(2018-08-05) Arqaam raises ODE target price to LE10, buy rating A fully-fledged developer with ample land assets: Orascom Development Egypt is one of the largest land bank holders within Egypt, with c.46m sqm of land spread across El Gouna, Taba, Makadi, and Fayoum. The business also owns one of the largest hospitality portfolios operating 24 hotels with 5k rooms. ODE monetizes its land bank by selling fully-built units, building on a track record of >5k units. ODE plans to co-develop 4.2m sqm of land in West Cairo, marking its first foray into the primary property market.
Arqaam said in its report, "deep value play: We adopt a conservative approach in our treatment of ODE’s land assets, and only account for 25% of Gouna’s 21m sqm gross land area in our development NPV, while applying a 90% liquidity discount on the remaining 75%. This drives 65% of our EGP 10/share TP, while the remaining emanates from hotel assets, which we value at 12% cap rate as we factor in minimal growth to occupancy rates and ADRs, out of prudence. At 0.5x CMP/NAV, ODE is among the cheapest NAV plays in MENA at current, trading 20% below mid-table. We initiate with a Buy rating and EGP 10 TP.
Monetising ODE’s land bank is central to producing NAV release via execution: Developing ODE’s residual land bank is a powerful RoE driver, in our view, since land cost is effectively negligible. Cash flow quality is markedly higher than peers, but visibility remains weak, for now. Only 40% of ODE’s gross land area has been developed, with the remaining 60% balance slated for launch at a 200-300k sqm/annum pace (EGP 3-5bn sales value). We consequently remain conservative with our treatment of land assets. We value 75% of residual land via MtM (90% discount) at EGP 1.4k/sqm, and model the remaining 25% as development NPV.
Occupancy rates at Gouna have peaked, but Taba offers significant growth potential: Occupancy rates at ODE’s 2.5k hotel keys in Gouna touched 80% as of Q1 18A, nearing historical peaks of 83%, thanks to a restoration in tourist flows (German tourists are the largest feeder visitor). Revenue growth is now solely a function of ADR expansions, which, in the absence of catalysts, will likely remain limited. Activity could improve once flight bans are completely lifted, and if additional keys are added. Hotels in Taba (2.4k keys, <30% occupancy) have huge growth potential, especially if travel bans to Sinai are removed. We estimate EGP 200-300m in incremental revenues and EGP 40-80m net income if occupancy rates reach 50-70%, respectively.
