Share analysis: Palm Hills Developments - Real Estate

Palm Hills Developments (PHD), founded in 2005 by Mansour and Maghraby Investment and Development (MMID) – currently the largest shareholder with a 42% stake – is a leading real estate developer offering integrated upper-middle and luxury primary and secondary housing and commercial projects. PHD has exposure to the hospitality sector through its 60%- owned subsidiary, Macor, that manages three hotels in Sixth of October City, Ismailia, and Sharm El Sheikh.

In 2008, PHD entered into a partnership agreement in Saudi Arabia and purchased 5m sq metres of land in Riyadh and Jeddah of which it owns a 51% stake. In 2014, Ripplewood acquired a 2.3% stake in PHD, and later in the year, Aabar Investments acquired a 5.6% stake. With an undeveloped proportionate land bank of 10.7m sq metres, a backlog worth LE7.5bn ($1bn), unsold inventory in existing projects worth some LE10.6bn ($1.4bn), a track record of 11 projects and 12 projects in the development phase, the company is well positioned to benefit from the positive dynamics of Egypt’s real estate sector. The company aims to complete all of its existing projects by 2017.

Facing Challenges

Because of its exposure to the luxury residential segment and to Egypt’s secondary home market, PHD suffered the most after the January 2011 revolution compared to the sector’s other large-cap listed players. At the time, MMID supported the company through shareholder loans. Things started to change, however, after the 30 June 2013 popular uprising with the new government’s determination to settle legal disputes with investors. This had a positive spillover across the sector, which enabled PHD to close its funding gap through bank loans and right issues, resume its construction spending, and ultimately turn around its operations. In late 2013, the company implemented a LE600m ($81.8m) rights issue, and in 2014 it secured a 6.5-year, LE2.4bn ($327.1m) syndicated loan. In 2015, PHD completed a LE1.65bn ($224.9m) rights issue and secured a LE750m ($102.2m) loan to refinance debt and accelerate development of its North Coast projects. The proceeds from the LE1.65m ($225,000) rights issue were meant to finance land acquisitions and residential partnerships, grow its retail and commercial portfolio, and repay part of the MMID shareholder loan. New off-plan sales more than tripled year-on-year (y-o-y) in 2014 to LE3.57bn ($487m), compared to LE1.16bn ($158.5m) in 2013, implying cancellations of LE362m ($49.3m) or 9.2% of gross sales, compared to LE316m ($43.1m) in 2013 (21.4% of gross sales).

The growth in sales was driven by a hike in unit sales in West Cairo projects, namely Golf Views, Palm Parks, and Golf Extension, and the launch of the Woodville and North Coast projects. The accelerated construction increased the pace of deliveries, which led to a 74% y-o-y increase in revenue to LE2.1bn ($286m). Gross profit margin increased to 33%, compared to 22% in 2013, due to increased selling prices and land recognition of standalone unit sales. Net income grew 49% y-o-y to LE353m ($48.1m). The company has a strong balance sheet with a net debt/equity of 0.4 times as of the end of 2014.

Development Strategy

PHD launched a new four-pillar strategy focusing on (1) growth, (2) earnings stabilisation and diversification, (3) improving profitability, and (4) expediting project delivery. After the turnaround, PHD’s focus shifted to growth as evidenced by the signing of two memoranda of understanding with the Egyptian government for a 500-feddan revenue-sharing project in East Cairo near Cairo’s new capital project and a revenue-sharing agreement in West Cairo, with the Egypt government and UAE-based developer Aabar Investments for a project called Wahet Misr in Sixth of October City over 10,000 feddans. PHD’s focus on revenue-sharing agreements aims to minimise initial cash outlays and risk due to the absence of land payment schedules, which greatly improves initial returns on investments.