Real estate

The Company

Sixth of October Development and Investment Company (SODIC) follows an integrated, low-risk, self-financed business model, focused mainly on the upper-middle-income class. Despite a smaller land bank than its competitors (Talaat Moustafa Group and Palm Hills Developments), SODIC manages to position itself among the biggest real estate developers in Egypt, generating sizeable, new contracted sales and capitalising on its strong experience in real estate development. SODIC aspires to venture into three areas: tapping the middle-income market; secondary housing in coastal areas such as those along the North Coast and the Red Sea; and secondary city retail like malls in Mansoura, Tanta or Upper Egypt.

Since its inception, the company has launched several successful projects, including Beverly Hills in Sheikh Zayed and Kattameya Plaza in New Cairo, selling over 3800 units and generating more than LE9bn ($1.28bn) in new contracted sales. It has branded its projects west of Cairo as SODIC West (Allegria, Westown Residences, Forty West, the Polygon and the Strip) and its projects east of Cairo as SODIC East (Eastown Residences). The company has the capacity to generate new contracted sales of LE3bn-3.5bn ($426m-497m) per year and implement annual executions worth around LE1.7bn ($241.4m), with a current backlog close to LE5bn ($710m).

The company’s new contracted sales peaked in 2013 at LE2.7bn ($383.4m), aided by the launch of four phases in Eastown Residences (a 50% y-o-y increase), with cancellations of fewer than 10% of sales. Revenue in 2013 reached LE1.3bn ($184.6m), down 7.3% y-o-y, with 680 units delivered in 2013, up 49% y-o-y. GPM fell to 27% from 36% in FY12. The drop in revenue and margin was due to two extraordinary, one-off cancellations worth LE242m ($34.4m). Consequently, the company reported a net loss of LE447m ($63.47m) in FY13, compared with a net profit of LE257m ($36.5m) a year earlier, also due to the writedown on SODIC’s investments in Syria at a value of LE478m ($67.9m). Nevertheless, SODIC enjoys a strong balance sheet, recording a net cash position of LE59m ($8.4m) and a net debt/equity of -3% as of the end of FY13, suggesting that SODIC has ample room for leveraging to finance expansion.

The company’s litigation risks are nearly non-existent as it has managed to settle its legal disputes with the New Urban Communities Authority and Solidere International through legal proceedings and settlement payments. In 2014 it repaid its USD-based liability to Solidere as well as LE100m ($14.2m) of its LE900m ($127.8m) settlement liability for the Eastown land, with the rest to be paid through 2021.

Development Strategy

Land replenishment has been a concern and posed as an overhang on the share price performance due to the increase in land prices and limited supply of sizeable land plots in prime locations. However, in June 2014 SODIC was able to acquire a 1.26m-sq-metre land plot worth LE2.4bn ($340.8m) in a very prime location in New Cairo that will help it secure a decent backlog over the coming three to four years and bring the company’s raw land bank to 3.6m sq metres. This project is expected to be launched by the end of 2014 or early 2015.

SODIC is currently in expansion mode and financing its expansionary plans by signing loan agreements with local banks for a combined value of LE2.2bn ($312.4m) over the past seven months as well as its LE1bn ($142m) rights issue at par value.

The company aims to create a recurring revenue stream from commercial leasing with the launch of Westown Hub toward the end of 2014 as well as by renting out units in the Polygon, Forty West and the Strip projects with expectations of generating lease revenue in excess of LE100m ($14.2m) by 2022.

SODIC is currently focused on replenishing its land bank, ensuring prompt cash collection, creating a recurring revenue stream, continuing timely project execution, maintaining a strong balance sheet, and capitalising on its sales and execution capabilities.