EGTS Egypt Real Estate 16 September 2014

FIRST TAKE
EGTS 2Q14 loss in-line, revenues surge on land sale, 2H14 could
surprise but not enough - maintain SELL
EGTS reported 2Q14 loss of EGP9.1m, in-line with our expectation
Growth in revenue (driven mainly by land sales) encouraging, but higher cost base drags bottom-line to a loss
2H14 could see more demand for land at Sahl Hasheesh, but still insufficient to justify an upside to valuation
We continue to recommend a SELL on EGTS at a TP of EGP1.26/share
EGTS 2Q14 net loss - in-line with our expectation

Egyptian Resorts Group (EGTS or ERC) reported 2Q14 net loss of

EGP9.1m as against a net profit of EGP1.3m in 2Q13 and a net loss
of EGP12.2m in 1Q14. The reported loss is in-line with our
expectation
Revenue came in at EGP44.4m during 2Q14, as against EGP12.8m
in 2Q13, and ahead of our forecast of EGP25m. The growth in
revenue driven by land sales which included a previously annulled
land plot sold to an existing developer, along with sale of an
additional plot to another existing hospitality investor

Recommendation

SELL

Market Price (EGP)

1.51

Target Price (EGP)

1.26

Downside Potential (%)

-16.6

Market Cap. (EGPm)

1,585

Market Cap (USDm)

220

Reuters Code

EGTS.CA

Bloomberg Code

EGTS EY

Gross profit came in at EGP4.1m in 2Q14 as against a loss of EGP1.6m in 2Q13 and a loss of EGP5.9m in 1Q14. General and
admin cost declined by 47.5% YoY and 20.5% QoQ to EGP6m. Selling and marketing costs stood at EGP3.3m, as against
EGP1.6m in 1Q14

On the balance sheet front, cash balance declined to EGP85m as of 2Q14 compared to EGP99m in 1Q14. ERC holds
receivables worth EGP352m as of 2Q14, which, along with cash, supports ERCs operations in the absence of a healthy
revenue stream

Deal with ODHN cancelled on MoU expiration - EGTS announced that the board has decided not to go ahead with its plan
to buy selected assets of Orascom Development Holding (ODHN) as the memorandum of understanding (MoU) between
the two parties expired due to inability to settle for a mutual agreement on the final terms of the deal. Earlier in May 2014,
ODHN had signed an MoU with EGTS, in which ODHN was expected sell (to EGTS) a majority stake in 3-4 of its hotels and
some of its undeveloped land bank strategically located adjacent to Sahl Hasheesh

Sahl Hasheesh court case - The ongoing Sahl Hasheesh court case now remains with the Commissioners Committee at the
State Council and EGTS management has filed a defense brief, highlighting committee members attention to Law 32 of
2014, which regulates thirdparty complaints regarding contracts entered into by the Government of Egypt

Our take and view on EGTS - Land sales encouraging but not enough. 2H14 could surprise

ERC managed to achieve some progress in selling land during 2Q14. However, the surge in revenue was not sufficient to
cover its cost base, resulting in a net loss

Land sales have been the principal revenue generating activity for the company in the past. ERC also generates revenue
from utilities and community services; however cash generated from this business is insufficient to cover costs. Whilst the
business model has a potential to generate stable cash flows in the longer run, slower growth in development acts as a
major hindrance to sustained profitability and to a large extent, curtailing an upward re-rating of the stock

Management is optimistic about the changing market conditions, with increasing interest coming from developers for the
available land, and most importantly, better revenue visibility. Average hotel occupancy in the Sahl Hasheesh has crossed
beyond 70% in 2014 - indicating revival of tourism activity in the Red Sea region

Going forward, given the encouraging outlook, we expect 2H14 to be operationally better compared to 1H14 and EGTS
could witness higher demand for its land at Sahl Hasheesh. We are expecting recovery in tourism and hospitality sectors in
2H14 helped mainly by the improved security situation and political stability restored post the elections in Egypt

We continue to recommend a SELL on EGTS at a TP of EGP1.26/share

Harshjit Oza
+202 3300 5322
harshjit.oza@naeemholding.com

Allen Sandeep
+202 3300 5174
allen.sandeep@naeemholding.com

Disclosure Appendix
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Stock Ratings
NAAEM believes that an investors decision to buy or sell a stock should depend on individual circumstances (including, but not limited to the
investors existing holdings and financial standing) and other considerations. Different securities firms use a range of rating terms and rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each report. In addition, since
NAEEMs research reports contain complete information about the analysts views, investors should read NAEEM reports in their entirety, and
not infer the contents from the ratings alone. Ratings (and/or research) should not be relied upon as an investment advice.
NAEEM assigns ratings to stocks on the following basis:
Rating

Upside/Downside potential

Rating distribution as of 16 September 2014

BUY

>20%

41%

ACCUMULATE

>10% to 20%

13%

HOLD

+10% to -10%

38%

REDUCE

<-10% to -20%

6%

SELL

< -20%

3%

Research Contacts
Allen Sandeep

Director, Research

+202 3300 5174

allen.sandeep@naeemholding.com

Harshjit Oza

Assistant Director, Research

+202 3300 5322

harshjit.oza@naeemholding.com

Sales and Trading Contacts

Nayal Khan

Regional Sales Director

+971 438 24767

nayal.khan@naeemholding.com

Teymour El Derini

Director of MENA Sales & Trading

+19176153127

teymour.elderini@naeemholding.com

Tarek Abaza

Executive Director, Sales & Trading

+202 3300 5416

tarek.abaza@naeemholding.com

Local Institutions , GCC & High Net Worth

Fadwa Ali

Senior Account Officer Local Institutions & GCC

+202 3300 5422

fadwa.ali@naeemholding.com

Nael Sedky

Senior Account Officer Local Institutions & GCC

+202 3300 5420

nael.sedky@naeemholding.com