HC maintains overweight rating of Orascom Development Egypt

Egypt - HC Brokerage issued an update note about Orascom Development – Egypt (ORHD) in light of the coronavirus outbreak stating that they maintain their Overweight rating on the steep drop in the share price.

Tourism exposure takes a toll on the company’s operations and share performance; the company’s tourism exposure has led to a steep decline in its share price (down c50% year-to-date vs only c26% for the EGX30) as investors perceive it to be amongst the most badly hit by the coronavirus and the restrictive measures taken to combat it.

Despite the government’s announcement of the reopening of hotels and resorts on May 15th for domestic tourism, HC is still conservative in our assumptions for 2020e, as hotels will only be permitted to operate at a maximum capacity of 25% for the remaining months of 2Q20 and at only at 50% by July, which justifies the downward revision in our 2020 estimates.

For the real estate segment, HC expects the sector to suffer further from weak presales due to the coronavirus outbreak, however, it believes the risk of a steep increase in cancellations is low. HC expects demand for the second homes segment to suffer the most, in its view, which affects the real estate operations of ORHD’s destinations, Gouna, Makadi and Fayoum.

Despite our general positive outlook for O West, we expect ORHD’s total real estate sales to drop c33% year to year (YoY)in 2020e on the back of lower volumes. It is worth noting that construction work for O West had already begun in January 2020 and the measures taken to combat the coronavirus so far do not pose a risk to delay deliveries, which are set to begin in 2023e, according to management.

"For real estate operations, we forecast a slowdown in 2020 sales with some EGP4.66 billion in contracted sales, c33% lower YoY while we expect total 2020–2026 contracted sales of EGP58.3 billion, mostly attributable to O West. Our forecasts point to total collections of EGP 84.0 billion over 2020–2034 (adjusted for ORHD’s share of O West collections) against CAPEX of EGP47.6 billion (including NUCA’s in-kind stake of O West). We expect total 2020e–2023e revenues of EGP29.2 billion against costs of EGP21.3 billion, implying an average gross profit margin of c27% We forecast the company’s 2020e net debt-to-equity to drop to 1.89x from 2.38x in 2019. We expect the company’s cost efficiency efforts to reflect positively on its SG&A expenses, additionally, a drop in LIBOR rates and local interest rates should reduce financing expenses.” Mariam Elsaadany, real estate analyst at HC Brokerage said.