MANAMÅ: According to a research by Bahrain-based TAIB Securities research, Makkah Construction & Development Co. (MCDC) has made a 32.2 percent increase in activity revenues to SR191.86 million for the first half of 2011 from SR145.18 million. Its net profit jumped 43.3 percent year on year (YoY) to SR161.42 million. "We are revising our FY2011E net profit from core business activities by 21 percent to SR310.63 million and overall net profit by 22.5 percent to SR303.87 million. "We are also revising our earlier neutral rating to overweight with a revised DCF target price of SR35, implying an upside of 14.8 percent," the study said.
Activity revenues jumped 32.2 percent to SR191.86 million during the first half of the year from SR145.18 million in the first half of 2010. Activity expenses were down 3.8 percent to SR10.20 million, compared to SR10.60 million during the same period in the prior year. In addition, depreciation expenses fell 2.9 percent to SR13.60 million from SR14.01 million. On the other hand, general and administrative (G&A) expenses remained flat at SR5.58 million.
Gross profit soared 35 percent to SR181.67 million from SR134.58 million due to higher activity revenues. Profit from main activities increased 41.3 percent to SR162.48 million from SR114.99 million, attributable to strong top-line growth.
Further, miscellaneous income jumped 98.4 percent to SR1.32 million from SR0.67 million in the earlier year. As a result, net profit advanced 43.3 percent to SR161.42 million from SR112.63 million. Consequently, adjusted annualized EPS rose to SR1.96 from SR1.37 in the first half of 2010.
The study also made the following observations:
If the sector's short- to medium-term growth prospects change due to an accelerated economic recovery, or a further slowdown, it may call for a revision of our rating. We have used the DCF valuation method to arrive at the fair value of MCDC, as explained below:
Assumptions: Risk free Rate of 3.18 percent, equivalent to 12-months average yield on a 10-year US T-bill; levered beta of 0.78; and terminal growth rate of two percent. Based on the above and using the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 7.78 percent and a WACC of 7.78 percent.
MCDC is engaged in real estate investment, property development and management, and ownership and management of hotels and shopping malls. Most of MCDC's properties and development projects are located in Makkah. Therefore, the properties are not only shielded from downturns, but also benefit from development spending.
Moreover, according to industry experts, real estate investment in Makkah and Madinah accounts for 40 percent of total real estate investments in Saudi Arabia, because land prices in the holy cities are the highest in the world, ranging between $70,000 and $110,000 per sq. m. Prices hit $133,000 per sq. m. in Makkah during 2010.
In addition, government-led investments in new rail lines and airport expansions to cater to growing demand during the Haj season present opportunities for local real estate companies.
According to the General Authority of Civil Aviation, a $5.3 billion rail line linking Makkah and Madinah with Jeddah, and capacity expansion at the Jeddah airport are currently underway. The expansion will help service 30 million passengers by 2012, up from an estimated 15 million this year.
Besides, MCDC is a founding member of Jabal Omar Development Co., with a 9.10 percent stake. The company will likely benefit from the various projects Jabal Omar is undertaking over a 230,000 sq. m. area including hotels, commercial properties and prayer facilities.
During the first half of 2011, MCDC posted strong financials with activity revenues jumping 32.2 percent to SR191.86 million from SR145.18 million during the same period last year. Further, net profit advanced 43.3 percent to SR161.42 million.
More than 10 million Muslim pilgrims from 140 countries visit the holy cities annually for Haj and Umrah, contributing SR30 billion per year.
Going forward, during the next few years, areas around the Grand Mosque in Makkah are expected to witness rapid development, including the construction of five-star hotels, 4,500 shops, a central transport station, prayer facilities for more than 200,000 worshippers and parking space for 12,000 vehicles. Therefore, MCDC is well placed to leverage these opportunities.
We had updated MCDC on Oct. 3, 2010, with a neutral recommendation (target price of SR31.15, indicating an upside of 3.8 percent. Currently, the company's stock is trading at a P/E multiple of 16.54x and 15.19x on 2011E and 2012E earnings, and at a P/BV multiple of 1.27x and 1.29x on 2011E and 2012E BVPS, respectively.
Meanwhile, the stock has gained 12.1 percent during the last 12 months, compared to a 6.9 percent gain registered by the Tadawul All Share Index. Considering the above factors, we have arrived at a price target of SR35, which represents an upside of 14.8 percent over the closing price of SR30.50 (as of Jan. 11, 2011). Accordingly, we are revising our earlier neutral rating to overweight on Makkah Construction & Development Company.
© Arab News 2011
