Al-Shams Housing & Development [ELSH]: Making Hay While the Sun Shines
A stable business model in the face of the sector’s potential slowdown
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Al-Shams Housing & Development [ELSH]
Egypt / Industrials / Core Coverage Report
12M PT EGP5.9 (+27%)
set on 7 Mar 2021
Investment Rating: Overweight | Risk Rating: High
Key Insights
A well-established real estate developer
Al-Shams Housing & Development [ELSH] has been serving the Egyptian market since 1946. It began its operation by renting its own units and later started selling, offering affordable housing with reasonable payment terms.
Diversified portfolio
ELSH has seven landmark projects and two active developments, namely Gardenia in the Sixth of October City and Solana which will be built on the land it recently acquired in the New Administrative Capital. As of now, Gardenia is almost fully developed with an inventory of 470 units left for sale under a 10-year payment plan and is offered for immediate delivery. Solana, which is set to launch in 2021, is ELSH’s first project to be sold completely off-plan. At a cost of EGP2.2bn, we estimate Solana will generate revenues of c.EGP3.6bn.
A fighting chance
Unlike prior years when fluctuating prices of building materials posed the biggest threat to developers, prices have recently been drifting downward, except for steel’s which rebounded in December (now flat ytd), giving developers a boost. Also, lower interest rates
(-400bps since 2020) should provide further support to the sector. At a time when developers are being forced to offer extended payment terms to attract customers, debt financing should come into play to cover the construction cost for timely delivery.
Valuation, Investment Thesis, & Risks
Overweight; 12M PT EGP5.9/share (+27%)
We valued ELSH using a discounted cash flow (DCF) method based on free cash flows to equity (FCFE), which produced a fair value of EGP5.1/share. This implies a 12-month PT of EGP5.9/share, hence our Overweight rating. Our DCF assumes a terminal COE of 17.6%.In addition, we applied a terminal cap rate of 10.1% to recurring income to work out the terminal value.
Investment thesis
ELSH’s Solana project in the New Administrative Capital could be the launch pad for the company’s future expansion should it prove successful. Meanwhile, revenue growth should be supported by (1) the commercial plots that ELSH reclaimed in the Sixth of October City by virtue of a court ruling and (2) a recent partnership ELSH entered into with Mirad to construct the remaining areas in Gardenia. Furthermore, ELSH has a strong inventory in landmark locations with an estimated value of c.EGP1bn.
Risks
Solana will be launched in 2021 at the same time projects in the area will be delivered, running a competition risk. Also, the extended payment terms offered raises liquidity risk. Moreover, ELSH is switching to off-plan sales, which requires greater marketing investment. Lastly, ELSH faces execution risk with the postponement of launching Solana.
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Kareem Farid
Equity Analyst
T +202 3300 5725