Medinet Nasr for Housing and Development (MNHD) has signed a final contract with Arab African International Bank (AAIB) for a short term loan of EGP 300m to finance Sarai's Zone S1 and S2 project, the company announced on Wednesday. According to the press statement, Sarai's Zone S1 and S2 represent a gross land area (GLA) of over 750, 000 square metres (sqm) and account for over 2,200 units; including 111 buildings. Furthermore, MNHD revealed that sales from Sarai, registered at EGP 767m in the first half of 2019 (1H 2019), marking an increase of 12% year-over-year (y-o-y), representing 453 units sold, compared to 254 units in the same period last year. The company attributed the growth to the launch of smaller version product of the S Villas. Launched in the first quarter of 2019 (1Q 2019), sales form MNHD's first office park, Cobalt Business District (CBD), amounted to EGP 620m in 1H 2019. Naeem Research told Daily News Egypt that they believe MNHD's decision to postpone the new launches in Taj City was due to several reasons, namely; factor in the fuel subsidies' cut effect in the new projects, avoid competition from competitors in East Cairo, and to catch in some momentum if the much-anticipated interest rate cut happens. Going forward for 2019, Naeem expects a pickup in top-line and presales, supported by the new launches in Taj City as well as higher execution rates which usually increase in the second half of the year. "Nevertheless, we think that the company will not be able to achieve full-year sales target of EGP 7bn, as the company has only achieved EGP 3bn until date, which seems to be a pitch amid current market conditions. Maintain our BUY recommendation, target price (TP) of EGP 8.59/share," the research firm added. Naeem values MNHD with a TP of EGP 8.59/share. The company's 7.2m sqm raw undeveloped land bank in East Cairo is valued using sum-of-the-parts valuation based on two equally weighted scenarios, the first applying a 75% discount to the plots fair market price (EGP 4,750/sqm) and the second is 15-year land development model and a nine-year instalment schedule. Moreover, the research firm explained that after adding the expected net cash inflows from the company's already launched projects, they arrived at the equity fair value of EGP 8.58/share. "We discount the expected future cash flows using a WACC of 23.8% for 2019, 21.4% for 2020 and a terminal WACC of 19.1%. The WACC for 2019, is based on a risk-free rate of 18.3%, equity risk premium of 6%, arriving at a cost of equity of 25.3%. We expect the risk-free rate to drop by 200bps in 2020 and 2021. We use a target debt to equity ratio of 15:85 in 2019, 20:80 for 2020 before it reaches 25:75 in 2021. Cost of debt is assumed as 20.3%, 18.3%, and 16.3% for, 2019, 2020, and 2021 respectively," Naeem concluded.
