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No harm done yet

Talaat Mustafa Group survives despite its head's indictment, but how long can it hold out for, asks Sherine Abdel-Razek
Goodwill is an intangible asset that appears in a given company's budget, to roughly represent the real market value of the company over and above the net worth of all its tangible assets minus its liabilities.

Such value comes from factors like a strong brand name, a uniquely strong market position, the outstanding productivity of employees and all other factors that make an investor willing to pay more for a share than what he would practically get back if the company went into liquidation and the proceeds were distributed among shareholders. In Talaat Mustafa Group 's ( TMG ) last budget, goodwill accounted for all of LE15 billion. Investors' confidence in the reliability of this figure is proven by the unprecedented demand for the company's IPO last November, which was 41 times oversubscribed.

Observers now expect this trust to remain barely shaken by the recent decision to refer the company's Chairman Hisham Talaat Mustafa, a member of parliament, to a criminal court on accusations of being involved in the murder of Lebanese singer Suzanne Tamim. To begin with, there was no such certainty, as market experts held their breath, expecting company shares to take a nose dive. Many had also feared that buyers in TMG 's suburban communities such as Rehab and Madinaty would soon be withdrawing their downpayments for fear that the group would not be able to meet its obligations. However, none of this happened.

On the contrary, the company's current chairman, Hisham's elder brother Tareq, stressed that none of the units have so far been abandoned by their owners. As for the shares, TMG has been on the rise over the week since the indictment.

Buyers' testimony added weight to the current chairman's assurances. "I never thought of selling any of the two flats I reserved in Madinaty. I do not understand in the financials of a company but my in-law is an auditor and he assured me that the financial position of the group is too strong to be shaken by criminal charges against Mustafa," said Nader Wassim, a 50-year-old lawyer working in Kuwait who bought two flats in Madinaty two years ago. Wassim stressed that even though he may sometimes need to borrow to meet instalment payment deadlines, he'd rather keep going than sell. "Seeing how the price of houses in Rehab has quadrupled since I made my decision to buy my flats, I have come to consider them a long-term investment," he told Al-Ahram Weekly.

Suzanne El Shorbagy, a housewife in her late 30s and owner of a unit in Madinaty seconds Wassim's confidence in the group, saying that while she was shocked by the news to start with and could not help having doubts, the smooth appointment of Tareq and reports on the company's strong financial position calmed her concerns. "At the end of the day the issue is one of personal wrongdoing," said El Shorbagy."It's not as though he is failing to repay his debts." El Shorbagy's only worry is in reference to how the group will perform long-term. "I know that TMG will deliver the units on time, but I wonder whether the company itself, in the absence of Hisham, will be managed as well as it has been in the past," she told the Weekly.

Shareholders were the big winners in this situation. The company's shares ended Monday's transactions at LE7.31 per share, or 36 per cent higher than their level on the day Mustafa was charged. "There is a lot of buying activity. It might be the company buying back its treasury shares to back stock or institutional investors lured by the share's currently very attractive price level," said Mohamed Sedik, a senior analyst at Prime Securities. Either way, it's a far cry from TMG 's situation some weeks ago. Share prices tumbled down in early August on the back of rumours that Talaat was involved in Tamim's murder, pushing TMG to buy back 94 million treasury shares.

On Saturday a lawyer sent a petition to the prosecutor-general asking for Hisham Mustafa's wealth to be brought under custody as a step towards sequestrating it, because he owes the New Urban Communities Authority payment for many lands that TMG is building on. When contacted to comment on the petition the group declined to reply. Sedik, for his part, said the accusation is ungrounded. "It is well known that TMG pays for the land after delivering all the units, and it has never failed to do so," he told the Weekly. "The company's financial position is very good and it enjoys a very low leverage which means that it does not depend on bank loans to finance its long-term commitments."

A research paper issued by Prime Securities earlier this year explained that TMG adopts a self-financing scheme which cushions TMG against leverage through conducting bilateral agreements with the Egyptian government, which secured TMG large scale areas of land for residential development. TMG pays the value of the land in the form of residential units delivered to the government at the end of each phase.

Furthermore, TMG does not launch construction of any cluster of its projects prior to the sale of approximately 80 per cent of its units, utilising off-plan sales policy. Up-front payments by buyers and the later instalments are structured in a way that unit funding is secured by the purchaser him or herself, thereby minimising the need for external financing. This financing scheme proves the fallacy of the rumours that spread soon after Mustafa's arrest, which questioned the company's ability to meet its financial obligations with its bank debts estimated at LE11 billion.

In actual fact, " TMG loans do not exceed LE2.2 billion, and these are short-term loans that do not weigh down on the financial status of the company, which in turn has an available liquidity of LE4 billion," noted TMG Deputy CEO Jihad Al-Sawaftah in press reports published early this week. He also said TMG sales reached LE29 billion by the end of July, generating LE8 billion in actual profits.

The late Talaat Mustafa founded the company in 1971 as a construction company that grew over the past 38 years to become a group that includes 30 companies with three lines of business: construction, agricultural projects and real estate development. It was the first to introduce suburbanisation schemes, building communities on the outskirts of the city like Al-Rabwa in Sixth of October City and Rehab, as well as its largest- ever project Madinaty in the extension of New Cairo. The group is currently tapping into the Saudi market, with a joint venture that will develop 5.9 million square metres in Jeddah and Riyadh.

In addition, TMG has several major tourism projects including the Four Seasons Cairo at the Nile Plaza, Four Seasons San Stefano, Four Seasons Sharm El-Sheikh and the Nile Hotel. It recently won a concession for a piece of land in Luxor to build a Four Seasons there too. The company's reach beyond Egypt includes plans to build 18 hotels in Eastern Europe starting with a Four Seasons in Ukraine.

Will Hisham's absence undermine the way these projects are planned and managed? "A group of the size of TMG is managed under an institutional frame governed by strict regulations, and it is not likely that a management reshuffle will reflect negatively on it," said Sedik. Speaking to the Weekly, he further added that a quick look at names in the ownership structure or the board will make any doubts of the sort vanish. After all, the board has 11 heavyweight professional members that represent the two major shareholders of the group: the Talaat Mustafa and the Saudi Bin Laden families, in addition to other professionals in management and finance.

© Al Ahram Weekly 2008