Real Estate

Company Overview

Addoha is Morocco’s largest real estate developer with operations in all the segments, including social, middle-income and high-end. In 2015 the social and middle-income segments accounted for 62% of the developer’s revenue, down from 70% in 2011. Revenue stood at Dh7.1bn (€651m) in 2015 compared to Dh9.5bn (€871m) in 2013 prior to the decision to cut production as a result of a new strategy, which focuses on cash generation. Addoha delivered 17,510 units in 2015, compared to 24,591 units in 2013. Addoha’s stock has been traded on the Casablanca Stock Exchange since 2006.

The management is currently implementing a three-year cash-generation plan (CGP), which commenced in January 2015. The CGP aims to:

• Focus on selling the unsold units accumulated in inventories (20,395 units at the end of 2014);
• Strongly limit launching the commercialisation of new tranches in projects where unsold units are located. The commercialisation of new tranches will be launched only if previous tranches are almost totally sold;
• Avoid in the future a new accumulation of unsold units in the group’s inventories. Consequently, the group will limit launching the development of new projects to only those which reach a pre-commercialisation rate threshold of 70%;
• Reduce investments in land acquisition. These investments were already cut from Dh2.1bn (€192.5m) in 2012 to Dh700m (€64.2m) in 2013 and 2014, and the objective is to further reduce them to a maximum of Dh300m (€27.5m) per annum during the implementation of the plan; and
• To decrease accounts receivables from 10 months of sales to four months of sales by the end of 2017.

If the company manages to achieve all of its objectives, it should be able to generate a huge level of cash flows from operations, estimated by the management at Dh8bn (€733.5m), for the 2015-17 period. This would enable it to significantly decrease its gearing from 80% in 2014 to 33% in 2017 and to strongly increase the dividends distributed to shareholders. In 2015 Addoha managed to restore confidence by reaching all of its objectives and actually over-delivering and showing investors that it does have the proper financial mechanisms, marketing capabilities and operational levers to strengthen the balance sheet, re-engineer the processes and sustain the business in the healthiest fashion.

Outlook

Generally, we believe that the strategic reforms adopted by Addoha since the beginning of 2014, following the significant increase in its inventories of unsold finished products in 2014, is relevant and justified. Regarding the new strategic objectives announced by the group, we believe that the management will be able to achieve most of them, even though we adopt a more conservative assumption regarding the reduction of clients’ accounts receivable. This new strategy will lead to a profound change in the company’s profile which, in our opinion, will transform the stock into a pure “income stock” over the next three to four years. The company’s strategy changes should generate a higher level of operating cash flow which we estimate at Dh7.7bn (€706m) on a cumulative basis compared with the management estimate of Dh8bn (€733.5m) over the 2015-17 period. As a result, Addoha will also be able to reduce debt (estimated gearing of 41% in 2017 vs. 80% in 2014) while significantly raising dividend payout.

This stock is appealing for income investors especially amid the current corporate strategy, which is intending to increase dividends. We also base this decision on the management’s objective to improve governance and financial communication through quarterly publication of financial results and the detailed achievements of the strategic plan. In the coming quarters this will continue to play a major role in restoring investors’ confidence in the stock.