Addoha: Real estate

COMPANY OVERVIEW: Addoha is the leader in the Moroccan real estate industry, with an exposure to both social and intermediary housing (62% of revenues) and high-end housing (33% of revenues). The group is benefitting from a supportive environment thanks to a growing rate of urbanisation, a poor rental market, a sizeable social housing deficit and several tax incentives. The group also has several competitive advantages in its market such as, first, a land bank of 5700 ha fully authorised, bought at very low price, and recorded at historical cost; second, deep and extensive know-how, especially in social housing; and third, an industrial commercialisation process backed by the one-stop-shop concept.

Regarding H1 13 results, revenues increased by 3.3% to Dh3.2m (€284,000), thanks to a 2.5% growth in the social and intermediary segment (-2.5% in deliveries and +5.1% in average selling price) and +5.0% in the high-end segment (-53% in deliveries and +124% in average selling price). At the gross margin level, Addoha showed an improvement of +0.5 points to 33.7% due, we think, to a better product mix in the high-end segment. This evolution, combined with a good operating expenses optimisation (other operating expenses declined by 17.6%) led to a strong improvement in earnings before interest and tax (EBIT), which rose by two points, to 27.7%. At bottom line, net income came in at Dh584.5m (€51.9m), a 6.4% increase on H1 12. Net debt declined by Dh234m (€20.8m), gearing at 84% stable versus end-2012. This reflects the group’s efforts to optimise its working capital through a reduction in investments in land acquisition and a better control of account receivables.

STRATEGIC DEVELOPMENT: We consider 2013 as a turning point for Addoha as we are expecting it to deliver a positive free cash flow after several years of an extensive cash consuming development. In this vein, we believe that Addoha should benefit from, first, a reduction in investments in land acquisition, and second, a reduction in the size of its accounts receivable – the average collection term in 2013 was 8.6 months, versus 9.1 months in 2012.

For 2013, revenues should increase by 5.6%, to Dh9.9m (€879,000) thanks to a recovery of deliveries in the social and intermediary segment (+12% in volume) even though the average unit price is expected to decline by 6% (from a product mix effect). At the margins level, thanks to stable development costs (mainly the cost of land) and operating expenses, margins are expected to remain stable, with EBIT and net margins at 28% and 20%, respectively.

For 2014, we expect the same trends to continue in terms of revenues, EBIT and net income, estimated respectively at Dh10.6m (€938,000), Dh2.9m (€262,00) and Dh2.1m (€189,500), representing an increase of 6.2%, 6.8% and 7.1%, with margins stable as compared to 2013. The main points to be monitored closely over the coming years are, we think, margins and deliveries, working capital requirements and the group’s net debt.

We have a “buy” recommendation on Addoha, with a target price of Dh83 (€7.37) per share. Addoha remains one of the most attractive stocks on the Casablanca Stock Exchange for the following reasons: 1) its strategic positioning and unique “savoirfaire” in social housing, a high growth segment in Morocco; 2) the company is entering a cycle of more stable growth aimed at optimising its working capital requirements, which should enable it to generate positive free cash flows from 2013; 3) this will allow Addoha to gradually reduce its gearing and to significantly increase its dividends (we project dividend yields of 3.8%, 4.7%, and 7.0% in 2013, 2014 and 2015); and 4) current valuation multiples are particularly attractive, with the stock trading at a price-to-earnings ratios of 9.1x and 8.5x for 2013 and 2014, and price-to-book ratios of 1.4x and 1.3x. Addoha’s valuation in terms of price-to-book is even more attractive considering that the company’s land reserves are recognised in its financial statements at historic cost.

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