Résidences Dar Saada (RDS) is a Moroccan social and intermediate housing pure play listed on the Casablanca Stock Exchange since December 2014. In less than four years, RDS successfully transitioned from a medium-sized real estate company to the third major operator in the Moroccan social and intermediate housing market, with about 5990 units delivered in 2014, compared to 896 units in 2009. Following its initial public offering (IPO), the company ownership structure is as follows: 1) The Berrada family, 55%; 2) foreign and Moroccan institutional holders, 25%; and 3) a free float of 20%.
The company’s 2014 performance was excellent, particularly considering the difficult business climate faced by Moroccan real estate developers that year. According to the firm’s management, RDS’s projects are only located in the areas where demand for social and intermediate housing is exceptionally high, thanks to the company’s very selective land acquisition process, and some 52% of the total projects are located in Casablanca.
Over the course of 2014, RDS produced 6680 units and pre-sold 6216 units with secured sales of Dh4.5bn (€490m). Sales soared 62% to Dh1.8m (€197m) year-on-year (y-o-y), and operating results jumped by 32% to Dh490m (€53.3m). The firm's net result stood at Dh406m (€44.2m). up 33% y-o-y. It is important to note that RDS manage their balance sheet by adopting a very strict risk management policy through the use of project finance.
Over the coming years, and according to the firm’s business plan, the group should continue to grow at a fast rate with a 2014-2017E sales compound annual growth rate of 13%. In this respect, we believe the company should be able to reach its objectives, given 1) the reliability of its previous forecasts communicated on June 2012 in its information memorandum related to a Dh750m (€81.6m) bond issue; 2) its sound financial structure, with a 2014 post-IPO gearing of 33% and expected positive free cash flow for the firm over the coming four years that should allow the company to secure the financing and normal functioning of its operations; 3) the possibility for the company, through the funds raised in the IPO, to accelerate the construction of the other tranches of some projects that are enjoying a strong commercial success, and 4) the company’s end of 2014 sizeable number of projects under construction which signal that significant growth can be delivered in the coming years.
In terms of gross margins, it is important to note that the strong contribution of land plots to the firm’s total sales, relative to other social and intermediary housing operators, is what enables the firm to achieve higher gross margins than its competitors. Historically, the company has generated an average gross margin of 50%. For the coming years, the company is expecting its gross margin standing to continue to rise, with estimates of 33% for 2015 and 2016, and projections of 36% in 2017.
A Top Pick
RDS is one of our top picks on the Casablanca exchange. The firm stands out from the entire Casablanca Stock Exchange with few listed firms currently offering a comparable growth prospects for the coming four to five years. Valuations are particularly attractive: the stock is currently trading at a price-to-equity (P/E) 2015E and P/E 2016E of 9.7x and 8.6x, respectively.
A more appropriate evaluation, however, would be to recalculate the P/E on a pre-money basis, in order to recapture the value that was generated by the Dh1.13bn (€123m) raised during the IPO. On a restated basis, the stock is currently trading at a P/E 2015E and P/E 2016E of 7.2x and 6.4x, respectively, implying that the company is undervalued, considering its strong growth prospects. On a P/B basis – assuming a provisional return on equity in the 18-20% range – and based on a double-digit sales growth, the firm only trades at P/B of 1.7x, 1.5x and 1.3x, for 2015E, 2016E and 2017E, respectively.
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