THE COMPANY: TMG Holding, with its 50m-sq-metre land bank, is among the largest and most diversified real estate developers in Egypt and caters to the middle- to upper-middle-income classes. The development schedule of its land bank extends beyond 2020, driven mainly by its flagship project Madinaty, which is divided into six phases, as well as new phases in the Al Rehab and Al Rabwa projects. TMG follows the off-plan model and, as most of its projects are master developments, the construction process is phased out over longer periods. TMG is also involved in the hospitality sector through several hotels, which provides it with a recurring income stream. Its market capitalisation is $1.3bn, representing 2% of the Egyptian Exchange’s market capitalisation, with a free float of 24%.
TMG has a robust 20-year track record in the housing and real estate development industry. It has developed 8.5m sq metres of land and sold more than 57,000 real estate units with a built-up area of more than 9m sq metres. TMG’s current development backlog of LE19bn ($3.2bn) is the largest among Egyptian players and should be delivered over the next three to four years, which provides earnings visibility.
Despite difficult conditions due to Egypt’s current political turmoil, TMG managed to post strong 1Q 2012 results, with revenue of LE1.3bn ($217.6m), up 79% quarter-on-quarter (q-o-q) but down 5% year-on-year (y-o-y). Property sales contributed 91% of total revenue, versus 9% derived from hotels and other income sources. The average hotel occupancy rate dropped to between 34% and 44%. Gross profit margin dropped to 25% from 31% in 4Q 2011, mainly from decreased villa sales. Net income came in at LE174m ($29.1m), up 107% q-o-q and 3% y-o-y. The main highlight of the results was the strong quarterly presales figure of LE1.1bn ($184.1m) (up 20% q-o-q and 90% y-o-y), which provides TMG with a good head start for the year. Cancellations were limited to 4.5% of gross accumulated sales.
We believe that TMG stands to benefit from a recovery in real estate expansion fuelled by the release of pent-up real estate demand due to the firm’s exposure to the middle- to upper-middle income segments. It has a strong balance sheet and low leverage, given its cash and marketable securities balance of LE1.9bn ($318m), its short-term receivables of LE13.4bn ($2.2bn), and a net debt/equity ratio of only 6% as of 1Q 2012. We believe TMG is doing the best operationally and financially of all listed Egyptian real estate players.
Land litigation risk heightened after the State Commissioner’s Authority (SCA) issued a report in July 2012 invalidating an administrative court ruling regarding the Madinaty land sale contract and rejecting TMG’s appeal against the revaluation of the unutilised portion of land. TMG’s legal advisor believes the firm is in a good position as the SCA’s report is nonbinding and TMG has not yet submitted all appeals and legal documents in its favour. The Higher Administrative Court will convene on November 7, 2012 to discuss the report.
DEVELOPMENT STRATEGY: TMG follows an integrated low-risk, self-financed business model. It plans to maintain a minimum land inventory of 35m sq metres via ongoing local and regional expansions and to increase the contribution of recurring income from operating assets to 35% of total revenue with a minimum internal rate of return of 18%.
We expect TMG’s revenue to grow at a compound annual growth rate of 9% over the next three years, on the back of property deliveries in Madinaty and Al Rehab. We anticipate hotel revenues’ contribution to increase to 14% from an average of 9%, and occupancy rates to hover at 70% versus an average of 53%. TMG typically earns 30% margins on its sale projects; going forward, we expect margins to expand, driven by the higher hotel revenue inflow. We estimate that TMG’s operating cash flows can fund its expansion plans. Most of the company’s debt is used to finance its hotels and retail lines of business, while its real estate business model is self-financed through receivables collection, with its 2012 capital expenditures bill of LE6bn ($1bn) expected to be financed through collections.
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