Egypt’s real estate sector is an attractive long-term prospect in an acutely undersupplied market, Deutsche Bank said in an initiation-of-coverage note that placed SODIC top among three main property developers.
While warning of regulatory risk and of limits to mid-market affordability due to minimal access to mortgages, Deutsche said a growing population and undersupply would widen the housing shortfall to 11 percent of demand by 2014 from 5 percent now.
Deutsche said high-end builder Six of October Development and Investment — also known as SODIC — has a strong balance sheet, a flexible model, minimal land liabilities and a quality landbank that has been highly discounted by the market.
"SODIC’s intrinsic value comes from its small but prime landbank entirely in Cairo," the Deutsche analysts wrote.
The bank initiated coverage with a "buy" recommendation and a target price of LE 112. SODIC traded at LE 82.15 on Tuesday.
Deutsche started "hold" recommendations on Palm Hills Developments, with a target price of LE 5.90, and Talaat Moustafa Group, with a target price of LE 7.8.
It sees Palm Hills as the most leveraged and risky of its peers but with healthy backlog supporting revenues for at least four years. Its cheaply acquired and diversified landbank should support project development for seven to 10 years.
Deutsche said regulatory risk was a short-term concern for the industry, referring specifically to Talaat Moustafa’s main Madinaty project.
In June, a court revoked the land purchase from a housing ministry body. That body, the New Urban Communities Authority, has appealed and both the company and government say the ruling will not affect building.
Talaat Moustafa, Egypt’s largest listed developer, is a strong story, but the likelihood of a negative outcome of the court case was 50 percent. Without that risk, its sum-of-parts valuation was LE 10.70, Deutsche said.