirus has further worsened pre-sales and deliveries.

MNHD was no exception especially that it was facing fierce East Cairo competition, in addition to delivery delays. Despite its relatively strong balance sheet (net debt to equity stood at 0.39x in 2Q20), we believe the company has been facing some liquidity shortfall, triggered by the infrastructure spending needs mainly in Sarai, as well as the relaxed payment plans it introduced to the market during the launch of Sarai in late 2016.

To resolve this, the company opted to: (1) offer more of its inventory on cash basis after slashing unit prices by up to c50% on some EGP500m worth of inventory, prioritizing cash flows over profitability, (2) resorting to bank debt by signing a EGP2.19bn syndicated loan with a consortium of banks (although management expects to only withdraw some EGP1.40–EGP1.50bn of the facility in 2020), (3) engaging in one-off commercial land plot sales, and (4) launching some EGP1bn of Sarai Mansions, selling residential land to individuals, which offers a different product to the company’s portfolio. It is worth mentioning that the company has delayed its delivery time for new sales currently to 4 years from 3 years previously to accommodate the delays in delivery.

The company has been steadily growing its backlog, which grew at a 3-year CAGR of c28%, standing at EGP8.53bn in 2Q20 with 2020 expected to be a strong year for its deliveries as it had targeted to handover some 2,500 units, implying 14.1x y-o-y growth. With the economic implications of the coronavirus affecting all sectors indiscriminately, we believe the company may not be able to meet this target, further affecting the pace of its execution cycle.”

“We expect total pre-sales of EGP14.6bn over 2020–22e implying a 3-year CAGR of c3%: We expect collections of EGP21.8bn over 2020–30e and CAPEX of EGP9.22bn over 2020–25e. Our estimates take into account the launched phases of Taj City (including Tag Sultan, T-Zone, Shalya, Lake Park Studios, and Cobalt) and Sarai (including Taval, Croons Condos, S2, Cavana Lakes, while we exclude future sales from MNHD’s 36% stake in its JV with Palm Hills Developments (PHDC EY, Overweight, TP EGP3.75) Capital Gardens and only accounting for the project’s existing backlog).

We expect the company’s backlog to be maintained at current levels as it delivers S1 in Sarai that it launched in 4Q16. Our collection period across the company’s project portfolio is also extended to capture the company’s relaxed payment plans approach in sales as the 7-year and 8-year plan are currently the most prevalent.

We exclude the company’s Nasr Gardens from our forecasts and value the project’s inventory at book value. Despite our expectation for delays in deliveries, we expect 2020–25e revenue of EGP19.7bn, with an average gross profit of EGP10.1bn, implying a margin of c51% as the company delivers its backlog.

We expect the company’s cash offers to have little impact on its receivables portfolio average collection period and margins, as units sold on cash basis were only around EGP500m, c5% of its receivables portfolio’s balance.” Mariam El Saadany added.

The real estate analyst at HC concluded her update on MNHD stating that: “We lower our TP c44% to EGP7.05/share but maintain our OW rating: We use a DCF valuation to value MNHD’s launched real estate phases in its 2 projects, Taj City and Sarai and value the company’s undeveloped land bank by accounting for the present value of the potential cash flows from developing this land in the future, using the master plan for each plot.

We exclude future sales from Capital Gardens from our valuation due to lack of visibility on future launches and on the slow sales pace, while only account for the project’s existing backlog. Our 5-year average moving WACC stands at 16.6%. Of our TP, c27% is from DCF and c73% is from land valuation, with the DCF value of launched real estate project at EGP2.90/share, undeveloped land value at EGP5.14/share, while a net debt position of EGP1.42bn shaves off a total of EGP0.99/share and yields a DCF value of EGP7.05/share. Our TP puts the company at a P/NAV of 0.35x, and implies a potential return of c107% over the 25 August closing price of EGP3.41/share, leading us to maintain our Overweight rating.

We estimate the stock is trading at a 2020e P/NAV of 0.17x, lower than the peer average of 0.28x. On our numbers, the market is assigning a value of EGP406/sqm to the company’s undeveloped land compared to our valuation of EGP1,395/sqm (c33% lower than our previous value of EGP2,076/sqm), and representing a c71% discount to market prices.